<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
LABONE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$6,111.00
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
S-4
------------------------------------------------------------------------
(3) Filing Party:
Lab Holdings, Inc.
------------------------------------------------------------------------
(4) Date Filed:
April 13, 1999
------------------------------------------------------------------------
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[LOGO] [LOGO]
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MERGER PROPOSED--YOUR VOTE IS IMPORTANT
TO THE STOCKHOLDERS OF LAB HOLDINGS AND LABONE:
<TABLE>
<S> <C>
The Boards of Directors of Lab Holdings, On June 30, 1999, the last reported sales
Inc. and LabONE, Inc. and a special price on the NASDAQ National Market of
committee of independent LabONE directors LabONE common stock (LABS) was $10.25 per
have approved a merger of LabONE into share and of Holdings common stock (LABH)
Holdings and recommend that you vote for was $13.88 per share.
approval of the merger. After the merger,
Holdings' name will be LabONE, Inc., its The merger requires the approval of the
management will consist of LabONE management holders of two-thirds of the outstanding
and its board will consist of nine of the shares of Holdings, a majority of the
current LabONE directors as well as three outstanding shares of LabONE and a majority
new independent non-management directors. of the shares voted by LabONE unaffiliated
stockholders. These matters will be voted on
Stockholders of Holdings will have each of at the annual meetings of both companies
their Holdings shares split immediately which have been scheduled to be held on
before the merger into 1.5 shares of common August 6, 1999 for Holdings and August 9,
stock. Stockholders of LabONE, other than 1999 for LabONE.
Holdings, may elect to have each of their
existing LabONE shares exchanged for one Regardless of the number of shares you own
share of the common stock of the combined or whether you plan to attend in person, it
company, or $12.75 in cash or a combination is important that your shares be represented
of cash and shares. However, if the LabONE and voted at the meetings. Voting
cash election shares exceed a cash limit of instructions are inside.
$16.6 million (approximately 50% of eligible
shares), then the cash will be allocated on This document provides you with detailed
a pro rata basis among the cash election information about the proposed merger. We
shares. encourage you to read this entire document
carefully.
[SIG] [SIG]
P. Anthony Jacobs W. Thomas Grant II
President and Chief Executive Officer Chairman, President and Chief Executive
Lab Holdings, Inc. Officer
LabONE, Inc.
</TABLE>
FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH YOU SHOULD CONSIDER IN
EVALUATING THE MERGER, SEE "RISK FACTORS" BEGINNING ON PAGE 13.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE HOLDINGS COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED WHETHER THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED JULY 2, 1999, AND IS FIRST BEING
MAILED TO STOCKHOLDERS ON JULY 3, 1999.
<PAGE>
[LOGO]
10101 RENNER BOULEVARD
LENEXA, KANSAS 66219
------------------------
NOTICE OF THE 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 9, 1999
------------------------
To the stockholders of LabONE, Inc.:
The annual meeting of stockholders of LabONE, Inc., a Delaware corporation,
will be held at the offices of LabONE at 10101 Renner Boulevard, Lenexa, Kansas
66219 on August 9, 1999, at 3:00 p.m., local time, to consider and vote upon:
1. A proposal to adopt the Agreement and Plan of Merger, as amended, by and
between Lab Holdings, Inc. and LabONE, Inc., dated as of March 7, 1999,
which is described in this joint proxy statement/prospectus, and the
transactions contemplated thereby. Under the merger agreement:
- shares of Holdings common stock will be split 1.5 for one immediately
prior to the merger,
- LabONE will merge with and into Holdings, with Holdings being the
combined company,
- each outstanding share of LabONE common stock (other than shares owned
by Holdings) will be converted into either:
- one share of combined company common stock, or
- cash equal to $12.75, subject to an aggregate $16.6 million cash
limit, or
- a combination of cash and shares,
- Holdings' name will be changed to "LabONE, Inc.,"
- the officers of Holdings will be replaced by the current officers of
LabONE,
- Holdings directors will be replaced by nine of the current LabONE
directors and three additional non-management directors, and
- the articles of incorporation and bylaws of Holdings will be amended
to read as set forth in Appendix B and Appendix C to the merger
agreement and to effect a reduction in stated capital by reducing the
par value of shares from $1.00 per share to $0.01 per share.
2. A proposal to elect twelve directors of LabONE as set forth in the
accompanying joint proxy statement/prospectus, to serve until the
effective time of the merger, or if the merger is not consummated, until
the 2000 annual meeting of stockholders.
3. A proposal to ratify the selection of KPMG LLP as independent public
accountants for LabONE and its subsidiaries for the 1999 fiscal year.
4. Such other business as may properly come before the meeting.
These proposals and other related matters are more fully described in the
accompanying joint proxy statement/prospectus. A copy of the merger agreement is
attached to the joint proxy statement/ prospectus as Appendix A.
<PAGE>
Page 2
Only holders of record of common stock of LabONE at the close of business on
June 24, 1999 are entitled to notice of and to vote at the meeting.
THE BOARD OF DIRECTORS OF LABONE AND A SPECIAL COMMITTEE OF INDEPENDENT
LABONE DIRECTORS HAVE APPROVED THE MERGER AGREEMENT, DECLARED ITS ADVISABILITY
AND RECOMMEND THAT YOU VOTE FOR ADOPTION OF THE MERGER AGREEMENT. It also
recommends that you vote FOR the election of each nominee to the board of
directors and FOR the approval and ratification of LabONE's independent public
accountants for the 1999 fiscal year.
YOUR VOTE IS IMPORTANT. PLEASE DATE, SIGN AND RETURN THE ACCOMPANYING PROXY
CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU INTEND TO BE PRESENT
AT THE MEETING. Sending in your proxy now will not interfere with your rights to
attend the meeting or to vote your shares personally at the meeting if you wish
to do so. If your shares are held in "street name" by your broker or other
nominee, only that holder can vote your shares. You should follow the directions
provided by them regarding how to instruct them to vote your shares.
If you are a record holder of LabONE shares and wish to receive cash for any
of your LabONE shares you should complete and return the form of election that
accompanies this joint proxy statement/prospectus, together with stock
certificates or a completed guaranty of delivery. If you are a LabONE
stockholder whose shares are held in "street name" by your broker or other
nominee, only that holder can make a cash election for you or revoke a cash
election once made. In that case you should follow the directions provided by
them regarding how to instruct them to make or revoke a cash election. ALL CASH
ELECTIONS MUST BE RECEIVED BY THE DISBURSING AGENT PRIOR TO 10:00 A.M. NEW YORK
CITY TIME ON AUGUST 9, 1999, AND MAY BE REVOKED ONLY BY GIVING WRITTEN NOTICE
THAT IS RECEIVED BY THE DISBURSING AGENT PRIOR TO THAT TIME.
You may revoke your proxy with respect to any proposal at any time prior to
the completion of the voting on such proposal at the meeting, by following the
procedures set forth in the accompanying joint proxy statement/prospectus.
The joint proxy statement/prospectus serves as the LabONE 1998 annual report
to stockholders. A separate annual report to stockholders will not be mailed to
LabONE stockholders in connection with the meeting.
By Order of the Board of Directors
[SIG]
Gregg R. Sadler,
SECRETARY
Lenexa, Kansas,
July 3, 1999
<PAGE>
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER......... 1
WHO CAN HELP ANSWER QUESTIONS.................. 2
SUMMARY........................................ 3
The Companies................................ 3
The Merger................................... 3
SUMMARY FINANCIAL INFORMATION.................. 7
Holdings' Historical Consolidated Financial
Information................................ 7
LabONE Historical Consolidated Financial
Information................................ 8
Summary Unaudited Pro Forma Financial
Information................................ 9
COMPARATIVE PER SHARE INFORMATION.............. 10
Comparative Per Share Data................... 10
Comparative Market Price and Dividend
Information................................ 11
RISK FACTORS................................... 13
Risk Factors Regarding Merger................ 13
Risk Factors Regarding LabONE................ 15
Cautionary Statement Regarding Forward
Looking Statements......................... 17
LABONE GROWTH STRATEGY......................... 18
THE PROPOSED MERGER............................ 21
General...................................... 21
Holdings Annual Meeting.................... 21
LabONE Annual Meeting...................... 21
The Holdings Stock Split..................... 21
Exchange of LabONE Shares and Cash
Elections.................................. 22
Stock Options and Warrants................... 22
Background of the Merger..................... 23
Holdings' Reasons for the Merger and
Recommendation of its Board................ 29
LabONE Reasons for the Merger;
Recommendations of the LabONE Special
Committee and Board of Directors........... 31
Opinion of Holdings' Financial Advisor....... 34
Opinion of Financial Advisor to the LabONE
Special Committee.......................... 40
Accounting Treatment......................... 45
Federal Income Tax Consequences.............. 46
General.................................... 46
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Holdings Stockholders...................... 46
LabONE Stockholders (Other than
Holdings)................................ 47
Holdings................................... 49
LabONE..................................... 49
Interests of Certain Persons in the Merger... 49
Dissenter's Rights........................... 50
Amendments to Holdings' Articles of
Incorporation and Bylaws................... 52
Articles of Incorporation.................. 52
Bylaws..................................... 53
Certain Possible Anti-takeover Effects of the
Amendments to the Articles of Incorporation
and Bylaws of the Combined Company......... 54
Resales of Common Stock...................... 55
THE MERGER AGREEMENT........................... 57
General...................................... 57
Pre-Merger Stock Split....................... 57
Closing of the Merger; Effective Time of the
Merger..................................... 57
Effect of Merger............................. 57
Conversion of LabONE Common Stock into Shares
of the Combined Company or Cash............ 58
Effect of Merger on Holdings Common Stock.... 60
Effect of Merger on Options and Warrants..... 60
Dissenters' Rights........................... 61
Conditions to the Merger..................... 61
Representations and Warranties............... 63
Certain Covenants; Conduct of Business....... 64
Amendment of Articles of Incorporation....... 65
Additional Agreements........................ 65
Expenses..................................... 65
Indemnification.............................. 66
Amendment, Waiver and Termination............ 67
MEETINGS OF STOCKHOLDERS....................... 69
Holdings Annual Meeting...................... 69
LabONE Annual Meeting........................ 70
UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS................................... 74
</TABLE>
i
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INFORMATION REGARDING LABONE................... 80
Business..................................... 80
General.................................... 80
Insurance Services......................... 80
Clinical Services.......................... 81
Substance Abuse Testing Services........... 82
Segment Information........................ 82
Operations................................. 82
Regulatory Affairs......................... 83
Sales and Marketing........................ 83
Competition................................ 84
Foreign Markets............................ 85
Technology Development..................... 85
Employees.................................. 85
Properties................................... 85
Litigation................................... 86
LABONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 87
MANAGEMENT OF LABONE........................... 94
LabONE Executive Compensation................ 97
MANAGEMENT OF COMBINED COMPANY AFTER THE
MERGER....................................... 103
SECURITY OWNERSHIP OF LABONE BEFORE AND AFTER
THE MERGER................................... 104
LABONE'S ANNUAL MEETING PROPOSALS.............. 107
Election of Directors Of LabONE.............. 107
Ratification of Selection of Independent
Public Accountants of LabONE............... 109
DESCRIPTION OF COMBINED COMPANY CAPITAL
STOCK........................................ 109
Certain Provisions of Articles of
Incorporation and Bylaws of Combined
Company that May Have an Anti-takeover
Effect..................................... 110
COMPARATIVE RIGHTS OF LABONE STOCKHOLDERS...... 112
Certain Differences between LabONE's and the
Combined Company's Charter and Bylaws...... 112
Certain Differences Between Missouri and
Delaware Corporation Statutes.............. 115
COMPARATIVE RIGHTS OF HOLDINGS STOCKHOLDERS.... 117
<CAPTION>
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MANAGEMENT OF HOLDINGS......................... 119
Directors and Officers....................... 119
Committees of the Holdings' Board of
Directors.................................. 119
Compensation of Directors.................... 120
Compensation of Executive Officers........... 121
Report of the Compensation Committee on
Executive Compensation..................... 122
Performance of Holdings' Common Stock........ 123
Security Ownership of Holdings Management.... 125
Security Ownership of Certain Other
Beneficial Owners of Holdings Common
Stock...................................... 126
Certain Relationships and Related
Transactions............................... 127
HOLDINGS' ANNUAL MEETING PROPOSALS............. 128
Proposal to Amend Articles Of
Incorporation.............................. 128
Proposal to Elect Two Holdings Directors..... 129
Proposal to Approve and Ratify Holdings'
Appointment of Independent Public
Accountants................................ 131
EXPERTS........................................ 131
LEGAL MATTERS.................................. 131
FUTURE STOCKHOLDER PROPOSALS................... 131
WHERE YOU CAN FIND MORE INFORMATION............ 132
INDEX TO LABONE FINANCIAL STATEMENTS........... F-1
LIST OF APPENDICES
Appendix A Merger Agreement
Exhibit B Form of Amended and Restated
Articles of Incorporation
Exhibit C Form of Amended and Restated
Bylaws
Appendix B Opinion of Salomon Smith Barney
Inc.
Appendix C Opinion of U.S. Bancorp Piper
Jaffray Inc.
Appendix D Section 351.455, RSMo Concerning
Dissenters' Rights
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: WHEN AND WHERE ARE THE ANNUAL MEETINGS?
A: The annual meetings are scheduled to take place at 2:00 p.m. Kansas City time
on August 6, 1999 for Holdings and at 3:00 p.m. Kansas City time on August 9
for LabONE. The meetings will be held at the new LabONE laboratory and
offices at 10101 Renner Blvd., Lenexa, Kansas 66219.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We expect to complete the merger promptly after receiving stockholder
approvals at the annual meetings.
Q: WHAT DO I NEED TO DO NOW?
A: You should carefully read and consider the information contained in this
document. Then, please fill out, sign and mail your proxy card in the
enclosed return envelope as soon as possible so that your shares may be
represented at the annual meeting. If the card does not specify a choice it
will be voted "FOR" the merger and all other proposals.
If you are a LabONE stockholder and you wish to exchange any of your LabONE
stock for cash, you should properly complete and timely return the cash
election forms that are furnished to you.
Q: WHAT IF I DON'T VOTE OR I ABSTAIN FROM VOTING?
A: If you are a Holdings stockholder and you do not vote or you abstain, the
effect will be a vote against the merger.
If you are a LabONE unaffiliated stockholder only votes "for" or "against"
the merger will affect the result.
Q: IF MY SHARES ARE HELD BY MY BROKER IN "STREET NAME," WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should follow the directions provided by your broker to vote your
shares.
Q: HOW WILL I BE ABLE TO ELECT TO RECEIVE CASH FOR ALL OR A PORTION OF MY LABONE
SHARES?
A: You should receive the election forms and instructions you will need for
making a cash election. You should receive those forms with this document if
you are a record holder. If you hold your shares in street names or in the
name of some other record holder you should receive directions from them as
to how to you may instruct them to make an election.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at the
annual meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you
can complete and submit a new proxy card. If you choose either of these two
methods, you must submit your notice of revocation or your new proxy card to
Lab Holdings, Inc. at 5000 West 95th Street, Suite 260, P.O. Box 7568,
Shawnee Mission, Kansas 66207, if you are a Holdings stockholder, or to
LabONE at 10101 Renner Blvd., Lenexa, Kansas 66219, Attention: Secretary, if
you are a LabONE stockholder. Third, you can attend the Holdings annual
meeting or the LabONE annual meeting and vote in person. Simply attending the
meeting, however, will not revoke your proxy; you must request a ballot and
vote the ballot at the meeting. If you have instructed a broker to vote your
shares, you must follow directions received from your broker to change your
vote.
Q: CAN I REVOKE A CASH ELECTION?
A: Yes. If you hold your shares in your name of record, you may do this by
sending a written notice of revocation to American Stock Transfer and Trust
Company at
1
<PAGE>
40 Wall Street, 46th Floor, New York, N.Y. 10005 so that it is received
before 10:00 A.M. New York City Time on August 9, 1999. Their telephone
number is (800) 937-5449. If you hold your shares in street names or in the
name of some other record holder you should receive directions from them as
to how you may instruct them to revoke an election.
Q: SHOULD I SEND IN MY STOCK CERTIFICATE NOW?
A: If you are a LabONE stockholder of record and wish to receive cash for some
or all of your shares, you should follow the instructions in the form of
election included with this document. You will need to submit a properly
completed form of election together with certificates for your shares (or a
guaranty of delivery) to the disbursing agent referred to therein. If you do
not want to receive any cash for your shares, you may keep your existing
certificates. They will be deemed to represent shares of the combined company
after the merger. We will send instructions after the merger explaining how
you may exchange your old LabONE certificates for new certificates evidencing
shares of the combined company.
If you are a Holdings stockholder, you may keep your existing certificates,
but you will also receive instructions on how you may exchange them for new
certificates bearing the name "LabONE, Inc." and the new par value of $0.01
per share. You will also be sent a new certificate for the additional shares
that will result from the split of each of your existing shares into 1.5
shares.
Q: WHAT WILL BE THE NEW TRADING SYMBOL FOR THE COMMON STOCK OF THE COMBINED
COMPANY?
A: Shares of common stock of the combined company will continue to trade on the
NASDAQ National Market. For a period of approximately twenty (20) trading
days after the effective time of the merger the shares will trade under the
issue symbol "LABSD." After this twenty day period, the shares will trade
under the issue symbol "LABS," the old trading symbol of LabONE, Inc.
WHO CAN HELP ANSWER MY QUESTIONS?
If you have more questions about the merger, you should call:
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LAB HOLDINGS STOCKHOLDERS: LABONE STOCKHOLDERS:
Georgeson & Company Inc. Georgeson & Company Inc.
Wall Street Plaza Wall Street Plaza
New York, NY 10005 New York, NY 10005
(800) 223-2064 (800) 223-2064
or or
Steven K. Fitzwater Robert D. Thompson
Executive Vice President, Executive Vice President and
Chief Operating and Financial Chief Operating and Financial
Officer and Secretary Officer
Lab Holdings, Inc. LabONE, Inc.
5000 West 95th Street, Suite 260 10101 Renner Blvd.
Shawnee Mission, Kansas 66207 Lenexa, Kansas 66219
</TABLE>
2
<PAGE>
SUMMARY
WE BELIEVE THIS SUMMARY HIGHLIGHTS KEY ASPECTS OF THE MERGER INFORMATION IN
THIS DOCUMENT. HOWEVER, FOR A MORE COMPLETE UNDERSTANDING OF THE TERMS OF THE
MERGER AND RELATED TRANSACTIONS, THE BUSINESS AND FINANCIAL AFFAIRS OF LABONE
AND HOLDINGS, AND THEIR SECURITIES, YOU SHOULD READ CAREFULLY THIS ENTIRE
DOCUMENT AND THE DOCUMENTS WE HAVE REFERRED YOU TO. SEE "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE 132. ALSO, WE USE THE TERM "LABONE UNAFFILIATED
STOCKHOLDERS" THROUGHOUT THIS DOCUMENT. THAT MEANS ALL LABONE STOCKHOLDERS OTHER
THAN HOLDINGS, OFFICERS AND DIRECTORS OF HOLDINGS AND BENEFICIAL OWNERS OF 10%
OR MORE OF THE OUTSTANDING SHARES OF HOLDINGS COMMON STOCK.
THE COMPANIES
LAB HOLDINGS, INC.
5000 West 95th Street
Suite 260, P.O. Box 7568
Shawnee Mission, Kansas 66207
(913) 648-3600
Holdings is presently engaged in the business of managing its 80.5% interest
in LabONE. Previously, Holdings owned interests in a number of other enterprises
that have since been disposed of in a variety of transactions.
LABONE, INC.
10101 Renner Blvd.
Lenexa, Kansas 66219
(913) 888-1770
Internet address: www.LabONE.com
LabONE is the largest provider of risk assessment laboratory testing
services to the life insurance industry in the United States and Canada. It is a
growing provider of clinical testing services for the healthcare industry and
substance abuse testing services for employers. These services were recently
expanded as a part of the LabONE diversification strategy in late 1998 to
include insurance claims investigation services through the acquisition of
Systematic Business Services, Inc. Services are primarily delivered from a newly
constructed, centrally located, state-of-the art 268,000 square foot laboratory
and office complex in the Kansas City metro area. The facility and site have
been configured to accommodate LabONE's growth strategy. See pages 18 through
20.
THE MERGER
REASONS FOR THE MERGER (SEE PAGES 29
THROUGH 34)
We believe the merger will position the LabONE business to grow:
- through acquisitions,
- the continued development of strategic relationships, and
- internally.
LabONE cannot effectively pursue this growth strategy under the current
holding company structure. This is because the need of Holdings to own more than
80% of LabONE for tax purposes inhibits LabONE's ability to use its common stock
for acquisitions and the building of other strategic relationships.
The merger will allow Holdings stockholders to enjoy the benefits of a
direct investment in the business of LabONE and its management while eliminating
duplicate holding company management and administrative costs. The merger should
also result in higher trading volumes, greater liquidity, a more efficient
market and increased investor interest in the common stock of the combined
company.
Although we believe the merger is in your best interests, it will subject
you to risks that are discussed under "Risk Factors." In particular, the merger
is expected to result in additional goodwill that will negatively impact net
earnings following the merger. Present dividend policies may also be adversely
affected by implementation of the combined company's growth strategy and any
debt incurred to finance the merger. See pages 13 through 17.
3
<PAGE>
WHAT HOLDINGS STOCKHOLDERS WILL RETAIN IN THE MERGER (SEE PAGES 21, 22 AND 57)
If you are a Holdings stockholder, you will receive in a stock split
immediately before the merger one additional share of Holdings common stock for
each two Holdings shares that you own at that time. The shares received by you
in the stock split as well as the shares held by you at the time of the stock
split will represent the same number of shares of the combined company after the
merger. All shares held by you and all other Holdings stockholders after the
merger will constitute about 78.9% of the combined company if all LabONE
stockholders other than Holdings elect to receive only stock in the merger. If
all those stockholders elect to exchange at least half of their shares for cash,
then all Holdings stockholders will own about 88.2% of the combined company
after the merger.
WHAT LABONE STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGES 22 AND 58)
If you are a LabONE stockholder other than Holdings, you will receive one
share of the common stock of the combined company for each share of LabONE
common stock held at the time of the merger. However, you may instead elect to
receive $12.75 in cash per share for all or a portion of your LabONE shares so
long as the aggregate cash elections of all LabONE stockholders do not exceed
$16.6 million (approximately 50% of eligible shares). If the cash elections
exceed $16.6 million, then the cash will be allocated on a pro rata basis among
the cash election shares. After the merger the LabONE stockholders will own
about 21.1% of the combined company if none elect cash and about 11.8% if cash
elections equal or exceed the $16.6 million cash limit.
FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 46 THROUGH 49)
LABONE STOCKHOLDERS. If you are a LabONE stockholder, you should not
recognize gain or loss for federal income tax purposes if you do not elect to
receive cash in the merger. If you receive cash and stock in exchange for your
LabONE shares you will recognize gain, but not loss, equal to the lesser of (x)
the total gain realized by you on the exchange after taking into account the
value of all the merger consideration received by you or (y) the amount of cash
received. If you receive solely cash for your LabONE shares, you may also
recognize gain. The gain that you recognize for your LabONE shares in the
exchange may be capital gain or ordinary income, depending on your individual
circumstances. Generally, the gain will be capital gain if the percentage of
combined company common stock owned directly or constructively by you after the
merger is less than 80% of the percentage that would have been owned directly or
constructively by you if all LabONE shares had been exchanged for combined
company common stock. Otherwise, the gain recognized likely will be treated as
ordinary income. You are urged to consult with your tax advisor regarding your
election rights in the merger.
HOLDINGS STOCKHOLDERS. If you are a Holdings stockholder, you should not
recognize gain or loss for federal income tax purposes in connection with the
stock split or the merger, except to the extent of cash you receive in payment
of any fractional share that may result from the stock split or from the
exercise of dissenters' rights.
DISSENTERS' RIGHTS (SEE PAGES 50 THROUGH 52)
If you are a Holdings stockholder, you have the right under Missouri law to
dissent and obtain payment in cash of the fair value of your Holdings shares as
of the day prior to the Holdings annual meeting. To exercise dissenters' rights,
you must:
- deliver a written objection to Holdings prior to or at the annual meeting;
- not vote in favor of the merger agreement; and
- deliver to the combined company within twenty (20) days after the merger a
written demand for payment of the fair value of your Holdings shares.
If you are a LabONE stockholder, you have no dissenters' rights with respect
to the merger.
4
<PAGE>
DIRECTORS AND MANAGEMENT FOLLOWING THE MERGER (SEE PAGES 103 THROUGH 104)
Upon completion of the merger, the board of the combined company will
consist of nine present LabONE directors and three additional independent
non-management directors nominated by the LabONE special committee and approved
by Holdings. None of the present Holdings directors will continue in office.
W.T Grant II, the current Chairman, President and Chief Executive Officer of
LabONE, will be the Chairman, President and Chief Executive Officer of the
combined company. The other present officers of LabONE will also continue to be
officers of the combined company. None of the present Holdings officers and
employees will continue in office following the merger.
AMENDMENTS TO HOLDINGS ARTICLES OF INCORPORATION AND BYLAWS (SEE PAGES 52
THROUGH 55 AND EXHIBIT B AND C TO THE MERGER AGREEMENT WHICH ARE MARKED TO SHOW
PROPOSED CHANGES FROM HOLDINGS EXISTING DOCUMENTS)
In the merger the following principal changes will be made to Holdings'
articles and bylaws:
- Holdings' name will be changed to "LabONE, Inc."
- The authorized shares of common stock will be increased to reflect the
number currently authorized by the LabONE certificate of incorporation.
- The par value of capital stock will be reduced to $0.01 per share to
reflect the current par value of LabONE shares.
- An 80% vote of stockholders will be required for certain amendments to the
articles of incorporation and bylaws.
- Advance notice will be required for stockholder proposals or nominations
for director.
- A provision authorizing four-fifths (4/5) of outstanding shares to call a
special meeting of stockholders will be eliminated.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 34 THROUGH 45 )
In deciding to approve the merger, Holdings and the LabONE special committee
each considered the opinion of its financial advisor as well as a number of
other matters detailed on pages 34 through 45. Holdings received an opinion from
Salomon Smith Barney Inc. as to the fairness to Holdings, from a financial point
of view, of the consideration to be paid by Holdings in the merger as of March
7, 1999. The special committee received an opinion from U.S. Bancorp Piper
Jaffray Inc. as to the fairness, from a financial point of view, of the merger
consideration to the LabONE unaffiliated stockholders as of March 7, 1999. These
opinions are not intended to be recommendations by either advisor as to how you
should vote on any matters relating to the merger. The opinions are attached as
Appendix B and C, and should be read carefully in their entirety.
CONDITIONS TO THE MERGER (SEE PAGES 61 THROUGH 63 AND THE MERGER AGREEMENT
ATTACHED AS APPENDIX A)
The completion of the merger depends upon the satisfaction of a number of
conditions, including the following:
- approval of the proposed amendment to Article X of the Holdings articles
of incorporation to change the definition of "Continuing Director Quorum"
from nine continuing directors to two-thirds of the continuing directors;
- approval by the Holdings stockholders, the LabONE stockholders, and a
majority of the votes cast by the LabONE unaffiliated stockholders;
- the continued accuracy of each company's representations and warranties
and compliance by each company with its agreements contained in the merger
agreement;
5
<PAGE>
- receipt of a legal opinion from Holdings' counsel as to the tax
consequences of the merger;
- the holders of not more than 5% of the Holdings common stock shall have
exercised dissenters' rights;
- the stock split of Holdings shares shall have become effective;
- the opinions of the financial advisors to the Holdings board or the
special committee shall not have been materially modified in an adverse
manner or withdrawn prior to the date of mailing of the proxy statement or
related supplement; and
- the merger will not trigger the vesting of outstanding LabONE stock
options or warrants.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGES 67 THROUGH 68)
Holdings and LabONE can agree to terminate the merger agreement without
completing the merger, and either company can terminate the merger agreement on
its own without completing the merger under various circumstances, including if
any of the following occurs:
- the merger is not completed by October 31, 1999, other than due to a
breach of the merger agreement by the terminating party;
- the stockholders of either company or the LabONE unaffiliated stockholders
do not approve the merger agreement;
- the stockholders of Holdings do not approve the amendment to Article X of
the Holdings articles of incorporation;
- the board of either company determines that termination is required due to
the terms of an acquisition proposal made by some other person;
- the financial advisor of the party withdraws or materially modifies in an
adverse manner its fairness opinion prior to the date of mailing of this
proxy statement or related supplement;
- the board of directors of the other party to the merger agreement
withdraws, modifies or changes its recommendation of the merger in a
manner adverse to the other party;
- a court or other governmental authority permanently prohibits the merger;
or
- a material inaccuracy in any representation or breach of certain covenants
in the merger agreement is not cured within 30 days after notice.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
We are providing the following financial information to aid you in your
analysis of the financial aspects of the merger. This information is only a
summary and you should read it in conjunction with the historical financial
statements of Holdings and LabONE and the related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations. These
items for LabONE are contained in its Management's Discussion and Analysis of
Financial Condition and Results of Operations beginning on page 87 and in the
LabONE financial statements beginning on page F-1. These items for Holdings are
contained in its annual, quarterly and other reports that Holdings has filed
with the Securities and Exchange Commission that are incorporated herein by
reference. See "Where You Can Find More Information" on page 132.
HOLDINGS HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(AS RESTATED)
The historical consolidated financial information for Holdings reflects the
following items which you should consider in making period-to-period
comparisons.
- All per share information has been adjusted to reflect the 1.5 for one
stock split which will occur immediately prior to the merger.
- In 1997, Holdings distributed, as a dividend to its stockholders, all
shares owned by Holdings of its subsidiary, Response Oncology, Inc.
- In 1997, Holdings distributed, as a dividend to its stockholders, all of
the outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation. In connection with this distribution, Holdings transferred
its real estate and energy businesses and certain miscellaneous assets to
SLH.
