SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 22, 1998
LabOne, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 0-15975 48-0952323
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(State or other jurisdiction (Commission (I. R. S. Employer
of incorporation File Number) Identification No.)
10310 W. 84th Terrace, Lenexa, KS 66214
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 913-888-1770
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Page 1 of 9
ITEM 5. Other Events
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CAUTIONARY STATEMENT UNDER THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
LabOne, Inc. (the "Company") is filing this Form 8-K in order to obtain
the benefits of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
Certain written and oral statements which have been made and which may be
made from time to time by the Company, or by its officers, directors or
employees acting on its behalf, that are not statements of historical fact,
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include, without
limitation, any statement specifically identified by the Company as a forward-
looking statement. Examples of forward-looking statements include, but are
not limited to: (i) projections of revenues, income or loss, earnings or loss
per share, capital expenditures, the payment or non-payment of dividends,
capital structure and other financial items, (ii) statements of plans and
objectives of the Company or its management or Board of Directors, including
plans or objectives relating to the products or services of the Company, (iii)
statements of future economic performance, and (iv) statements of assumptions
underlying the statements described in (i), (ii) and (iii). Forward-looking
statements can often be identified by the use in such statements of forward-
looking terminology, such as "believes," "expects," "may," "will," "should,"
"could," "intends," "plans," "estimates" or "anticipates," or the negative
thereof, other variations thereon or comparable terminology.
Forward-looking statements made by or on behalf of the Company involve
risks and uncertainties which may cause actual results to differ materially
from those in such statements. The Company cautions investors that any
forward-looking statement made by the Company is not a guarantee of future
performance or results.
Any forward-looking statement made by or on behalf of the Company speaks
only as of the time at which the statement is made. The Company does not
undertake to publicly update or correct any forward-looking statement made by
or on behalf of the Company.
The list set forth below of factors which could cause actual results to differ
materially from those discussed in forward-looking statements made by or on
behalf of the Company is not exhaustive. Other factors not identified herein
could also have such an effect.
Important factors which could cause actual results to differ materially
from those discussed in forward-looking statements made by or on behalf of the
Company include the following:
Insurance Testing.
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A substantial portion of the Company's revenues and net earnings are
derived from the Company's provision of risk appraisal laboratory services to
the insurance industry. The tests performed by the Company are specifically
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designed to assist an insurance company in objectively evaluating the
mortality and morbidity risks posed by policy applicants. The majority of the
testing is performed on specimens of individual life insurance policy
applicants. The Company also provides testing services on specimens of
individuals applying for individual and group medical and disability policies.
The Company's results of operations from insurance testing services are
subject to a number of risks and uncertainties, including, without limitation,
the number of life insurance applications written in the industry, the policy
amount thresholds at which insurance companies order tests, the type and cost
of tests requested by insurance companies (i.e. blood, urine, saliva, hair,
etc.), innovations in the types and cost of tests available for testing which
are approved by the Food and Drug Administration, the prices which the Company
can charge for performing tests, the nature and extent of competition in the
industry and the extent to which insurance companies maintain in-house testing
facilities. Changes in these factors are generally beyond the Company's
control and are difficult to predict. As a result of these and other risks
and uncertainties, future results of the Company's insurance testing
operations may be materially better or worse than expected or projected.
Expansion into New Markets.
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The Company's growth strategy entails expanding its laboratory testing
services to include: (a) testing for the healthcare industry and (b) substance
abuse testing. The Company began offering testing services in these areas in
1994.
With respect to testing services for the healthcare industry, the Company
provides clinical testing services to aid in the diagnosis and treatment of
patients. The Company markets its clinical testing services to the payers of
healthcare - insurance companies and self-insured groups - through exclusive
arrangements with managed care organizations and through the Lab Card Program.
The Lab Card Program provides laboratory testing at substantial savings, which
savings are shared with the patient to create an incentive for the patient to
direct laboratory work to the company. Prior to the Company's adoption of the
Program in 1994, the Program was untested in the marketplace. The Program
will be successful only to the extent that the Company can continue to
convince potential customers of its efficacy and value, patients direct
laboratory work to the Company and competitors do not adopt equivalent or
superior marketing programs.
With respect to substance abuse testing, the Company is certified by the
Substance Abuse and Mental Health Services Administration (SAMHSA) to perform
substance abuse testing for federally regulated employers. The Company is
currently marketing substance abuse testing services throughout the country to
both regulated and non-regulated employers, including Fortune 1000 companies,
third party administrators and occupational health providers.
