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 JUNE 30, 2003
----------------------
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
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(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
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act. Yes X No
----- -----
The number of shares outstanding of the issuer's common stock is
144,849,441 shares as of July 31, 2003.
INDEX
PART I. Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations (unaudited)
Six and three months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Changes in
Shareholders' Equity (unaudited)
Six months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows
(unaudited) Six months ended June 30, 2003 and 2002
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 4 Submission of Matters to a Vote of Security Holders
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)
June 30, December 31,
2003 2002
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 33.9 $ 56.4
Accounts receivable, net 444.5 393.0
Supplies inventories 49.4 44.8
Prepaid expenses and other 23.7 33.8
Deferred income taxes 68.6 68.7
-------- --------
Total current assets 620.1 596.7
Property, plant and equipment, net 368.2 351.2
Goodwill 1,272.2 910.1
Identifiable intangible assets, net 570.6 307.4
Investments in equity affiliates 481.9 400.6
Other assets, net 36.0 26.0
-------- --------
$ 3,349.0 $ 2,592.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 82.9 $ 79.9
Accrued expenses and other 163.8 148.5
Current portion of long-term debt 0.4 0.4
-------- --------
Total current liabilities 247.1 228.8
Revolving credit facility 85.0 --
Zero coupon-subordinated notes 518.0 512.9
5 1/2% senior notes 354.1 --
Long-term debt, less current portion 2.7 3.1
Capital lease obligations 4.9 5.5
Other liabilities 388.0 230.0
Commitments and contingent liabilities -- --
Shareholders' equity:
Preferred stock, $0.10 par value; 30,000,000
shares authorized; shares issued: none -- --
Common stock, $0.10 par value; 265,000,000
shares authorized;148,130,106 and
147,839,103 shares issued and outstanding
at June 30, 2003 and December 31,
2002, respectively 14.8 14.8
Additional paid-in capital 1,422.8 1,406.5
Retained earnings 426.4 266.1
Treasury stock, at cost; 3,383,620 shares
and 97,426 shares at June 30, 2003 and
December 31, 2002, respectively (95.6) (4.4)
Unearned restricted stock compensation (32.0) (41.4)
Accumulated other comprehensive
earnings (loss) 12.8 (29.9)
-------- --------
Total shareholders' equity 1,749.2 1,611.7
-------- --------
$ 3,349.0 $ 2,592.0
======== ========
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)
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
----------------------- -----------------------
Net sales $ 1,455.9 $ 1,202.4 $ 743.7 $ 612.4
Cost of sales 842.9 667.7 427.2 336.1
------- ------- ------- -------
Gross profit 613.0 534.7 316.5 276.3
Selling, general and
administrative expenses 327.4 273.9 164.1 137.0
Amortization of intangibles
and other assets 18.0 10.3 9.5 5.2
------- ------- ------- -------
Operating income 267.6 250.5 142.9 134.1
Other income (expense):
Interest expense (21.4) (8.4) (10.0) (4.2)
Income from equity
investments, net 21.1 -- 11.3 --
Investment income 4.7 2.0 2.4 1.2
Other income (expense), net (0.3) (0.4) (0.2) 0.2
-------- ------- ------- -------
Earnings before income taxes 271.7 243.7 146.4 131.3
Provision for income taxes 111.4 99.4 60.0 52.8
------- ------- ------- -------
Net earnings $ 160.3 $ 144.3 $ 86.4 $ 78.5
======= ======= ======= =======
Basic earnings per
common share $ 1.10 $ 1.03 $ 0.60 $ 0.56
======== ======== ======== ========
Diluted earnings per
common share $ 1.10 $ 1.01 $ 0.60 $ 0.55
======== ======== ======== ========
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, EXCEPT PER SHARE DATA)
(Unaudited)
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
------- --------- ------------- ----------
PERIOD ENDED JUNE 30, 2002
Balance at beginning of year $ 14.1 $1,081.8 $ 11.5 $ --
Comprehensive earnings:
Net earnings -- -- 144.3 --
Other comprehensive earnings:
Foreign currency translation
adjustments -- -- -- --
----- ------- ------- ------
Comprehensive earnings -- -- 144.3 --
Issuance of common stock 0.1 14.5 -- --
Issuance of restricted stock
awards 0.1 40.9 -- --
Amortization of unearned
restricted stock compensation -- -- -- --
Income tax benefit from stock
options exercised -- 15.4 -- --
Purchase of common stock -- -- -- (4.4)
----- ------- ------- ------
BALANCE AT JUNE 30, 2002 $ 14.3 $1,152.6 $ 155.8 $ (4.4)
===== ======= ======= ======
PERIOD ENDED JUNE 30, 2003
Balance at beginning of year $ 14.8 $1,406.5 $ 266.1 $ (4.4)
Comprehensive earnings:
Net earnings -- -- 160.3 --
Other comprehensive loss:
Foreign currency translation
adjustments -- -- -- --
Tax effect of other comprehensive
loss adjustments -- -- -- --
----- ------- ------ ------
Comprehensive earnings -- -- 160.3 --
Issuance of common stock -- 5.9 -- --
Issuance of restricted stock