- LabONE constructed a new facility in 1998 to house its laboratory,
administrative and warehouse functions. Construction of the facility was
financed through $20 million in industrial revenue bonds and cash.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ 27,328 23,333 102,227 78,926 61,878 75,246 86,027
Cost of sales.................................. 15,651 12,959 56,720 42,017 35,488 46,059 51,489
Selling, general and administrative expenses... 9,188 7,997 34,101 35,270 29,767 36,702 36,199
Earnings (loss) from continuing operations..... 999 1,140 4,877 (8,103) (4,226) (1,826) (276)
Basic earnings (loss) per share from continuing
operations................................... .10 .12 .50 (.83) (.43) (.19) (.02)
Diluted earnings (loss) per share from
continuing operations........................ .10 .11 .49 (.83) (.43) (.19) (.02)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
--------------- -----------------------------------------------------
1999 1998 1997 1996 1995 1994
--------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................................... $ 97,131 98,008 74,482 196,783 198,018 234,196
Long-term debt................................... 18,094 18,097 -- -- -- 8
Stockholders' equity............................. 53,604 54,539 56,439 174,024 187,084 200,933
Cash dividends declared per common share......... .20 .80 .80 .80 .80 .80
</TABLE>
7
<PAGE>
LABONE HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(AS RESTATED)
The historical consolidated financial information for LabONE reflects the
following item which you should consider in making period-to-period comparisons:
- LabONE constructed a new facility in 1998 to house its laboratory,
administrative and warehouse functions. Construction of the facility was
financed through $20 million in industrial revenue bonds and cash.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................. $ 27,328 23,333 102,227 78,926 59,432 57,029 60,726
Cost of sales..................................... 15,651 12,959 56,720 42,017 32,717 29,934 29,073
Selling, general and administrative expenses...... 8,564 7,448 31,579 28,211 23,623 24,908 24,821
Net earnings...................................... 1,853 1,917 8,888 1,898 2,868 2,797 5,687
Basic earnings per share.......................... .14 .15 .67 .14 .22 .21 .43
Diluted earnings per share........................ .14 .14 .67 .14 .22 .21 .43
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
--------------- -----------------------------------------------------
1999 1998 1997 1996 1995 1994
--------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $ 84,922 85,726 59,670 64,743 70,048 76,758
Long-term debt................................. 18,094 18,097 -- -- -- --
Stockholders' equity........................... 52,018 52,546 51,195 58,449 64,864 71,237
Cash dividends declared per common share....... .18 .72 .72 .72 .72 .72
</TABLE>
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following summary unaudited pro forma financial information presents:
- summary unaudited pro forma balance sheet data at March 31, 1999, giving
effect to the merger as if the merger had been consummated on that date,
and
- summary unaudited pro forma operating data for the three months ended
March 31, 1999 and for the year ended December 31, 1998, giving effect to
the acquisition of minority interests as if the merger had been
consummated on January 1, 1998.
The merger will be accounted for as an acquisition of minority interests
using the purchase method of accounting. The summary unaudited pro forma
financial information shown below is provided for informational purposes only
and should be read in conjunction with the separate audited consolidated
financial statements and related notes of Holdings (which are incorporated
herein by reference) and LabONE (which are included elsewhere in this joint
proxy statement/prospectus). That information is based on certain assumptions
and is not indicative of the results which actually would have occurred if the
merger had been consummated on the dates indicated or which may be obtained in
the future. See "Unaudited Pro Forma Condensed Financial Statements" on page 74
and "Accounting Treatment" on page 45.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999 YEAR ENDED DECEMBER 31, 1998
------------------------------- ------------------------------
ASSUMES ALL ASSUMES STOCK ASSUMES ALL ASSUMES STOCK
STOCK AND MAXIMUM STOCK AND MAXIMUM
ELECTIONS CASH ELECTIONS ELECTIONS CASH ELECTIONS
-------------- --------------- -------------- --------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................. $ 27,328 27,328 102,227 102,227
Cost of sales..................................... 15,651 15,651 56,720 56,720
Selling, general and administrative expenses...... 9,219 9,252 34,218 34,351
Net earnings...................................... 1,245 1,077 6,078 5,406
Basic earnings per share.......................... .10 .10 .49 .49
Diluted earnings per share........................ .10 .10 .49 .48
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
---------------------------------------
ASSUMES ALL
STOCK ASSUMES STOCK AND
ELECTIONS MAXIMUM CASH ELECTIONS
-------------- -----------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................... $ 23,546 20,546
Cash and short-term investments......................................... 9,995 6,995
Total assets............................................................ 117,825 117,476
Current liabilities..................................................... 15,542 15,542
Long-term debt.......................................................... 18,094 31,694
Stockholders' equity.................................................... 83,939 69,990
</TABLE>
9
<PAGE>
COMPARATIVE PER SHARE INFORMATION
COMPARATIVE PER SHARE DATA
The following table presents comparative per share information for Holdings
and LabONE on a historical basis and on a pro forma and equivalent pro forma
basis, assuming that the merger had occurred at the beginning of the period
presented for earnings per common share, book value per common share and
dividends per share. The Holdings historical per share information has been
adjusted to reflect the 1.5 to one stock split which will occur immediately
prior to the merger. Both Holdings and LabONE paid dividends during 1998 and the
first quarter of 1999. The tables should be read in conjunction with the
financial statements and notes thereto of Holdings that are incorporated by
reference in this joint proxy statement/prospectus, the financial statements and
notes thereto of LabONE included elsewhere in this joint proxy
statement/prospectus and the unaudited pro forma financial statements and
related notes thereto included elsewhere herein. See "Unaudited Pro Forma
Condensed Financial Statements" on pages 74 through 79.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
--------------------- ---------------------
<S> <C> <C>
HOLDINGS--HISTORICAL (AS RESTATED)
Book value per common share.............................................. $ 5.51 5.60
Basic earnings per common share.......................................... .10 .50
Diluted earnings per common share........................................ .10 .49
Cash dividends declared per share........................................ .20 .80
HOLDINGS--PRO FORMA (UNAUDITED)
(ALL STOCK ELECTIONS)
Book value per common share.............................................. 6.81 6.93
Basic earnings per common share.......................................... .10 .49
Diluted earnings per common share........................................ .10 .49
Cash dividends declared per share........................................ .20 .78
HOLDINGS--PRO FORMA (UNAUDITED)
(STOCK AND MAXIMUM CASH ELECTIONS)
Book value per common share.............................................. 6.34 6.48
Basic earnings per common share.......................................... .10 .49
Diluted earnings per common share........................................ .10 .48
Cash dividends declared per share........................................ .22 .87
LABONE--HISTORICAL (AS RESTATED)
Book value per common share.............................................. 3.91 3.95
Basic earnings per common share.......................................... .14 .67
Diluted earnings per common share........................................ .14 .67
Cash dividends declared per share........................................ .18 .72
LABONE--EQUIVALENT PRO FORMA (UNAUDITED)
(ALL STOCK ELECTIONS)
Book value per common share.............................................. 6.81 6.93
Basic earnings per common share.......................................... .10 .49
Diluted earnings per common share........................................ .10 .49
Cash dividends declared per share........................................ .20 .78
LABONE--EQUIVALENT PRO FORMA (UNAUDITED)
(STOCK AND MAXIMUM CASH ELECTIONS)
Book value per common share.............................................. 6.34 6.48
Basic earnings per common share.......................................... .10 .49
Diluted earnings per common share........................................ .10 .48
Cash dividends declared per share........................................ .22 .87
</TABLE>
The LabONE equivalent pro forma per share amounts were calculated by multiplying
the Holdings pro forma per share amounts by the exchange ratio of one share to
one share.
10
<PAGE>
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
HOLDINGS. The shares of Holdings common stock are listed for trading under
the symbol "LABH" as a NASDAQ National Market issue on The NASDAQ Stock Market.
The following table sets forth the quarterly high and low sales prices of
Holdings common stock as reported by NASDAQ and cash dividends declared, in each
case based on published financial sources. All per share information has been
adjusted to reflect the 1.5 for one stock split which will occur immediately
prior to the merger. The Holdings cash dividends do not reflect the dividend
distributions in 1997 of SLH and Response which amounted to $10.20 per share.
<TABLE>
<CAPTION>
HOLDINGS COMMON STOCK
(AS ADJUSTED FOR PROPOSED STOCK SPLIT)
-----------------------------------------
CASH DIVIDENDS
HIGH LOW DECLARED PER SHARE
--------- --------- -------------------
<S> <C> <C> <C>
1997
First quarter...................................... $ 28.08 21.67 .20
Second quarter..................................... 23.83 21.16 .20
Third quarter...................................... 23.83 15.33 .20
Fourth quarter..................................... 17.67 13.33 .20
1998
First quarter...................................... 16.33 14.42 .20
Second quarter..................................... 16.17 13.58 .20
Third quarter...................................... 15.67 10.17 .20
Fourth quarter..................................... 12.42 9.33 .20
1999
First quarter...................................... 12.75 10.08 .20
Second quarter..................................... 11.33 7.92 .20
</TABLE>
On March 5, 1999, the last full trading day prior to the public announcement of
the merger, the reported closing price of Holdings common stock on The NASDAQ
Stock Market was $10.71 per share, after adjustment for the proposed 1.5 for one
stock split. On June 30, 1999, the reported closing price was $9.25 after
adjustment for the proposed 1.5 for one stock split.
11
<PAGE>
LABONE. The shares of LabONE common stock are listed for trading under the
symbol "LABS" as a NASDAQ National Market issue on The NASDAQ Stock Market. The
following table sets forth the quarterly high and low sales prices of LabONE
common stock as reported by NASDAQ and dividends declared, in each case based on
published financial sources.
<TABLE>
<CAPTION>
LABONE COMMON STOCK
-----------------------------------------
CASH DIVIDENDS
HIGH LOW DECLARED PER SHARE
--------- --------- -------------------
<S> <C> <C> <C>
1997
First quarter...................................... $ 20.00 16.25 .18
Second quarter..................................... 18.50 15.25 .18
Third quarter...................................... 18.75 15.38 .18
Fourth quarter..................................... 18.50 15.13 .18
1998
First quarter...................................... 18.25 15.75 .18
Second quarter..................................... 18.50 16.63 .18
Third quarter...................................... 17.13 11.50 .18
Fourth quarter..................................... 16.75 9.25 .18
1999
First quarter...................................... 13.50 9.75 .18
Second quarter..................................... 13.00 9.50 .18
</TABLE>
On March 5, 1999, the last full trading day prior to the public announcement of
the merger, the reported closing price of LabONE common stock on The NASDAQ
Stock Market was $10.88 per share. On June 30, 1999, the reported closing price
was $10.25.
12
<PAGE>
RISK FACTORS
RISK FACTORS REGARDING THE MERGER
In addition to the matters addressed in "Cautionary Statement Regarding
Forward-Looking Statements" on page 17 and the other information included in
this document, the Holdings and LabONE stockholders should consider the
following risk factors carefully in determining whether to approve the merger.
FOLLOWING THE MERGER, THE EARNINGS OF THE COMBINED COMPANY WILL BE REDUCED BY
THE AMORTIZATION OF GOODWILL ARISING FROM THE MERGER AND HOLDINGS HISTORICAL
GOODWILL.
For accounting purposes, we estimate that the merger will add from $22.4
million to $25.1 million of goodwill to our post merger balance sheet. The
amortization of this transaction goodwill will reduce our future earnings. This
transaction goodwill arises due to the difference between the cost of acquiring
the LabONE shares in the merger and the fair value of the LabONE net assets
allocated to those shares. We expect to amortize the transaction goodwill over
twenty years at an annual rate ranging from about $1.1 million (assuming no cash
elections) to $1.3 million (assuming maximum cash elections). Our post merger
balance sheet will also reflect existing or "historical" goodwill that is
currently a Holdings asset that has resulted from Holdings prior acquisitions of
LabONE common stock. The historical goodwill at March 31, 1999 was $6 million
and is being amortized at the rate of about $1.5 million per year until April
2003.
The earnings of your LabONE common stock have not previously been affected
by the transaction goodwill or Holdings historical goodwill. However, following
the merger this goodwill will reduce earnings of the combined company at the
annual rate of $2.6 million (assuming no cash elections) to $2.8 million
(assuming maximum cash elections) until April 2003, and thereafter at $1.1 to
$1.3 million per year until the 20th anniversary of the merger. Although these
future charges against earnings would not reduce cash generated from operations,
they could depress the market price of combined company common stock following
the merger. This could be the case if our post merger stock prices are
influenced by investors that focus primarily on the issuer's net earnings rather
than earnings before interest, taxes, depreciation and amortization.
The impact of this goodwill will be different if you are a Holdings
stockholder. The earnings of Holdings are already being affected by the Holdings
historical goodwill. The impact on Holdings' stockholders of the annual $1.1 to
$1.3 million of transaction goodwill will be lessened by the elimination of
Holdings' management and administrative expenses of approximately $1 million per
year.
The amounts reflected in this discussion are on a pro forma or hypothetical
basis as if the merger had occurred as shown in the pro forma financial
statements included in this document on pages 74 through 79. The actual amount
of goodwill that will be incurred in the merger will depend on the number of
combined company shares issued in the merger, the actual amount of transaction
costs and the fair value of the LabONE net assets at the time of the merger.
BECAUSE THE MERGER CONSIDERATION WAS FIXED ON THE DATE OF THE MERGER AGREEMENT,
LABONE STOCKHOLDERS MAY RECEIVE HOLDINGS STOCK THAT IS HIGHER OR LOWER IN MARKET
VALUE THAN THE MARKET VALUE OF THE SHARES ON THE DATE OF THE MERGER AGREEMENT.
Because the merger consideration was fixed on the date of the merger
agreement, you will receive a fixed number of shares of combined company common
stock for your LabONE shares that are not exchanged for cash, rather than a
number of shares of combined company common stock with a particular fixed market
value. The market values of Holdings and LabONE common stock at the time of the
merger could vary significantly from their prices on the date of the merger
agreement. Because the merger consideration will not be adjusted to reflect any
changes in the market value of Holdings or
13
<PAGE>
LabONE common stock, the market value of the combined company common stock that
you receive for your LabONE common stock may be higher or lower than the market
value of those shares on the date of the merger agreement.
THE LABONE DIVERSIFICATION AND GROWTH STRATEGIES MAY NOT PRODUCE DESIRED
RESULTS.
A principal purpose of the merger is to make it easier for LabONE to pursue
its growth strategy, which includes acquiring ongoing businesses and entering
into strategic alliances. We cannot guarantee that we will be able to continue
growing, through this growth strategy or otherwise. Our strategy to acquire
ongoing businesses involves significant risks. We may not be able to acquire
attractive businesses on reasonable terms. If we acquire a business, we may have
difficulty in integrating that business with our existing operations. In
addition, the key personnel of the acquired business may decide not to work for
us. These difficulties could disrupt our ongoing operations, distract our
management and employees and increase our expenses. Furthermore, we may incur
debt or issue equity securities to pay for any future acquisitions. The issuance
of equity securities could be dilutive to our existing stockholders. These
risks, together with the inability to use pooling of interests accounting for
future acquisitions as described below, could result in negative rather than
positive results.
THE EXPECTED ELIMINATION OF POOLING OF INTERESTS ACCOUNTING COULD HAVE AN
ADVERSE EFFECT ON OUR ABILITY TO MAKE ACQUISITIONS.
On April 21, 1999, the Financial Accounting Standards Board publicly
announced that it plans to eliminate pooling of interests accounting for
acquisitions initiated after it issues a final standard on this subject, which
it expects to do in late 2000. Pooling of interests accounting now applies to
certain acquisitions funded with stock, while purchase accounting applies to
most other types of acquisitions. As a result, acquisitions through the issuance
of additional shares of our stock that would otherwise qualify for pooling
accounting and that are initiated after issuance of the final standard by the
FASB would have to be accounted for using the purchase method of accounting. Use
of the purchase method of accounting for such acquisitions creates an intangible
goodwill asset to the extent that the cost of the acquisition exceeds the fair
value of the assets acquired. The goodwill must be amortized over periods of up
to 40 years, thereby reducing earnings by the amount of the periodic charge. The
FASB has indicated that it may issue standards shortening the permitted time
period over which goodwill created through acquisitions may be amortized. This
would further increase the amount of the periodic charge against earnings. We
expect that the anticipated requirement to use purchase accounting for all
acquisitions or the shortening of the amortization period for acquisition
goodwill will make fewer acquisition opportunities feasible for us due to their
possible dilutive effect on future earnings. If the merger is consummated our
growth strategy is likely to include efforts to initiate an acquisition that
would qualify for pooling accounting before the issuance of any final FASB
standard. However, we cannot give any assurance that we can do this or that we
will be able to satisfy the otherwise strict technical requirements that must be
met to qualify for pooling accounting under the present standards.
THE COMBINED COMPANY WILL HAVE INCREASED DEBT SERVICE OBLIGATIONS THAT MAY
PREVENT US FROM PURSUING FUTURE ACQUISITIONS.
We expect to borrow up to $13.6 million to satisfy cash elections by LabONE
stockholders in the merger in excess of $3 million. Additional cash could be
needed to the extent that any Holdings' stockholders perfect dissenters' rights.
Although we don't expect the additional borrowings to negatively impact earnings
per share due to a reduction in shares outstanding, they will increase our
annual interest expense and subject us to the normal risks associated with debt
financing. The additional debt could also impair our ability to pursue
acquisition and growth strategies that would otherwise be available and could
impact our future operating results if we borrow additional funds to complete
acquisitions in the future.
14
<PAGE>
THERE IS NO ASSURANCE THAT REGULAR QUARTERLY DIVIDENDS WILL CONTINUE AT PRE
MERGER LEVELS.
The current board of directors of LabONE has no plans to cause the combined
company to discontinue or reduce Holdings' current $0.30 per share quarterly
dividend ($0.20 after the proposed stock split). However, after the merger, that
decision will be made by the new board of directors of the combined company, a
majority of whom will be independent non-management directors. Although nine of
the twelve current LabONE directors are expected to continue as directors of the
combined company, we cannot predict what decisions may be made by that board in
the future. Any decision by that board will be based upon the financial
condition, operating results, and liquidity of the combined company and numerous
other factors. In addition, our pursuit of the LabONE growth and diversification
strategy, the increased debt that is expected to result from the merger, any
changes in the market for our products and services, negative developments
caused by other risks described in this document or other factors could
influence the board of the combined company to reduce or eliminate the quarterly
dividend.
RISK FACTORS REGARDING LABONE
In addition to the matters addressed in "Cautionary Statement Regarding
Forward-Looking Statements" on page 17 and the other information included in
this document, stockholders should consider the following risk factors relating
to LabONE's business in determining whether to elect to receive cash instead of
shares of the combined company in the merger.
LABONE'S CLINICAL TESTING BUSINESS MAY NOT BECOME PROFITABLE UNLESS WE INCREASE
THE NUMBER OF CLINICAL TESTS WE PERFORM.
LabONE is incurring substantial costs in expanding its business to provide
clinical testing services to the healthcare industry. These costs resulted in an
operating loss for our clinical testing business of $6.2 million in 1998, after
including the business' share of allocated corporate overhead. The expenses
associated with this business, particularly labor costs for our testing work
force, are relatively fixed over the short term. The primary means of increasing
our profit margin is to increase the volume of tests we perform. Although we
have been successful to date in marketing our clinical testing services, we
cannot guarantee that the revenues in this business will continue to grow at
historical rates. If revenues do not continue to grow, our clinical testing
business will not become profitable.
ANY ADVERSE CHANGE IN THE NUMBER AND TYPES OF TESTS ORDERED BY LIFE INSURANCE
COMPANIES COULD REDUCE LABONE'S PROFITS.
A major part of LabONE's business is providing risk-appraisal laboratory
testing services to the life insurance industry. The life insurance testing
business is our only currently profitable business. The level of demand for
testing services from the insurance industry is determined by a number of
factors, including
- the number of life insurance applications written,
- the policy amount thresholds at which insurance companies order testing,
- the type and costs of tests requested,
- testing innovations approved by the Food and Drug Administration,
- the extent to which insurance companies may create in-house testing
facilities, and
- the development in the future of suitable on-site rapid assay testing
products that eliminate the need for centralized testing.
Many of these factors are beyond our control. Any adverse changes in life
insurance industry demand for testing services could significantly reduce our
profits.
15
<PAGE>
INCREASING PRICE COMPETITION IN THE LIFE INSURANCE TESTING BUSINESS COULD REDUCE
LABONE'S PROFITS.
LabONE has competed in the life insurance testing business by offering more
complete and higher quality services than our competitors at competitive prices.
Many of our competitors are attempting to charge lower prices than us. If they
continue to lower prices and our customers refuse to pay higher prices for
better service, our profits will be reduced. See "Competition" on page 84.
LABONE'S LABORATORY TESTING SERVICES CREATE A RISK OF LEGAL LIABILITY.
LabONE clients rely on the accuracy of our testing to make significant
insurance, treatment and hiring and firing decisions. We could be required to
pay substantial damages if the number of reports containing false positive or
false negative results increased. In addition, federal and state laws regulate
disclosure of specimen testing results. If we do not adequately protect the
confidentiality of test subjects, we could incur significant liability. LabONE
has insurance to cover these types of claims, but we cannot guarantee that this
coverage is adequate. Any uninsured claims could adversely affect our profits
and financial condition. See "Information Regarding LabONE" on page 80.
ANY DISRUPTION IN EXPRESS DELIVERY SERVICE COULD HARM LABONE'S BUSINESS.
LabONE generally relies on express couriers to transport specimens to its
laboratory quickly and safely. A disruption in these couriers' business
resulting from a labor dispute or other event could harm our business.
ANY FAILURE BY LABONE OR ITS CUSTOMERS OR SUPPLIERS TO BE YEAR 2000 COMPLIANT
COULD SEVERELY DISRUPT LABONE'S BUSINESS AND ADVERSELY AFFECT LABONE'S RESULTS
OF OPERATIONS.
LabONE uses a significant number of computer systems and software programs
in its operations. LabONE has established an oversight committee to review both
internal compliance and the Year 2000 preparation and contingency plans of its
clients and vendors. See "Year 2000" on page 92. We expect to complete the Year
2000 compliance program by the end of the second quarter of 1999. However, we
cannot guarantee that the adjustments to our computer systems will completely
eliminate all Year 2000 problems. Nor, can we guarantee that the systems of our
clients and vendors will be Year 2000 compliant or that their Year 2000
conversions will be compatible with our computer systems. Year 2000 problems
that are not corrected could severely disrupt our business and adversely affect
our results of operations.
THE DEVELOPMENT AND APPROVAL OF COMPETITIVE ON-SITE RAPID ASSAY TESTS COULD
HINDER LABONE'S CONTINUED GROWTH.
LabONE serves its customers through laboratory based testing facilities.
Although there are some on-site rapid assay testing products in the marketplace,
rapid assays have not achieved broad market acceptance due to the high cost of
such assays, difficulties in maintaining the confidentiality of tests, liability
concerns, less accurate testing results and the absence of a broad testing menu.
If more competitive assays become available, such products could be substituted
for laboratory-based testing and have an adverse impact on our financial
condition and results of operations.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Holdings and LabONE have made forward-looking statements in this document,
and in the other documents that we refer to in this document. Forward-looking
statements are statements that are not historical in nature and can often be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "could," "intends," "plans," "estimates" or
"anticipates," variations of these words or similar expressions. Examples of
forward-looking statements include:
- pro forma financial statements and projections relating to revenues,
income or loss, earnings or loss per share, financial condition, capital
expenditures, the payment or non-payment of dividends, and other financial
items;
- statements of plans and objectives;
- statements of future economic performance; and
- statements of the assumptions underlying these statements.
Forward-looking statements are not guarantees of future performance or
results. They involve risks, uncertainties and assumptions. Future results of
operations, financial condition, business and stock values of Holdings, LabONE
and the combined company may be materially different from those described in
these forward-looking statements. Stockholders of Holdings and LabONE are
cautioned not to put undue reliance on any forward-looking statement.
Among the factors that could cause actual results to be materially different
from those described in the forward-looking statements are the following:
- materially adverse changes in general economic conditions or in the
markets served by LabONE;
- LabONE's ability to successfully market its services to new customers in
new markets;
- the volume, pricing and mix of laboratory tests performed by LabONE;
- the ability of LabONE to complete and integrate appropriate acquisitions,
strategic alliances and joint ventures;
- acquisition costs, restructuring and other charges associated with
acquisitions;
- changes in LabONE's management personnel;
- the ability of LabONE to obtain and maintain all certifications required
by its customers; and
- future changes in laws and regulations, including regulations affecting
government reimbursement for clinical laboratory testing, and regulations
governing anti-fraud and abuse, drug testing, and environmental and
occupational safety.
We have described under "Risk Factors" additional factors that could cause
actual results to be materially different from those described in the
forward-looking statements. Other factors that we have not identified in this
document could also have this effect.
All forward-looking statements made in this document are made as of the date
of this document. Holdings and LabONE may not publicly update or correct any of
these forward-looking statements in the future.
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LABONE GROWTH STRATEGY
LabONE has developed an integrated strategy designed to significantly
increase its growth, which is described below. For the reasons set forth below
and elsewhere in this joint proxy statement/prospectus, both LabONE and Holdings
believe that the merger is essential to the execution of several important
elements of this growth strategy. See "Background of the Merger," "Holdings'
Reasons for the Merger and Recommendations of its Board" and "LabONE's Reasons
for the Merger and Recommendation of its Board" on pages 23 to 34.
INTERNAL GROWTH
LabONE plans to continue to implement existing internal growth strategies
which have focused on
- increasing efficiency and cost-effectiveness in providing high quality
laboratory testing services at very competitive prices, and
- gaining increased market share in the substance abuse and clinical testing
market segments which it entered in 1994.
LabONE's primary strategy for creating significant internal growth is
through the continued expansion of its benefit management program and
LabCard-Registered Trademark-. LabCard is a vehicle for delivering outpatient
laboratory services and is marketed to healthcare payers (self-insured employers
and other groups, health maintenance organizations and insurance companies). The
LabCard provides laboratory testing at reduced rates, as compared to traditional
laboratories, using a unique benefits design that shares the cost savings with
the patient. The patient incurs no out-of-pocket expense when the LabCard is
used and the healthcare payer receives substantial savings on its laboratory
charges.
ACQUISITIONS
LabONE recently moved into a new 268,000 square foot, custom designed
facility located in Lenexa, Kansas that consolidates its laboratory,
administrative and warehouse facilities and functions into one building. This
new facility improves the efficiency of our operations and approximately doubles
our capacity. We now have the capacity to acquire other laboratory testing
companies and achieve cost savings by consolidating their less efficient
operations and serving their customers from this single location. If we are
successful in acquiring less efficient laboratory operations at reasonable
prices, the economies of scale arising from our expanded laboratory capacity
should enable us to compete more effectively on price, service and quality.
Customers in each of the market segments which LabONE serves are struggling
with ways to increase their competitiveness by lowering their overhead costs and
increasing their efficiency. We believe we can successfully differentiate
ourself from our competitors by actively assisting our customers in meeting
these challenges through integrated services that collect, warehouse and manage
healthcare and insurance risk data.
LabONE supplies greater value to its customers in this regard by offering
complementary data collection and storage services that eliminate the customer's
need to maintain an in-house staff to collect certain kinds of data that are
essential to conducting the customer's business. A prime illustration of this
approach is our recent acquisition of Systematic Business Services, Inc.
Systematic Business Services provides telephone inspections, motor vehicle
reports, attending physician statements and claims investigation services which
are routinely required by life and health insurers nationwide. Systematic
Business Services is cost-effective in delivering this data because of its
specialization, expertise and economies of scale that are very difficult for our
customers to duplicate with an in-house staff. We believe that other acquisition
opportunities exist which would permit us to offer complementary services
providing similar benefits to our customers. Broadening the array of such
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services should provide us with a unique advantage in our markets and provide
opportunities to increase the volume of our business and improve profit margins.
LabONE also delivers greater value to its customers by reducing the cost
burden of managing the voluminous paper records that historically have been
necessary to conduct their businesses and satisfy regulatory requirements. The
data we collect and our testing results are each deliverable electronically via
reports and formats that are readily capable of being customized to meet the
needs of customers through an automated link between our custom-designed
laboratory and business processing system and customers' computer systems. As a
result, our customers can significantly reduce their data collection and storage
costs, streamline their information processes and improve their efficiency and
reliability, which should serve to further strengthen our position with each
customer. This capability also may enable our customers to comply more
cost-effectively with the requirements of the Health Insurance Portability and
Accountability Act of 1996 and regulations under that act that may be required
as early as the fall of 2001. The Health Insurance Portability and
Accountability Act will require many customers to convert healthcare information
to electronic form that state law had previously required to be maintained in
paper form. The competitive advantage derived from customers' reliance on our
capabilities as a collector, warehouse and manager of healthcare and risk
management data should increase as we augment the scope of our service offerings
through acquisitions of complementary businesses.
LabONE believes that its acquisition strategy will be enhanced significantly
by the ability to offer its common stock as part or all of the consideration for
the acquisition of other laboratory testing companies and companies with
complementary service offerings. Many of these candidates do not have
substantial tangible assets and the acquisition of such companies for cash would
create significant goodwill because the purchase price is likely to be
determined as a multiple of the acquired company's earnings or cash flow. If the
merger with Holdings is completed, LabONE would be able to account for certain
acquisitions using its common stock on a pooling-of-interests basis prior to the
elimination of that method of accounting by the FASB, which is expected to occur
in late 2000. Accounting for an acquisition using pooling, rather than the
purchase accounting method currently required to be used by LabONE and which
will be required after pooling is eliminated, avoids the creation of goodwill
and the resulting dilution of LabONE's future earnings. Completion of the merger
would also eliminate the present adverse effect on Holdings that would result
from acquisitions using LabONE common stock due to the potential loss of
Holdings' eligibility to file consolidated income tax returns. Without the
ability to use its common stock to effect acquisitions, and to use
pooling-of-interests accounting to account for them prior to its expected
elimination in late 2000, LabONE believes it will be at a significant
disadvantage in competing for acquisition candidates in order to participate in
the consolidation of the clinical and substance abuse laboratory testing markets
which it believes will occur in the next few years. LabONE currently has no
plans, understandings, agreements or arrangements for any such acquisition.
STRATEGIC ALLIANCES
LabONE believes that strategic alliances offer important opportunities to
facilitate its growth. The purpose of such alliances is to align the incentives
of LabONE and its strategic partners in order to expand business opportunities
for their mutual benefit. We believe that an important means of aligning our
interests and those of our strategic partners is the issuance to them of LabONE
common stock or warrants to purchase common stock.
LabONE has entered into strategic alliances with companies engaged in claims
processing and marketing that are focused on serving numerous customers that are
too small for LabONE to market directly. LabONE has issued medium term
performance warrants to purchase LabONE common stock to these types of
companies, quarterly installments of which do not become exercisable unless
specified performance standards are met. These performance standards are
designed to ensure that sufficient
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profitability is achieved for LabONE to avoid dilution of its earnings per share
when the warrants are exercised. We believe that the performance incentive
inherent in these warrants should enable us to generate significant additional
revenues and differentiates LabONE from its competitors who typically offer only
cash-based fees for services. In 1998, LabONE issued performance warrants to
purchase an aggregate of 1,000,000 shares of common stock in connection with two
marketing agreements. On May 14, 1999, LabONE issued an additional performance
warrant to purchase 500,000 shares of its common stock in connection with a new
multi-year marketing agreement with HealthPlan Services Corporation.
Warrants may also be used by LabONE to obtain technology in order to provide
competitive advantage to LabONE's business. Businesses possessing such
technology frequently want to participate in its economic benefits as its value
is proven over time. The issuance of warrants or other contractual rights to
receive common stock of LabONE would enable LabONE and such businesses to share
the upside potential of such technology while reducing the substantial financial
pressure that might otherwise be caused if cash were used to acquire such
technology.
A recent illustration of this strategy is LabONE's issuance on May 14, 1999,
of a 50,000 share non performance based warrant to STC Technologies, Inc., in
connection with a Distribution Agreement entered into between LabONE and STC
Technologies. Under the Distribution Agreement,, STC Technologies appointed
LabONE as its exclusive distributor in the North American workplace testing
market for its new product line that is designed to identify illicit drug abuse
through oral fluids rather than urine or blood samples.