Although the Company has met with initial success in marketing its
testing services in the healthcare and substance abuse testing industries,
there can be no assurance that the Company will be able to continue increasing
its market share in these industries or that the Company's provision of
testing services in these industries will become profitable. The Company's
continued expansion in, and results of operations from, these industries is
subject to a number of risks and uncertainties, including, without limitation,
the nature and extent of competition, the Company's ability to comply with
additional regulatory and certification requirements applicable to testing
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in these industries, the extent of future efforts in the healthcare industry
to control or reduce costs, and the Company's ability to successfully market
its services to new customers in new markets.
Cost Reduction Efforts in the Healthcare Industry.
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The clinical testing industry has been affected by the growth of managed
care organizations and the efforts of third party payers to control the
utilization and costs of health care services. Managed care organizations
have become a significant force in the health care industry. Managed care
providers typically contract with a limited number of clinical laboratories
and negotiate discounts to the fees charged by such laboratories in an effort
to control costs. Many managed care providers have used capitated payment
contracts, pursuant to which the managed care provider and the laboratory
agree to a per member, per month payment to cover an agreed upon schedule
of laboratory tests during the month, regardless of the number or cost of
those tests actually performed. The effect of capitated payment contracts
is to shift the risks of additional testing beyond that covered by
the capitated payment to the clinical laboratory. As a result of the
expansion of managed care, many clinical laboratories have experienced
declines in test utilization and per-test revenue. In addition, Medicare,
Medicaid and insurance companies have increased efforts to control the cost
and delivery of health care services, including testing services. These
efforts have also reduced prices, added costs and decreased test utilization
in the clinical laboratory industry. There is a substantial risk that further
reductions in reimbursement rates of third-party payers will occur. The
Company believes that it can effectively compete with existing clinical
laboratories in providing low cost testing services to managed care companies
and third party payers. Even if the Company is successful in marketing its
services to managed care companies and insurance companies, continued cost-
cutting efforts may further erode the volume of testing and profit margins in
the industry and adversely affect the Company's clinical laboratory
operations.
Competition.
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The Company currently services over half of the insurance laboratory
testing market. The Company has two other main competitors, Osborn
Laboratories, Inc. and Clinical Reference Laboratory. The insurance testing
industry is highly competitive. The primary focus of the competition is
pricing. This continued competition has resulted in a decrease in the average
price per test charged by the Company. The clinical laboratory testing market
is highly fragmented and very competitive. The Company faces competition from
numerous independent clinical laboratories and hospital-owned or physician-
owned laboratories. Many of the Company's competitors are significantly
larger and have substantially greater financial resources than the Company.
The Company competes in the substance abuse testing market nationwide. The
Company's major competitors are the three major clinical chains, Laboratory
Corporation of America, Quest Diagnostics and SmithKline Beecham Laboratories,
who collectively service approximately two-thirds of the substance abuse
testing market. The principal methods of competition in the clinical
laboratory and substance abuse testing markets are price and timeliness
of service. The Company's competitors may take actions to meet the
Company's marketing programs and other initiatives, and may be willing to
accept lower margins and to reduce prices in order to more effectively compete
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in the Company's industries. As a result of such actions, the Company could
fail to achieve sales and revenues increases or otherwise fail to meet its
anticipated results. There can be no assurance that increased competition in
the Company's industries will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Certification.
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The Company's laboratory is currently certified to conduct laboratory
testing under the Clinical Laboratory Improvement Amendments of 1988
(collectively, as amended, CLIA '88), by the Substance Abuse and Mental Health
Services Administration (SAMHSA) and by all other states that require separate
licensure. The Company is also accredited by the College of American
Pathologists (CAP). Certification and accreditation is essential to the
Company's business because some of its customers are required to use certified
laboratories, and many of its customers look to certification and
accreditation as an indication of accuracy and reliability of results. In
order to remain certified and accredited, the Company is subject to frequent
inspections and proficiency testing challenges. Failure to meet any of the
numerous certification requirements to which the Company is subject could
result in suspension or loss of certification. Such suspension or loss of
certification could have a material adverse effect on the Company.
General Economic Conditions.
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Demand for the Company's services is dependent on general economic
conditions. The Company generally conducts fewer tests for the insurance
industry during periods of recession. In addition, recessions and economic
slow-downs generally result in fewer new hires, and therefore may lead to
fewer pre-employment drug tests for public and private employer customers.