awards -- 0.2 -- --
Cancellation of restricted stock
awards -- (1.0) -- --
Amortization of unearned
restricted stock compensation -- -- -- --
Income tax benefit from stock
options exercised -- 2.7 -- --
Assumption of vested stock options
in connection with acquisition -- 8.5 -- --
Purchase of common stock -- -- -- (91.2)
------ ------- ------- ------
BALANCE AT JUNE 30, 2003 $ 14.8 $1,422.8 $ 426.4 $ (95.6)
====== ======= ======= ======
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Unearned Accumulated
Restricted Other Total
Stock Comprehensive Shareholders'
Compensation Earnings (Loss) Equity
------------ --------------- -------------
PERIOD ENDED JUNE 30, 2002
Balance at beginning of year $ (13.2) $ (8.8) $1,085.4
Comprehensive earnings:
Net earnings -- -- 144.3
Other comprehensive earnings:
Foreign currency translation
adjustments -- 0.4 0.4
------- ------- -------
Comprehensive earnings -- 0.4 144.7
Issuance of common stock -- -- 14.6
Issuance of restricted stock
awards (41.0) -- --
Amortization of unearned
restricted stock compensation 6.2 -- 6.2
Income tax benefit from stock
options exercised -- -- 15.4
Purchase of common stock -- -- (4.4)
------- ------- -------
BALANCE AT JUNE 30, 2002 $ (48.0) $ (8.4) $1,261.9
======= ======= =======
PERIOD ENDED JUNE 30, 2003
Balance at beginning of year $ (41.4) $ (29.9) $1,611.7
Comprehensive earnings:
Net earnings -- -- 160.3
Other comprehensive loss:
Foreign currency translation
adjustments -- 71.3 71.3
Tax effect of other comprehensive
loss adjustments -- (28.6) (28.6)
------- ------- -------
Comprehensive earnings -- 42.7 203.0
Issuance of common stock -- -- 5.9
Issuance of restricted stock
awards (0.2) -- --
Cancellation of restricted stock
awards 1.0 -- --
Amortization of unearned
restricted stock compensation 8.6 -- 8.6
Income tax benefit from stock
options exercised -- -- 2.7
Assumption of vested stock options
in connection with acquisition -- -- 8.5
Purchase of common stock -- -- (91.2)
------- ------- -------
BALANCE AT JUNE 30, 2003 $ (32.0) $ 12.8 $1,749.2
======= ======= =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Six Months Ended
June 30,
--------------------------
2003 2002
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 160.3 $ 144.3
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 66.7 45.8
Stock compensation 8.6 6.2
(Gain) loss on sale of assets (0.1) 0.4
Accreted interest on zero coupon-
subordinated notes 5.1 5.0
Deferred income taxes 15.0 4.8
Change in assets and liabilities:
Increase in accounts receivable, net (18.0) (27.4)
Increase in inventories (2.4) (4.6)
Decrease (increase) in prepaid
expenses and other 3.6 (5.6)
(Decrease) increase in accounts payable (5.7) 10.3
Increase in accrued expenses and other 25.3 25.9
Other, net (0.2) 0.2
------ ------
Net cash provided by operating activities 258.2 205.3
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (37.4) (37.9)
Proceeds from sale of assets 0.6 0.6
Deferred payments on acquisitions (6.3) (8.0)
Proceeds from sale of marketable securities 50.4 --
Distributions from equity affiliates in
excess of cumulative earnings 1.6 --
Acquisition of licensing technology -- (15.0)
Acquisition of businesses, net of cash
acquired (636.0) (3.3)
------ ------
Net cash used for investing activities (627.1) (63.6)
------ ------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Six Months Ended
June 30,
------------------------
2003 2002
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan $ 350.0 $ --
Payments on bridge loan (350.0) --
Proceeds from revolving credit
facilities 265.0 --
Payments on revolving credit
facilities (180.0) --
Proceeds from senior note offering 350.0 --
Payments on other long-term debt (0.4) --
Termination of interest rate swap
agreement 5.3 --
Debt issuance costs (7.3) (1.7)
Payments on long-term lease obligations (0.7) (0.6)
Purchase of common stock (91.2) --
Net proceeds from issuance of stock to
employees 5.8 14.6
------- ------
Net cash provided by financing activities 346.5 12.3
------- ------
Effect of exchange rate changes on cash
and cash equivalents (0.1) 0.4
------- ------
Net increase (decrease) in cash and
cash equivalents (22.5) 154.4
Cash and cash equivalents at
beginning of period 56.4 149.2
------- -------
Cash and cash equivalents at
end of period $ 33.9 $ 303.6
======= =======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 2.9 $ 0.7
Income taxes, net of refunds 70.8 55.5
Disclosure of non-cash financing
and investing activities:
Issuance of restricted stock awards 0.2 41.0
Assumption of vested stock options
in connection with acquisition 8.5 --
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. On January 17,
2003, the Company completed the acquisition of DIANON Systems, Inc.,
(DIANON) a leading U.S. provider of anatomic pathology and oncology
testing services. Disclosure of certain business combination
transactions is included in Note 7 - Business Acquisition - DIANON
Systems, Inc. The Company operates in one business segment.