LabONE believes that there are many other opportunities to create strategic
alliances that would improve marketing capabilities, capture leading technology
or provide other types of competitive advantage. Our ability to pursue those
opportunities is currently constrained by Holdings' need to maintain its
ownership in excess of 80% of LabONE's outstanding common stock so that it can
file consolidated income tax returns for itself and LabONE. The merger would
permit this constraint to be eliminated and should result in higher trading
volumes, greater liquidity, a more efficient market and increased investor
interest in the common stock of the combined company. We believe that the
resulting enhanced efficiency of the market for our common stock should increase
the relative attractiveness of the stock as an inducement for potential
strategic partners to enter into alliances and should improve the incentive for
enhanced performance inherent in such alliances.
By providing LabONE management with the opportunity to effect acquisitions
and strategic alliances with common stock, the enhanced growth potential of the
common stock is also expected to increase the performance incentive inherent in
stock options and other equity-based management incentive programs. We believe
that the ability to offer common stock with enhanced growth characteristics
should increase the likelihood of our retaining the management of acquired
companies and attracting new management talent in order to improve our operating
performance.
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THE PROPOSED MERGER
GENERAL
Holdings and LabONE are furnishing this document to their stockholders in
connection with the solicitation of proxies by their Boards of Directors for use
at their annual meetings of their stockholders and at any adjournments or
postponements thereof.
HOLDINGS ANNUAL MEETING.
At the Holdings annual meeting, Holdings stockholders will be asked to vote
on the following proposals:
<TABLE>
<CAPTION>
NUMBER OF VOTES "FOR"
PROPOSAL NEEDED TO APPROVE PROPOSAL
----------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
- to adopt the Agreement and Plan of Merger, as 2/3 of shares outstanding on June 24, 1999
amended, dated as of March 7, 1999
- to change the definition of "Continuing Director majority of shares outstanding on June 24, 1999
Quorum" in Article X of the articles of
incorporation as described under "Holdings Annual
Meeting Proposals" on page 129
- to confirm the board's appointment of independent majority of votes cast
public accountants for 1999
- to elect directors to serve in the event that the plurality of votes cast with shares being voted
merger is not effected. cumulatively
</TABLE>
The presence, in person or by proxy, of the holders of a majority of the
common stock is necessary to constitute a quorum for the conduct of the meeting.
See "Holdings Annual Meeting" on page 69, "Quorum" on page 70 and "Holdings
Annual Meeting Proposals" on page 128.
LABONE ANNUAL MEETING.
At the LabONE meeting, LabONE stockholders will be asked to vote upon the
following proposals:
<TABLE>
<CAPTION>
NUMBER OF VOTES "FOR"
PROPOSAL NEEDED TO APPROVE PROPOSAL
----------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
- to adopt the Agreement and Plan of Merger, as majority of shares outstanding on June 24, 1999 and
amended, dated as of March 7, 1999 majority of votes cast for or against proposal by
LabONE unaffiliated stockholders
- to elect twelve directors plurality of votes cast
- to confirm the board's appointment of independent majority of votes cast
public accountants for 1999.
</TABLE>
The presence, in person or by proxy, of the holders of a majority of the
common stock is necessary to constitute a quorum for the conduct of the meeting.
See "LabONE Annual Meeting of Stockholders" at page 70, "Quorum" on page 70 and
"LabONE Annual Meeting Proposals" at page 107.
THE HOLDINGS STOCK SPLIT
The merger agreement provides that, prior to the effective time of the
merger, the Holdings board will declare a stock split payable as a dividend so
that, immediately prior to the effective time, each
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issued and outstanding share of Holdings common stock shall be automatically
converted into 1.5 shares of Holdings common stock. The dividend will not be
paid unless all conditions to the merger have been satisfied. It will then be
payable after the merger in common stock of the combined company to holders of
record of Holdings common stock immediately prior to the merger. Based on the
present schedule, the dividend is expected to be paid on August 19, 1999 to
holders of record on August 9, 1999, if the merger occurs on August 10, 1999.
EXCHANGE OF LABONE SHARES AND CASH ELECTIONS
MERGER CONSIDERATION FOR LABONE COMMON STOCK. If you are a record holder of
LabONE common stock immediately prior to the effective time you may elect to
receive either:
- a cash price per share equal to $12.75;
- one (1) share of combined company common stock; or
- a combination of cash and shares.
If you fail to make a timely election to receive cash for your shares, you
will receive combined company common stock for all of your LabONE common stock.
If you elect to receive cash for some or all of your LabONE shares, the
number of your shares that will be converted into cash is dependent on the
maximum amount payable in cash with respect to all shares of LabONE common
stock. That maximum amount may not exceed $16,600,000 in the aggregate. If the
amount payable in cash with respect to shares of all holders who make cash
elections exceeds the maximum cash payment amount, then your cash election
shares will be converted into the right to receive a combination of combined
company common stock and cash in proportion to $16.6 million divided by the
aggregate amount of all valid cash elections. See "The Merger
Agreement--Conversion of LabONE Common Stock Into Shares of the Combined Company
or Cash" on page 58.
FOR EXAMPLE--if all cash elections amount to $20,000,000 and you elected all
cash for 100 of your shares, you would receive cash for 83 LabONE shares and
combined company stock for 17 of your LabONE shares as follows:
$16,600,000/$20,000,000 = .83 x 100 shares =83 shares x $12.75 = $1,058 in cash
and .17 x 100 shares = 17 shares of combined company common stock
A form for making your election accompanies the delivery of this document if
you are a stockholder of record. The form includes instructions for completing
the form and returning it with your LabONE stock certificate if you are making a
cash election. If your shares are held in "street name" by a broker or other
nominee you should receive a form from them as to how you may make a cash
election.
PROPERLY COMPLETED CASH ELECTIONS MUST BE RECEIVED BY AMERICAN STOCK
TRANSFER & TRUST COMPANY BEFORE 10:00 A.M. NEW YORK CITY TIME ON AUGUST 9, 1999,
TO BE EFFECTIVE. LABONE SHARES THAT ARE NOT COVERED BY AN EFFECTIVE CASH
ELECTION WILL BE CONVERTED INTO SHARES OF THE COMBINED COMPANY ONLY.
STOCK OPTIONS AND WARRANTS
LABONE OPTIONS AND WARRANTS. As the surviving corporation, Holdings will
assume each outstanding option or warrant to purchase LabONE common stock that
is outstanding at the effective time, whether or not then exercisable. Those
options and warrants will become options and warrants to purchase the same
number of shares of common stock of the combined company, at the same price and
on the same terms as are provided in the existing option agreements for the
purchase of LabONE
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<PAGE>
common stock. In addition, the merger agreement contemplates that no option or
warrant will vest or become exercisable as a result of the merger.
HOLDINGS STOCK OPTIONS. At the effective time, stock options issued under
the Holdings 1997 Directors' Stock Option Plan will be adjusted to reflect the
1.5 for 1 stock split. Approval of the merger agreement will also effect a
ratification of action taken by the Holdings board on August 27, 1998, that
amended the Plan and outstanding options so that they could be exercised by the
optionee at any time until the end of the term of the option following the
termination of director status due to a merger such as the merger, contemplated
by the merger agreement. See "Interests of Certain Persons in the Merger" on
page 49.
BACKGROUND OF THE MERGER
Following the sale of its insurance operations in 1990, Holdings was a
diversified holding company whose assets consisted primarily of a majority
interest in LabONE, a substantial ownership position in Response Oncology, Inc.,
a publicly traded oncology management business, and several investments in
healthcare and insurance services businesses, as well as real estate and energy
ventures. In early 1995, Holdings announced that it would begin to explore
strategic alternatives designed to increase the value of its common stock. One
of the strategies that was discussed was a possible merger of Holdings into
LabONE.
Following Holdings' announcement that it would explore strategic
alternatives, including a possible merger of Holdings into LabONE, on February
10, 1995, the board of directors of LabONE established a special committee
consisting of independent non-management members of the LabONE board of
directors to consider and act upon any merger or reorganization proposal
presented to LabONE by Holdings. The LabONE board also authorized the special
committee to engage independent legal and financial advisers. The special
committee retained Stinson, Mag & Fizzell in May 1995 as its independent legal
adviser and U.S. Bancorp Piper Jaffray in April 1997 as its independent
financial adviser.
At the request of the special committee's legal adviser, the LabONE board of
directors expanded the authority of the special committee on August 4, 1995 to
exercise all powers of the board for the purposes of representing solely the
interests of LabONE and the LabONE unaffiliated stockholders in all respects in
connection with any potential transaction whereby, directly or through one or
more affiliates:
- Holdings would make any proposal or offer for a merger, consolidation or
other business combination or reorganization involving LabONE, or
- a third party would make any other proposal or offer (whether by tender or
exchange offer or otherwise) to acquire the LabONE common stock or all or
substantially all of the assets of LabONE or its subsidiaries.
The expanded authority also authorized the special committee to:
- investigate, evaluate and analyze transaction proposals,
- negotiate the terms and conditions of such proposals for the benefit of
the LabONE unaffiliated stockholders,
- determine after such negotiation whether such proposal would be in the
best interest of LabONE and the LabONE unaffiliated stockholders,
- approve or reject such proposal, and
- make a recommendation to the LabONE board or the LabONE unaffiliated
stockholders that they should or should not vote in favor of such
proposal.
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<PAGE>
By the end of March 1997, Holdings had disposed of or had made arrangements
for the disposition of all of its assets other than its interest in LabONE and
about $7 million of cash and cash equivalents. On April 10, 1997, Holdings
proposed to the special committee that Holdings be merged downstream into LabONE
to enhance LabONE's opportunities for growth and to provide Holdings
stockholders with a direct investment in LabONE. The proposal contemplated that
each share of Holdings common stock would be converted into 1.65 shares of
LabONE common stock after first distributing all of its cash and other assets to
Holdings' stockholders.
On July 1, 1997, Holdings terminated those merger discussions following a
determination that a merger with either entity surviving would have to be
accounted for as a purchase transaction rather than as a pooling of interests as
had been originally contemplated. Accordingly, either an upstream or a
downstream merger of the two companies would reduce earnings of the combined
company due to the addition of a significant amount of amortizable goodwill to
the balance sheet of the combined company. The goodwill would arise from the
transaction itself--"transaction goodwill"--and from existing or "historical
goodwill" accrued by Holdings from its prior purchases of LabONE common stock.
At that time, Holdings believed that the stockholders of both companies would be
better served by continuing the existing holding company structure under a
strategy designed to reduce Holdings' management and administrative expenses.
Consistent with this strategy, Holdings restructured its board and
management in September 1997. The board was reduced from eleven to the four
present directors, none of whom hold any office or position with LabONE. Mr.
Jacobs was also elected to replace Mr. Grant as the Chief Executive Officer of
Holdings, while Mr. Grant continued in office as the Chairman, President and
Chief Executive Officer of LabONE. The reduction in the number of directors and
officers and a contract with a former Holdings subsidiary (then known as SLH
Corporation) to provide Holdings with administrative services for $75,000 per
annum enabled Holdings to reduce management and administrative expenses from
prior levels.
On August 6, 1998, Mr. Grant, advised Mr. Jacobs that he believed that
LabONE would be interested in resuming merger discussions. Mr. Grant stated that
it would be desirable for LabONE to pursue a growth strategy that could involve
the use of LabONE stock for acquisitions in view of the need for critical mass
and economies of scale and the anticipated consolidation of the industry. He
further noted that, as a subsidiary, acquisitions by LabONE could not be
accounted for under the pooling of interests method of accounting and that,
without such accounting treatment, many acquisition opportunities would be
unrealistic. Management of LabONE had therefore concluded that the advantages of
combining Holdings and LabONE could potentially justify the effect that
amortization of transaction and historical goodwill would have on the earnings
of the combined company.
On August 13, 1998, Holdings management and Lathrop & Gage L.C., Holdings'
legal counsel, met with LabONE management and Morrison & Hecker, LLP, outside
general counsel to LabONE. The meeting, followed regularly scheduled meetings of
the Boards of Directors of both companies at LabONE's offices. During the
meeting, LabONE management discussed a variety of growth opportunities that
would be consistent with LabONE's diversification strategy. LabONE management
explained that the current parent-subsidiary structure between Holdings and
LabONE was a significant impediment to the pursuit of this diversification
strategy. That structure made it impossible for LabONE to utilize pooling of
interests accounting with respect to potential acquisitions. It was recognized
that the combination would also eliminate the need of Holdings to continue its
strategy of owning a minimum of 80% of LabONE common stock for tax reasons. That
strategy was inconsistent with the strategy of LabONE to use its stock for
acquisitions and the building of other strategic relationships.
Following the meeting, the Holdings board concluded that resuming merger
discussions would be advisable. The August 6, 1998 merger of SLH Corporation and
Syntroleum Corporation resulted in the termination of the contract under which
SLH Corporation was providing management and
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<PAGE>
administrative services to Holdings for $75,000 per annum. As a consequence,
Holdings was required to engage a staff of full time employees and to bear all
other expenses related to the operation of a public company. A merger followed
by the discontinuation of all operations at the Holdings level would eliminate
this expense and its negative impact on Holdings' per share earnings. The
financial and strategic benefits expected to be obtained by enabling LabONE to
pursue a growth strategy based in significant part on acquisitions also appeared
to outweigh the negative accounting impact of the transaction goodwill that
would result from the combination.
On September 2, 1998, Mr. Jacobs, with the authorization of the Holdings
board, made arrangements to engage Salomon Smith Barney Inc. to advise Holdings
with respect to the financial aspects of a possible merger with LabONE. After
conducting due diligence during September 1998, Salomon Smith Barney met on
October 5, 1998 with the Holdings board and Lathrop & Gage to discuss the terms
of a possible merger. Although it was recognized that the transaction would
generate significant amortizable goodwill that would negatively impact earnings,
the Holdings board concluded that the long term interests of both companies
would be promoted by a merger.
Prior to the October 5, 1998 Holdings board meeting, Lathrop & Gage
contacted Morrison & Hecker, outside general counsel to LabONE, to arrange a
meeting on the afternoon of October 5 with the LabONE special committee.
At the request of the legal adviser to the special committee, the special
committee of LabONE that was originally established in February 1995 was
reconvened with the powers granted to it in 1995. Due to two changes on the
LabONE board of directors, two of the original members of the special committee,
including the original Chairman of the special committee, no longer served on
the LabONE board of directors. The remaining members, Richard S. Schweiker,
Richard A. Rifkind, M.D., and Joseph H. Brewer, M.D., convened a meeting of the
special committee on October 16, 1998. At that meeting Mr. Schweiker was elected
Chairman of the special committee and John E. Walker was made a new member of
the special committee. Also at that meeting, the special committee reaffirmed
its decision to retain Stinson, Mag & Fizzell as its independent legal adviser
and U.S. Bancorp Piper Jaffray as its independent financial adviser.
Following the October 5 Holdings board meeting, Holdings management, Lathrop
& Gage and Salomon Smith Barney met with representatives of the special
committee, Stinson, Mag & Fizzell, P.C. and U.S. Bancorp Piper Jaffray. During
the meeting, Mr. Jacobs proposed a merger of LabONE into Holdings. The merger
would be immediately preceded by a split of each outstanding share of Holdings
common stock into 1.73 shares. Holders of LabONE other than Holdings would
receive one share of the combined company for each LabONE share. The combined
company would have the name and management of LabONE, the board of directors
would be as recommended by LabONE, with the approval of the Holdings board, the
transaction would not trigger early vesting of LabONE options or warrants and
the transaction would require the approval of a majority of all LabONE
stockholders voting on the merger. Holdings also requested assurance that its
current dividend policy be continued following the merger.
The 1.73 split ratio proposed by Holdings reflected ownership by Holdings
stockholders as a group after the merger equal to the same number of shares of
LabONE common stock presently held by Holdings (10,712,200) plus additional
shares having a market value equal to Holdings cash and cash equivalents then on
hand.
The LabONE special committee indicated that it would consider the proposal
and respond following a period of due diligence.
On November 6, 1998, the special committee, through its financial adviser,
made a counter proposal that provided for a split of each share of Holdings
common stock into 1.38 shares prior to the merger. The proposed 1.38 split
factor was calculated based upon an analysis of the relative market
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<PAGE>
value of the shares of Holdings and LabONE stock and the possible effect on
market values that anticipated pro forma adjustments for additional amortizable
goodwill would have upon earnings per share, assuming the price-earnings ratio
remained the same. This proposal did not provide additional consideration to
Holdings stockholders for the Holdings cash and cash equivalents because the
special committee and its advisers believed that such cash was already factored
into the market price of Holdings stock.
On November 13, 1998, at the direction of Holdings, Salomon Smith Barney
responded to the counter proposal with a proposed split ratio of 1.60. On
November 20, 1998, the special committee responded through U.S. Bancorp Piper
Jaffray with a proposed split ratio of 1.50. The next day, at the direction of
Holdings, Salomon Smith Barney countered with a proposed split of 1.56.
Principal areas of negotiation during the preceding discussions centered on the
uncertain impact of the estimated pro forma effects of the merger, especially
amortization of historical and transaction goodwill on share value and the
resulting market prices of the shares of the combined company following the
merger, and on the value of the cash and cash equivalents on Holdings' balance
sheet with respect to the split ratio.
On November 30, 1998, the special committee and Holdings tentatively agreed
on a 1.56 split ratio. Other terms proposed by the special committee included a
proposal that the board of directors of the combined company consist of a
majority of independent directors, a dividend policy to be set by the board of
the combined company, the exclusion of votes cast by Holdings and its affiliates
in determining the approval of the merger by a majority of the LabONE
unaffiliated stockholders and a provision that Holdings would reimburse LabONE
for transaction related expenses if the merger is not consummated. U.S. Bancorp
Piper Jaffray was requested by the special committee to prepare an opinion
confirming the fairness of the proposed merger consideration, from a financial
point of view, to the LabONE unaffiliated stockholders. Holdings and the special
committee then continued through their legal advisers to negotiate other terms
for a definitive merger agreement.
On December 4, 1998, Lathrop & Gage forwarded a draft of a merger agreement
to Stinson Mag, with a view to resolving any open issues in the process of
finalizing the merger agreement.
By December 18, 1998, the parties had concluded negotiations on the
substantive provisions of the merger agreement except for provisions in the
proposed articles of incorporation and bylaws of the combined company. Meetings
of the boards of both companies and of the special committee to act on the
merger agreement had been scheduled to be held on December 21. On December 18,
1998, U.S. Bancorp Piper Jaffray, based on its continued analysis of the
proposed merger consideration in connection with the preparation of its fairness
opinion, advised the special committee of its view that the proposed split
factor of 1.56 was inadequate from a financial point of view.
On December 22, 1998, U.S. Bancorp Piper Jaffray, at the direction of the
special committee, discussed with Salomon Smith Barney a preliminary alternative
proposal. This proposal contemplated a fixed split factor of unspecified amount
for Holdings shares and a floating exchange ratio including a collar mechanism.
The collar mechanism was intended to limit the market trading range within which
the exchange ratio would be determined. It was the special committee's belief
that this alternative structure was a means of better assuring that the LabONE
unaffiliated stockholders would receive consideration substantially equivalent
to the value of the shares they held prior to the merger.
Holdings concluded that the alternative structure was unsatisfactory due to
its focus on the market value of Holdings stock and because it failed to propose
a specific split ratio or objective criteria for determining the merger
consideration. On December 22, 1998, Holdings common stock was trading at
$11.22, assuming a 1.56 split, in relation to a LabONE market price of $14.50.
Holdings believed that its stock price was being negatively affected by factors
arising from the existing structure that would disappear and not affect the
combined company following the merger. These factors included Holdings'
management and administrative expenses and its low tax basis in its LabONE
shares. Holdings believed that the proposal did not give proper consideration to
the elimination of these negative factors.
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On January 14, 1999, Lathrop & Gage met with Stinson, Mag to discuss the
concerns of both parties, the impasse between their clients and possible
approaches to a resolution of the matter. During the meeting, the legal advisers
discussed possible alternative approaches to valuation and structure and the
common interests of LabONE and Holdings in renewing negotiations after Holdings
was provided with a more definitive response from the special committee. Stinson
Mag indicated that it would try to provide a response by the end of January. In
the following weeks the special committee and its advisers reviewed alternative
structures and analyzed the changes in the pricing environment for LabONE's
services, the resulting changes in LabONE's financial forecast, and their impact
on share value and the trading price of LabONE's common stock with a view to
developing a new proposal.
On February 12, 1999, the Holdings board held its regularly scheduled
quarterly board meeting. Although previous requests had been made to the special
committee to provide the further response to enable the board to consider it at
that meeting, none had been transmitted. After deliberation, the board
instructed Lathrop & Gage to advise Stinson Mag that Holdings would consider
negotiations terminated with respect to the proposed combination unless a
further response was received on or before Wednesday, February 17. The lead
attorney at Lathrop & Gage was not able to contact the lead attorney at Stinson
Mag to discuss the deadline until the afternoon of February 16. As a result of
the discussion on the 16th, Lathrop & Gage was advised that they could expect to
receive the further response the next morning, although no firm commitment was
made to meet that schedule. Based on that expectation, Lathrop & Gage believed
it to be unnecessary to then advise Stinson Mag of the deadline. When the
further response was not received the next morning, Lathrop & Gage then advised
Stinson Mag that the Holdings board would consider negotiations terminated if
the further response was not received by midnight on that day, February 17.
During the discussion, Stinson Mag expressed concerns about the ability of the
special committee and its advisors to complete their analysis, conduct a meeting
and deliver a response within the time allotted. Stinson Mag indicated, however,
that an effort would be made to meet the deadline but requested that an
extension be granted to permit appropriate steps to be taken. The next morning,
February 18, 1999, the Holdings board met again since the further response had
not been delivered. Due to the short notice of the deadline, Lathrop & Gage was
directed by the Holdings board to deliver a letter to the special committee to
the effect that Holdings would resume negotiations if it received the further
response by noon on February 22, 1999. Lathrop & Gage delivered that notice on
the afternoon of February 18.
On the morning of February 22, 1999, the special committee, through U.S.
Bancorp Piper Jaffray, delivered to Holdings a new proposal. Under the new
proposal, the outstanding Holdings common stock would be split at the rate of
1.5 for one. After the split, the LabONE stockholders other than Holdings would
be entitled to elect to receive for each share of LabONE stock either one share
of stock of the combined company or $13.00 per share in cash, or a combination
of cash and stock. The special committee proposed this new structure in order to
achieve a number of objectives, including: to provide the LabONE unaffiliated
stockholders with the opportunity to continue their investment in the LabONE
operating entity through a tax-deferred exchange of their LabONE shares for
shares of the combined company; to provide an orderly liquidation opportunity
for those LabONE unaffiliated stockholders that prefer to sell their interests
in LabONE; and to modulate the unpredictable impact of the merger on the trading
market and market price of the shares of the combined company resulting from the
reduction in earnings of the combined company due to amortization of historical
and transaction goodwill.
Following the delivery of the new proposal, Holdings, the special committee
and their respective legal and financial advisors continued to negotiate the
terms of a potential merger. After these negotiatons, Holdings and the special
committee agreed that the Holdings common stock would be split 1.5 for one and
after the split the LabONE stockholders other than Holdings could elect to have
each LabONE share exchanged for one share of the combined company or $12.75 in
cash or a combination of cash and shares, subject however to a $16.6 million
cash limit.
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The February 22 special committee proposal also suggested a change in the
merger structure such that LabONE would be merged into an acquisition subsidiary
to be formed by Holdings rather than directly into Holdings. The change in
structure would eliminate statutory appraisal rights for Holdings stockholders
and the requirement for a two-thirds vote of the Holdings stockholders to
approve the merger. Morrison & Hecker also proposed on behalf of LabONE changes
in the articles of incorporation and bylaws for the combined company that would
have eliminated cumulative voting for directors of the combined company and that
would have required an 80% vote of stockholders to amend any provision of the
bylaws. Holdings objected to all of these changes and after discussions between
Lathrop & Gage, Stinson Mag, and Morrison & Hecker (with respect to the articles
of incorporation and bylaws only) the Holdings position was agreed to.
On March 4, 1999, Lathrop & Gage circulated a draft of a revised merger
agreement. On the afternoon of March 5, 1999, the parties had reached consensus
on all issues and final copies of the merger agreement were circulated on March
6, 1999.
On March 7, 1999, special meetings of the Boards of Directors of Holdings
and LabONE and a meeting of the LabONE special committee were held.
At the March 7, 1999 Holdings board meeting, Lathrop & Gage reported on the
course of discussions with the special committee and reviewed the terms of the
merger agreement. Drafts of that agreement had been circulated to directors
prior to the meeting. A representative of KPMG LLP, independent public
accountants for Holdings, reported on various accounting matters related to the
transaction. Salomon Smith Barney made a financial presentation to the board and
delivered its oral opinion to the effect that, as of March 7, 1999, and based
upon the matters described in the opinion, and after taking into account the
stock split, the merger consideration was fair to Holdings from a financial
point of view. The oral opinion was confirmed in writing. It is attached as
Appendix B and is described beginning on page 34. After further discussion and
further considerations of the matters presented by Holdings management,
independent public accountants and legal and financial advisors, the Holdings
board unanimously approved the merger agreement.
At the March 7, 1999 LabONE board meeting, the LabONE directors reviewed the
terms of the merger agreement. Drafts of that agreement had been circulated to
the directors prior to the meeting. Representatives of U.S. Bancorp Piper
Jaffray made a financial presentation to the special committee and the LabONE
board with respect to its opinion and the financial analysis supporting that
opinion. U.S. Bancorp Piper Jaffray expressed its oral opinion to the effect
that, as of March 7, 1999, and based upon the matters described in the opinion,
and after taking into account the stock split, the merger consideration was
fair, from a financial point of view, to the LabONE unaffiliated stockholders.
The opinion was confirmed in writing, is attached as Appendix C and is described
on page 40. The special committee reported to the LabONE board that, based in
part on the advice and recommendations of its advisers, the merger was
unanimously approved by the special committee and that it determined that the
merger was fair to, and in the best interest of, LabONE and the LabONE
unaffiliated stockholders. Following this discussion, the LabONE board of
directors approved the merger.
Following the meetings the merger agreement was signed by Holdings and
LabONE.
On March 8, 1999, the merger was publicly announced.
On April 21, 1999 the Financial Accounting Standards Board issued a news
release stating that it would eliminate the pooling of interests method of
accounting for acquisitions initiated after it issues a final standard on that
subject. The news release indicates that the issuance of the final standard is
expected to occur in late 2000. Separate meetings of the special committee, the
LabONE board, and the Holdings board were held in May 1999. One of the items
considered at the meetings was the impact of the future elimination of pooling
of interests accounting on their recommendation of the proposed merger. The
special committee, the LabONE board and the Holdings board each separately
concluded
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that the other benefits of the merger more than outweighed the countervailing
considerations and that the future elimination of pooling of interests
accounting did not change their respective original conclusions or
recommendations with respect to the merger.
On May 14, 1999 the merger agreement was amended to revise the procedures
for making cash elections. The original agreement provided that cash elections
would be made during a fifteen day period immediately following the effective
time of the merger. The amendments changed that procedure so that cash elections
will be made between the date of mailing of this joint proxy statement/
prospectus and the commencement of the LabONE meeting of stockholders. The
change was made primarily so that voting and election decisions would be made at
the same time.
HOLDINGS REASONS FOR MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF
HOLDINGS
At a special meeting of the Holdings board held on March 7, 1999, the
Holdings board unanimously:
- determined that the merger agreement and the transactions contemplated
thereby (including the amendments to the articles of incorporation and
bylaws provided for in the merger agreement) are fair to and in the best
interests of Holdings and Holdings stockholders;
- approved the terms and provisions of the merger agreement;
- recommended that the merger agreement be adopted by Holdings stockholders;
and
- directed that the merger agreement and amendments to the articles of
incorporation of Holdings be submitted to the stockholders at the 1999
annual meeting of stockholders.
The Holdings board reached its decision and recommendation for the following
reasons:
- LabONE is Holdings' only remaining material asset other than cash, and the
merger will allow Holdings' stockholders to hold their equity interests in
LabONE directly rather than indirectly through Holdings, thereby
eliminating holding company management and administrative costs;
- the merger will facilitate the use by LabONE of its stock as a currency in
creating strategic relationships with business partners;
- the merger will position LabONE to grow both internally and through
acquisitions, and will enable it to consider transactions not feasible in
the existing structure;
- the merger should enable LabONE to effect pooling-of-interests
transactions;
- by consolidating management, the merger will sharpen management and
investor focus;
- the merger should increase the float and liquidity of the combined
company's stock, thereby creating the opportunity for increased Wall
Street research coverage and investor interest; and
- the merger also comes at the right time since LabONE had recently moved
into new and larger facilities that provide it with the ability to grow
and handle larger volumes of testing services.
The Holdings board made its determination after careful consideration of,
and based on, a number of factors, including discussions with Holdings'
management, independent public accountants and legal and financial advisors, the
factors described above and the following additional factors:
- the Holdings board's understanding of the current economic and market
conditions and trends in the insurance, clinical and substance abuse
testing markets, the current value of Holdings and LabONE and strategic
options available to Holdings other than a merger with LabONE;
- the current and historical market prices of the common stock of each
company;
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- information concerning the financial performance and conditions, business
operations, debt and capital levels, asset quality, personnel and
prospects of LabONE and Holdings, and each company's projected future
financial performance as a separate entity and on a combined basis,
including the ability of the combined company to service and repay the
debt to be incurred to satisfy cash elections;
- the judgment, advice and analyses of Holdings management, including its
favorable recommendation of the merger;
- presentations of Salomon Smith Barney, including its opinion dated March
7, 1999 as described below to the effect that, as of that date and based
upon the matters described in the opinion, and after taking into account
the stock split, the merger consideration was fair from a financial point
of view to Holdings (See "Opinion of Holdings' Financial Advisor" on page
34);
- the terms of the merger agreement, including the conditions to closing of
the merger, the ability of Holdings to consider unsolicited alternative
business combination proposals, and the ability to terminate the agreement
on certain conditions;
- the fact that options and warrants of LabONE will not be triggered as a
result of the merger;
- the availability of financing necessary to satisfy cash elections;
- that the merger will be accomplished on a tax-free basis to the
stockholders for United States federal income tax purposes, except for
cash received by stockholders in connection with cash elections or in lieu
of fractional shares;
- the fact that the merger will be accomplished on a tax-free basis to
LabONE and Holdings so that the combined company's tax basis in its assets
will be the same as LabONE's tax basis in such assets; and
- the governance structure of the combined company.
In reaching its decisions the Holdings board did not view any single factor
as determinative, and did not find it necessary or practicable to assign any
relative or specific weights to the various factors considered. Furthermore,
individual directors may have given differing weights to different factors.
The Holdings board also considered other countervailing considerations,
including:
- the fact that the transaction goodwill created by the merger will
negatively impact future earnings of the combined company;
- the fact that Holdings stockholders will in the aggregate own up to 1.6%
less equity in the combined company than currently through Holdings 80.5%
ownership of LabONE, assuming none of the LabONE stockholders elect to
receive cash;
- the fact that the dividend policy of the board of the combined company
could change following the merger in order to provide funds for future
growth strategies of the combined company;
- the increased leverage that may be created to fund cash elections; and
- the risks associated with LabONE's business.
However, the Holdings board determined that the foregoing considerations
were outweighed by the potential benefits of the merger that are summarized
above.