Because expenses associated with maintaining the Company's testing work force
are relatively fixed over the short term, the Company's profit margins tend to
increase in periods of higher testing volume and decrease in periods of lower
testing volume.
Fluctuations in Quarterly Operating Results
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The Company's quarterly operating results will be influenced by a host of
factors, which include those discussed herein and the following: regulatory
matters; the extent to which the Company's services gain market acceptance in
new markets; competition; changes in the mix of testing services provided in a
given quarter; changes in pricing policies by the Company and by its
competitors; acquisition costs and restructuring and other charges associated
with acquisitions; the Company's success in implementing its growth strategy;
personnel changes; and general economic conditions. As a result of the
influence of these factors, the Company's results of operations may fluctuate
from quarter to quarter, and the Company's results of operations in any
particular quarter may be materially better or worse than expected or
projected.
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Legal Proceedings.
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In the ordinary course of its business, claims are made against the
Company by individuals alleging false positive or false negative reports. To
date, the Company has not experienced any material liability related to these
claims, although there can be no assurance that the Company will not at some
time in the future experience significant liability in connection with such
claims. The Company believes that its liability insurance coverage is
adequate for its business. However, there can be no assurance that the
Company's existing insurance coverage limits will be adequate to protect the
Company from any liabilities it might incur in connection with its operations.
Any liabilities in excess of coverage could have a material adverse affect on
the Company's business, results of operations and financial condition.
Dependence on Key Personnel.
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The Company is dependent upon a number of key management and technical,
sales and marketing personnel. The loss of a number of key employees could
have a material adverse effect on the Company. The Company believes that its
future success will depend in part upon its continued ability to attract,
retain and motivate highly skilled personnel.
Governmental Regulation.
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Operation of Clinical Laboratory.
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The clinical laboratory industry is subject to significant governmental
regulation at the Federal, state and local levels. Virtually all clinical
laboratories, including the laboratory owned by the Company, are required to
be certified or licensed under CLIA, the Medicare and Medicaid programs and
various state and local laws, and may be subject to periodic inspections by
regulatory agencies. In 1992, the Department of Health and Human Services
issued regulations implementing CLIA '88 which establish quality standards for
the conduct of different categories of laboratory tests. The potential
penalties for failure to comply with these regulations include denial of the
right to conduct business, significant fines and criminal penalties. The
Company is also subject to state regulations which may impose more stringent
requirements than federal law. Although the Company has instituted programs
to ensure that its operations meet all applicable regulatory requirements,
there can be no assurance that the Company will always be able to comply with
all of such requirements. The loss of a license, imposition of a fine or
future changes in such Federal, state and local laws and regulations could
have a material adverse effect on the Company.
Medicare/Medicaid Regulations.
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A small portion of the Company's revenues from clinical laboratory services
are received from Medicare or Medicaid programs. Although the Company does
not expect the percentage of its revenues derived from Medicare and Medicaid
reimbursements to increase substantially in the future, to the extent that
such revenues do increase, the Company's results of operations may be affected
by Medicare and Medicaid reimbursement policies. In 1984, Congress
established a Medicare fee schedule for clinical laboratory services performed
for patients under Part B of the Medicare program.
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Subsequently, Congress imposed a national ceiling on the amount that can be
paid under the fee schedule. Since 1984, Congress has periodically reduced
the ceilings on Medicare reimbursement to clinical laboratories from
previously authorized levels. In addition, state Medicaid programs are
prohibited from paying more than the Medicare fee schedule for clinical
laboratory services provided to Medicaid recipients. It is impossible to
predict if additional Medicare reductions will be implemented.
The Federal government has adopted policies for administration of
Medicare payments to clinical laboratories for the most frequently performed
automated blood chemistry profiles. The policies establish a consistent
nationwide standard for the content of automated blood chemistry profiles and
require laboratories performing certain profiles to obtain and provide
documentation of the medical necessity of tests included in the profiles for
each Medicare beneficiary. The Company incurs additional costs in complying
with these regulations.
Future changes in Federal, state and local regulations affecting
government reimbursement of clinical laboratory testing could have an adverse
effect on the Company. The materiality of any such adverse effect will depend
in part upon the extent to which the Company receives its revenues from
Medicare and Medicaid programs.
Fraud and Abuse Regulations.