The financial statements of the Company's foreign subsidiaries
are measured using the local currency as the functional currency.
Assets and liabilities are translated at exchange rates as of the
balance sheet date. Revenues and expenses are translated at average
monthly exchange rates prevailing during the period. Resulting
translation adjustments are included in "Accumulated Other
Comprehensive Earnings (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.
Certain amounts in the prior year's financial statements have
been reclassified to conform with the current year presentation.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings
by the weighted average number of common shares outstanding.
Dilutive earnings per share is computed by dividing net earnings by
the weighted average number of common shares outstanding plus
potentially dilutive shares, as if they had been issued at the
beginning of the period presented. Potentially dilutive common
shares result primarily from the Company's restricted stock awards
and outstanding stock options.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The following represents a reconciliation of the weighted
average shares used in the calculation of basic and diluted earnings
per share:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ --------------------------
2003 2002 2003 2002
------------------------ --------------------------
Basic 144,562,713 140,723,679 145,222,214 140,320,864
Assumed conversion/
exercise of:
Stock options 485,967 1,081,033 381,169 977,307
Restricted stock awards -- 1,610,213 103,769 1,649,248
----------- ----------- ----------- -----------
Diluted 145,048,680 143,414,925 145,707,152 142,947,419
----------- ----------- ----------- -----------
The following table summarizes the potential common shares
not included in the computation of diluted earnings per share
because their impact would have been antidilutive:
June 30,
2003 2002
------------------------
Stock Options 4,432,902 --
Restricted Stock Awards 1,304,896 --
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 the period ended June 30, 2003.
3. STOCK COMPENSATION PLANS
During May 2003, the Company made awards of 8,230 shares of
restricted stock and 12,680 options to its non-employee directors at
a price of $30.36 under its 2000 Stock Incentive Plan.
During February 2003, the Company granted to employees
1,532,500 options at a price of $24.46 under its 2000 Stock
Incentive Plan. During March 2003, the Company granted to employees
216,700 options at a price of $28.18 under its 2000 Stock Incentive
Plan.
The tax benefits associated with the exercise of non-qualified
stock options reduced taxes currently payable by $2.7 and $15.4 for
the six months ended June 30, 2003 and 2002, respectively. Such
benefits are credited to additional paid-in-capital.
On January 21, 2003, in connection with the acquisition of
DIANON, the Company filed a Form S-8 registering approximately
690,000 shares of the Company's common stock under DIANON stock
incentive plans.
The Company applies the provisions of APB Opinion No. 25 in
accounting for its stock compensation plan and, accordingly, no
compensation cost has been recognized for its stock compensation
plans in the financial statements. Had the Company determined
compensation cost based on the fair value method as defined in SFAS
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
No. 123, and as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123", the impact on the Company's net earnings on a
pro forma basis is indicated below:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Net earnings As reported $ 86.4 $ 78.5 $ 160.3 $ 144.3
Pro forma $ 79.8 73.3 147.2 133.9
Basic earnings per
common share As reported 0.60 0.56 1.10 1.03
Pro forma 0.55 0.52 1.01 0.95
Diluted earnings per
common share As reported 0.60 0.55 1.10 1.01
Pro forma 0.55 0.51 1.01 0.94
4. STOCK REPURCHASE PROGRAM
On October 22, 2002, the Company's Board of Directors
authorized a stock repurchase program under which the Company may
purchase up to an aggregate of $150.0 of its common stock from time-
to-time. During the six months ended June 30, 2003, the Company
purchased approximately 3.1 million shares of its common stock
totaling approximately $86.4 with cash flow from operations. It is
the Company's intention to fund future purchases of its common stock
with cash flow from operations.
5. SENIOR CREDIT FACILITIES
On January 14, 2003, the Company entered into a new $150.0 364-
day revolving credit facility with Credit Suisse First Boston,
acting as Administrative Agent, and a group of financial
institutions to replace the existing $100.0 364-day revolving credit
facility. The $200.0 three-year revolving credit facility was
amended on January 14, 2003 and expires on February 18, 2005. These
credit facilities bear interest at varying rates based upon the
Company's credit rating with Standard & Poor's Ratings Services. As
of June 30, 2003, the effective interest rate on the revolving
credit agreements was 1.86%.
On January 17, 2003, in conjunction with the acquisition of
DIANON, the Company borrowed $350.0 under the DIANON Bridge Loan
Agreement with Credit Suisse First Boston, acting as Administrative
Agent. On January 31, 2003, the Company sold $350.0 aggregate
principal amount of its 5 1/2% Senior Notes due February 1, 2013.
Proceeds from the issuance of these Notes ($345.1) together with
cash on hand was used to repay the $350.0 principal amount of the
Company's bridge loan facility, and as a result, the DIANON bridge
loan was terminated.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
During the six months ended June 30, 2003, the Company borrowed
a total of $265.0 and made payments of $180.0 under its revolving
credit agreements leaving an outstanding balance of $85.0 as of June
30, 2003. At June 30, 2003, the effective interest rate on the
revolving credit agreements was 1.86%.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements, which have been used by the
Company from time to time in the management of interest rate
exposure, are accounted for on an accrual basis. Amounts to be paid
or received under such agreements are recognized as interest expense
in the periods in which they accrue.