After the merger agreement was executed, the Financial Accounting Standards
Board ("FASB") publicly announced that it plans to eliminate pooling of
interests accounting for acquisitions initiated after it issues a final standard
on this subject. That issuance is expected to occur in late 2000. At a meeting
held after the FASB's announcement, the Holdings board determined that the
inability to use
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pooling of interests accounting for acquisitions initiated after issuance of
that final standard would not alter its conclusion that the merger is in the
best interests of Holdings and its stockholders. This conclusion was based on
the other benefits of the merger, the opportunity to use pooling accounting for
a period of time after the merger and the ability of the combined company to use
its capital stock as a medium of exchange regardless of the applicable
accounting principles following the merger.
Accordingly, the Holdings board unanimously recommends that the stockholders
of Holdings vote "FOR" the adoption of the merger agreement.
LABONE REASONS FOR THE MERGER; RECOMMENDATIONS OF THE LABONE SPECIAL COMMITTEE
AND BOARD OF DIRECTORS
The LabONE special committee and the board reached their decisions and
recommendations for the following reasons:
- GROWTH AND LONG-TERM VALUE CREATION. The special committee believes that
the merger is a necessary step to enable the LabONE unaffiliated
stockholders to enjoy the potential for long-term growth in stockholder
value, primarily through acquisitions and strategic alliances. The need
for greater critical mass, economies of scale and resources to achieve the
financial and strategic benefits of growth and enhanced competitiveness
were important considerations in this regard.
- ABILITY TO USE POOLING OF INTERESTS ACCOUNTING FOR FUTURE
ACQUISITIONS. Holdings owns 80.5% of the common stock of LabONE. This
parent-subsidiary structure makes it impossible under current generally
accepted accounting principles for LabONE to account for acquisitions
using pooling of interests accounting. By merging LabONE into Holdings,
eliminating this parent-subsidiary corporate structure, the combined
company is expected to be able to engage in certain acquisitions applying
the pooling of interests method after July 1999. Pooling is critical for
certain acquisitions because it does not create an intangible goodwill
asset to reflect the difference between the purchase price and the fair
value of the net assets acquired. The creation of goodwill as an asset
reduces earnings in future periods due to accounting requirements that it
be amortized. Many of the companies that might be acquisition candidates
do not have substantial tangible assets and the purchase price might
therefore create extensive goodwill because it would be based primarily on
a multiple of earnings and/or cash flow. Accordingly, because valuations
in the public market are heavily influenced by future expectations of
earnings per share, the ability to utilize pooling of interests accounting
would enable the combined company to accelerate growth by effecting
acquisitions without experiencing earnings or valuation effects due to
amortization expenses from goodwill that would otherwise result.
However, as described above, after the merger agreement was executed, the
FASB publicly announced that it plans to eliminate pooling of interests
accounting for acquisitions initiated after it issues a final standard on
this subject. This is expected to occur in late 2000. At separate meetings
of the special committee and the LabONE board held after the FASB's
announcement, both the special committee and the LabONE board determined
that the inability to use pooling of interests accounting for acquisitions
initiated after issuance of any final standard would not alter their
respective conclusions that the merger is in the best interests of the
LabONE unaffiliated stockholders, LabONE and all LabONE stockholders. The
special committee and the LabONE board also each took into account the
possibility that, if the merger is consummated, the combined company could
seek to initiate one or more acquisitions before the FASB issues its final
standard in an effort to use the pooling of interest method to account for
those acquisitions and the ability of the combined company to use its
capital stock as a medium of exchange regardless of the applicable
accounting principles following the merger. There can be no assurance that
any acquisitions could be initiated by the combined company prior to that
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time or that those acquisitions would be able to satisfy the strict
technical requirements that must be met to qualify for the use of the
pooling of interests method of accounting.
- INCREASED LIQUIDITY OF THE STOCK. LabONE currently has about 13.3 million
shares outstanding. Only approximately 1.8 million of these shares (or
13.9% of the total shares outstanding) are freely traded in the public
market (of the remaining shares, 10.7 million shares are held by Holdings
and 800,000 shares are held by LabONE insiders). Following the merger and
assuming that none of the LabONE stockholders other than Holdings elect to
receive cash as all or part of their merger consideration, the combined
company will have approximately 12.3 million shares outstanding, with
approximately 9.8 million shares (or 79.7% of the total shares
outstanding) freely trading and approximately 2.5 million shares held by
insiders. The greater liquidity in the public market for the stock of the
combined company may result in higher trading volumes, greater liquidity
and enhanced pricing of the stock because investors will have greater
assurance of their ability to acquire or dispose of stock positions
without substantially impacting the market price of the stock. In
addition, greater liquidity and increased trading volume may result in
more securities analysts reporting on the stock as well as a more
efficient trading market for the stock.
- CORPORATE GOVERNANCE. In connection with the merger, the special committee
negotiated for a majority of the board of the combined company to be
composed of independent directors nominated by the special committee. In
addition, the merger also will eliminate the 80.5% control position of
Holdings as the parent company and result in control residing in a fluid
aggregation of public stockholders. With no controlling stockholders, the
independent board will have greater discretion to pursue strategies for
growth that would have been inconsistent with Holdings' strategy to
maintain ownership of more than 80% of LabONE's common stock for tax
reasons. In addition, by eliminating Holdings' control position, potential
acquisition targets and merger partners will have a greater level of
comfort regarding the ability of the combined company's management and
board to enter into and effect strategic combinations and alliances
independently. The independent board will also have greater freedom to
consider a dividend policy that is consistent with a growth strategy.
- STREAMLINED CORPORATE AND OWNERSHIP STRUCTURE. The merger will streamline
the existing corporate structure by collapsing the parent-subsidiary
structure into a single publicly-held corporate entity. This
simplification generally will eliminate confusion in the market arising
from the existence of two securities that essentially pertain to the same
operating entity. The merger will cause the consolidation of investor
interest currently divided between the two entities.
- NON-TAXABLE TRANSACTION FOR STOCK RECEIVED. The merger will be a
non-taxable event to the holders of LabONE stock (except to the extent
they elect to receive cash).
- ATTRACTION AND RETENTION OF EFFECTIVE MANAGEMENT. Enhancing opportunities
for growth of the business is believed to be highly significant to
attracting and retaining effective management that will possess the
leadership and vision to achieve sustained increases in long-term
stockholder value.
- STRUCTURE OF TRANSACTION. Offering a cash election opportunity in addition
to equity consideration will provide LabONE unaffiliated stockholders with
the opportunity to continue their investment in the LabONE operating
entity through a tax-deferred exchange of their LabONE shares for shares
of the combined company while providing an orderly liquidation opportunity
for those LabONE unaffiliated stockholders that prefer to sell their
interests in LabONE. It will also modulate the unpredictable impact of the
merger on the trading market and market price of the shares of the
combined company resulting from the reduction in earnings of the combined
company due to amortization of historical and transaction goodwill. The
cap of $16.6 million on the amount of such elections is expected to be
sufficient to allow LabONE
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stockholders who are likely to elect cash to have all of their shares
purchased for cash, particularly since the officers and directors of
Holdings and the Grant family have represented that they will not elect
cash.
- MARKET CHECK AND AUTHORITY TO NEGOTIATE SUPERIOR ALTERNATIVE. The special
committee negotiated for the expansion of its authority to act on behalf
of the LabONE board in considering and negotiating any other proposals for
an acquisition of, or combination with, LabONE with any third parties as
well as Holdings. The special committee also negotiated for the inclusion
of a fiduciary out in the merger agreement. This feature permits the
special committee to terminate the merger agreement if a financially
superior proposal reasonably capable of being financed is presented prior
to consummation of the merger. If no such proposal is forthcoming prior to
consummation of the merger, it will support the special committee's
conclusion that the merger is the best transaction reasonably available to
LabONE and to the LabONE unaffiliated stockholders.
- FAIR DEALING AND FAIR PRICE. The terms of the merger were negotiated at
arms length on behalf of LabONE unaffiliated stockholders by the special
committee. That committee is composed of independent directors and is
advised by independent legal and financial advisers. The special committee
also negotiated to have the merger conditioned on the approval of the
holders of a majority of the shares owned by LabONE unaffiliated
stockholders that vote on the merger so that they would have an
independent opportunity to decide to approve the merger without coercion
and after receiving full disclosure of all material facts. The merger
consideration was determined to be fair by the special committee in part
in reliance upon the opinion and supporting financial analysis of U.S.
Bancorp Piper Jaffray that, as of the date of its opinion, such
consideration was fair, from a financial point of view, to the LabONE
unaffiliated stockholders. The special committee understood that it should
conduct its analysis, negotiations and actions with respect to the merger
with the degree of independence equivalent to that of a wholly-independent
board of directors dealing at arms-length with a disinterested third-party
entity seeking to merge with LabONE. The special committee also recognized
that it had the power not to pursue the merger and the authority to pursue
instead any superior alternative transaction that might arise prior to the
consummation of the merger. The special committee determined that it would
approve the merger only if it determined that:
- the merger is in the best interests of LabONE and the LabONE
unaffiliated stockholders and is the best transaction reasonably
available,
- the terms and conditions of the merger are the best that can possibly
be obtained from Holdings after negotiating at arms-length, and
- the terms of the merger are procedurally and substantively fair to
LabONE and the LabONE unaffiliated stockholders. The special committee
concluded that these criteria had been satisfied as part of its
determination to approve the merger and recommend its approval by the
full LabONE board and the LabONE unaffiliated stockholders.
The LabONE board and special committee made their determination after
careful consideration of, and based on, a number of factors, including
discussions with LabONE's management, accountants and legal and financial
advisers and the factors described above. In reaching their determinations, the
LabONE board and special committee did not view any single factor as
determinative, and did not find it necessary or practicable to assign any
relative or specific weights to the various factors considered. Furthermore,
individual directors and committee members may have given differing weights to
different factors.
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The LabONE board and special committee also considered other countervailing
considerations, including:
- the fact that following the merger transaction goodwill and historical
Holdings goodwill will negatively impact earnings of the combined company
at the annual rate of $2.6 million (assuming no cash elections) to $2.8
million (assuming maximum cash elections) until April 2003, and thereafter
at $1.1 to $1.3 million per annum until the 20th anniversary of the
merger;
- the possibility that as a result of the merger the stock of the combined
company may trade at a discount due to the reduction in earnings resulting
from amortization of the historical and transaction goodwill, which was
modulated by the cash election feature of the transaction structure;
- the increased leverage that may be created to fund cash elections;
- the risks and contingent liabilities associated with Holdings' prior
operations, but which were considered to be remote in view of due
diligence investigation completed prior to execution of the merger
agreement; and
- the strict technical requirements that must be satisfied by the acquiror
and the target to utilize pooling-of-interests accounting and the risk
that pooling-of-interests accounting is expected to be eliminated by the
FASB for acquisitions initiated before a final standard is issued on that
subject, that is currently anticipated to occur in late 2000.
However, the LabONE board and special committee each determined that the
foregoing considerations were outweighed by the potential benefits of the merger
that are summarized above.
Accordingly, the LabONE board and special committee unanimously recommend,
with W. D. Grant abstaining, that the stockholders of LabONE vote "FOR" the
adoption of the merger agreement. Mr. Grant abstained upon the advice of his
personal counsel due to the appearance of a conflict of interest caused by his
beneficial ownership of approximately 16.7% of the outstanding shares of common
stock of Holdings.
OPINION OF HOLDINGS' FINANCIAL ADVISOR
Holdings retained Salomon Smith Barney to act as its financial advisor in
connection with the proposed merger and to evaluate the fairness, from a
financial point of view, to Holdings of the consideration to be paid by Holdings
in the merger. On March 7, 1999, at a meeting of the Holdings board held to
evaluate the proposed merger, Salomon Smith Barney delivered to the Holdings
board an oral opinion to the effect that, as of that date and based upon the
matters described in the opinion, and after taking into account the stock split,
the merger consideration was fair, from a financial point of view, to Holdings.
The opinion was confirmed by delivery of the written opinion that is attached as
Appendix B.
In arriving at its opinion, Salomon Smith Barney:
- reviewed the merger agreement;
- held discussions with senior officers, directors and other representatives
and advisors of Holdings and senior officers, other representatives and
advisors of LabONE concerning the businesses, operations and prospects of
Holdings and LabONE;
- examined publicly available business and financial information relating to
Holdings and LabONE;
- examined financial forecasts and other information and data for Holdings
and LabONE that the management of Holdings and LabONE provided to or
discussed with Salomon Smith Barney,
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including information relating to strategic implications and operational
benefits anticipated to result from the merger;
- reviewed the financial terms of the merger contained in the merger
agreement;
- reviewed current and historical market prices and trading volumes of
Holdings common stock and LabONE common stock;
- reviewed the historical and projected earnings and other operating data of
Holdings and LabONE;
- reviewd the capitalization and financial condition of Holdings and LabONE;
- considered, to the extent publicly available, the financial terms of other
similar recent transactions that it considered relevant in evaluating the
merger;
- analyzed financial, stock market and other publicly available information
relating to the businesses of other companies whose operations it
considered relevant in evaluating those of Holdings and LabONE;
- evaluated the potential pro forma financial impact of the merger on
Holdings; and
- conducted other analyses and examinations and considered other financial,
economic and market criteria as it deemed appropriate in arriving at its
opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied upon the
accuracy and completeness of all financial and other information and data which
it reviewed or considered. The accuracy and completeness of that information was
not independently verified by Salomon Smith Barney. With respect to financial
forecasts and other information and data, the managements of Holdings and LabONE
advised Salomon Smith Barney that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Holdings and LabONE as to the future financial performance of
Holdings and LabONE and the strategic implications and operational benefits
anticipated to result from the merger. Salomon Smith Barney assumed, with the
consent of Holdings, that the merger will be treated as a tax-free
reorganization for federal income tax purposes.
Salomon Smith Barney did not express any opinion as to what the value of the
surviving corporation common stock will be when issued in the merger or the
price at which the surviving corporation common stock will trade after the
merger. Salomon Smith Barney did not make and was not provided with an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of Holdings or LabONE. It also did not make any physical inspection
of the properties or assets of Holdings or LabONE. Salomon Smith Barney did not
express any view as to, and its opinion does not address, the relative merits of
the merger as compared to any alternative business strategies that might exist
for Holdings or the effect of any other transaction in which Holdings might
engage. Salomon Smith Barney noted that its opinion was necessarily based on
information available, and financial, stock market and other conditions and
circumstances existing and disclosed, to it as of the date of its opinion.
Although Salomon Smith Barney evaluated the merger consideration from a
financial point of view, it was not asked to and did not recommend the specific
consideration payable in the merger. The merger consideration was determined
through negotiation between Holdings and the special committee. No other
instructions or limitations were imposed by Holdings on Salomon Smith Barney
with respect to the investigations made or procedures it followed in rendering
its opinion.
The full text of Salomon Smith Barney's written opinion which is attached as
Appendix B is incorporated into this document by reference. The opinion
describes important considerations, assumptions and limitations that you should
read fully. The opinion was delivered for the use and consideration of the
Holdings board and relates only to the fairness of the merger consideration from
a
35
<PAGE>
financial point of view to Holdings. It does not address any other aspect of the
merger and does not constitute a recommendation to any stockholder as to how to
vote on any matter relating to the proposed merger.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The summary
of these analyses is not a complete description of the analyses. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is difficult to summarize. Salomon Smith
Barney's opinion was not based on any single factor or analysis, but rather on
the totality of the factors considered and analyses performed. Accordingly,
Salomon Smith Barney believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors or focusing on
information presented in tabular format, without considering all analyses and
factors or the narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying its analyses and opinion.
In its analyses, Salomon Smith Barney considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion. Many of these factors are beyond the
control of Holdings and LabONE. No company, transaction or business used in
those analyses as a comparison is identical to Holdings, LabONE or the proposed
merger. An evaluation of those analyses also is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed.
The estimates contained in Salomon Smith Barney's analyses and the valuation
ranges resulting from any particular analysis do not necessarily reflect actual
values or future results or values. Those values may be significantly more or
less favorable than those suggested by the analyses. In addition, analyses
relating to the value of businesses or securities are not necessarily appraisals
and do not necessarily reflect the prices at which businesses or securities
actually may be sold. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty.
Salomon Smith Barney's opinion and analyses were only one of many factors
considered by the Holdings board in its evaluation of the merger and should not
be viewed as determinative of the views of the Holdings board or management with
respect to the merger consideration or the proposed merger.
The following is a summary of the material analyses that Salomon Smith
Barney performed in connection with its opinion to the Holdings board dated
March 7, 1999. The financial analyses summarized below include information
presented in tabular format. In order to fully understand these financial
analyses, the tabular presentation must be read together with the text of the
accompanying summary. The tabular presentation alone is not a complete
description of the financial analyses. Considering the data set forth below
without considering the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Salomon Smith Barney's financial
analyses.
SELECTED COMPANIES ANALYSIS.
Using publicly available information, Salomon Smith Barney analyzed the
market values and trading multiples of LabONE, Holdings and the following three
selected publicly held companies in the laboratory testing services industry:
- Laboratory Corporation of America Holdings
- Quest Diagnostics Incorporated
36
<PAGE>
- Unilab Corporation
Each of these companies was selected because it operates in the laboratory
testing services industry, which is the same industry in which LabONE operates.
Salomon Smith Barney compared market values as a multiple of estimated net
income for calendar years 1999 and 2000, and adjusted market values, calculated
as fully diluted market value, plus debt outstanding, less cash, as multiples of
calendar year 1998 earnings before interest, taxes, depreciation and
amortization and earnings before interest and taxes. All multiples were based on
closing stock prices on March 5, 1999. Estimated net income data for the
selected companies were based on research analysts' estimates and estimated net
income data for LabONE and Holdings were based on internal estimates of the
managements of LabONE and Holdings.
Applying a range of multiples of estimated net income for calendar years
1999 and 2000, and calendar year 1998 earnings before interest, taxes,
depreciation and amortization and earnings before interest and taxes, for the
selected companies to corresponding financial data of LabONE indicated the
following implied average per share reference range for LabONE, as compared to
the blended per share value of the merger consideration based on the closing
stock price of Holdings common stock on March 5, 1999 and assuming maximum cash
elections are made in the merger:
<TABLE>
<CAPTION>
BLENDED PER SHARE VALUE OF MERGER CONSIDERATION BASED
IMPLIED AVERAGE ON
PER SHARE REFERENCE CLOSING STOCK PRICE OF HOLDINGS COMMON STOCK ON
RANGE FOR LABONE MARCH 5, 1999 AND ASSUMING MAXIMUM CASH ELECTIONS
--------------------- -------------------------------------------------------
<S> <C>
$9.09 - $13.18......................... $ 11.73
</TABLE>
Applying a range of multiples of estimated net income for calendar years
1999 and 2000, and calendar year 1998 earnings before interest, taxes,
depreciation and amortization and earnings before interest and taxes, for the
selected companies to corresponding financial data of Holdings indicated the
following implied average per share reference range for Holdings, as compared to
the per share closing stock price of Holdings common stock on March 5, 1999:
<TABLE>
<CAPTION>
IMPLIED AVERAGE PER SHARE CLOSING STOCK PRICE
PER SHARE REFERENCE OF HOLDINGS COMMON STOCK ON
RANGE FOR HOLDINGS MARCH 5, 1999
--------------------- -------------------------------------------------------
<S> <C>
$11.82 - $18.10........................ $ 16.06
</TABLE>
SELECTED TRANSACTIONS ANALYSIS.
Using publicly available information, Salomon Smith Barney reviewed the
purchase prices and implied transaction value multiples paid or proposed to be
paid in the following seven selected transactions in the laboratory testing
services industry:
<TABLE>
<CAPTION>
ACQUIROR TARGET
------------------------------------------------ -----------------------------------------------
<S> <C> <C>
- - Quest Diagnostics Incorporated SmithKline Beecham Clinical Laboratories
- - Kroll-o'Gara Company Laboratory Specialists of America, Inc.
- - Unilab Corporation Medical Laboratory Network, Inc.
- - Genzyme Corporation IG Laboratories, Inc.
- - National Health Laboratories Incorporated Roche Biomedical Laboratories
- - Corning Inc. Nichols Institute
- - National Health Laboratories Incorporated Allied Clinical Laboratories, Inc.
</TABLE>
Each of these transactions was selected because the target companies in the
selected transactions operate or operated in the laboratory testing services
industry, which is the same industry in which LabONE operates.
37
<PAGE>
Salomon Smith Barney compared the purchase prices paid or proposed to be
paid in the selected transactions as a multiple of latest 12 months and one-year
forward earnings per share, and transaction values as a multiple of latest 12
months earnings before interest, taxes, depreciation and amortization and
earnings before interest and taxes. All multiples were based on financial
information available at the time of the relevant transaction.
Applying a range of multiples for the selected transactions of latest 12
months and one-year forward earnings per share and latest 12 months earnings
before interest, taxes, depreciation and amortization and earnings before
interest and taxes to corresponding financial data of LabONE indicated the
following implied average per share reference range for LabONE, as compared to
the blended per share value of the merger consideration based on the closing
stock price of Holdings common stock on March 5, 1999 and assuming maximum cash
elections are made in the merger:
<TABLE>
<CAPTION>
BLENDED PER SHARE VALUE OF MERGER CONSIDERATION BASED
IMPLIED AVERAGE ON
PER SHARE REFERENCE CLOSING STOCK PRICE OF HOLDINGS COMMON STOCK ON
RANGE FOR LABONE MARCH 5, 1999 AND ASSUMING MAXIMUM CASH ELECTIONS
--------------------- -------------------------------------------------------
<S> <C>
$11.67 - $16.13........................ $ 11.73
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS.
Salomon Smith Barney performed separate discounted cash flow analyses for
each of LabONE and Holdings to estimate the projected free cash flows that
LabONE and Holdings could each generate over the fiscal years 1999 through 2002,
based on internal estimates of the managements of LabONE and Holdings. The range
of estimated terminal values for LabONE and Holdings was calculated by applying
terminal value multiples of 6.0x to 8.0x to the projected 2002 earnings before
interest, taxes, depreciation and amortization. The cash flows and terminal
values were discounted to present value using discount rates ranging from 9% to
11%.
Based on the terminal multiples and discount rates described above, this
analysis indicated the following implied per share reference range for LabONE,
as compared to the blended per share value of the merger consideration based on
the closing stock price of Holdings common stock on March 5, 1999 and assuming
maximum cash elections are made in the merger:
<TABLE>
<CAPTION>
BLENDED PER SHARE VALUE OF MERGER CONSIDERATION BASED
IMPLIED AVERAGE ON
PER SHARE REFERENCE CLOSING STOCK PRICE OF HOLDINGS COMMON STOCK ON
RANGE FOR LABONE MARCH 5, 1999 AND ASSUMING MAXIMUM CASH ELECTIONS
--------------------- -------------------------------------------------------
<S> <C>
$10.25 - $14.04........................ $ 11.73
</TABLE>
Based on the terminal multiples and discount rates described above, this
analysis indicated the following implied per share reference range for Holdings,
as compared to the per share closing stock price of Holdings common stock on
March 5, 1999:
<TABLE>
<CAPTION>
IMPLIED AVERAGE PER SHARE CLOSING STOCK PRICE
PER SHARE REFERENCE OF HOLDINGS COMMON STOCK ON
RANGE FOR HOLDINGS MARCH 5, 1999
--------------------- -------------------------------------------------------
<S> <C>
$15.92 - $21.55........................ $ 16.06
</TABLE>
PRO FORMA MERGER ANALYSIS.
Salomon Smith Barney analyzed the pro forma effects resulting from the
merger for calendar years 1999 through 2001, based on internal estimates of the
managements of Holdings and LabONE. The results of the pro forma merger analysis
suggested that the merger could be dilutive to Holdings in calendar years 1999
through 2001. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
38
<PAGE>
EXCHANGE RATIO ANALYSIS.
Salomon Smith Barney performed an exchange ratio analysis comparing the
implied effective exchange ratio in the merger with implied historical exchange
ratios for Holdings common stock and LabONE common stock. The implied historical
exchange ratios were calculated by dividing the per share price of LabONE common
stock by the per share price of Holdings common stock over specified periods.
Since the implied historical exchange ratios did not reflect the stock split
contemplated in the merger, Salomon Smith Barney calculated an implied effective
exchange ratio, without giving effect to the stock split, based upon the pro
forma equity ownership of the stockholders of Holdings and LabONE in the
combined company upon consummation of the merger. The resulting implied
effective exchange ratio of 0.667 was then compared against implied historical
exchange ratios for Holdings common stock and LabONE common stock over the
one-day, 60-day, three-month, six-month and twelve-month periods ending March 5,
1999. This analysis indicated the following implied historical exchange ratios
for these periods:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 5, 1999 IMPLIED EXCHANGE RATIO
- ---------------------------------------------------------------------- -----------------------
<S> <C>
one-day............................................................... 0.677
60-day................................................................ 0.735
three-month........................................................... 0.736
six-month............................................................. 0.771
12-month.............................................................. 0.750
</TABLE>
OTHER FACTORS.
In rendering its opinion, Salomon Smith Barney considered other factors for
informational purposes, including:
- the history of trading prices and volume for Holdings common stock and
LabONE common stock and the relationship between movements in Holdings
common stock and LabONE common stock and movements in the common stock of
the S&P 400 Index;
- the implied premiums payable in minority stock purchase transactions; and
- selected published analysts' reports on LabONE.
MISCELLANEOUS.
Under the terms of its engagement, Holdings has agreed to pay Salomon Smith
Barney upon completion of the merger an aggregate fee of $900,000. Holdings has
also agreed to reimburse Salomon Smith Barney for its travel and other
out-of-pocket expenses, and to indemnify Salomon Smith Barney and related
persons against liabilities arising out of its engagement, including liabilities
under the federal securities laws.
In the ordinary course of business, Salomon Smith Barney and its affiliates
may actively trade or hold the securities of Holdings and LabONE for their own
account or for the account of customers and, accordingly, may at any time hold a
long or short position in those securities. In addition, Salomon Smith Barney
and its affiliates, including Citigroup Inc. and its affiliates, may maintain
relationships with Holdings, LabONE and their respective affiliates.
Holdings selected Salomon Smith Barney based on its experience, expertise
and reputation. Salomon Smith Barney is an internationally recognized investment
banking firm that, as a customary part of its business, evaluates businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
39
<PAGE>
OPINION OF FINANCIAL ADVISOR TO THE LABONE SPECIAL COMMITTEE
The special committee retained U.S. Bancorp Piper Jaffray on April 18, 1997
to provide financial advisory services in connection with a proposed merger of
LabONE with Holdings and, if requested by the special committee, to render its
opinion to the special committee regarding the fairness, from a financial point
of view, of the consideration to be received by the LabONE unaffiliated
stockholders.
U.S. Bancorp Piper Jaffray delivered to the special committee on March 7,
1999 its oral opinion that, as of that date and based upon the assumptions,
factors and limitations set forth in the written opinion and described below,
the consideration proposed to be received by the LabONE unaffiliated
stockholders in the proposed merger with Holdings was fair, from a financial
point of view, to those stockholders. The opinion was later confirmed in
writing. A copy of U.S. Bancorp Piper Jaffray's written opinion is attached to
this joint proxy statement/prospectus as Appendix C and is incorporated into
this joint proxy statement/prospectus by reference.
While U.S. Bancorp Piper Jaffray rendered its opinion and provided certain
analyses to the special committee, U.S. Bancorp Piper Jaffray was not requested
to and did not make any recommendation to the special committee as to the
specific form or amount of the consideration to be received by the LabONE
unaffiliated stockholders in the proposed merger with Holdings. Those matters
were determined through negotiations between Holdings and the special committee.
That opinion was delivered for use and considered by the special committee, is
directed only to the fairness, from a financial point of view, of the proposed
consideration to be received by the LabONE unaffiliated stockholders in the
proposed merger, does not address the value of a share of LabONE common stock or
Holdings common stock, does not address LabONE's underlying business decision to
participate in the merger and does not constitute a recommendation to any LabONE
stockholder as to how a stockholder should vote with respect to the merger or
any election such stockholder should make with respect to the consideration
offered.
In arriving at its opinion, U.S. Bancorp Piper Jaffray reviewed, analyzed
and relied upon material relating to the financial and operating condition and
prospects of LabONE and Holdings and material prepared in connection with the
proposed merger. These materials included:
- a draft of the merger agreement dated March 7, 1999;
- publicly available financial, operating and business information related
to LabONE;
- publicly available financial and securities data related to LabONE;
- internal financial information of LabONE on a stand-alone basis prepared
for financial planning purposes and furnished by LabONE management;
- publicly available financial, operating and business information related
to Holdings;
- publicly available financial and securities data related to Holdings; and
- to the extent publicly available, financial terms of certain acquisition
transactions involving acquisitions of remaining interests in publicly
traded companies by the entities holding their controlling interests.
In addition, U.S. Bancorp Piper Jaffray had discussions with members of
Holdings' management concerning the financial condition, current operating
results and business outlook for Holdings and LabONE both on a stand-alone basis
and as combined, Holdings' plans relating to the proposed combined company, as
well as the amount and timing of the cost savings and related expenses expected
to result from the merger. U.S. Bancorp Piper Jaffray also had discussions with
members of LabONE's management regarding the financial condition, current
operating results and business outlook for LabONE and the proposed combined
company.
40
<PAGE>
In delivering its opinion to the special committee on March 7, 1999, U.S.
Bancorp Piper Jaffray prepared and delivered to the special committee written
materials containing various analyses and other information material to the
opinion. Here is a summary of the analyses contained in the materials.
SELECTED MARKET INFORMATION
U.S. Bancorp Piper Jaffray reviewed certain stock trading characteristics of
LabONE common stock and Holdings common stock, including stock price and volume
comparisons for periods ended March 4, 1999. The closing stock price of LabONE
common stock on March 4, 1999 was $11.00 and the closing stock price of Holdings
common stock on that date was $16.00.
LABONE STAND-ALONE DISCOUNTED CASH FLOW ANALYSIS
U.S. Bancorp Piper Jaffray performed a discounted cash flow analysis for
LabONE on a stand-alone basis. In this analysis it estimated the present value
of the projected future cash flows of LabONE using internal financial planning
data prepared by LabONE management. U.S. Bancorp Piper Jaffray estimated a range
of theoretical values for LabONE based on the net present value of its implied
annual cash flows and a terminal value for LabONE in 2002 calculated based upon
a multiple of earnings before interest, taxes, depreciation and amortization.
U.S. Bancorp Piper Jaffray applied a range of terminal value multiples of
forecasted 2002 earnings before interest, taxes, depreciation and amortization
of 5.5x to 7.5x and a range of discount rates of 12.5% to 17.5%. This analysis
yielded a per share equity value of LabONE ranging from $8.09 to $12.21 with a
midpoint of $10.00 and an aggregate equity value of LabONE ranging from $107.7
million to $162.6 million with a midpoint of $133.2 million.