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A wide array of fraud and abuse provisions apply to clinical laboratories
participating in Medicare and Medicaid programs. Penalties for violations of
these laws include exclusion from participation in Medicare/Medicaid programs
and civil and criminal penalties. The Office of Inspector General of the
Department of Health and Human Services has developed a sample Model
Compliance Plan. Laboratories are being advised to ensure compliance with
anti-fraud and abuse laws and rules governing federally-financed reimbursement
for laboratory testing services. Even though only a small portion of the
Company's business encompasses fee-for-service Medicare/Medicaid, a Chief
Compliance Officer and nine Co-Compliance Officers have been appointed. The
Company is in the process of developing its own Compliance Plan.
Drug Testing.
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Drug testing for certain public sector employees is regulated by SAMHSA, which
has established detailed quality standards for drug testing on employees of
federal government contractors and certain other entities. Certification by
SAMHSA is essential to the Company's substance abuse testing business. See
"Certification."
Environmental and Occupational Safety.
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The Company is subject to various federal, state and local laws and
regulations concerning the environment and occupational safety and health,
including laws and regulations relating to the handling, transportation and
disposal of specimens, infectious and hazardous waste and radioactive
materials. The Company is subject to extensive regulation relating to
workplace safety for healthcare employers whose workers may be exposed to
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blood-borne pathogens such as HIV. Although the Company is not aware of any
material non-compliance with such laws and regulations, any failure to comply
could subject the Company to denial of the right to conduct business, fines,
criminal and civil penalties and civil liability. The Company cannot predict
what environmental or health and safety legislation or regulations will be
enacted in the future or how existing or future laws or regulations will be
administered or interpreted, nor can it predict the amount of future
expenditures which may be required in order to comply with any environmental
or health and safety laws or regulations.
Dividends.
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The Company has paid quarterly dividends with respect to shares of Common
Stock over the past several years. Declaration and payment of dividends are
subject to the discretion of the Company's Board of Directors and may be made
only from funds legally available therefor. The Board of Directors reviews
the Company's dividend policy on a periodic basis. The Company's ability to
pay dividends depends upon the Company's financial condition and results of
operations. The Company has paid dividends per share in excess of earnings
per share in recent years. There can be no assurance that the Company will be
able to, or will continue to, declare and pay dividends with respect to shares
of Common Stock.
Single Facility; New Facility.
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The Company's testing operations are contained in a single facility
located in Overland Park, Kansas. Although the Company has a full-time
alternative power source in the event of an electrical power shortage and has
taken steps to limit the possibility of a fire, the facility is subject to
risk of fire, earthquake, tornado, telecommunications failure and similar
events. Even though the Company does carry business interruption insurance to
compensate for losses which might occur, the occurrence of such an event with
respect to the Company's testing facility could materially adversely affect
the Company's business, results of operations and financial condition.
The Company is arranging for the construction of a new testing facility
to replace the existing laboratory, warehouse and administration facilities.
The facility is expected to be completed during the first quarter of 1999.
Completion of the new facility in a timely manner is subject to a number of
risks and uncertainties, including weather and construction delays.
Year 2000 Computer Concerns.
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Year 2000 computer concerns are the result of computer programs using two
digits instead of four digits to identify the applicable year. Such computer
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations, resulting in
a disruption of operations. The Company is actively addressing Year 2000
computer concerns. The Company has established an oversight committee which
includes management from all parts of the Company and meets periodically to
review progress. The Company expects to complete all internal Year 2000
objectives by the end of the first quarter, 1999 and is assessing the Year
2000 preparation and contingency plans of its clients and vendors. Total
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expenses related to this project are not expected to be material to the
Company. However, there can be no assurance that the Company's adjustments to
its computer systems will completely eliminate all Year 2000 problems. In
addition, there can be no assurance that the systems of clients and vendors
will be converted to address Year 2000 problems in a timely and effective
manner or that such conversions will be compatible with the Company's computer
systems. A failure to properly address the Year 2000 problem could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Supplies.
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The Company's operations require the supply of insurance testing kits,
testing agents and other laboratory supplies. The Company has several
suppliers for most of these materials. There can be no assurance, however,
that the Company will not experience shortages of such materials or be forced
to seek alternative sources of supply. In addition, there can be no assurance
that prices for such materials will remain stable. Any shortages of such
materials may result in service delays and increased costs which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SIGNATURES
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 hereunto duly authorized.
LabOne, Inc.
Date: October 22, 1998 By: /s/Kurt E. Gruenbacher
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Kurt E. Gruenbacher,
V.P. Finance, Chief Accounting
Officer and Treasurer
Date: October 22, 1998 By: /s/Robert D. Thompson
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Robert D. Thompson
Executive V.P., Chief Operating
Officer and Chief Financial Officer
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