On June 18, 2003, the Company terminated its only outstanding
interest rate swap agreement and received net proceeds of $5.3.
Approximately $1.2 of these proceeds are included in the Company's
interest expense for the six months ended June 30, 2003. The
remaining $4.1 of these proceeds has been deferred on the Company's
balance sheet and will reduce interest expense on the 5 1/2% senior
notes over the life of the notes. Including the effect of this swap
agreement, the weighted-average effective interest rate on the
Company's 5 1/2% senior notes was 4.07% at June 30, 2003.
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 June 30, 2003 and 2002.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
7. BUSINESS ACQUISITION - DIANON SYSTEMS, INC.
On January 17, 2003, the Company completed the acquisition of
all of the outstanding shares of DIANON Systems, Inc. (DIANON) for
$47.50 per share in cash, or approximately $595.6 including
transaction fees and expenses, and converted approximately 390,000
vested DIANON employee stock options into approximately 690,000
vested Company options valued at $8.5. The transaction total of
approximately $604.1 was funded by a combination of cash on hand,
borrowings under the Company's senior credit facilities and a bridge
loan facility.
DIANON is a leading provider of anatomic pathology and oncology
testing services in the U.S. and had 2001 revenues of approximately
$125.7. DIANON had approximately 1,100 employees at the closing
date of the acquisition and processed more than 8,000 samples per
day in one main testing facility and four regional labs.
The acquisition of DIANON was accounted for under the purchase
method of accounting. As such, the cost to acquire DIANON has been
allocated to the assets and liabilities acquired based on estimated
fair values as of the closing date. The consolidated financial
statements include the results of operations of DIANON subsequent to
the closing of the acquisition.
The Company finalized its recording of the DIANON purchase
price allocation during the second quarter of 2003. In connection
with the DIANON integration plan, the Company recorded $18.9 of
costs associated with the execution of the plan. The majority of
these integration costs related to contractual obligations
associated with leased facilities and equipment ($10.8) and employee
severance ($8.1). These costs were accounted for as costs of the
DIANON acquisition and included in goodwill.
The following table summarizes the Company's purchase price
allocation related to the acquisition of DIANON based on the fair
value of the assets acquired and liabilities assumed on the
acquisition date.
Fair Values
as of
January 17, 2003
-------------------
Current assets $ 87.7
Property, plant and equipment 28.3
Goodwill 353.9
Identifiable intangible assets 271.5
Other assets 3.0
-------
Total assets acquired 744.4
-------
Current liabilities $ 33.1
Other liabilities 106.8
-------
Total liabilities assumed 139.9
-------
Net assets acquired $ 604.5
=======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
As a result of this acquisition, the Company recorded an
addition to non-deductible goodwill of approximately $353.9, an
addition to customer lists of approximately $227.8 (expected period
of benefit of 30 years, non-deductible for tax) and an addition to
trade names of approximately $43.7 (expected period of benefit of 15
years, non-deductible for tax).
The following unaudited pro forma combined financial
information for the three and six months ended June 30, 2003 and
2002 assumes that the DIANON and Dynacare acquisitions which were
closed by the Company on January 17, 2003 and July 25, 2002,
respectively, were acquired on January 1, 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------------- -------------------
Net sales $ 743.7 $ 737.3 $1,463.9 $1,447.1
Net earnings 86.4 82.5 160.4 151.6
Diluted earnings per
common share $ 0.60 $ 0.55 $ 1.10 $ 1.02
The Company believes that the combined company is now in a
position nationally to offer to both primary care physicians and
specialists such as oncologists, urologists and gastroenterologists,
the broadest range of leading-edge anatomic, genomic and clinical
testing technology for the large and rapidly growing cancer
diagnostic market.
8. 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, 2002 $ 5.8 $20.3 $26.1
DIANON integration 8.1 10.8 18.9
Cash payments (6.3) (1.4) (7.7)
---- ---- ----
Balance at June 30, 2003 $ 7.6 $29.7 $37.3
==== ==== ====
Current $21.8
Non-current 15.5
----
$37.3
====
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
9. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six-
month period ended June 20, 2003 and for the year ended December 31,
2002 are as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Balance as of January 1 $ 910.1 $ 719.3
Goodwill acquired during
the period 375.0 190.8
Adjustments to goodwill (12.9) --
-------- --------
Balance at end of period $ 1,272.2 $ 910.1
======== ========
The adjustments to goodwill represent certain adjustments made
to the balances of investments in equity affiliates relating to the
Dynacare acquisition.