COMBINED COMPANY DISCOUNTED CASH FLOW ANALYSIS
U.S. Bancorp Piper Jaffray also performed a discounted cash flow analysis to
calculate a range of theoretical values for the combined entity that would
result from the proposed merger. U.S. Bancorp Piper Jaffray estimated a range of
theoretical values for the combined company using internal financial planning
data prepared by LabONE management. These values were based on the net present
value of the combined company's projected annual cash flows and a terminal value
for the combined company in 2002 based on a multiple of earnings before
interest, taxes, depreciation and amortization. For purposes of this analysis,
U.S. Bancorp Piper Jaffray applied LabONE's management's assumptions that the
administrative overhead costs associated with Holdings would cease to exist and
that, accordingly, the future cash flows of the combined company would remain
essentially unchanged from LabONE's estimated future cash flows. U.S. Bancorp
Piper Jaffray was advised by Holdings management that, to the extent that the
LabONE stockholders other than Holdings elect to receive cash consideration in
the merger, the combined company would borrow the funds necessary to complete
the transaction. U.S. Bancorp Piper Jaffray presented this analysis assuming a
merger consideration consisting of 50% equity and 50% cash and also assuming a
merger consideration consisting of 100% equity. These two assumptions represent
the endpoints of the range of possibilities of the cash and equity components of
the consideration under the terms of the merger agreement. U.S. Bancorp Piper
Jaffray applied
41
<PAGE>
multiples of forecasted 2002 earnings before interest, taxes, depreciation and
amortization of 5.5x to 7.5x and a range of discount rates of 12.5% to 17.5%.
<TABLE>
<CAPTION>
50% STOCK/
PER SHARE EQUITY VALUE OF COMBINED COMPANY 50% CASH 100% STOCK
- --------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Low.................................................................. $ 7.88 $ 8.70
Mid.................................................................. 10.00 10.69
High................................................................. 12.47 13.01
<CAPTION>
AGGREGATE EQUITY VALUE OF COMBINED COMPANY
- ---------------------------------------------------------------------
50% STOCK/
(IN THOUSANDS) 50% CASH 100% STOCK
---------- -----------
<S> <C> <C>
Low.................................................................. $ 94,413 $ 110,826
Mid.................................................................. 119,800 136,204
High................................................................. 149,378 165,771
</TABLE>
PRO FORMA ANALYSIS
U.S. Bancorp Piper Jaffray estimated the net income of the combined company
after the merger by using LabONE management's estimates of 1999 LabONE net
income, less estimated goodwill expenses and transaction financing costs
resulting from the combination of LabONE and Holdings and estimated by LabONE
management. U.S. Bancorp Piper Jaffray calculated an implied value per share for
stock of the combined company by applying a multiple of net income equal to
13.3, the share price to net earnings multiple for LabONE common stock as of
March 4, 1999. U.S. Bancorp Piper Jaffray assumed that the share price to
earnings multiple for the operating company before the merger would also be
applied to the combined company after the merger. U.S. Bancorp Piper Jaffray
performed this analysis assuming a merger consideration of 50% equity and 50%
cash and also assuming a merger consideration consisting of 100% equity.
<TABLE>
<CAPTION>
50% STOCK/
50% CASH 100% STOCK
---------- -----------
<S> <C> <C>
Implied combined company equity value (in thousands)(1).............. $ 118,526 $ 126,481
Implied combined company value per share(1).......................... $ 10.74 $ 10.26
Percentage ownership of combined company by LabONE stockholders other
than Holdings...................................................... 11.8% 21.1%
Total stock consideration (in thousands)............................. $ 13,961 $ 26,657
</TABLE>
- ------------------------
(1) Implied values are calculated solely for purposes of analysis integral to
consideration of fairness from a financial point of view, and are not
intended to be, and should not be, relied upon as an estimate of the stock
trading value of shares of the combined company after the merger.
U.S. Bancorp Piper Jaffray compared the implied pro forma market
capitalization of the combined company after the merger to the market
capitalization of LabONE as of March 4, 1999 and as of the date 30 days prior to
March 4, 1999.
<TABLE>
<CAPTION>
50% STOCK/
MARKET CAPITALIZATION PREMIUM (DISCOUNT) 50% CASH 100% STOCK
- --------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Current.............................................................. 6.8% (6.8)%
30 days prior........................................................ 0.6% (12.1 )%
</TABLE>
42
<PAGE>
DILUTION ANALYSIS
U.S. Bancorp Piper Jaffray analyzed the hypothetical pro forma effect of the
merger on LabONE's estimated earnings per share for the fiscal years ending
December 31, 1999 through 2002 assuming a merger consideration consisting of 50%
equity and 50% cash and also assuming a merger consideration consisting of 100%
equity. In each case the analyses were based on the internal financial planning
data used for purposes of the discounted cash flow analyses. In both cases, U.S.
Bancorp Piper Jaffray observed that the merger was expected to be dilutive to
LabONE stockholders in 1999, with slightly increased dilution in 2000.
COMPARABLE COMPANY ANALYSIS
U.S. Bancorp Piper Jaffray compared financial information and valuation
ratios of LabONE relative to the corresponding data and ratios of five publicly
traded companies deemed comparable to LabONE (Bio Reference Laboratories,
Laboratory Corporation of America, PharmChem Laboratories, Quest Diagnostics,
Inc. and Unilab Corp.). This group was selected from companies that:
- are assigned the Standard Industrial Classification Code for medical
laboratories;
- focus on providing laboratory services;
- are publicly traded companies with market capitalizations between $9
million and $1 billion; and
- have latest twelve month revenue greater than $15 million.
For purposes of its analysis, U.S. Bancorp Piper Jaffray calculated the LabONE
company value of $156.1 million (consisting of market capitalization plus debt
less cash).
The analysis produced multiples of selected valuation data as follows:
<TABLE>
<CAPTION>
COMPARABLE COMPANIES
--------------------------------------------
LABONE MEAN MEDIAN HIGH LOW
----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Company value/latest twelve months revenue........................... 1.5x 0.7x 0.6x 1.0x 0.3x
Company value/latest 12 months EBITDA(1)............................. 8.4x 6.6x 6.5x 7.4x 5.7x
Market capitalization/book value..................................... 3.3x 2.0x 2.0x 2.7x 1.2x
Market capitalization/latest twelve months earnings.................. 15.9x 19.6x 19.6x 35.0x 8.8x
Market capitalization/net earnings for calendar year 1999(2)......... 13.3x 21.6x 21.6x 25.0x 18.1x
</TABLE>
- ------------------------
(1) Earnings before interest, taxes, depreciation and amortization.
(2) Calendar year 1999 net earnings data was not available for Bio Reference
Laboratories, PharmChem Laboratories or Unilab Corp.
COMPARABLE MERGER AND ACQUISITION ANALYSIS
U.S. Bancorp Piper Jaffray reviewed merger and acquisition transactions
involving acquisitions of remaining interests in publicly traded subsidiaries by
the companies holding the controlling interest. The transactions reviewed were
completed between January 1, 1994 and February 28, 1998 and had a transaction
value of more than $25 million. U.S. Bancorp Piper Jaffray included merger and
acquisition transactions involving companies outside the industry group in which
LabONE operates in order to permit comparison with transactions involving
characteristics, such as parent-subsidiary relationship and stock consideration.
U.S. Bancorp Piper Jaffray deemed these more significant for purposes of this
analysis than industry comparability. The purpose of this analysis was to
compare the price paid to public stockholders for the acquisition of the
remaining interest in those companies to the proposed consideration to be paid
to the LabONE stockholders other than Holdings. U.S. Bancorp Piper Jaffray again
performed this analysis assuming that a merger consideration consisting of 50%
equity and 50%
43
<PAGE>
cash and also assuming a merger consideration consisting of 100% equity. The
analysis was based on information obtained from SEC filings, public company
disclosures, press releases, industry and popular press reports, databases and
other sources. U.S. Bancorp Piper Jaffray advised that publicly disclosed
information regarding such transactions is often incomplete, especially for
transactions involving acquisitions of or by privately held companies.
The companies involved in the comparable transactions are shown in the following
table:
<TABLE>
<CAPTION>
ACQUIROR TARGET
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
The E.W. Scripps Company Scripps Howard Broadcasting Company
Ogden Corporation Ogden Projects, Inc
Mobile Telecommunication Corporation Destineer Corporation
Uniholding Corporation Unilabs Group Ltd.
Conseco Inc. Bankers Life Holding
National Patent Development Corporation General Physics Corporation
Sears, Roebuck & Co. Maxserv Inc.
Enron Corporation Enron Global Power & Pipelines LLC
Newmont Mining Corporation Newmont Gold Company
</TABLE>
This analysis produced multiples of selected valuation as follows:
<TABLE>
<CAPTION>
LABONE COMPARABLE COMPANIES
------------------------ --------------------------------------------
50%/50% 100% MEAN MEDIAN MAX. MIN.
----------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Percent owned prior to transaction.................. 80.5% 80.5% 73.6% 80.0% 93.8% 52.0%
Transaction value (in millions)..................... $ 30.5 $ 26.7 $ 131.7 $ 94.0 $ 421.9 $ 25.7
Premium (discount) one day prior to announcement.... 6.8% (6.8)% 4.4% 1.4% 33.3% (9.6)%
Premium (discount) four weeks prior to
announcement...................................... 0.6% (12.1 )% 11.8% 12.9% 54.2% (24.5)%
</TABLE>
In reaching its conclusion as to the fairness of the merger consideration
and in its presentation to the special committee, U.S. Bancorp Piper Jaffray did
not rely on any single analysis or factor described above, assign relative
weights to the analyses or factors considered by it, or make any conclusion as
to how the results of any given analysis, taken alone, supported its opinion.
The preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analysis or summary description. U.S. Bancorp Piper
Jaffray believes that its analyses must be considered as a whole and that
selection of portions of its analyses and of the factors considered by it,
without considering all of the factors and analyses, would create a misleading
view of the processes underlying the opinion.
The analyses of U.S. Bancorp Piper Jaffray do not necessarily reflect actual
values or future results. Those values and results may be significantly more or
less favorable than suggested by the analyses. Analyses relating to the value of
companies are not appraisals or valuations or necessarily reflect the price at
which companies may actually be sold. No company or transaction used in any
analysis for purposes of comparison is identical to LabONE, Holdings or the
merger. Accordingly, an analysis of the results of the comparisons is not
mathematical; rather, it involves complex considerations and judgments about
differences in the companies to which LabONE and Holdings were compared and
other factors that could affect the public trading value of the companies.
For purposes of its opinion, U.S. Bancorp Piper Jaffray relied upon and
assumed the accuracy, completeness and fairness of the financial statements and
other information provided to it by LabONE and Holdings and did not assume
responsibility for the independent verification of such information. Information
prepared for financial planning purposes was not prepared with the expectation
of public disclosure. U.S. Bancorp Piper Jaffray relied upon the assurances of
the management of LabONE and
44
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Holdings that the information provided to it by LabONE and Holdings was prepared
on a reasonable basis, that the financial planning data and other business
outlook information reflects the best currently available estimates of
management, and that management was not aware of any information or facts that
would make the information provided to U.S. Bancorp Piper Jaffray incomplete or
misleading. U.S. Bancorp Piper Jaffray also relied upon memoranda and
discussions with the special committee and the special committee's legal counsel
concerning the elements of fairness of price under applicable law in the context
of a merger such as the merger of LabONE and Holdings.
For purposes of its opinion, U.S. Bancorp Piper Jaffray assumed that the
final form of the merger agreement would be substantially similar to the last
draft it reviewed, without modification or waiver of material terms or
conditions by Holdings or LabONE. In addition, U.S. Bancorp Piper Jaffray
assumed that, in the course of obtaining the necessary regulatory approvals for
the merger transaction, no restrictions, including any divestiture requirements,
will be imposed that would have a material adverse effect on the contemplated
benefits of the transaction.
In arriving at its opinion, U.S. Bancorp Piper Jaffray did not perform any
appraisals or valuations of any specific assets or liabilities of Holdings or
LabONE, and were not furnished with any such appraisals or valuations. U.S.
Bancorp Piper Jaffray analyzed LabONE as a going concern and accordingly
expressed no opinion as to the liquidation value of any entity. U.S. Bancorp
Piper Jaffray expressed no opinion as to the price at which shares of Holdings
common stock have traded or at which the shares of the combined company may
trade at any future time. The opinion is based on information available to U.S.
Bancorp Piper Jaffray and the facts and circumstances as they existed and were
subject to evaluation on the date of the opinion. Events occurring after that
date could materially affect the assumptions used in preparing the opinion.
U.S. Bancorp Piper Jaffray was not hired or authorized to solicit, and it
did not solicit, any other business combination transaction or strategic
alternative transaction to the merger.
U.S. Bancorp Piper Jaffray, as a customary part of its investment banking
business, evaluates businesses and their securities in connection with mergers
and acquisitions, underwritings and secondary distributions of securities,
private placements and valuations for estate, corporate and other purposes. The
special committee selected U.S. Bancorp Piper Jaffray because of its expertise,
reputation and familiarity with the healthcare services industry in general. In
the ordinary course of its business, U.S. Bancorp Piper Jaffray and its
affiliates may actively trade securities of LabONE or Holdings for their own
accounts or the accounts of their customers and, accordingly, may at any time
hold a long or short position in those securities.
Under the terms of the engagement letter dated April 18, 1997, LabONE paid
U.S. Bancorp Piper Jaffray a non-refundable retainer of $25,000 for its
financial advisory services rendered in connection with the merger transaction
and agreed to pay an additional $125,000 upon rendering its opinion. Whether or
not the merger is consummated, LabONE has agreed to pay the reasonable
out-of-pocket expenses of U.S. Bancorp Piper Jaffray and to indemnify U.S.
Bancorp Piper Jaffray against liabilities incurred. These liabilities include
liabilities under the federal securities laws in connection with the engagement
of U.S. Bancorp Piper Jaffray by the special committee.
ACCOUNTING TREATMENT
The merger will be accounted for as an acquisition of minority interest
using the purchase method of accounting. For the purposes of preparing its
consolidated financial statements, Holdings will determine fair values of
LabONE's assets and liabilities, and will record as goodwill the excess of
consideration paid, plus costs of the merger, over the fair value of the net
assets acquired. A final determination of required purchase accounting
adjustments, including the allocation of the purchase price to the assets
acquired and liabilities assumed based on their respective fair values has not
yet been made, however, management does not believe the adjustments to LabONE's
assets or liabilities will
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be material. The transaction goodwill created by the merger will be expensed
over a 20 year period. The purchase accounting adjustments made in connection
with the development of the pro forma financial statements appearing elsewhere
in the joint proxy statement/prospectus are preliminary and have been made
solely for purposes of developing such pro forma financial statements. For
financial reporting purposes, the results of operations relating to the
acquisition of the minority interest in LabONE will be included in the combined
company's consolidated financial statements following the effective date of the
merger. See "Unaudited Pro Forma Condensed Financial Statements" on page 74.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a summary of material United States federal
income tax consequences of the merger to Holdings, LabONE, Holdings
stockholders, and LabONE stockholders. However, the discussion is not a complete
analysis or listing of all of the tax considerations that might be relevant to
any particular Holdings stockholder or LabONE stockholder in making a decision
to vote for or against the merger. The discussion does not deal with the tax
consequences of the merger to persons who are subject to special rules such as,
for example, financial institutions, dealers in securities, persons who hold
stock as part of a straddle or conversion transaction, regulated investment
companies, insurance companies, tax-exempt organizations, and foreign persons.
The discussion also does not address the tax consequences of the merger to any
stockholder of Holdings or LabONE who does not hold that stock as a capital
asset or who acquires the stock as compensation. Moreover, the application to
the merger of any applicable state, local, or foreign tax laws, or any estate or
gift tax laws, is not discussed.
This discussion is based on the Internal Revenue Code of 1986, its
legislative history, applicable final, temporary, and proposed Treasury
Regulations, judicial authority, and administrative rulings and practice, all as
currently existing and in effect. There can be no assurance that the Internal
Revenue Service and the courts will not take a contrary view with respect to
these tax consequences, and no ruling from the IRS respecting these tax
consequences has been or will be sought. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may be retroactive and could affect (possibly adversely) the tax
consequences of the merger to the constituent corporations and their respective
stockholders.
Holdings has obtained an opinion letter from its counsel, Lathrop & Gage
L.C., regarding the tax consequences of the merger under current law. The
remainder of this discussion summarizes the views of Lathrop & Gage L.C. as set
forth in that opinion letter.
HOLDINGS STOCKHOLDERS. For federal income tax purposes the merger will have
no effect on Holdings stockholders who do not exercise dissenters rights.
However, Holdings stockholders who receive cash in lieu of fractional shares in
connection with the stock split that precedes the merger will be treated for
federal income tax purposes as if they had received the fractional shares and
such shares were then redeemed by Holdings. The specific tax consequences of
this treatment to each such stockholder will depend on such stockholder's
individual circumstances, although the IRS generally has ruled that a
stockholder who receives cash that is not separately bargained-for consideration
in lieu of a fractional share will recognize gain or loss on the deemed
redemption of such fractional share in an amount equal to the difference between
the amount of cash received and the stockholder's tax basis in such fractional
share.
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Similarly, Holdings stockholders who receive cash as a result of their
exercise of statutory dissenters' rights will be treated for federal income tax
purposes as if their Holdings stock were redeemed by Holdings. This deemed
redemption will be treated as a sale or exchange of a dissenting stockholder's
Holdings stock, and thus will trigger capital gain or loss in an amount equal to
the difference between the amount of cash received and the stockholder's tax
basis in such stock, unless the stockholder is treated pursuant to certain
constructive ownership rules of the Internal Revenue Code as being the owner of
Holdings stock that is actually owned by another related person. If a dissenting
stockholder is deemed to continue to own Holdings stock after the merger by
reason of these constructive ownership rules, then the deemed redemption of such
stockholder's Holdings stock will be treated either as a sale or exchange of
such stock (and thus will trigger capital gain or loss) or as a dividend, in
accordance with the deemed redemption rules discussed below that are applicable
to LabONE stockholders who receive both combined company stock and cash in
exchange for their LabONE stock pursuant to the merger.
Because the specific tax consequences of the merger and the stock split that
precedes the merger to Holdings stockholders who exercise statutory dissenters'
rights or receive cash in lieu of fractional shares will depend on their
individual circumstances, they are urged to consult with their tax advisors
regarding the specific tax consequences to them of these events.
LABONE STOCKHOLDERS OTHER THAN HOLDINGS. With respect to LabONE
stockholders, other than Holdings, the merger will qualify for federal income
tax purposes as a tax-free reorganization and both Holdings and LabONE will be
parties to such reorganization. Accordingly, the principal federal income tax
consequences of the merger to such stockholders are as follows.
No gain or loss will be recognized by LabONE stockholders who receive only
combined company stock in exchange for their LabONE stock pursuant to the
merger.
LabONE stockholders who receive some combined company stock and some cash in
exchange for their LabONE stock pursuant to the merger will recognize gain, but
not loss, on such exchange. The amount of the gain recognized by such a
stockholder will be equal to the lesser of:
- the total gain realized by such stockholder on the exchange (I.E., the
value of the merger consideration received by such stockholder, including
both cash and combined company stock, less such stockholder's tax basis in
the LabONE stock that is given up in the exchange); or
- the amount of cash received.
The gain that is realized by a LabONE stockholder may be capital gain or
ordinary income, depending on the stockholder's individual circumstances.
For purposes of determining whether the gain realized by LabONE stockholders
who receive some combined company stock and some cash in exchange for their
LabONE stock pursuant to the merger is capital gain or ordinary income, such
stockholders will be treated as if they exchanged all of their LabONE stock for
combined company stock and Holdings immediately redeemed a portion of such
combined company stock for cash. This deemed redemption of a LabONE stockholder
will be treated as a sale or exchange of the stock that is deemed to have been
redeemed, and thus will trigger capital gain or loss, if the deemed redemption
is considered to be "not essentially equivalent to a dividend" (within the
meaning of the Internal Revenue Code) or if it is considered to be
"substantially disproportionate" with respect to the stockholder (within the
meaning of the Internal Revenue Code); otherwise the gain will be treated as a
dividend. In determining whether the deemed redemption is not essentially
equivalent to a dividend or is substantially disproportionate, certain
constructive ownership rules of the Internal Revenue Code generally apply to
determine whether a stockholder is treated as owning stock that is actually
owned by certain other related parties.
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A deemed redemption of Holdings stock treated as held by a LabONE
stockholder who receives some combined company stock and some cash in exchange
for LabONE stock will be considered to be not essentially equivalent to a
dividend if the deemed redemption results in a meaningful reduction in the
stockholder's interest in Holdings. In this regard, the IRS has taken the
position that the "not essentially equivalent to a dividend" test may be
satisfied with respect to a redemption of a portion of a stockholder's stock in
a corporation if the stockholder's percentage stock ownership interest in the
corporation is minimal, the stockholder exercises no control over corporate
affairs, and there is a meaningful reduction in the stockholder's percentage
stock ownership.
A deemed redemption of Holdings stock treated as held by a LabONE
stockholder who receives some combined company stock and some cash in exchange
for LabONE stock will be considered to be substantially disproportionate with
respect to the stockholder if the stockholder actually and constructively owns
less than 50 percent of the voting power of the outstanding Holdings stock after
the deemed redemption and if the percentage of Holdings stock actually and
constructively owned by such stockholder after the deemed redemption is less
than 80 percent of the percentage of Holdings stock actually and constructively
owned by such stockholder immediately before the deemed redemption.
As indicated in the foregoing discussion, the character of the gain, if any,
recognized by LabONE stockholders who receive some combined company stock and
some cash in exchange for their LabONE stock pursuant to the merger depends on
the stockholders' individual circumstances. Therefore, such stockholders are
urged to consult with their tax advisors regarding the character of the gain, if
any, that is recognized by them as a result of such event.
LabONE stockholders who receive only cash in exchange for their LabONE stock
pursuant to the merger will likely be treated as if they had received combined
company stock in the merger and such stock was redeemed by Holdings immediately
after the merger, although the law in this regard is unclear and such
stockholders may be treated as if they had sold their LabONE stock to Holdings.
A deemed redemption may be treated as a sale or exchange of Holdings stock (with
the recognition of capital gain or loss) or it may be treated as a dividend,
depending on the stockholder's individual circumstances. A deemed sale would
cause the recognition of capital gain or loss.
A deemed redemption of Holdings stock held by a LabONE stockholder who
receives only cash in exchange for LabONE stock will be treated as a sale or
exchange of such stock, and thus will trigger capital gain or loss in an amount
equal to the difference between the amount of cash received and such
stockholder's tax basis in such stock, unless the stockholder is treated
pursuant to constructive ownership rules of the Internal Revenue Code as being
the owner of Holdings stock that is actually owned by another related person. If
such a LabONE stockholder is deemed to continue to own Holdings stock after the
merger by reason of these constructive ownership rules, then the deemed
redemption either will be treated as a sale or exchange of such stock (and thus
will trigger capital gain or loss) under the "not essentially equivalent to a
dividend" and "disproportionate redemption" rules discussed above or it will be
treated as a dividend.
Because of the uncertainty in the law, and because of the LabONE
stockholders' varying circumstances, LabONE stockholders who receive only cash
in exchange for their LabONE stock pursuant to the merger are urged to consult
with their tax advisors regarding the tax consequences to them of such event.
The tax basis of the shares of combined company stock received by a LabONE
stockholder pursuant to the merger will equal the tax basis of such
stockholder's shares of LabONE stock exchanged in the merger, increased by the
amount of any gain recognized by such stockholder and decreased by the amount of
any cash received by such stockholder. The holding period for shares of combined
company stock received by a LabONE stockholder pursuant to the merger will
include the holding period for the shares of LabONE stock exchanged in the
merger.
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HOLDINGS. With respect to Holdings the merger will qualify as a tax-free
liquidation of LabONE. The principal federal income tax consequences of such
qualification are as follows.
No gain or loss will be recognized by Holdings upon the receipt by it of all
of LabONE's property and the cancellation of its LabONE stock pursuant to the
merger or as a result of the stock split that precedes the merger. However, and
notwithstanding the preceding sentence, Holdings will at the time of the merger
recognize any gain or loss that is realized by it upon its receipt of property
from LabONE in satisfaction of any debt that is then owed to it by LabONE. Also,
and again notwithstanding the first sentence of this paragraph, Holdings may at
the time of the merger recognize income from the discharge of indebtedness if
any indebtedness is then owed by it to LabONE.
Holdings' initial tax basis in each of the properties received by it from
LabONE pursuant to the merger will be the same as LabONE's tax basis therein
immediately before the merger. Holdings' holding period for the property
received by it from LabONE pursuant to the merger will include the period for
which the property was held by LabONE.
LABONE. With respect to LabONE the merger will qualify as a tax-free
liquidation of LabONE. Accordingly, no gain or loss will be recognized by LabONE
for federal income tax purposes upon the distribution by it of all of its
property to Holdings pursuant to the merger.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH
HOLDINGS STOCKHOLDER WHO MAY WISH TO EXERCISE DISSENTERS' RIGHTS, AND EACH
LABONE STOCKHOLDER, IS URGED TO CONSULT WITH SUCH STOCKHOLDER'S TAX ADVISOR AS
TO THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR NON-UNITED STATES LAWS AND
ANY PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the LabONE board of directors and the
Holdings board of directors with respect to the merger, stockholders should be
aware that certain members of the board of directors of LabONE, certain
executive officers of LabONE, certain members of the board of directors of
Holdings and certain executive officers of Holdings have the following interests
in the merger separate from and in addition to their interests as LabONE
stockholders and Holdings stockholders, respectively.
COMPOSITION OF THE COMBINED COMPANY BOARD. In connection with the merger,
nine of the current directors of LabONE, will be elected as directors of the
combined company at the time of the merger. All of the current directors of
Holdings will concurrently resign their positions as directors and will cease to
have any continuing office with the combined company.
DIRECTOR COMPENSATION AFTER THE MERGER. Directors who are not employees of
the combined company will receive the same compensation as non-employee
directors received from LabONE prior to the merger, subject to change from time
to time by the board of directors of the combined company. Directors who are not
employees of the combined company will receive an annual retainer fee of $5,000
in cash and a grant of a number of shares of common stock of the combined
company having a value equal to $10,000, plus $500 for each board and committee
meeting attended and reimbursement for reasonable expenses in attending
meetings.
Richard S. Schweiker, who will serve as a director of the combined company,
has agreed to attend national meetings of insurance underwriters on behalf of
the combined company and to make selected contacts in furtherance of its
business. For these services the combined company will pay Mr. Schweiker
additional fees of $30,000 annually.
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ADJUSTMENTS TO HOLDINGS STOCK OPTIONS. Each of the four Holdings directors
who will cease to hold office at the effective time of the merger hold options
to purchase 15,000 shares of the Holdings common stock at a price of $26.50 per
share. The options were granted on September 17, 1997, for terms expiring on the
earlier of:
- September 17, 2007,
- 90 days after the directors term as director terminates other than by
death, or
- one year after death if the death occurs during or within 90 days after
the term of the director terminates.
The options become exercisable in three equal annual installments commencing on
each of the first three anniversaries of the date of grant. They also become
exercisable in full upon certain change-in-control events or in the event of a
merger which contemplates that the director's term will cease following the
merger, as is the case in the proposed merger. During August 1998, and based on
the recommendation of the compensation committee of the Holdings board, the
board of directors of Holdings amended the options so that they would not
automatically expire 90 days following a termination of director status due to a
merger. Adoption of the merger agreement will effect a ratification of that
board action. In addition, the merger agreement provides that at the effective
time the options will be adjusted so that each option to purchase 15,000 shares
for $26.50 per share will become an option to purchase 22,500 shares at a per
share price of $17.66 per share. See "Management of Holdings--Report of the
Compensation Committee on Executive Compensation" on page 122.
PAYMENTS UPON TERMINATION OF EMPLOYMENT AGREEMENTS. The merger agreement
also provides that the employment of all officers of Holdings will terminate at
the effective time of the merger. This will effect a termination of the
employment agreements without cause of each of those officers so as to trigger a
requirement of Holdings to pay Mr. Jacobs and Mr. Fitzwater their base salaries
for a period of two years, and Ms. McCoy her base salary for a period of one
year, following the date of termination. The annual base salary of each of
Messrs. Jacobs and Fitzwater is $100,000 and the base salary of Ms. McCoy is
$70,000.
INDEMNIFICATION. The merger agreement obligates the combined company to
provide indemnification and to advance expenses to persons who were officers and
directors of LabONE or Holdings prior to the effective time. These obligations
will survive the merger and will remain in force for six years after the
effective time. Further, the merger agreement obligates the combined company to
provide directors and officers liability insurance for a period of six years to
persons who were directors or officers on March 7, 1999 and who cease to be so
prior to or at the effective time. The obligation of the combined company to
indemnify directors and officers includes the obligation to indemnify for
liabilities arising out of the merger or the merger agreement.
LabONE also has corporate reimbursement and directors and officers liability
insurance. This insurance indemnifies directors and officers against claims made
against them during the policy period for wrongful acts in their capacities as
directors and officers of LabONE. This insurance has been recently modified to
eliminate a previous exclusion of coverage for claims against such persons
brought by or on behalf of Holdings or its stockholders by reason of any
proposed or completed merger of LabONE and Holdings.
DISSENTERS' RIGHTS
Under The Delaware General Corporation Law, LabONE stockholders have no
dissenters' rights with respect to the Merger.
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Under Section 351.455 of The Missouri General and Business Corporation Law,
Holdings stockholders who do not vote in favor of adoption of the merger
agreement and who follow the procedures summarized below will have the right to
dissent from and obtain payment in cash of the fair value of their shares of
Holdings common stock, as of the day prior to the day of the Holding's meeting,
in the event of the consummation of the merger. However, Holdings may elect to
terminate the merger agreement if holders of more than 5% of Holdings
outstanding shares exercise dissenters' rights. No holder of Holdings common
stock dissenting from the merger will be entitled to shares of combined company
common stock or any dividends or other distributions unless and until the holder
fails to perfect or effectively withdraws or loses such holder's right to
dissent from the merger agreement.
The following is a summary of the procedures which must be followed by any
stockholder who wishes to dissent and demand payment for his or her shares in
the event of consummation of the merger. The text of Section 351.455, contains
the applicable procedures. It is set forth in Appendix D to this joint proxy
statement/prospectus. Holders of Holdings common stock receiving cash upon
exercise of dissenters' rights may recognize gain for federal income tax
purposes. See "Federal Income Tax Consequences" on page 46.
A Holdings stockholder may assert dissenters' rights only by complying with
all of the following requirements:
a. The stockholder must deliver to Holdings prior to or at the annual
meeting a written objection to the merger agreement. Such objection
should be delivered or mailed in time to arrive before the annual
meeting to Lab Holdings, Inc., 5000 West 95th Street, Suite 260, Shawnee
Mission, Kansas 66207, Attention: Corporate Secretary. Such a written
objection must be made in addition to, and separate from, any proxy or
other vote against adoption of the merger agreement. Neither a vote
against, a failure to vote for, or an abstention from voting will
satisfy the requirement that a written objection be delivered to
Holdings before the vote is taken. Unless a stockholder files the
written objection as provided above, he or she will not have any
dissenters' rights of appraisal.
b. The stockholder must not vote in favor of adoption of the merger
agreement.
c. The stockholder must deliver to the combined company within twenty days
after the effective time of the merger a written demand for payment of
the fair value of his or her shares of Holdings common stock as of the
day prior to the date on which the vote for adoption of the merger
agreement was taken. That demand must include a statement of the number
of shares of Holdings common stock owned. The demand must be mailed or
delivered to the combined company at 10101 Renner Boulevard, Lenexa,
Kansas 66219, Attn: W.T. Grant II, Chairman and President. Any
stockholder who fails to make a written demand for payment within the
twenty-day period after the effective time will be conclusively presumed
to have consented to the merger agreement and will be bound by the terms
thereof. Neither a vote against the merger agreement nor the written
objection referred to in (a) satisfies the written demand requirement
referred to in this clause (c).