The components of identifiable intangible assets are as follows:
June 30, 2003 December 31, 2002
----------------------- ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------- -----------------------
Customer lists $ 578.3 $ 104.0 $ 338.4 $ 90.8
Patents and
technology 51.9 8.3 55.2 6.0
Non-compete
agreements 22.1 17.0 21.3 16.1
Trade name 49.6 2.0 5.9 0.5
------- ------- ------- -------
$ 701.9 $ 131.3 $ 420.8 $ 113.4
======= ======= ======= =======
Amortization of intangible assets for the six month and three
month periods ended June 30, 2003 was $18.0 and $9.5, respectively,
and $10.3 and $5.2 for the six and three month periods ended June
30, 2002. Amortization expense for the net carrying amount of
intangible assets is estimated to be $20.2 for the remainder of
fiscal 2003, $40.3 in fiscal 2004, $39.6 in fiscal 2005, $37.1 in
fiscal 2006, and $35.4 in fiscal 2007.
10. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity"
was issued. SFAS No. 150 requires certain financial instruments
that embody obligations of the issuer and have characteristics
of both liabilities and equity to be classified as liabilities.
The provisions for SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
all other instruments that exist as of the beginning of the
first interim financial reporting period beginning after June
15, 2003. The Company does not have any financial instruments
that meet the provisions of SFAS No. 150, and therefore,
adopting the provisions of this Statement is not expected to
have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In April 2003, the Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" was issued. This
Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS No.
133. The new guidance amends SFAS No. 133 for decisions made
(1) as part of the Derivatives Implementation Group process that
effectively required amendments to SFAS No. 133, (2) in
connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues
raised in relation to the application of the definition of a
derivative. The amendments set forth in SFAS No. 149 improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. This Statement is
generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after
June 30, 2003. It is not expected that the provisions of SFAS
No. 149 will have a material impact on the Company's
consolidated financial position, results of operations or cash
flows.
In January 2003, the FASB issued FASB Interpretation No. 46
(FIN No. 46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN No. 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties. FIN No. 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or
annual period beginning after June 15, 2003. The Company does not
believe it has any unconsolidated variable interest entities, but
has not fully completed its evaluation.
In December 2002, Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123",
was issued. This Statement amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require disclosure in interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
results. The Company does not intend to adopt the fair-value method
of accounting for stock-based employee compensation under SFAS No.
123 and therefore, the adoption of SFAS No. 148 has only impacted
disclosures, and not the financial results of the Company.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others."
Interpretation No. 45 changes current practice in accounting for and
disclosure of guarantees and will require certain guarantees to be
recorded as liabilities at fair value on the balance sheet. Current
practice requires that liabilities related to guarantees be recorded
only when a loss is probable and reasonably estimable, as those
terms are defined in SFAS No. 5, "Accounting for Contingencies."
Interpretation No. 45 also requires a guarantor to make significant
new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure requirements of
Interpretation No. 45 were effective December 31, 2002. The initial
recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December
31, 2002. The Company does not have any material guarantees that
would require current disclosure or further recognition under
Interpretation No. 45.
11. 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 materially differ
from accruals previously established or have a material adverse
effect on the Company. The Company has now substantially
implemented its obligations under the settlement. On January 9,
2001, the Company was served with a complaint in North Carolina
which purported to be a class action and makes claims similar to
those referred to above. That claim has now been dismissed with
prejudice.
On June 24, 2003, the Company and certain of its executive
officers were sued in the United States District Court for the
Middle District of North Carolina in the first of a series of
putative shareholder class actions alleging securities fraud.
Since that date, at least five other complaints containing
substantially identical allegations have been filed against the
Company and certain of the Company's executive officers. Each of
the complaints alleges that the defendants violated the
federal securities laws by making material misstatements and/or
omissions that caused the price of the Company's stock to be
artificially inflated between February 13 and October 3, 2002. The
plaintiffs seek certification of a class of substantially all
persons who purchased shares of the Company's stock during
that time period and unspecified monetary damages. The Company
anticipates that these six cases, as well as any subsequently
filed cases making substantially similar allegations, will be
consolidated and proceed as a single case. The defendants deny
any liability and intend to defend the case vigorously. At this
time, it is premature to make any assessment of the potential outcome
of the cases or whether they could have a material adverse effect
on the Company's financial condition.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company is the appellant in a patent case originally filed
in the United States District Court for the District of Colorado.
The Company has disputed liability and contested the case
vigorously. After a jury trial, the district court entered judgment
against the Company for patent infringement. The Company appealed
the case to the United States Court of Appeals for the Federal
Circuit. The Company has received a letter from its counsel dated
February 7, 2003 stating "it remains our opinion that the amended
judgment and order will be reversed on appeal."
The Company is a party to two lawsuits involving Chiron Inc.
relating to Hepatitis C and HIV testing. Chiron asserts that the
Company has infringed on Chiron's patents in each of these areas. The
Company denies liability and intends to contest the suits vigorously.
It is premature at this juncture to assess the likely outcome of these
matters, or to determine whether they will have a material effect on
the Company.
The Company is also involved in various claims and legal
actions arising in the ordinary course of business. These matters
include, but are not limited to, intellectual property disputes,
professional liability, employee related matters, and inquiries from
governmental agencies and Medicare or Medicaid payors and managed
care payors requesting comment on allegations of billing
irregularities that are brought to their attention through billing
audits or third parties. In the opinion of management, based upon
the advice of counsel and consideration of all facts available at
this time, the ultimate disposition of these matters is not expected
to have a material adverse effect on the financial position, results
of operations or liquidity of the Company.
The Company 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 June 30, 2003 and 2002, the Company had provided letters of
credit aggregating approximately $46.1 and $29.3 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. 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 applicable Federal Occupational Safety
and Health Administration requirements and the Needlestick
Safety and Prevention Act which may result in penalties and
loss of licensure;
5. failure to comply with HIPAA, which could result in
significant fines;
6. failure of third party payors to complete testing with the
Company, or to accept or remit transactions in HIPAA-required
standard transaction and code set format on and after October 16, 2003,
could result in an interruption in the Company's cash flow unless
regulatory relief from the requirements is obtained;
7. increased competition, including price competition;
8. changes in payor mix, including an increase in capitated
managed-cost health care;
9. failure to obtain and retain new customers and alliance
partners, or a reduction in tests ordered or specimens
submitted by existing customers;
10.failure to integrate newly acquired businesses and the cost
related to such integration;
11.adverse results in litigation matters;
12.inability to attract and retain experienced and qualified
personnel;
13.failure to maintain the Company's days sales outstanding
levels;
14.decrease in credit ratings by Standard & Poor's and/or
Moody's;
15.failure to develop or acquire licenses for new or improved
technologies, or if customers use new technologies to perform
their own tests; and
16.failure in the Company's information technology systems
resulting in an increase in testing turnaround time or
billing processes.
RESULTS OF OPERATIONS
- ---------------------
As discussed in the Company's Annual Report for the year
ended December 31, 2002, the Company acquired Dynacare Inc. on
July 25, 2002 and DIANON Systems, Inc. on January 17, 2003. All
dollar amounts are in millions.
Three Months ended June 30, 2003 compared with Three Months ended
June 30, 2002.
Net sales for the three months ended June 30, 2003 were
$743.7, an increase of $131.3, or approximately 21.4%, from
$612.4 for the comparable 2002 period. The sales increase is a
result of an increase of approximately 16.0% in volume (primarily
volume growth in genomic testing and resulting from the
acquisitions of Dynacare and DIANON) and 5.5% in price (increased
price per accession in core and esoteric testing, a continued mix
shift to higher-priced esoteric tests and acquisitions of
Dynacare and DIANON). These improvements were partially offset
by the slowing economy and physician strikes to protest rising
malpractice rates.
Cost of sales, which includes primarily laboratory and
distribution costs, was $427.2 for the three months ended June
30, 2003 compared to $336.1 in the corresponding 2002 period, an
increase of $91.1. The increase in cost of sales is primarily
the result of increases in volume due to recent acquisitions,
growth in the base business and growth in genomic and esoteric
testing. Cost of sales as a percentage of net sales was 57.4%
for the three months ended June 30, 2003 and 54.9% in the
corresponding 2002 period, reflecting cost of additional lab
infrastructure along with the shift in test mix.
Selling, general and administrative expenses increased to
$164.1 for the three months ended June 30, 2003 from $137.0 in
the same period in 2002. This increase resulted primarily from
personnel and other costs as a result of the Dynacare and DIANON
acquisitions. As a percentage of net sales, selling, general and
administrative expenses were 22.1% and 22.4% for the three months
ended June 30, 2003 and 2002, respectively, reflecting the
realization of synergies from the Dynacare and DIANON
acquisitions, as well as the Company's reduction of its bad debt
expense rate by 50 basis points during the quarter.
The amortization of intangibles and other assets was $9.5
and $5.2 for the three months ended June 30, 2003 and 2002. The
increase in the amortization expense for the three months ended
June 30, 2003 is a direct result of the acquisitions of Dynacare
and DIANON.
Interest expense was $10.0 for the three months ended June
30, 2003 compared with $4.0 for the same period in 2002. This
increase was a direct result of the Company's financing of the
DIANON acquisition.
Income from equity investments was $11.3 for the three months
ended June 30, 2003. This income represents the Company's ownership
share in equity affiliates acquired as part of the Dynacare
acquisition on July 25, 2002. A significant portion of this income
is derived from investments in Ontario and Alberta, Canada, and is
earned in Canadian dollars. The strengthening of the Canadian
dollar versus the U.S. dollar during the second quarter of 2003 has
had a positive impact on this income as well as the cash generated
from the Canadian investments.
The provision for income taxes as a percentage of earnings
before taxes was 41.0% for the three months ended June 30, 2003
compared to 40.2% for the three months ended June 30, 2002.
Six Months ended June 30, 2003 compared with Six Months ended
June 30, 2002.
Net sales for the six months ended June 30, 2003 were
$1,455.9, an increase of $253.5, or 21.1%, from $1,202.4 for the
same period in 2002. The sales increase is a result of an
increase in volume of approximately 15.0% (primarily volume
growth in genomic testing and resulting from the acquisitions of
Dynacare and DIANON) and an increase in price of approximately
6.0% (increased price per accession in core and esoteric testing,
a continued mix shift to higher-priced esoteric tests and
acquisitions of Dynacare and DIANON). These improvements were
partially offset by the impact of severe winter weather during
the first quarter of 2003 and more recently, the slowing economy
and physician strikes to protest rising malpractice rates.