A beneficial owner of shares of Holdings common stock who is not the record
owner may not assert dissenters' rights. If the shares of Holdings common stock
are owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, or by a nominee, the written demand asserting dissenters' rights must
be executed by the fiduciary or nominee. If the shares of Holdings common stock
are owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand must be executed by all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for a
stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in executing the demand, he is acting as agent
for the record owner.
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If within thirty days of the effective time the value of a dissenting
stockholder's shares of Holdings common stock is agreed upon between the
stockholder and the combined company, the combined company will make payment to
the stockholder within ninety days of the effective time, upon the stockholder's
surrender of his or her certificates. Upon payment of the agreed value, the
dissenting stockholder will cease to have any interest in such shares or in the
combined company.
If the dissenting stockholder and the combined company do not agree on the
fair value of the shares within thirty days after the effective time, the
dissenting stockholder may, within sixty days after the expiration of the thirty
days, file a petition in any court of competent jurisdiction within Cole County,
Missouri asking for a finding and a determination of the fair value of the
shares. The dissenting stockholder is entitled to judgment against the combined
company for the amount of such fair value as of the day prior to the date on
which such vote was taken adopting the merger agreement, together with interest
thereon to the date of judgment. The judgment is payable only upon and
simultaneously with the surrender to the combined company of the Holdings
certificates representing said shares. Upon payment of the judgment, the
dissenting stockholder shall cease to have any interest in such shares or in the
combined company. Unless the dissenting stockholder will file such petition
within the time herein limited, such stockholder and all persons claiming under
such stockholder will be conclusively presumed to have adopted and ratified the
merger agreement, and will be bound by the terms thereof.
The right of a dissenting stockholder to be paid the fair value for his or
her shares will cease if the stockholder fails to comply with the procedures of
Section 351.455 or if the merger agreement is terminated for any reason.
The preceding is qualified in its entirety by the text of the appraisal
provisions of Section 351.455. A copy of that statute is attached hereto as
Appendix D and is incorporated herein by reference.
It is a condition to the merger that the holders of not more than 5% of
Holdings' outstanding common stock exercise dissenters' rights.
AMENDMENTS TO HOLDINGS' ARTICLES OF INCORPORATION AND BYLAWS
Holdings is the combined company in the merger. The merger agreement
provides that Holdings' articles of incorporation and bylaws will be amended in
certain respects as of the effective time of the merger. These changes are
reflected in the articles of incorporation and bylaws of the combined company
attached as Exhibits B and C to the merger agreement. The principal changes are
described below.
ARTICLES OF INCORPORATION
- The name of the corporation will be changed to LabONE, Inc.
- The authorized common stock will be increased from 24,000,000 to
40,000,000 shares to match the number of currently authorized common stock
of LabONE.
- The par value of the common stock and preferred stock of the corporation
will be reduced from $1.00 par value per share to $.01 par value per
share.
- A "fair price" provision which waives the requirement of 80% stockholder
approval on certain business combinations involving certain related
persons if the business combination is approved by a two-thirds vote of
continuing directors at a meeting at which (before giving effect to the
articles amendment described on page 128) a quorum of at least nine
continuing directors are present, is changed to require a two-thirds vote
of all continuing directors in order to waive the 80% stockholder approval
requirement. The fair price provision is also changed to expand the
universe of bylaw provisions which must be retained in a merger with a
subsidiary in order for the merger not to be considered a business
combination.
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- A provision requiring the affirmative vote of at least 80% of the
outstanding shares entitled to vote in order to amend, modify or repeal
certain provisions of the articles of incorporation or bylaws, unless the
board of directors unanimously recommends any such amendment, is changed:
- to expand the sections of the bylaws which may not be amended without
80% stockholder approval,
- to require 80% stockholder approval to adopt provisions inconsistent
therewith, and
- to eliminate such 80% stockholder approval requirement if any such
amendment is favorably recommended by only a majority of the entire
board of directors.
The additional provisions of the bylaws to be covered by the 80% stockholder
approval requirements for amendment include:
- a provision specifying the officers who may preside over stockholders'
meetings and giving the presiding officer authority to adjourn
stockholders' meetings from time to time;
- a provision limiting the business to be conducted at stockholders'
meetings to matters stated in the notice of such meetings or otherwise
properly brought before the meetings;
- a provision stating that the property and business of the corporation
shall be controlled and managed by the board of directors;
- provisions providing for the indemnification and limitation of
liability of directors, officers and employees of the corporation, or
persons who are serving at the request of the corporation as directors,
officers or employees of other enterprises; and
- provisions establishing advance notice procedures for stockholders
wishing to nominate candidates for election as directors or to bring
other proposals before annual stockholders' meetings.
BYLAWS
- A new provision will be added to require advance notice of all
stockholders' nominations for election as directors and to bring other
proposals not sponsored by the board of directors before annual
stockholders' meetings. Stockholders will be required to deliver prior
written notice of any director nomination or other proposal to the
Secretary of the corporation no later than ninety days before the meeting
date or ten days after the meeting date is publicly announced, whichever
is later. Such notice must be accompanied by specific information of the
sort needed by the corporation for inclusion in any proxy materials
prepared in accordance with the Securities Exchange Act of 1934. If the
stockholder's nomination or proposal is deemed incomplete by the board of
directors or a designated committee thereof, the stockholder will be
notified and given five days, or such shorter time as may reasonably be
deemed appropriate by the board or committee, to cure the deficiency. If
the board or designated committee does not act on the stockholder
nomination or proposal before the meeting, then the presiding officer of
the meeting will make the determination whether the request is in proper
form for consideration at the meeting.
- The right of the holders of four-fifths of the outstanding shares of the
corporation entitled to vote to call a special stockholders' meeting will
be eliminated.
- The right of a single director to call a special meeting of the board will
be eliminated; such a meeting may be called by specified officers or a
majority of the entire board.
- A provision that no person shall be eligible for election as an outside
director of the corporation after he has attained the age of seventy-five
will be eliminated.
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- A provision allowing one or more directors to call a special meeting of
the board of directors will be changed to permit a majority of the entire
board to call a special board of directors' meeting.
- A provision is added specifying the officers who may preside over
stockholders' meetings and giving the presiding officer authority to
adjourn stockholders' meetings from time to time.
- A provision is added limiting the business to be conducted at
stockholders' meetings to matters stated in the notice of such meetings or
otherwise properly brought before the meetings.
- A provision is added empowering the board of directors to determine which
class of directors will have a number of directors different from the
other classes if the number of directors is not evenly divisible by three.
CERTAIN POSSIBLE ANTI-TAKEOVER EFFECTS OF THE AMENDMENTS TO THE ARTICLES OF
INCORPORATION AND BYLAWS OF THE COMBINED COMPANY
The merger is not being proposed in order to prevent any known attempt to
acquire control of Holdings by means of a merger, tender offer, solicitation in
opposition to management or otherwise, or to obtain representation on the
Holdings or LabONE boards of directors. It is not the policy of LabONE or
Holdings to discourage legitimate offers to enhance stockholder value. However,
certain of the amendments to the articles of incorporation and bylaws of the
combined company may have an anti-takeover effect as described below. The
proposed amendments to the articles of incorporation and bylaws of the combined
company are not part of a plan to adopt a series of such amendments.
INCREASE IN AUTHORIZED SHARES. As described above, the authorized shares of
common stock of the combined company will be increased in the merger from
24,000,000 shares to 40,000,000 shares. LabONE and Holdings agreed to increase
the authorized shares of common stock to 40,000,000 shares so that the number of
authorized shares of common stock of the combined company after the merger would
equal the number of authorized shares of common stock of LabONE prior to the
merger, although the ratio of authorized shares to outstanding shares is
expected to decline as a result of the merger and related transactions. This
increase in the number of authorized shares is not intended as an anti-takeover
device, and there are currently no plans, understandings, agreements or
arrangements concerning the issuance of additional shares of capital stock of
the combined company, other than shares to be issued in connection with the
merger and the stock split, pursuant to employee benefit plans and upon the
exercise of warrants issued by LabONE that are being assumed by the combined
company in the merger. However, the increase in the number of authorized shares
could enable the board of directors of the combined company to render more
difficult or discourage a hostile transaction to take control of the combined
company. In the course of exercising their fiduciary responsibilities to
stockholders, the board of directors could issue additional shares without
stockholder approval in order to increase the voting power of parties friendly
to the board of directors or to dilute the voting and other rights of the
proposed acquiror. The 3,000,000 authorized but unissued shares of combined
company preferred stock may be also issued by the board of directors for the
same purposes.
ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND PROPOSALS. The combined
company's bylaws will contain a new provision establishing an advance notice
procedure for stockholders wishing to nominate candidates for election as
directors or bring other business before an annual meeting of stockholders. By
requiring advance notice of nominations and stockholder proposals, the new bylaw
provision will provide a more orderly procedure for conducting annual meetings
of stockholders and will provide the board of directors with the opportunity to
inform stockholders prior to such meetings, to the extent deemed necessary or
desirable by the board of directors, of the qualifications of such nominees and
of any business to be conducted at such meetings. Although the advance notice
provisions do not give the board of directors of the combined company any power
to approve or disapprove stockholder nominations or proposals, they may have the
effect of precluding or delaying a
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contest for the election of directors or the consideration of stockholder
proposals if the designated procedures are not followed. Such provisions may
have the effect of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to the combined company or its
stockholders.
SPECIAL STOCKHOLDERS' MEETINGS. The combined company's bylaws will be
amended to eliminate the right of the holders of four-fifths ( 4/5) of
outstanding shares to call a special meeting of stockholders. Special meetings
may be called only by a majority of the entire board of directors. The purpose
of this amendment is to avoid the time, expense and disruption resulting from
holding special meetings of stockholders in addition to annual meetings, unless
the special meetings are approved by the board of directors. However, this
amendment may have the effect of delaying a change in control of the combined
company or delaying the presentation to the stockholders of a stockholder
proposal favored by the holders of four-fifths ( 4/5) of the outstanding shares.
EXISTING PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS. Certain
existing provisions found in Holdings' articles of incorporation and bylaws that
also will be included in the combined company's articles of incorporation and
bylaws might have the effect of discouraging a potential acquiror from
attempting a takeover of the combined company on terms which some stockholders
might favor, and might reduce the opportunity for the combined company's
stockholders to sell shares at a premium over then-prevailing market prices.
These include provisions relating to a classified board of directors, removing
and appointing directors, "blank-check preferred stock", business combinations
and charter and bylaw amendments. See "Description Of Combined Company Capital
Stock--Certain Provisions of Combined Company Articles of Incorporation and
Bylaws That May Have an Anti-takeover Effect" on page 110.
RESALES OF COMMON STOCK
The shares of Holdings common stock to be issued to the stockholders of
LabONE in the merger are being registered under the Securities Act of 1933
pursuant to the registration statement of which this joint proxy
statement/prospectus is a part. However, because some stockholders of LabONE are
or may be affiliates of LabONE, such persons will not be able to resell the
common stock of the combined company received in the merger with respect to
their LabONE shares unless the common stock of the combined company is
registered for resale under the Securities Act, is sold in compliance with an
exemption from the registration requirements of the Securities Act or is sold in
compliance with Rule 145 under the Securities Act.
Under Rule 145 the sale of common stock acquired by LabONE affiliates with
respect to their LabONE shares in the merger will be subject to certain
restrictions. Such persons may sell common stock of the combined company under
Rule 145 if:
- the combined company 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,
- the common stock is sold in a "broker's transaction," or in transactions
directly with a market maker, and
- such sale and all other sales made by such person within the preceding
three months do not collectively exceed the greater of:
a. 1% of the outstanding shares of the common stock of the combined
company, or
b. the average weekly trading volume of that common stock on The
NASDAQ Stock Market during the four-week period preceding the sale.
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One year following the merger and if such person is not an affiliate of the
combined company, the person may sell the common stock of the combined company
under Rule 145 without complying with the requirements described above if the
combined company has filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months. Two years following
the merger, if such person is not an affiliate of the combined company and has
not been an affiliate for at least three months, the person may sell the common
stock of the combined company without complying with any of the requirements
described above.
Persons who may be deemed to be affiliates of LabONE generally include
individuals or entities which control, are controlled by, or are under common
control with, LabONE and may include certain officers, directors and principal
stockholders of LabONE and Holdings. The merger agreement requires LabONE to use
its commercially reasonable efforts to cause each of its affiliates to execute a
written agreement acknowledging that the person is covered by the provisions of
Rule 145(d).
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THE MERGER AGREEMENT
GENERAL
The merger agreement provides for the merger of LabONE into Holdings, with
Holdings continuing as the surviving corporation. This section of the document
describes material provisions of the merger agreement that is appended to this
document as Appendix A. Because the description of the merger agreement is a
summary, it does not contain all the information that may be important to you.
You should read carefully the entire copy of the merger agreement before you
decide how to vote.
PRE-MERGER STOCK SPLIT
The merger agreement provides that, prior to the effective time of the
merger, the board of directors of Holdings will declare a stock split payable as
a dividend so that, immediately prior to the effective time, each issued and
outstanding share of Holdings common stock shall be automatically converted into
1.50 shares of Holdings common stock. The dividend will be conditioned upon
satisfaction of all conditions to the merger and will be payable after the
merger in common stock of the combined company.
CLOSING OF THE MERGER; EFFECTIVE TIME OF THE MERGER
CLOSING OF THE MERGER. Unless the parties agree otherwise, the closing of
the merger will take place on the business day on which there is satisfaction
(or waiver) of the latest to occur of all of the closing conditions. This is
expected to occur shortly after the approval of the stockholders of both
companies at the annual meetings.
EFFECTIVE TIME OF THE MERGER. At the closing of the merger, Holdings will
file articles of merger with the Missouri Secretary of State and a certificate
of merger with the Secretary of State of Delaware. The effective time of the
merger will be when the Missouri Secretary of State issues a certificate of
merger attaching to it the articles of merger.
EFFECT OF MERGER
SURVIVING CORPORATION. Holdings will be the surviving corporation in the
merger. However, pursuant to the merger agreement, its name will be changed to
LabONE, Inc.
ARTICLES AND BYLAWS. The articles of incorporation and bylaws of Holdings
as in effect immediately prior to the effective time will be amended to read as
set forth in Exhibits B and C, respectively, to the merger agreement. See "The
Proposed Merger--Amendments to Holdings' Articles of Incorporation and Bylaws"
on page 52 and "Description of Combined Company Capital Stock" on page 109.
DIRECTORS AND OFFICERS. At the effective time, the directors and officers
of Holdings will resign, management of the combined company will consist of the
present LabONE management and the board of directors of the combined company
will consist of twelve persons, nine of whom are presently members of the LabONE
board. See "Management of LabONE" on page 94 and "Management of Combined Company
After the Merger" on page 103.
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CONVERSION OF LABONE COMMON STOCK INTO SHARES OF THE COMBINED COMPANY OR CASH
MERGER CONSIDERATION FOR LABONE COMMON STOCK. If you are a record holder of
LabONE common stock immediately prior to the effective time, you may elect to
receive:
a. a cash price per share equal to $12.75; or
b. one (1) share of combined company common stock; or
c. the cash price per share for a stated number of your shares and
combined company common stock for a stated number of your shares;
however, as discussed below, the number of your shares that will be converted
into cash is dependent on the maximum amount payable in cash with respect to all
shares of LabONE common stock. That maximum amount may not exceed $16,600,000 in
the aggregate.
A form of election that a record holder of LabONE common stock may use to
make a cash election or a partial cash election is being furnished with this
joint proxy statement/prospectus to record holders. If you are a LabONE
stockholder whose shares are held in "street name" by your broker or other
nominee, you should receive election forms from that person. If you or your
record holder fails to properly make a cash election or partial cash election by
submitting to American Stock Transfer and Trust Company a properly completed and
signed form of election before 10:00 a.m. New York City time on the day of the
meeting of the stockholders of LabONE, you will be deemed to have made a stock
election and will receive stock of the combined company in exchange for your
shares of LabONE in the merger. American Stock Transfer and Trust Company is
acting as disbursing agent.
If you make a stock election or a partial stock election, your shares of
LabONE common stock with respect to which your election is made (collectively,
the "stock election shares") will be converted into the right to receive
combined company common stock. As noted above, if you fail to make a cash
election or partial cash election, you will be deemed to have made a stock
election. Therefore, you do not need to do anything to make a stock election.
From and after the effective time, certificates evidencing shares of LabONE
common stock (other than shares held by Holdings, which will be cancelled and
cash election shares) will be deemed to represent the number of shares of
combined company common stock into which they were converted. Accordingly,
holders who wish to make a stock election will not be required to surrender
their shares to the disbursing agent. However, such holders may obtain new
certificates at a later date by delivering the old certificates to the combined
company's transfer agent, American Stock Transfer & Trust Company, together with
appropriate transmittal documents that may be obtained from such agent upon
request.
As mentioned above, if you elect to receive cash for some or all of your
LabONE shares, the number of your shares that will be converted into cash is
dependent on whether all of the cash elections exceed the $16.6 million cash
limit. If the cash limit is not exceeded, all of your LabONE shares covered by a
proper cash election will be converted into cash. However, if the cash limit is
exceeded, then your cash election shares will be converted into the right to
receive a combination of combined company common stock and cash. In that case
each cash election share will be converted into the right to receive:
a. an amount in cash, without interest, equal to $12.75 times a
fraction, the numerator of which is $16,600,000 and the denominator
of which will be the aggregate amount of all valid cash elections
with respect to all cash election shares; and
b. a fractional share of combined company common stock equal to one
minus the fraction defined in clause a. above. If the total number of
shares issuable to you results in a fractional share, then the number
of shares that you will receive will be rounded up to the nearest
whole number of shares and the amount of cash payable under clause a.
will be reduced by the value of such fractional share.
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FOR EXAMPLE--if all cash elections amount to $20,000,000 and you elected all
cash for 100 of your shares, you would receive cash for 83 LabONE shares and
combined company stock for 17 of your LabONE shares as follows:
$16,600,000/$20,000,000 = .83 = cash fraction
.83 x 100 shares = 83 shares x $12.75= $1,058.25 in cash and
.17 x 100 shares = 17 shares of combined company common stock
ELECTION PROCEDURES. Holdings has appointed its transfer agent, American
Stock Transfer & Trust Company, to act as disbursing agent for the payment of
merger consideration to holders of LabONE common stock. At the effective time,
the combined company will deposit with the disbursing agent in trust for the
benefit of LabONE stockholders cash in an amount sufficient to make cash
payments to those who have made cash elections or partial cash elections
together with shares of combined company common stock for those who have made
partial stock elections.
Pursuant to the merger agreement, each person who was a LabONE stockholder
on the record date for the LabONE annual meeting is receiving with this joint
proxy statement/prospectus a letter of transmittal that includes a form of
election for use in making a cash election or a partial cash election. Holdings
and LabONE have agreed to use their reasonable efforts to make the form of
election and related letter of transmittal and the joint proxy
statement/prospectus available to all persons who become record holders of
LabONE common stock during the period between such record date and the election
date referred to below. The form of election specifies that delivery shall be
effected, and risk of loss and title to the LabONE certificates shall pass, only
upon proper delivery of the LabONE certificates to the disbursing agent and
contains instructions for use in effecting the surrender of LabONE certificates
in exchange for payment of cash to stockholders who wish to make a cash election
or a partial cash election
If you are a LabONE stockholder whose shares are held in "street name" by
your broker or other nominee, only that holder can make a cash election for you
or revoke a cash election once made. In that case you should follow the
directions provided by them regarding how to instruct them to make or revoke a
cash election. If you do not receive instructions you should immediately contact
the record holder and seek instructions.
Under the merger agreement, any cash election or partial cash election will
be properly made only if the disbursing agent receives at its designated office,
before 10:00 a.m. New York City time on August 9, 1999, a form of election and
related letter of transmittal, properly completed and signed, and accompanied by
certificates for the shares of LabONE common stock to which such form of
election relates, properly endorsed or otherwise in proper form for transfer (or
accompanied by an appropriate guarantee of delivery of such certificates as set
forth in such letter of transmittal from a firm which is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States, provided such certificates are in fact
delivered to the disbursing agent within three trading days after the date of
execution of such guarantee of delivery). Failure to deliver certificates
covered by a guarantee of delivery within three trading days after the date of
execution of such guarantee of delivery will invalidate any otherwise properly
made cash election or partial cash election.
Any LabONE stockholder of record who submits a form of election to the
disbursing agent may revoke it by delivering written notice to the disbursing
agent prior to 10:00 a.m., New York City time, on August 9, 1999. If you are a
LabONE stockholder whose shares are held in "street name" by your broker or
other nominee, you should provide instructions to your record holder well in
advance of the August 9, 1999, deadline so that the record holder will have
sufficient time to act effectively on your instructions. All forms of election
shall automatically be revoked if the disbursing agent is notified in
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writing by Holdings and LabONE that the merger has been abandoned. If a form of
election is revoked, the certificate or certificates (or guarantees of delivery,
as appropriate) for the shares of LabONE common stock to which such form of
election relates will be promptly returned to the stockholder submitting the
same to the disbursing agent.
Promptly after the effective time, the combined company will cause the
disbursing agent to make payment to those who have timely and properly submitted
their LabONE certificates with a duly executed letter of transmittal and such
other documents as may be reasonably required by the disbursing agent. No
interest will be paid or will accrue on amounts payable upon the surrender of
the LabONE certificates. If payment is to be made to a person other than the
person in whose name the LabONE certificate surrendered is registered, it shall
be a condition of payment that the LabONE certificate so surrendered be properly
endorsed or otherwise be in proper form for transfer and that the person
requesting such payment pay any transfer or other taxes required by reason of
the payment to a person other than the registered holder of the LabONE
certificate surrendered or establish to the satisfaction of the combined company
that such tax has been paid or is not applicable.
The combined company will have the discretion to determine whether forms of
election have been properly completed, signed and submitted. That discretion may
be delegated in whole or in part to the disbursing agent. The decision of the
combined company or the disbursing agent on such matters will be conclusive and
binding. Neither the combined company nor the disbursing agent are under any
obligation to notify any person of any defect in a letter of transmittal
submitted to the disbursing agent. If the combined company or disbursing agent
determines that any purported cash election, partial cash election, or partial
stock election is not properly made, such purported election will be deemed to
be of no force and effect and any stockholder making such purported cash
election, partial cash election, or partial stock election will for purposes
hereof be deemed to have made a non-election and will receive combined company
common stock for his or her shares of LabONE common stock.
The merger agreement provides that the disbursing agent shall make all
computations as to any proration required with respect to cash elections and
partial cash elections and that any such computation will be conclusive and
binding on the holders of shares of LabONE common stock. The disbursing agent
may, with the mutual agreement of Holdings and LabONE, make such rules as are
consistent with the merger agreement for the implementation of the elections
provided for therein as shall be necessary or desirable fully to effect such
elections.
EFFECT OF MERGER ON HOLDINGS COMMON STOCK
Each share of Holdings $1.00 par common stock issued and outstanding
immediately prior to the effective time and each treasury share, assuming the
prior effectiveness of the stock split, will remain outstanding after the
effective time as a share of $0.01 par value common stock of the combined
company; provided, that shares as to which dissenters' rights have been properly
exercised under Missouri law will be treated as discussed under "Dissenters'
Rights" on page 50.
Although the merger will effect a change in the name of Holdings to "LabONE,
Inc.", certificates evidencing shares of Holdings common stock prior to the
effective time will continue to evidence the same number of shares of combined
company common stock after the effective time. However, holders of such
certificates may obtain new certificates that bear the name "LabONE, Inc. " and
that reflect Missouri as the state of incorporation and a par value of $0.01 per
share by delivering the old certificates to the combined company's transfer
agent, American Stock Transfer & Trust Company, together with appropriate
transmittal documents that may be obtained from such agent upon request.
EFFECT OF MERGER ON OPTIONS AND WARRANTS
LABONE OPTIONS AND WARRANTS. As the surviving corporation, Holdings will
assume each outstanding option or warrant to purchase LabONE common stock that
is outstanding at the effective
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time, whether or not then exercisable. As a consequence of the assumption and
due to adjustment provisions contained in the option and warrant agreements, the
options and warrants will become options and warrants to purchase the same
number of shares of common stock of the combined company, at the same price and
on the same terms as are provided in the existing option agreements for the
purchase of LabONE common stock. LabONE and its compensation committee have also
taken such steps as are necessary to insure that no option or warrant will vest
or become exercisable as a result of the merger, the absence of which is a
condition to the obligations of Holdings to close the merger.
HOLDINGS STOCK OPTIONS. At the effective time stock options issued under
the Holdings 1997 Directors' Stock Option Plan will be adjusted to reflect the
1.5 for 1 stock split. Approval of the merger agreement will also effect a
ratification of action taken by the Holdings board on August 27, 1998, that
amended the plan and outstanding options so that they could be exercised by the
optionee at any time until the end of the term of the option following the
termination of director status due to a merger such as the merger contemplated
by the merger agreement. See "Interests of Certain Persons in the Merger" on
page 49.
DISSENTERS' RIGHTS
Holders of Holdings common stock are entitled to dissenters' rights under
Section 351.455 of the Missouri General and Business Corporation Law, if they
comply with the conditions of the statute. See "The Proposed Merger--Dissenters'
Rights" on page 50.
CONDITIONS TO THE MERGER
CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER
The respective obligations of each party to effect the merger are
conditioned on the satisfaction prior to the closing of the merger of the
following conditions:
LABONE STOCKHOLDER APPROVAL. The merger agreement and the merger shall have
been approved and adopted by the affirmative vote of the holders of a majority
of the outstanding shares of LabONE common stock entitled to vote thereon and by
the holders of a majority of the outstanding shares of LabONE common stock
present and voting in favor of or against the merger agreement and the merger,
other than Holdings, officers and directors of Holdings and beneficial owners of
10% or more of the outstanding shares of Holdings common stock.
HOLDINGS STOCKHOLDER APPROVAL. The merger agreement and the merger shall
have been approved and adopted by the affirmative vote of the holders of
two-thirds of the outstanding shares of Holdings common stock entitled to vote
thereon. The amendment to the Holdings articles of incorporation referred to
under "Proposal to Amend Articles of Incorporation" on page 128, shall have been
approved and adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Holdings common stock entitled to vote thereon.
LISTING OF COMBINED COMPANY COMMON STOCK. The shares of the combined
company common stock issuable to LabONE stockholders pursuant to the merger and
such other shares of combined company common stock required to be reserved for
issuance in connection with the merger and related transactions, if any, shall
have been authorized for trading on the National Market System of The NASDAQ
Stock Market upon official notice of issuance.
GOVERNMENTAL APPROVALS. All filings, consents, approvals, permits and
authorizations required to be obtained prior to the effective time from any
governmental entity in connection with the execution and delivery of the merger
agreement and the consummation of the transactions contemplated thereby by
LabONE and Holdings must have been made or obtained and the registration
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statement must have become effective under the Securities Act and must not be
the subject of any stop order or proceeding seeking a stop order. Other than
matters relating to the continued effectiveness of the registration statement
with the Securities and Exchange Commission and filings of merger certificates
and articles of merger with state authorities, the parties are not aware of any
other governmental consents, approvals or authorizations that are required in
connection with the merger.
OTHER APPROVALS. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the merger or
imposing conditions the compliance with which would reasonably be expected to
have a material adverse effect may be in effect at the effective time. In
addition, Holdings and LabONE must have obtained all necessary consents required
under the merger agreement.
DISSENTERS. The total number of shares held by holders of Holdings common
stock who have exercised dissenters' rights under Section 351.455 of the
Missouri General and Business Corporation Law must not exceed 5% of the Holdings
common stock outstanding.
TAX OPINION. LabONE and Holdings shall have received an opinion, reasonably
satisfactory to both LabONE and Holdings, of Lathrop & Gage L.C., counsel to
Holdings, generally as described under "Federal Income Tax Consequences" on page
46.
STOCK SPLIT. The stock split shall have become effective.
FINANCING. Holdings will have obtained the financing necessary to
consummate the merger and other transactions contemplated by the merger
agreement.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF HOLDINGS
The obligations of Holdings to effect the merger are conditioned on the
satisfaction of certain other conditions, including:
ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of LabONE set forth in the merger agreement shall be accurate both as
of the date of the merger agreement and as of the time of closing on the closing
date of the merger (or if the representation or warranty speaks as of another
date, it shall be accurate as of that date), except for any inaccuracy that
would not have a material adverse effect.
PERFORMANCE OF AGREEMENTS. LabONE shall have performed in all material
respects all obligations required to be performed by it at or prior to the time
of closing on the closing date of the merger.
OPINION OF HOLDINGS' FINANCIAL ADVISOR. The opinion of Salomon Smith Barney
as to the fairness from a financial point of view of the merger consideration to
Holdings shall not have been withdrawn or materially modified in an adverse
manner prior to the date of mailing of the joint proxy statement/prospectus or
any related supplement. See "The Proposed Merger--Opinion of Holdings' Financial
Advisor" on page 34.
LETTERS FROM LABONE AFFILIATES. LabONE shall cause to be prepared and
delivered to Holdings a list identifying all persons who, at the time of the
LabONE annual meeting, may be deemed to be LabONE affiliates as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act. As a
condition to its obligations, Holdings shall have received signed copies of
agreements from all parties deemed to be LabONE affiliates pursuant to which
each such party acknowledges that it is subject to the provisions of Rule
145(d).
NO VESTING OF LABONE STOCK OPTIONS. LabONE stock options shall not vest as
a result of the merger and will maintain the same vesting period as if the
merger had not occurred.
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ADDITIONAL CONDITIONS TO OBLIGATIONS OF LABONE
The obligations of LabONE to effect the merger are conditioned on the
satisfaction of certain other conditions, including:
ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Holdings set forth in the merger agreement shall be accurate both
as of the date of the merger agreement and as of the time of closing on the
closing date of the merger (or if the representation or warranty speaks as of
another date, it shall be accurate as of that date), except for any inaccuracy
that would not have a material adverse effect.
PERFORMANCE OF AGREEMENTS. Holdings shall have performed in all material
respects all obligations required to be performed by it at or prior to the time
of closing on the closing date of the merger.
OPINION OF LABONE'S FINANCIAL ADVISOR. LabONE has received an opinion of
U.S. Bancorp Piper Jaffray Inc. to the effect that, as of the date of execution
of the merger agreement, the consideration to be received in the merger by the
LabONE unaffiliated stockholders is fair from a financial point of view to the
LabONE unaffiliated stockholders. As a condition to LabONE's obligations, such
opinion shall not have been withdrawn or materially modified in an adverse
manner prior to the date of mailing of the joint proxy statement/prospectus or
any supplement thereto. See "The Proposed Merger--Opinion of Financial Advisor
to the LabONE special committee" on page 40.