Cost of sales, which includes primarily laboratory and
distribution costs, was $842.9 for the six months ended June 30,
2003 compared to $667.7 for the same period of 2002, an increase
of $175.2. The increase in cost of sales is primarily the result
of increases in volume and supplies due to recent acquisitions,
growth in the base business and growth in esoteric and genomic
testing (with significant increases in Cystic Fibrosis and Human
Papillomavirus testing). Cost of sales as a percentage of net
sales was 57.9% for the six months ended June 30, 2003 and 55.5%
for the same period in 2002, reflecting cost of additional lab
infrastructure along with the shift in test mix.
Selling, general and administrative expenses increased to
$327.4 for the six months ended June 30, 2003 from $273.9 for the
same period in 2002. This increase resulted primarily from
personnel and other costs as a result of the recent acquisitions.
As a percentage of net sales, selling, general and administrative
expenses were 22.5% and 22.8% for the six months ended June 30,
2003 and 2002, respectively, reflecting the realization of
synergies from the Dynacare and DIANON acquisitions, as well as
the Company's reduction of its bad debt expense rate by
approximately 100 basis points during the first six months of
2003 compared to 2002.
The amortization of intangibles and other assets was $18.0
and $10.3 for the six months ended June 30, 2003 and 2002. The
increase in the amortization expense for the six months ended
June 30, 2003 is a result of the acquisitions of Dynacare and
DIANON.
Interest expense was $21.4 for the six months ended June 30,
2003 compared with $8.4 for the same period in 2002. This
increase was a direct result of the Company's financing of the
DIANON acquisition.
The provision for income taxes as a percentage of earnings
before taxes was 41.0% for the six months ended June 30, 2003
compared to 40.8% for the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $258.2 and $205.3
for the six months ended June 30, 2003 and June 30, 2002,
respectively. The increase in cash flows from operations primarily
resulted from improved earnings and the improvement of the Company's
DSO to 54 days at June 30, 2003 from 58 days at June 30, 2002.
Capital expenditures were $37.4 and $37.9 at June 30, 2003 and
2002, respectively. The Company expects capital expenditures of
approximately $90.0 in 2003. These expenditures are intended to
continue to improve information systems and further automate
laboratory processes. Such expenditures are expected to be funded
by cash flow from operations as well as borrowings under the
Company's revolving credit facilities.
During the three months ended June 30, 2003, the Company repaid
a total of $50.0 on its revolving credit facilities.
During the three months ended June 30, 2003, the Company
purchased approximately 1.9 million shares of its common stock
totaling approximately $52.8 with cash flow from operations for a
total repurchase of approximately 3.1 million shares totaling
approximately $86.4 for the six month period. In addition, certain
employees of the Company surrendered 174,794 shares of restricted
stock in April 2003 for the payment of payroll taxes totaling
approximately $4.8, in accordance with the terms of the Company's
stock incentive plan. It is the Company's intention to fund future
purchases of its common stock with cash flow from operations.
In connection with the DIANON integration plan, the Company
expects to achieve synergy savings of approximately $7.5 in 2003,
$25.0 in 2004, and a total savings of $35.0 by 2005. The
integration of Dynacare remains on schedule with $4.0 in synergy
savings at the end of 2002, $36.0 in 2003, and a total savings of
$45.0 by 2004.
During the first quarter of 2003, the Company entered into an
interest rate swap agreement with a major financial institution,
solely to manage its interest rate exposure on $175.0 of its 5 1/2%
senior notes. This swap agreement was terminated during June 2003
and resulted in net proceeds to the Company of $5.5.
Based on current and projected levels of operations, coupled
with availability under its revolving credit facilities, the Company
believes it has sufficient liquidity to meet both its short-term and
long-term cash needs.
CONTRACTUAL CASH OBLIGATIONS
- ---------------------------
Payments Due by Period
----------------------------------------
1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
------- ------- ------- ----------
Capital lease obligations $ 1.8 $ 5.4 $ 4.1 $ --
Operating leases 26.4 70.0 35.3 32.2
Contingent future acquisition
payments 5.7 -- -- --
Restructuring obligations 3.5 3.4 3.4 13.2
Contingent future licensing
payments 42.5 7.0 15.0 --
Revolving credit facilities -- 85.0 -- --
5 1/2% Senior Notes -- -- -- 350.0
Zero Coupon-Subordinated Notes -- 530.5(a) -- --
----- ----- ----- -----
Total contractual cash
obligations $ 79.9 $701.3 $ 57.8 $395.4
===== ===== ===== =====
(a) Holders of the zero coupon-subordinated notes may require the
Company to purchase all or a portion of their notes on
September 11, 2004, 2006 and 2011 at prices ranging from
$712.97 to $819.54 per note. The Company may choose to pay the
purchase price in cash or common stock or a combination of cash
and common stock. If the holders elect to require the Company
to purchase their notes, it is the Company's current intention
to retire the notes by a cash payment. However, future market
conditions are subject to change. Should the holders put the
notes to the Company on any of the dates above, the Company
believes that it will be able to obtain alternate financing to
satisfy this contingent obligation.