BOARD OF DIRECTORS AND OFFICERS AT THE EFFECTIVE TIME. LabONE shall have
received irrevocable letters of resignation effective as of the effective time
of the merger from all of the current directors of Holdings and all current
officers of Holdings.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties by each
of Holdings and LabONE. Key representations and warranties include the
following:
- the organization and similar corporate matters of it and its
subsidiaries, if any,
- its capital structure,
- the authorization, execution, delivery, performance and enforceability
of the merger agreement and related matters, and the absence of
conflicts, violations of or defaults under its governing documents or
any loan or credit agreement, note, bond, mortgage, indenture or other
agreement, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to it, any of its respective subsidiaries or any of their
respective properties or assets as a result of the merger agreement,
- the absence of undisclosed material liabilities,
- the absence of defaults in any material agreements,
- compliance with certain laws,
- compliance with environmental laws, and
- title to real and personal property.
The merger agreement also contains representations and warranties of LabONE
and Holdings regarding the documents and reports that they have filed with the
Securities and Exchange Commission.
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CERTAIN COVENANTS; CONDUCT OF BUSINESS
During the period from the date of the merger agreement and continuing until
the effective time, each of Holdings and LabONE has agreed as to itself and its
subsidiaries that it will:
- carry on its businesses in the usual, regular and ordinary course in
substantially the same manner as previously conducted,
- not declare or pay any dividends on or make other distributions in
respect of any of its capital stock, except for cash dividends
consistent with past practices,
- not split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock
(other than the stock split, in the case of Holdings),
- not repurchase, redeem or otherwise acquire, or permit any of its
subsidiaries to purchase, redeem or otherwise acquire, any shares of
its capital stock, subject to limited exceptions,
- not deliver or sell, or authorize or propose to issue, deliver or sell,
any shares of its capital stock of any class, any indebtedness having
the right to vote or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting debt or
convertible securities,
- not amend or propose to amend its charter documents except as
contemplated by the merger agreement,
- not acquire or agree to acquire any business or any corporation,
partnership, association or other business organization or division
thereof,
- not sell, lease, encumber or otherwise dispose of, or agree to sell,
lease (whether such lease is an operating or a capital lease), encumber
or otherwise dispose of, any of its material assets,
- not authorize, recommend, propose or announce an intention to adopt a
plan of complete or partial liquidation or dissolution,
- not grant any increases in the compensation of any of its directors,
officers or employees, except increases in the ordinary course of
business and in accordance with past practice,
- not pay or agree to pay any pension, retirement allowance or other
employee benefit not required or contemplated by any of the existing
Holdings or LabONE benefit programs or plans to any director, officer
or employee, whether past or present,
- not enter into any new, or amend any existing, employment or severance
or termination agreement with any director, officer or key employee,
- not become obligated under any new benefit program or plan, which was
not in existence or approved by the Holdings or LabONE board of
directors prior to or on the date of the merger agreement, or amend any
such plan or arrangement in existence on the date of the merger
agreement if such amendment would have the effect of materially
enhancing any benefits thereunder,
- except in the ordinary course of business, not incur any indebtedness
for borrowed money or guarantee any such indebtedness or issue or sell
any debt securities or warrants or rights to acquire any debt
securities of such party or any of its subsidiaries or guarantee any
debt securities of others,
- not commit to aggregate capital expenditures in excess of $100,000
outside such party's capital budget,
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- not, directly or indirectly, solicit or initiate any prospective buyer
or make any proposal that constitutes, or may reasonably be expected to
lead to, an acquisition proposal (as defined below) except for certain
unsolicited proposals which the directors of either party may be
required to respond to pursuant to their fiduciary duties, and
- not take any action that could reasonably be expected to prevent a
merger or other acquisition by the combined company from being
accounted for as a pooling of interests.
An "acquisition proposal" means any proposal or offer, other than one by
Holdings, LabONE or their affiliates, as the case may be, for a tender or
exchange offer, a merger, consolidation or other business combination involving
Holdings, LabONE or any of their subsidiaries or any proposal to acquire in any
manner a substantial equity interest in, or substantially all of the assets of,
Holdings, LabONE or any of their subsidiaries, as the case may be.
Holdings also agrees to take action reasonably necessary to cause the stock
split to be effective prior to the effective time of the merger.
AMENDMENT OF ARTICLES OF INCORPORATION
Pursuant to the merger agreement and in connection with the merger, the
articles of incorporation of Holdings will be amended by the certificate of
merger. See "Amendments to Holdings' Articles of Incorporation and Bylaws" on
page 52.
ADDITIONAL AGREEMENTS
Pursuant to the merger agreement, Holdings and LabONE have agreed among
other matters, that:
- Holdings will take all corporate action necessary to permit it to issue
shares of Holdings common stock pursuant to the merger and will use all
reasonable efforts to have approved for listing on the NASDAQ National
Market System, subject to official notice of issuance, the shares of
Holdings common stock to be issued in the merger and upon exercise of
the LabONE stock options and warrants;
- the combined company will assume the LabONE stock options and warrants
(except under certain limited circumstances);
- the combined company will, subject to certain limitations, maintain
directors' and officers' liability insurance for officers and directors
of LabONE and its subsidiaries (see "Indemnification" on page 66); and
- neither will take or omit to take any action that would affect the
qualification of the merger as a reorganization described in Section
332 and 368(a) of the Internal Revenue Code.
EXPENSES
Each party to the merger agreement will pay its own expenses incident to
preparing for, entering into and carrying out the merger agreement and the
consummation of the transactions contemplated thereby, provided that immediately
prior to the effective time Holdings will reimburse LabONE for its merger
expenses.
If the merger agreement is terminated
a. by Holdings because either
- LabONE fails to comply in any material respect with any of its
covenants, agreements or conditions, or
- any representation or warranty of LabONE is not true and correct in all
material respects, or
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b. by LabONE, because of an Acquisition proposal, and if Holdings is not in
material breach of the merger agreement at the time of such termination, then
LabONE will pay the reasonable out-of-pocket expenses incurred by Holdings in
connection with the merger agreement.
Likewise, if the merger agreement is terminated
a. by LabONE because either
- Holdings fails to comply in any material respect with any of its
covenants, agreements or conditions, or
- any representation or warranty of Holdings is not true and correct in
all material respects, or
b. by Holdings because of an acquisition proposal, and if LabONE is not in
material breach of the merger agreement at the time of such termination, then
Holdings will pay the reasonable out-of-pocket expenses incurred by LabONE in
connection with the merger agreement.
INDEMNIFICATION
The merger agreement obligates the combined company to provide
indemnification and to advance expenses to persons who were officers and
directors of LabONE or Holdings prior to the effective time. These obligations
are in addition to the indemnification obligations contained in the bylaws and
separate indemnification agreements and will survive the merger and will remain
in force for six years after the effective time. Further, the merger agreement
obligates the combined company to provide directors and officers liability
insurance for a period of six years to persons who were directors or officers on
March 7, 1999 and who cease to be so prior to or at the effective time. The
obligation of the combined company to indemnify directors and officers includes
the obligation to indemnify for liabilities arising out of the merger or the
merger agreement,
More specifically, the merger agreement provides that the combined company
will:
a. indemnify, defend and hold harmless each person who is now, or has
been at any time prior to the date of the merger agreement or who becomes
prior to the effective time, an officer or director of Holdings or LabONE or
any of their subsidiaries or an employee of Holdings or LabONE or any of
their subsidiaries who acts as a fiduciary under any of the Holdings benefit
programs or plans or the LabONE benefit programs or plans, against all:
- losses, claims, damages, costs, expenses (including attorneys'
fees), liabilities, judgments, penalties or fines (including
excise taxes assessed with respect to employee benefit plans),
- amounts that are paid in settlement with the approval of the
indemnifying party, and
- all related interest, assessments and other charges,
of or in connection with any threatened or actual claim, action, suit,
proceeding or investigation that is based in whole or in part on, or arising
in whole or in part out of, the fact that such person is or was a director,
officer, or such employee of Holdings or LabONE or any of their subsidiaries
or as a fiduciary under any benefit program or plans, whether pertaining to
any matter existing or occurring at or prior to the effective time and
whether asserted or claimed prior to, or at or after, the effective time,
unless in any such case the conduct of the indemnified person is finally
adjudged to have been knowingly fraudulent, deliberately dishonest or wilful
misconduct;
b. advance expenses on an unsecured basis upon receipt of an
undertaking from an indemnified party to repay the advance if it is finally
adjudged in the judicial proceeding in which liability is imposed that the
indemnified party is not entitled to indemnification; and
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c. indemnify an indemnified person against expenses reasonably incurred
by such person in enforcing his or her rights to indemnification and
advances under the merger agreement or any other agreement or bylaw of
Holdings or LabONE or rights to recovery under any insurance policy.
Under the merger agreement, the combined company will bear the burden of proof
in any proceeding in which it is contesting an indemnified party's right to
indemnification or advances.
AMENDMENT, WAIVER AND TERMINATION
Upon the terms and conditions set forth in the merger agreement, the merger
agreement may be terminated and the merger may be abandoned at any time prior to
the effective time, whether before or after approval of the matters presented in
connection with the merger by the stockholders of LabONE or Holdings:
a. by mutual written consent of LabONE and Holdings, or by mutual
action of their respective boards of directors, which in the case of LabONE
requires that the LabONE board act consistently with the recommendations of
the special committee;
b. by either LabONE or Holdings if:
- the merger shall not have been consummated by October 31, 1999;
- any court of competent jurisdiction, or other governmental body
or regulatory authority shall have issued an order, decree or
ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the merger and such order,
decree, ruling or other action shall have become final and
nonappealable;
- the stockholders of Holdings shall not have approved the merger
agreement or the amendment to Article X of Holdings' articles of
incorporation described under "Proposal to Amend Articles of
Incorporation" on page 128;
- the stockholders of LabONE or the LabONE unaffiliated
stockholders of LabONE shall not have approved the merger
agreement and the merger;
- in the exercise of its good faith judgment as to its fiduciary
duties to its stockholders, as advised by outside counsel, the
Holdings board determines that such termination is required by
reason of an acquisition proposal having been made; or
- in the exercise of its good faith judgment as to its fiduciary
duties to its stockholders, as advised by outside counsel, the
LabONE board determines that such termination is required by
reason of an acquisition proposal having been made;
c. by Holdings if:
- LabONE shall have failed to comply in any material respect with
any of its covenants, agreements or conditions contained in the
merger agreement to be complied with or performed by LabONE at or
prior to such date of termination (after notice and an
opportunity to cure);
- subject to limited exceptions, any representation or warranty of
LabONE contained in the merger agreement shall not be true in all
material respects when made (after notice and an opportunity to
cure) or on and as of the effective time as if made on and as of
the effective time (except to the extent it relates to a
particular date);
- Holdings' financial advisor withdraws or materially modifies its
fairness opinion in an adverse manner; or
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- the LabONE board of directors ( in accordance with a
recommendation by the special committee) withdraws, modifies or
changes its recommendation of the merger agreement and the merger
in a manner adverse to Holdings or resolves to do any of the
foregoing; or
d. by LabONE if:
- Holdings shall have failed to comply in any material respect with
any of its covenants, agreements or conditions contained in the
merger agreement to be complied with or performed by it at or
prior to such date of termination (after notice and an
opportunity to cure);
- subject to limited exceptions, any representation or warranty of
Holdings contained in the merger agreement shall not be true in
all material respects when made (after notice and an opportunity
to cure) or on and as of the effective time as if made on and as
of the effective time (except to the extent it relates to a
particular date);
- LabONE's financial advisor withdraws or materially modifies its
fairness opinion in an adverse manner; or
- the Holdings board of directors withdraws, modifies or changes
its recommendation of the merger agreement and the merger in a
manner adverse to LabONE or resolves to do any of the foregoing.
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THE MEETINGS OF STOCKHOLDERS
HOLDINGS ANNUAL MEETING
The Holdings annual meeting will be held on Friday, August 6, 1999 at 2:00
p.m. local time, at the offices of LabONE, 10101 Renner Boulevard, Lenexa,
Kansas 66219.
At the Holdings annual meeting, the stockholders of Holdings will be asked
to consider and vote upon:
1. A proposal to adopt the Agreement and Plan of Merger, as amended, by and
between Lab Holdings, Inc. and LabONE, Inc., dated as of March 7, 1999,
which is described in this joint proxy statement/prospectus, and the
transactions contemplated thereby. Under the merger agreement:
- shares of Lab Holdings, Inc. common stock will be split 1.5 for one
immediately prior to the merger,
- LabONE will merge with and into Holdings, with Holdings being the
surviving corporation,
- each outstanding share of LabONE common stock, other than shares owned
by Holdings, will be converted into either:
a. one share of combined company common stock, or
b. cash equal to $12.75, subject to an aggregate $16.6 million cash
limit, or
c. a combination of cash and shares,
- Holdings' name will be changed to "LabONE, Inc.,"
- the officers of Holdings will be replaced by the current officers of
LabONE,
- Holdings directors will be replaced by nine of the current LabONE
directors and three additional non-management directors, and
- the articles of incorporation and bylaws of Holdings will be amended to
read as set forth in Appendix B and Appendix C to the merger agreement
and to effect a reduction in stated capital by reducing the par value
of shares from $1.00 per share to $0.01 per share.
2. A proposal to amend Paragraph B.4 of Article X of the articles of
incorporation to change the definition of the term "Continuing Director
Quorum" from nine continuing directors to two-thirds of the continuing
directors.
3. A proposal to elect two class B directors, to serve until the earlier of
the 2002 annual meeting of stockholders or the effective time of the
merger.
4. A proposal to confirm the selection of KPMG LLP as independent public
accountants for Holdings for 1999.
5. Such other business as may properly come before the annual meeting or
any adjournment or postponement thereof.
These proposals and related matters are described more fully in this joint
proxy statement/ prospectus. A copy of the merger agreement is attached to the
joint proxy statement/prospectus as Appendix A. A copy of the articles of
incorporation and bylaws of Holdings, as proposed to be amended by the merger
agreement, are attached to the joint proxy statement/prospectus as Appendix B
and C, respectively.
The board of directors of Holdings has unanimously approved the proposed
amendment to the articles of incorporation described in Proposal 1 and
recommends a vote FOR adoption and approval of that amendment and the merger
agreement. The board of directors of Holdings also recommends that you vote FOR
the election of each nominee to the board of directors and FOR the approval and
ratification of Holdings' independent public accountants for 1999.
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LABONE ANNUAL MEETING
The LabONE annual meeting will be held on Monday, August 9, 1999, at 3:00
p.m. local time at the offices of LabONE, 10101 Renner Boulevard, Lenexa, Kansas
66219.
At the LabONE annual meeting stockholders of LabONE will be asked to
consider and vote upon:
1. A proposal to adopt the Agreement and Plan of Merger, as amended, by and
between Lab Holdings, Inc. and LabONE, Inc., dated as of March 7, 1999,
which is described in this joint proxy statement/prospectus, and the
transactions contemplated thereby. Under the merger agreement:
- shares of Lab Holdings, Inc. common stock will be split 1.5 for one
immediately prior to the merger,
- LabONE will merge with and into Holdings, with Holdings being the
surviving corporation,
- each outstanding share of LabONE common stock, other than shares owned
by Holdings, will be converted into either:
a. one share of combined company common stock, or
b. cash equal to $12.75, subject to an aggregate $16.6 million cash
limit, or
c. a combination of cash and shares,
- Holdings' name will be changed to "LabONE, Inc.",
- the officers of Holdings will be replaced by the current officers of
LabONE,
- Holdings directors will be replaced by nine of the current LabONE
directors and three additional non-management directors, and
- the articles of incorporation and bylaws of Holdings will be amended to
read as set forth in Appendix B and Appendix C to the merger agreement
and to effect a reduction in stated capital by reducing the par value
of shares from $1.00 per share to $0.01 per share.
2. A proposal to elect twelve directors of LabONE as set forth in this
joint proxy statement/ prospectus, to serve until the effective time of
the merger, or if the merger is not consummated, until the 2000 annual
meeting of stockholders.
3. A proposal to confirm the selection of KPMG LLP as independent public
accountants for LabONE and its subsidiaries for the 1999 fiscal year.
4. Such other business as may properly come before the meeting.
These proposals and related matters are described more fully in this joint
proxy statement/ prospectus. A copy of the merger agreement is attached to the
joint proxy statement/prospectus as Appendix A. A copy of the articles of
incorporation and bylaws of Holdings, as proposed to be amended by the merger
agreement, are attached to the joint proxy statement/prospectus as Appendix B
and C, respectively.
The board of directors of LabONE, upon the recommendation of the special
committee, has approved the merger agreement, declared its advisability and
recommends a vote FOR adoption of the merger agreement. The board of directors
of LabONE also recommends that you vote FOR the election of each nominee to the
board of directors and FOR the approval and ratification of LabONE's independent
public accountants for the 1999 fiscal year.
QUORUM
The presence, in person or by proxy, of the holders of a majority of the
shares of Holdings common stock is necessary to constitute a quorum at the
Holdings annual meeting. Similarly, the
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presence, in person or by proxy, of the holders of a majority of the outstanding
shares of LabONE common stock is necessary to constitute a quorum at the LabONE
annual meeting.
VOTE REQUIRED
HOLDINGS MEETING OF STOCKHOLDERS. The affirmative vote of the holders of
two-thirds of the outstanding Holdings common stock is required to adopt the
merger agreement and the transactions contemplated thereby. Approval of the
merger agreement constitutes approval of the transactions contemplated by the
merger agreement.
The affirmative vote of the holders of a majority of the outstanding
Holdings common stock is required to adopt the amendment to Article X of the
articles of incorporation.
In the election of directors, shares may be voted cumulatively and directors
are elected by a plurality vote. Accordingly, a stockholder is entitled to two
votes for each share owned, one for each director to be elected. A stockholder's
votes may be cast equally among all nominees or may be voted all for one
nominee.
The affirmative vote of the holders of a majority of the shares present, in
person or by proxy, at the Holdings annual meeting is necessary to approve and
confirm the appointment of Holdings' independent public accountants for the 1999
fiscal year.
LABONE MEETING OF STOCKHOLDERS. The affirmative vote of the holders of a
majority of the outstanding LabONE common stock is required to adopt the merger
agreement and the transactions contemplated thereby. Adoption of the merger
agreement constitutes approval of the transactions contemplated by the merger
agreement. The merger is also conditioned on approval by the holders of a
majority of the outstanding shares of LabONE common stock present and voting in
favor of or against the merger agreement and the merger, other than Holdings,
officers and directors of Holdings and beneficial owners of 10% or more of the
outstanding shares of Holdings common stock.
Each of the twelve directors to serve as members of the board of directors
will be elected by a plurality of the votes cast by the holders of LabONE common
stock. There will be no cumulative voting for directors.
The affirmative vote of the holders of a majority of the shares present, in
person or by proxy, at the LabONE annual meeting and entitled to vote thereon is
necessary to approve and confirm the appointment of LabONE's independent public
accountants for the 1999 fiscal year.
RECORD DATE; STOCK ENTITLED TO VOTE
The Holdings board of directors has established June 24, 1999 as the date to
determine those record holders of Holdings common stock entitled to notice of
and to vote at the Holdings annual meeting. On that date, there were 6,489,103
shares of Holdings common stock outstanding and approximately 1,678 holders of
record of such shares. Holders of Holdings common stock are entitled to one vote
for each share held, except in the election of directors, as to which cumulative
voting applies.
The LabONE board of directors has established the close of business on June
24, 1999 as the date to determine those record holders of LabONE common stock
entitled to notice of and to vote at the LabONE annual meeting. On that date,
there were 13,317,211 shares of LabONE common stock outstanding and 2,096
holders of record of such shares. Holders of LabONE common stock are entitled to
one vote for each share held.
VOTING OF PROXIES
Shares represented by all properly executed proxies received in time for
each of the respective Meetings will be voted at such meeting in the manner
specified by the holders thereof. Proxies of Holdings stockholders that do not
contain voting instructions will be voted FOR adoption and approval
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of the articles amendment, FOR adoption and approval of the merger agreement,
FOR the election as a director of each nominee listed herein, and FOR adoption
and ratification of the appointment of Holdings' independent public accountants
for 1999. Proxies of LabONE stockholders that do not contain voting instructions
will be voted FOR adoption and approval of the merger agreement, FOR the
election as a director of each nominee listed herein, and FOR adoption and
ratification of the appointment of LabONE's independent public accountants for
the 1999 fiscal year. The proxies confer discretionary authority on the persons
named therein with respect to procedural matters and matters that properly come
before a meeting as to which the corporation holding the meeting did not receive
notice a reasonable time before the date this joint proxy statement/prospectus
was mailed. It is not expected that any proposal other than those referred to
herein will be brought before either of the meetings. If, however, other matters
are properly presented, the persons named as proxies will vote in accordance
with their judgment with respect to such matters, except that proxies containing
instructions to vote AGAINST adoption of the merger agreement will not be voted
in favor of a motion to adjourn either meeting to another time and/or place.
If a holder of Holdings common stock or LabONE common stock does not return
a signed proxy card, his or her shares will not be voted and this will have the
effect of a vote against the merger agreement at the respective meetings and a
vote against the proposed amendment to Article X of the Holdings articles of
incorporation, provided that shares of LabONE common stock that are not voted
will not affect whether the merger agreement is approved by a majority of the
LabONE unaffiliated stockholders voting on the merger agreement. Abstentions and
broker non-votes (shares held by brokers and other nominees or fiduciaries that
are present at either meeting but not voted on a particular matter) will have
the effect of a vote against the merger agreement at the respective meetings and
a vote against the articles amendment at the Holdings annual meeting. Broker
non-votes will not be counted in determining whether the merger agreement has
been approved by a majority of the LabONE unaffiliated stockholders voting on
the merger agreement. For purposes of ratifying the appointment of Holdings' and
LabONE's independent public accountants for 1999, an abstention shall be deemed
a vote against such appointment and a broker non-vote will not be counted either
for or against ratification and will thus have no effect.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS. A
SEPARATE ENVELOPE AND A LETTER OF TRANSMITTAL IS ENCLOSED FOR LABONE
STOCKHOLDERS OF RECORD WHO WISH TO RECEIVE CASH FOR THEIR SHARES OF LABONE
COMMON STOCK.
REVOCATION OF PROXIES
Any record holder of Holdings common stock has the unconditional right to
revoke his or her proxy at any time prior to the voting thereof at the Holdings
annual meeting by (a) filing a written revocation with the Secretary of Holdings
bearing a later date than the proxy prior to the voting of such proxy, (b)
giving a duly executed proxy bearing a later date or (c) attending the Holdings
annual meeting and voting in person. Attendance by a stockholder at the Holdings
annual meeting will not by itself revoke his or her proxy. Holdings stockholders
of record should address any revocation of such proxy to: Lab Holdings, Inc.,
5000 West 95th Street, Suite 260, Shawnee Mission, Kansas 66207, Attention:
Steven K. Fitzwater.
Any record holder of LabONE common stock has the unconditional right to
revoke his or her proxy at any time prior to the voting thereof at the LabONE
annual meeting by (a) filing a written revocation bearing a later date than the
proxy with the Secretary of LabONE prior to the voting of such proxy, (b) giving
a duly executed proxy bearing a later date or (c) attending the LabONE annual
meeting and voting in person. Attendance by a stockholder at the LabONE annual
meeting will not by itself revoke his or her proxy. LabONE stockholders of
record should address any revocation of such proxy to: LabONE, Inc., 10101
Renner Boulevard, Lenexa, Kansas 66219 Attention: Gregg R. Sadler.
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REVOCATION OF CASH ELECTIONS
Any record holder of LabONE common stock who has elected to receive cash for
any of the holders' LabONE shares by delivering a properly executed and
documented form of election, may only revoke that election by a written notice
received by the disbursing agent prior to 10:00 a.m., New York City time, on
August 9, 1999. The disbursing agent's address for this purpose is: American
Stock Transfer and Trust Company at 40 Wall Street, 46th Floor, New York, N.Y.
10005. If you are a LabONE stockholder whose shares are held in "street name" by
your broker or other nominee, you should provide any revocation instructions to
your record holder well in advance of the August 9, 1999, deadline so that the
record holder will have sufficient time to act effectively on your instructions.
An election will also be automatically revoked if the disbursing agent is
notified in writing by Holdings and LabONE that the Merger has been abandoned.
If an election is revoked, the certificate or certificates (or guarantees of
delivery, as appropriate) for the shares of LabONE common stock covered by the
election will be promptly returned to the record holder.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the Holdings annual meeting and the
LabONE annual meeting may be made in person or by mail, telephone, telecopy or
telegram. Each of Holdings and LabONE will bear the cost of the solicitation of
proxies from its own stockholders. In addition to solicitation by mail, the
directors, officers and regular employees of each company and its subsidiaries
may solicit proxies from stockholders of such company by telephone, telecopy or
telegram or in person. Holdings and LabONE have requested banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of Holdings common stock and
LabONE common stock held of record by such entities, and Holdings and LabONE
will, upon the request of such record holders, reimburse reasonable forwarding
expenses. In addition, Holdings and LabONE may engage third parties to assist in
the solicitation of proxies, and in that event would incur additional costs.
In addition, Holdings and LabONE have each retained Georgeson & Company
Inc., to assist them in the solicitation of proxies from stockholders in
connection with their respective meetings of stockholders. Georgeson & Company
Inc. will receive a fee of $3,750 from each of Holdings and LabONE as
compensation for its services and reimbursement of its out-of-pocket expenses in
connection therewith. Each of Holdings and LabONE has agreed to indemnify
Georgeson Company, Inc against certain liabilities arising out of or in
connection with these engagements.
SECURITY OWNERSHIP OF CERTAIN PERSONS
As of the record date for the Holdings annual meeting, the directors and
executive officers of Holdings as a group beneficially owned (excluding shares
purchasable upon exercise of stock options) 2.2% of the outstanding shares of
Holdings common stock. In addition, as of such date, officers and directors of
LabONE who are not officers or directors of Holdings beneficially owned 16.84%
of the outstanding shares of Holdings common stock.
As of the LabONE record date, the directors and executive officers of LabONE
as a group beneficially owned (excluding shares purchasable upon exercise of
stock options) 0.77% of the outstanding shares of LabONE common stock. As of the
LabONE record date, Holdings beneficially owned 80.44% of the outstanding shares
of LabONE common stock. In addition, as of the LabONE record date, officers and
directors of Holdings who are not officers and directors of LabONE beneficially
owned less than one percent of the outstanding shares of LabONE common stock.
All of such officers and directors of both Holdings and LabONE, and Holdings
have indicated that they intend to vote in favor of the proposal to adopt the
merger agreement.
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UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements present unaudited pro
forma balance sheet data at March 31, 1999, giving effect to the merger as if
the merger had been consummated on that date, and unaudited pro forma operating
data for the three months ended March 31, 1999 and for the year ended December
31, 1998, giving effect to the acquisition of minority interest as if the merger
had been consummated on January 1, 1998.
The consolidated financial statements of Holdings include the accounts of
Holdings and its majority-owned subsidiary, LabONE. Therefore, the "Holdings
Consolidated Historical" column in the following unaudited pro forma financial
statements includes LabONE's financial position at March 31, 1999 and the
results of its operations for the three months ended March 31, 1999 and for the
year ended December 31, 1998.
The merger will be accounted for as an acquisition of minority interest
using the purchase method of accounting. For the purpose of preparing its
consolidated financial statements, the combined company will determine fair
values of LabONE's net assets and with the excess of consideration paid, plus
costs of the merger, over the fair value of the net assets acquired, recorded as
goodwill. The goodwill created by the merger will be amortized over a 20 year
period. A final determination of required purchase accounting adjustments,
including the allocation of the purchase price to the assets acquired and
liabilities assumed based on their respective fair values, has not yet been
made; however, management does not believe the adjustments to LabONE's assets
and liabilities will be material. Accordingly, the purchase accounting
adjustments made in connection with the development of the following summary pro
forma combined financial statements are preliminary and have been made solely
for the purposes of developing such pro forma combined financial statements.
The following unaudited pro forma financial statements are provided for
informational purposes only and should be read in conjunction with the separate
audited consolidated financial statement and related notes of Holdings (which
are incorporated herein by reference) and LabONE's (which are included elsewhere
in this joint proxy statement/prospectus). The historical consolidated
information for Holdings has been adjusted to reflect the 1.5 to one stock split
and the change in par value from $1.00 to $.01 per share. The following
unaudited pro forma financial statements are based on certain assumptions and
are not indicative of the results which actually would have occurred if the
merger had been consummated on the dates indicated or which may be obtained in
the future.