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. As more fully discussed in Note 6 to the Unaudited
Condensed Consolidated Financial Statements, the Company had an
interest rate swap agreement with a major financial institution,
solely to manage its interest rate exposure on $175.0 of its 5 1/2%
senior notes. This swap agreement was terminated during June 2003
and the Company received net proceeds of $5.5. Although, as set forth
below, the Company's zero coupon-subordinated notes contain features
that are considered to be embedded derivative instruments, the Company
does not hold or issue derivative financial instruments for trading
purposes. The Company does not believe that its exposure to market risk
is material to the Company's financial position or results of
operations.
The Company's zero coupon-subordinated notes contain the
following three features that are considered to be embedded
derivative instruments under FAS No. 133:
1) The Company will pay contingent cash interest on the zero
coupon-subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of the
sum of the issue price, accrued original issue discount and
contingent additional principal, if any, for a specified
measurement period.
2) Contingent additional principal will accrue on the zero
coupon-subordinated notes during the two-year period from
September 11, 2004 to September 11, 2006, if the Company's
stock price is at or below specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for
conversion during any period in which the rating assigned to
the zero coupon-subordinated notes by Standard & Poor's
Ratings Services is BB- or lower.
Based upon independent appraisals, these embedded derivatives
had no fair value at June 30, 2003.
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.
There were no significant changes in the Company's internal
controls or in other factors that could adversely affect the
internal controls subsequent to the date the Company completed its
evaluation.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 11 to the Company's Unaudited Condensed Consolidated
Financial Statements" for the six-months ended June 30, 2003, which
is incorporated by reference.
Item 4 Submission of Matters to a Vote of Security Holders
The following votes were provided by American Stock Transfer
& Trust Company in their proxy tabulation reports dated May 23,
2003:
Total outstanding shares of Laboratory Corporation
of America (NEW): 146,501,837
Total shares voted 132,731,308
Votes Votes
For Withheld
------------- -----------
Election of the members
of the Board of Directors:
Thomas P. Mac Mahon 127,685,060 5,046,247
Jean-Luc Belingard 127,942,427 4,788,881
Wendy E. Lane 124,431,273 8,299,035
Robert E. Mittelstaedt, Jr. 127,945,207 4,786,101
James B. Powell, MD 106,447,776 26,283,532
Andrew G. Wallace, MD 128,788,039 3,943,269
Votes Votes Votes
For Against Abstained
---------- ----------- -----------
Approval of the Amendment to
the Laboratory Corporation of
America Holdings 2000 Stock
Incentive Plan 114,872,801 12,696,603 5,161,904
Approval of the Amendment to the
Laboratory Corporation of America
Holdings Management Incentive
Bonus Plan 115,897,078 11,660,785 5,173,445
Ratification of the appointment of
PricewaterhouseCoopers LLP as the
Company's independent accountants
for the fiscal year ending
December 31, 2003 129,377,315 1,721,596 1,632,397
Item 4. Submission of Matters to a Vote of
Security Holders- Continued
Total outstanding shares of Laboratory Corporation
of America Holdings (OLD): 48,554
Total shares voted 5,030
Votes Votes
For Withheld
------------- -----------
Election of the members
of the Board of Directors:
Thomas P. Mac Mahon 5,030 0
Jean-Luc Belingard 5,030 0
Wendy E. Lane 5,030 0
Robert E. Mittelstaedt, Jr. 5,030 0
James B. Powell, MD 5,030 0
Andrew G. Wallace, MD 5,030 0
Votes Votes Votes
For Against Abstained
---------- ----------- -----------
Approval of the Amendment to the
Laboratory Corporation of America
Holdings 2000 Stock Incentive
Plan 4,858 172 0
Approval of the Amendment to the
Laboratory Corporation of America
Holdings Management Incentive
Bonus Plan 4,804 226 0
Ratification of the appointment of
PricewaterhouseCoopers LLP as the
Company's independent accountants
for the fiscal year ending
December 31, 2003: 4,958 72 0
In addition, certain shares of National Health Laboratories
Holdings Inc. (NHL) which have not been converted to Company shares
were eligible to vote at the annual meeting and were voted as follows:
Total outstanding NHL shares: 116
Total shares voted: 5
Item 4. Submission of Matters to a Vote of
Security Holders- Continued
Votes Votes
For Withheld
------------- ----------
Election of the members
of the Board of Directors:
Thomas P. Mac Mahon 5 0
Jean-Luc Belingard 5 0
Wendy E. Lane 5 0
Robert E. Mittelstaedt, Jr. 5 0
James B. Powell, MD 5 0
Andrew G. Wallace, MD 5 0
Votes Votes Votes
For Against Abstained
---------- ----------- ---------
Approval of the Amendment to the
Laboratory Corporation of America
Holdings 2000 Stock Incentive
Plan 5 0 0
Approval of the Amendment to the
Laboratory Corporation of America
Holdings Management Incentive
Bonus Plan 5 0 0
Ratification of the appointment of
PricewaterhouseCoopers LLP as the
Company's independent accountants
for the fiscal year ending
December 31, 2003: 5 0 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer
32 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer and the Chief Financial
Officer
(b) Reports on Form 8-K
N/A
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
August 14, 2003