74
<PAGE>
LAB HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED BALANCE SHEETS
MARCH 31, 1999
<TABLE>
<CAPTION>
HOLDINGS
CONSOLIDATED ASSUMES ALL STOCK ASSUMES STOCK AND
HISTORICAL ELECTIONS MAXIMUM CASH ELECTIONS
(AS ------------------------ ------------------------
RESTATED) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 11,745 (1,750)(a) 9,995 (4,750)(a) 6,995
Accounts receivable.......................... 19,692 19,692 19,692
Current income taxes......................... 374 374 374
Other current assets......................... 5,743 5,743 5,743
Deferred income taxes........................ 3,284 3,284 3,284
------------ ----------- ----------- ----------- -----------
Total current assets....................... 40,838 (1,750) 39,088 (4,750) 36,088
Property, plant and equipment, net............. 41,712 41,712 41,712
Other assets:
Intangible assets............................ 13,090 22,444(a) 35,534 25,095(a) 38,185
Deferred income taxes........................ 342 342 342
Other........................................ 1,149 1,149 1,149
------------ ----------- ----------- ----------- -----------
Total assets............................... $ 97,131 20,694 117,825 20,345 117,476
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 5,962 5,962 5,962
Retainage and construction payable........... 3,473 3,473 3,473
Current portion of long-term debt............ 1,863 1,863 1,863
Other current liabilities.................... 3,994 250(g) 4,244 250(g) 4,244
------------ ----------- ----------- ----------- -----------
Total current liabilities.................. 15,292 250 15,542 250 15,542
Long-term debt................................. 18,094 18,094 13,600(a) 31,694
Other liabilities.............................. 250(g) 250 250(g) 250
------------ ----------- ----------- ----------- -----------
Total liabilities............................ 33,386 500 33,886 14,100 47,486
------------ ----------- ----------- ----------- -----------
Minority interests............................. 10,141 (10,141)(a) -- (10,141)(a) --
------------ ----------- ----------- ----------- -----------
Stockholders' equity(h):
Preferred stock.............................. -- -- --
Common stock................................. 112 26(b) 138 13(b) 125
Additional paid in capital................... 10,309 30,998(a) 41,281 17,049(a) 27,345
(26)(b) (13)(b)
Accumulated other comprehensive income....... (671) (163)(a) (834) (163)(a) (834)
Retained earnings............................ 73,998 (500)(g) 73,498 (500)(g) 73,498
------------ ----------- ----------- ----------- -----------
83,748 30,335 114,083 16,386 100,134
Less treasury stock.......................... (30,144) (30,144) (30,144)
------------ ----------- ----------- ----------- -----------
Total stockholders' equity................. 53,604 30,335 83,939 16,386 69,990
------------ ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity................................... $ 97,131 20,694 117,825 20,345 117,476
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
75
<PAGE>
LAB HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
HOLDINGS
CONSOLIDATED ASSUMES ALL STOCK ASSUMES STOCK AND
HISTORICAL ELECTIONS MAXIMUM CASH ELECTIONS
(AS ------------------------- -------------------------
RESTATED) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------ ----------- ------------ ----------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales....................................... $ 27,328 27,328 27,328
Cost of sales............................... 15,651 15,651 15,651
------------ ------------ ------------
Gross profit.............................. 11,677 11,677 11,677
Selling, general and administrative......... 9,188 (250)(c) 9,219 (250)(c) 9,252
281(d) 314(d)
------------ ----------- ------------ ----------- ------------
Earnings (loss) from operations........... 2,489 (31) 2,458 (64) 2,425
Investment income--net...................... 147 147 147
Interest expense............................ (290) (290) (204)(f) (494)
Other income (expense)...................... (6) (6) (6)
------------ ----------- ------------ ----------- ------------
Earnings (loss) before income taxes....... 2,340 (31) 2,309 (268) 2,072
Income taxes................................ 979 85(c) 1,064 85(c) 995
(69)(f)
------------ ----------- ------------ ----------- ------------
Earnings (loss) before minority
interests............................... 1,361 (116) 1,245 (284) 1,077
Minority interests.......................... 362 (362)(e) -- (380)(e) --
------------ ----------- ------------ ----------- ------------
Net earnings.............................. $ 999 246 1,245 78 1,077
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Basic earnings per share.................... $ 0.10 0.10 0.10
Diluted earnings per share.................. 0.10 0.10 0.10
Weighted average common shares
outstanding............................... 9,733,655 2,599,250 12,332,905 1,299,625 11,033,280
Weighted average common shares and common
share equivalents outstanding............. 9,733,655 2,734,424 12,468,079 1,434,799 11,168,454
</TABLE>
76
<PAGE>
LAB HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HOLDINGS
CONSOLIDATED ASSUMES ALL STOCK ASSUMES STOCK AND
HISTORICAL ELECTIONS MAXIMUM CASH ELECTIONS
(AS ------------------------- -------------------------
RESTATED) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
------------ ----------- ------------ ----------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales....................................... $ 102,227 102,227 102,227
Cost of sales............................... 56,720 56,720 56,720
------------ ------------ ------------
Gross profit.............................. 45,507 45,507 45,507
Selling, general and administrative......... 34,101 (1,000)(c) 34,218 (1,000)(c) 34,351
1,117(d) 1,250(d)
------------ ----------- ------------ ----------- ------------
Earnings (loss) from operations........... 11,406 (117) 11,289 (250) 11,156
Investment income--net...................... 861 861 861
Interest expense............................ (70) (70) (816)(f) (886)
Other income (expense)...................... (42) (42) (42)
------------ ----------- ------------ ----------- ------------
Earnings (loss) before income taxes....... 12,155 (117) 12,038 (1,066) 11,089
Income taxes................................ 5,620 340(c) 5,960 340(c) 5,683
(277)(f)
------------ ----------- ------------ ----------- ------------
Earnings (loss) before minority
interests............................... 6,535 (457) 6,078 (1,129) 5,406
Minority interests.......................... 1,658 (1,658)(e) -- (1,658)(e) --
------------ ----------- ------------ ----------- ------------
Net earnings.............................. $ 4,877 1,201 6,078 529 5,406
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Basic earnings per share.................... $ 0.50 0.49 0.49
Diluted earnings per share.................. 0.49 0.49 0.48
Weighted average common shares
outstanding............................... 9,733,655 2,599,250 12,332,905 1,299,625 11,033,280
Weighted average common shares and common
share equivalents outstanding............. 9,733,655 2,734,424 12,468,079 1,434,799 11,168,454
</TABLE>
77
<PAGE>
LAB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(a) Reflects the merger transaction. The excess of acquisition cost over the
estimated fair value of net assets acquired is computed as follows:
<TABLE>
<CAPTION>
ALL STOCK STOCK AND MAXIMUM CASH
ELECTIONS ELECTIONS
----------------- -----------------------
(IN THOUSANDS)
<S> <C> <C>
Purchase price:
Common stock....................................................... $ 27,838 13,919
Cash............................................................... -- 16,570
Transaction costs.................................................. 1,750 1,750
Fair value of stock options and warrants........................... 3,000 3,000
------- ------
32,588 35,239
Estimated fair value of net assets acquired.......................... 10,144 10,144
------- ------
Excess of acquisition cost over the estimated fair value of net
assets acquired (goodwill)......................................... $ 22,444 25,095
------- ------
------- ------
</TABLE>
The common stock portion of the purchase price was computed to be $10.71
using the average closing price for Holdings common stock for the fifteen days
prior to and the fifteen days after the announcement of the proposed merger. The
common stock purchase price was calculated by multiplying $10.71 times the
number of shares to be purchased: 2,599,250 shares for all stock elections and
1,299,625 shares for stock and maximum cash elections.
The stock and maximum cash elections scenario assumes cash on hand of $3
million plus a note payable of $13.6 million are used to pay the maximum of
$16.6 million for one-half of the minority stockholders' shares.
For purposes of the purchase price allocations there are no significant
differences between the book value and the fair value of net assets acquired
due, in part, to the recently completed construction of the new LabONE facility
and related acquisition of equipment.
The fair value of the stock options is estimated based on a Black Scholes
model. No value has been assigned to the warrants for purchase price allocation
purposes because such warrants are performance based.
The adjustments to additional paid in capital are computed as follows:
<TABLE>
<CAPTION>
ALL STOCK STOCK AND MAXIMUM CASH
ELECTIONS ELECTIONS
----------------- -----------------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill......................................... $ 22,444 25,095
Minority interests............................... 10,141 10,141
Accumulated other comprehensive income........... 163 163
Note payable..................................... -- (13,600)
Cash............................................. (1,750) (4,750)
------- -------
$ 30,998 17,049
------- -------
------- -------
</TABLE>
The adjustment to accumulated other comprehensive income represents the
elimination of the minority interest share of this component of stockholders'
equity.
78
<PAGE>
LAB HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Reflects the issuance of shares of the combined company to LabONE
minority stockholders. (All stock elections - 2,599,250 shares; stock and
maximum cash elections - 1,299,625 shares)
(c) Reflects the elimination of Holdings redundant overhead expense and
corresponding tax benefit.
The components of the annual redundant overhead expenses are as follows:
<TABLE>
<CAPTION>
<S> <C>
Insurance premiums.............................................................. $ 200,000
Salaries and benefits........................................................... 406,000
Legal and accounting fees....................................................... 125,000
Directors' fees and expenses.................................................... 59,000
Reporting to stockholders....................................................... 95,000
Rent and miscellaneous.......................................................... 115,000
------------
Total......................................................................... $ 1,000,000
------------
------------
</TABLE>
(d) Reflects amortization of the goodwill created by the merger on a
straight-line basis over 20 years.
(e) Reflects the elimination of the minority interests share of earnings.
(f) Reflects interest expense resulting from the issuance of debt to finance
the cash portion of the purchase price and corresponding tax benefit. Interest
on the new debt is assumed to be 6%.
(g) As a result of the merger, Holdings' officers will resign and, as
provided in their employment agreements, Holdings will incur expense of
approximately $500,000 in severance benefits. This adjustment is not reflected
in the pro forma statement of earnings because it will not have a continuing
impact. See "Certain Relationships and Related Transactions" at page 127.
(h) In connection with the merger, the number of authorized shares of
Holdings will increase from 24,000,000 shares of common stock to 40,000,000
shares. The par value of all authorized stock will also be changed from $1.00
per share to $0.01 per share.
79
<PAGE>
INFORMATION REGARDING LABONE
BUSINESS
GENERAL LabONE, a Delaware corporation, provides laboratory and
investigative services for the insurance industry, clinical testing services for
the healthcare industry and substance abuse testing services for employers.
LabONE, Inc., together with its wholly-owned subsidiaries Lab ONE Canada Inc.
and Systematic Business Services, Inc., hereinafter collectively referred to as
LabONE, is the largest provider of insurance laboratory testing services in the
United States and Canada. (See Note 9 of Notes to Consolidated Financial
Statements for financial information regarding foreign operations.)
LabONE provides risk-appraisal laboratory services to the insurance
industry. The tests performed by LabONEare specifically 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. LabONE also provides
testing services on specimens of individuals applying for individual and group
medical and disability policies.
Effective October 30, 1998, LabONE acquired Systematic Business Services,
Inc., a Missouri corporation. Systematic Business Services provides telephone
inspections, motor vehicle reports, attending physician statements, and claims
investigation services to life and health insurers nationwide.
LabONE's clinical testing services are provided to the healthcare industry
as an aid in the diagnosis and treatment of patients. LabONE operates only one
highly automated and centralized laboratory, which LabONE believes has
significant economic advantages over other conventional laboratory competitors.
LabONE markets its clinical testing services to the payers of
healthcare-insurance companies and self-insured groups. LabONE does this through
exclusive arrangements with managed care organizations and through
LabCard-Registered Trademark-, a Laboratory Benefits Management program.
LabONE is certified by the Substance Abuse and Mental Health Services
Administration to perform substance abuse testing services for federally
regulated employers and is currently marketing these services throughout the
country to both regulated and nonregulated employers. LabONE's rapid turnaround
times and multiple testing options help clients reduce downtime for affected
employees and meet mandated drug screening guidelines.
INSURANCE SERVICES
Insurance companies require an objective means of evaluating the insurance
risk posed by policy applicants in order to establish the appropriate level of
premium payments, or to determine whether to issue a policy. Because decisions
of this type are based on statistical probabilities of mortality and morbidity,
insurance companies generally require quantitative data reflecting the
applicant's general health. Standardized laboratory testing, tailored to the
needs of the insurance industry and reported in a uniform format, provides
insurance companies with an efficient means of evaluating the mortality and
morbidity risks posed by policy applicants. The use of standardized blood, urine
and oral fluid testing has proven a cost-effective alternative to individualized
physician examinations, which utilize varying testing procedures and reports.
LabONE's insurance testing services consist of certain specimen profiles
that provide insurance companies with specific information that may indicate
liver or kidney disorders, diabetes, the risk of cardiovascular disease,
bacterial or viral infections and other health risks. LabONE also offers tests
to detect the presence of antibodies to human immunodeficiency virus (HIV).
Insurance companies generally offer a premium discount for nonsmokers and often
rely on testing to determine whether an applicant is a user of tobacco products.
Standardized laboratory testing can be used to verify responses on a policy
application to such questions as whether the applicant is a user of tobacco
products, certain controlled substances or certain prescription drugs. Cocaine
use has been associated with increased risk of accidental death and
cardiovascular disorders, and as a result of increasing cocaine abuse in the
80
<PAGE>
United States and Canada, insurance companies are testing a greater number of
policy applicants to detect its presence. Therapeutic drug testing also detects
the presence of certain prescription drugs that are being used by an applicant
to treat a life-threatening medical condition that may not be revealed by a
physical examination. Insurance specimens are normally collected from individual
insurance applicants by independent paramedical personnel using LabONE's
custom-designed collection kits and containers. These kits and containers are
delivered to LabONE's laboratory via overnight delivery services or mail, coded
for identification and processed according to each client's specifications.
Results are generally transmitted to the insurance company's underwriting
department that same evening. LabONE provides a one-day service guarantee on
oral fluid and urine HIV specimen results.
In association with Lincoln National Risk Management, LabONE provides
electronic data collection services and software to enable insurance companies
to receive data directly into their underwriting systems. LabONE offers LabONE
NET, a combination network/software product that provides a connection for
insurance underwriters for ordering and delivery of risk assessment information
such as laboratory results, telephone inspections, motor vehicle reports and
other applicant information. LabONE handles paramedical examination paperwork
and assists with administration of data for insurance underwriting.
Additionally, LabONE can obtain attending physician statements, telephone
inspections, motor vehicle reports, and perform claims investigation through its
subsidiary, Systematic Business Services.
CLINICAL SERVICES
Clinical laboratory tests are generally requested by physicians and other
healthcare providers to diagnose and monitor diseases and other medical
conditions through the detection of substances in blood and other specimens.
Laboratory testing is generally categorized as either clinical testing, which is
performed on bodily fluids including blood and urine, or anatomical pathology
testing, which is performed on tissue. Clinical and anatomical pathology tests
are frequently performed as part of regular physical examinations and hospital
admissions in connection with the diagnosis and treatment of illnesses. The most
frequently requested tests include blood chemistry analyses, blood cholesterol
level tests, urinalyses, blood cell counts, PAP smears and AIDS-related tests.
Clinical specimens are collected at the physician's office or other
specified sites. LabONE's couriers pick up the specimens and deliver them to
local airports for express transport to the Kansas laboratory. Specimens are
coded for identification and processed. LabONE's testing menu includes the
majority of tests requested by its clients. Tests not performed in-house are
sent to reference laboratories for testing, and results are transmitted into
LabONE's computer system along with all other completed results.
LabONE has established the LabCard-Registered Trademark- Program as a
vehicle for delivering outpatient laboratory services. The LabCard Program is
marketed to healthcare payers (self-insured groups and insurance companies),
allowing them to avoid price mark-ups and cost shifting. The LabCard Program
provides laboratory testing at reduced rates as compared to traditional
laboratories. It uses a unique benefit design that shares the cost savings with
the patient, creating an incentive for the patient to help direct laboratory
work to LabONE. Under the Program, the patient incurs no out-of-pocket expense
when the LabCard is used, and the insurance company or self-insured group
receives substantial savings on its laboratory charges.
LabONE has several exclusive arrangements with managed care organizations.
The two most significant are Principal Healthcare of Kansas City and Blue Cross
Blue Shield of Tennessee. With these arrangements, LabONE contracts with the
managed care organizations, and they direct all testing for their members
through LabONE.
81
<PAGE>
SUBSTANCE ABUSE TESTING SERVICES:
LabONE markets substance abuse testing to large companies, third party
administrators and occupational health providers. Certification by the Substance
Abuse and Mental Health Services Administration enables LabONE to offer
substance abuse testing services to federally regulated industries.
Specimens for substance abuse testing are typically collected by independent
agencies who use LabONE's forms and collection supplies. Specimens are sealed
with bar-coded, tamper-evident seals and shipped overnight to LabONE. Automated
systems monitor the specimens throughout the screening and confirmation process.
Negative results are available immediately after testing is completed. Initial
positive specimens are verified by the gas chromatography/mass spectrometry
method, and results are generally available within 24 hours. Results can be
transmitted electronically to the client's secured computer, printer or fax
machine, or the client can use LabONE's LabLink Dial-In software to retrieve,
store, search and print its drug testing results.
SEGMENT INFORMATION
The following table summarizes LabONE's revenues from services provided to
the insurance, clinical and substance abuse testing markets (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1999 1998 1998 1997 1996
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Insurance.............................................. $ 17,584 $ 16,822 $ 69,149 $ 61,988 $ 50,801
Clinical............................................... 5,958 3,654 18,600 7,512 3,942
Substance Abuse........................................ 3,786 2,857 14,478 9,416 4,689
--------- --------- ---------- --------- ---------
$ 27,328 $ 23,333 $ 102,227 $ 78,926 $ 59,432
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
- ------------------------
(See Note 10 of Notes to Consolidated Financial Statements for operating income
and identifiable assets by segment on page F-20)
OPERATIONS
LabONE's operations are designed to facilitate the testing of a large number
of specimens and to report the results to clients, generally within 24 hours of
receipt of the specimens. LabONE has internally developed, custom-designed
laboratory and business processing systems. It is a centralized network system
that provides an automated link between LabONE's testing equipment, data
processing equipment and clients' computer systems. This system offers LabONE's
clients the ability to customize their testing and reflex requirements by
several parameters to best meet their needs.
As a result of the number of tests it has performed over the past several
years, LabONE has compiled and maintains a large statistical data base of test
results. These summary statistics are useful to the actuarial and underwriting
departments of an insurance client in comparing that client's test results to
the results obtained by LabONE's entire client base. Company-specific and
industry-wide reports are frequently distributed to clients on subjects such as
coronary risk analysis, cholesterol and drugs of abuse. Additionally, LabONE's
statistical engineering department is capable of creating customized reports to
aid managed care entities or employers in disease management and utilization
tracking to help manage healthcare costs.
LabONE considers the confidentiality of its test results to be of primary
importance and has established procedures to ensure that results of tests remain
confidential as they are communicated to the client that requested the tests.
82
<PAGE>
Substantially all of the reagents and materials used by LabONE in conducting
its testing are commercially purchased and are readily available from multiple
sources.
REGULATORY AFFAIRS
The objective of the regulatory affairs department is to ensure that
accurate and reliable test results are released to clients. This is accomplished
by incorporating both internal and external quality assurance programs in each
area of the laboratory. In addition, quality assurance specialists share the
responsibility with all LabONE employees of an ongoing commitment to quality and
safety in all laboratory operations. Internal quality and education programs are
designed to identify opportunities for improvement in laboratory services and to
meet all required safety training and education issues. These programs help
ensure the reliability and confidentiality of test results.
Procedure manuals in all areas of the laboratory help maintain uniformity
and accuracy and meet regulatory guidelines. Tests on control samples with known
results are performed frequently to maintain and verify accuracy in the testing
process. Complete documentation provides record keeping for employee reference
and meets regulatory requirements. All employees are thoroughly trained to meet
standards mandated by the Occupational Safety and Health Administration in order
to maintain a safe work environment. Superblind Testing Service-TM- controls are
used to challenge every aspect of service at LabONE from specimen arrival
through final billing. Approximately 500 sample kits are prepared and submitted
anonymously each month. These samples have at least 15 different indicators each
representing over 7,500 challenges to the testing, handling and reporting
procedures. Specimens requiring special handling are evaluated and verified by
control analysis personnel. A computer edit program is used to review and verify
clinically abnormal results and all positive HIV antibody and drugs-of-abuse
records. As an external quality assurance program, LabONE participates in a
number of proficiency programs established by the College of American
Pathologists, the American Association of Bioanalysts and the Centers for
Disease Control. LabONE is accredited by the College of American Pathologists.
Even though only a small portion of LabONE's business encompasses
fee-for-service Medicare/ Medicaid, LabONE has appointed a Chief Compliance
Officer and nine Co-Compliance Officers. Additionally, LabONE has developed the
LabONE Compliance Plan, based on the Model Compliance Plan recommended by the
Office of Inspector General of the Department of Health and Human Services to
ensure compliance with anti-fraud and abuse laws and rules governing
federally-financed reimbursement for lab testing services.
LabONE is licensed under the Clinical Laboratory Improvement Amendments of
1988. LabONE has additional licenses for substance abuse testing from the state
of Kansas and all other states where such licenses are required. LabONE is
certified by the Substance Abuse and Mental Health Services Administration to
perform testing to detect drugs of abuse in federal employees and in workers
governed by federal regulations.
SALES AND MARKETING
LabONE's client base consists primarily of insurance companies in the United
States and Canada. LabONE believes that its ability to provide prompt and
accurate results on a cost-effective basis, and its responsiveness to customer
needs have been important factors in servicing existing business.
All of LabONE's sales representatives for the insurance market have
significant business experience in the insurance industry or clinical
laboratory-related fields. These representatives call on major clients several
times each year, usually meeting with a medical director or vice president of
underwriting. An important part of LabONE's marketing effort is directed toward
providing its existing clients and prospects with information pertaining to the
actuarial benefits of, and trends in, laboratory testing.
83
<PAGE>
LabONE's sales representatives and its senior management also attend and sponsor
insurance industry underwriters' and medical directors' meetings.
The sales representatives for the clinical industry are experienced in the
healthcare benefit market or clinical laboratory-related fields, and currently
work in the geographic areas which they represent. Marketing efforts are
directed at insurance carriers, self-insured employers and trusts, third party
administrators and other organizations nationwide.
Substance abuse marketing efforts are primarily directed at Fortune 1000
companies, occupational health clinics and third party administrators. LabONE's
strategy is to offer quality service at competitive prices. The sales force
focuses on LabONE's ability to offer multiple reporting methods, next-flight-out
options, dedicated client service representatives and rapid reporting of
results.
COMPETITION
LabONE believes that the insurance laboratory testing market in the US and
Canada is approximately a $130 million industry. LabONE currently services more
than half the market. LabONE has maintained its market leadership through the
development of long term client relationships, its reputation for providing
quality products and services at competitive prices, and its battery of tests
which are tailored specifically to an insurance company's needs. LabONE has two
other main laboratory competitors, Osborn Laboratories, Inc. and Clinical
Reference Laboratory.
The insurance testing industry continues to be highly competitive. The
primary focus of the competition has been on pricing. This continued competition
has resulted in a decrease in LabONE's average price per test. It is anticipated
that prices may continue to decline in 1999. LabONE continues to develop
innovative data management services that differentiate its products from
competitors. These services enable LabONE's clients to expedite the underwriting
process, saving time and reducing underwriting costs.
The outpatient clinical laboratory testing market is a $20 billion industry
which is highly fragmented and very competitive. LabONE faces competition from
numerous independent clinical laboratories and hospital- or physician-owned
laboratories. Many of LabONE's competitors are significantly larger and have
substantially greater financial resources than LabONE. LabONE is working to
establish a solid client base through the use of LabCard and the establishment
of exclusive arrangements to provide laboratory services with large groups and
managed care entities.
LabONE's business plan is to be the low-cost provider of high-quality
laboratory services to self-insured employers and insurance companies in the
healthcare market. LabONE feels that its superior quality and centralized,
low-cost operating structure enable it to compete effectively in this market.
LabONE competes in the substance abuse testing market nationwide. There are
presently 71 laboratories that are certified by the Substance Abuse and Mental
Health Services Administration. LabONE's major competitors are the three major
clinical chains, Laboratory Corporation of America, Quest Diagnostics and
SmithKline Beecham Laboratories, who collectively constitute approximately
two-thirds of the substance abuse testing market. LabONE's focus is fast
turnaround with high-quality, low-cost service.
84
<PAGE>
FOREIGN MARKETS
Lab One Canada Inc. markets insurance testing services to Canadian clients,
with laboratory testing performed in the United States. The following table
summarizes the revenue, profit and assets applicable to LabONE's domestic
operations and its subsidiary, Lab ONE Canada Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997* 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Sales:
United States.................................................. $ 95.7 $ 72.4 $ 53.1
Canada......................................................... 6.5 6.6 6.4
Operating Profit:
United States.................................................. 13.6 1.5 2.4
Canada......................................................... 0.3 0.6 0.7
Identifiable Assets:
United States.................................................. 82.9 56.5 62.1
Canada......................................................... 2.8 3.2 2.7
</TABLE>
- ------------------------
* 1997 operating profit includes a one-time write-off of $6.6 million. (See
Note 1 of Notes to Consolidated Financial Statements.)
TECHNOLOGY DEVELOPMENT
The technology development department evaluates new commercially available
tests and technologies, or develops new assays, and compares them to competing
products in order to select the most accurate laboratory procedures.
Additionally, LabONE's scientists present findings to clients to aid them in
choosing the best tests available to meet their requirements. Total technology
development expenditures are not considered significant to LabONE as a whole.
EMPLOYEES
As of March 1, 1999, LabONE had 895 employees, including 23 part-time
employees, representing an increase of 230 employees from the same time in 1998.
The addition of Systematic Business Services accounts for approximately 65% of
the increase. None of LabONE's employees are represented by a labor union.
LabONE believes its relations with employees are good.
PROPERTIES
On December 26, 1998, LabONE started moving into its new 268,000 square
foot, custom-designed facility located in Lenexa, Kansas, approximately 15 miles
from Kansas City, Missouri. This facility consolidates LabONE's laboratory,
administrative and warehouse functions into one building. The facility is owned
by LabONE under a capital lease and financed through $20 million in industrial
revenue bonds issued by the City of Lenexa, Kansas in September, 1998. The
testing laboratory has certain enhancements that improve the efficiency of
operations. Conveyor systems transport inbound test kits from the receiving area
to the laboratory and remove waste after the opening process. All automated
testing equipment requiring purified water is linked directly to a centralized
water-purification system. Over 50,000 square feet of raised flooring allows
laboratory instruments and PCs to be arranged or moved quickly and easily. The
security system includes proximity card readers to control access and a ceiling
detector system to prevent foreign substances from being thrown into the
laboratory. In addition, three diesel generators and a back-up battery system
are on-line in the event of electrical power shortage. These back-up power
sources allow specimen testing and data processing to continue until full power
is restored, thus assuring LabONE's clients of continuous laboratory operation.
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Systematic Business Services utilizes two facilities in Independence,
Missouri under five year leases expiring in 2003. LabONE leases 10 locations in
Northern California and 9 in the Midwest which serve as LabONE Service Centers.
These facilities provide specimen collection services for patients and are
typically located in medical office buildings.
Lab ONE Canada Inc. leases office space in Ontario, Canada, which is used
for sales and client services. This lease expires in 2000. Additionally, Lab ONE
Canada, Inc. leases space in Quebec, Canada for assembly and distribution of
specimen collection kits for Canadian insurance testing. This lease expires in
2000.
LabONE also owns two buildings which are currently under contract to be sold
in the first and second quarter of 1999. Prior to moving to the new facility,
these buildings were used for laboratory operations, administrative offices and
data processing. LabONE's lease on its former warehouse facility expired in
February 1999.
LITIGATION
In the normal course of business, LabONE had certain lawsuits pending at
December 31, 1998.
The Comptroller of the State of Texas has conducted an audit of LabONE for
sales tax compliance and contends that LabONE's insurance laboratory testing
services are taxable under the Texas tax code and has issued an audit
assessment, including interest and penalties, of approximately $1.9 million.
LabONE has appealed this assessment arguing that its services do not fit within
the definition of insurance services under the Texas code. The assessment is
under review by the Texas State Hearing Attorney.
In the opinion of management, after consultation with legal counsel and
based upon currently available information, none of these lawsuits are expected
to have a material impact on the business, financial condition or results of
operations of LabONE. No provisions for loss related to litigation are included
in the accompanying consolidated financial statements.
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LABONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On July 1, 1999, LabONE announced a restatement of earnings for the years
ended December 31, 1997 and 1998, and for the quarter ended March 31, 1999. As
requested by the staff of the Securities and Exchange Commission, LabONE has
changed the amortization schedule from fifteen years to five years on a customer
list acquired during the first quarter 1997. LabONE's original amortization
period was based on historical performance, however the SEC has requested the
amortization period be reduced to five years. The amortization expense of this
asset was originally reported at $252,000 and $275,000 in 1997 and 1998,
respectively, and has been restated to $757,000 and $826,000, respectively. The
amortization expense was originally reported at $69,000 in the first quarter
1999, and has been restated to $206,000. This restatement is not the result of
any changes in customer relationships and has no effect on any present or future
cash flows.
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
Net sales increased 17% in the first quarter 1999 to $27.3 million from
$23.3 million in the first quarter 1998. The increase of $4.0 million is due to
increases in clinical laboratory revenue of $2.3 million, substance abuse
testing (SAT) revenue of $0.9 million and insurance services revenue of $0.8
million.
Clinical diagnostic testing revenue increased from $3.7 million to $6.0
million for the quarter due to increased testing volumes partially offset by a
6% decrease in average revenue per patient. SAT revenue increased from $2.9
million in 1998 to $3.8 million in 1999 due to a 35% increase in testing volumes
as compared to last year.
The insurance services division revenue increased $0.8 million due to the
addition of Systematic Business Services revenue and growth in non laboratory
services revenue, partially offset by lower laboratory and kit revenue.
Systematic Business Services was acquired in October 1998 and contributed $1.9
million, and non laboratory services revenue increased $0.3 million over last
year. Insurance laboratory testing revenue decreased $0.8 million as a result of
reductions in price and volumes due to competitive pressures. The total number
of insurance applicants tested in the first quarter 1999 decreased by 4% as
compared to the same quarter last year due to competitive pressures. Average
revenue per applicant decreased 2.5%, primarily due to price reductions and a
shift in product mix to lower priced products. Kit and container revenue
declined due to a decrease in the number of kits sold.
Cost of sales increased $2.7 million or 21% in the first quarter 1999 as
compared to the prior year, due to increases in payroll, outside services such
as paramed collections and state motor vehicle report fees, and postage expense.
A significant portion of these increases are related to the addition of
Systematic Business Services. Laboratory overtime and regular labor expense
increased related to the move to the new facility. These increases were
partially offset by a decrease in insurance kit expenses due to lower sales
volumes. Clinical cost of sales expenses were $3.9 million as compared to $3.4
million in the first quarter 1998. SAT cost of sales expenses were $2.8 million
as compared to $2.1 million in the first quarter 1998. Insurance cost of sales
expenses increased from $7.5 million to $9.0 million primarily due to the
addition of Systematic Business Services.
As a result of the above factors, gross profit for the quarter increased
$1.3 million or 13% from $10.4 million in 1998 to $11.7 million in 1999.
Clinical gross profit increased $1.7 million on an increase in revenue of $2.3
million. SAT gross profit increased $0.2 million on an increase in revenue of
$0.9 million. Insurance gross profit decreased $0.7 million or 7%.
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Selling, general and administrative expenses increased $1.1 million or 15%
in the first quarter 1999 as compared to the prior year due primarily to the
inclusion of Systematic Business Services and increases in bad debt,
depreciation and moving expenses. Bad debt expense increased primarily due to
the revenue growth in clinical and SAT segments which have inherently higher bad
debt experience than the insurance testing segment. Insurance expenditures
increased to $4.6 million for the quarter as compared to $4.2 million in 1998
primarily due to the addition of Systematic Business Services. Total clinical
expenditures increased $0.8 million to $3.0 million in 1999 primarily due to an
increase in corporate overhead allocations to $0.9 million in 1999 from $0.6
million in 1998 and an increase in bad debt expense. SAT expenditures were $1.1
million as compared to $1.0 million last year. Closure on the sale of the former
laboratory facility resulted in a gain of $0.3 million. Depreciation expense on
the new facility is expected to be less than $0.3 million per quarter.
Earnings from operations increased from $2.9 million in the first quarter
1998 to $3.1 million in 1999. The clinical segment improved $1.0 million to an
operating loss of $1.0 million. The SAT segment improved $0.1 million from an
operating loss of $0.2 million in the first quarter 1998 to a loss of $0.1
million in 1999. The insurance segment declined $1.1 million to an operating
profit of $4.0 million.
Non operating expense increased $0.4 million primarily due to interest
expense on the industrial revenue bonds and a reduction in capital available for
investment. The effective income tax rate declined from 39% in 1998 to 36% in
1999 due to state income tax incentives.
The combined effect of the above factors resulted in net earnings of $1.9
million or $0.14 per share in the first quarter 1999 as compared to $1.9 million
or $0.14 per share in the same period last year.
1998 COMPARED TO 1997
Revenue for the year ended December 31, 1998 was $102.2 million as compared
to $78.9 million in 1997. The increase of $23.3 million, or 30%, was due to
increases in clinical laboratory revenue of $11.1 million, insurance services
revenue of $7.2 million and SAT revenue of $5.1 million. Clinical laboratory
revenue increased from $7.5 million during 1997 to $18.6 million in 1998
primarily due to increased testing volumes. The insurance services segment
revenue increased from $62 million in 1997 to $69.1 million due to an increase
in the total number of insurance applicants tested and an increase in non
laboratory services, including Systematic Business Services, partially offset by
a 3% decrease in the average revenue per applicant. SAT revenue increased from
$9.4 million in 1997 to $14.5 million in 1998 primarily due to a 48% increase in
testing volumes.
Cost of sales increased $14.7 million, or 35%, for the year as compared to
the prior year. This growth is primarily due to increases in inbound freight,
laboratory and kit supplies and payroll expenses due to the larger specimen
volume for all three business segments. Insurance segment cost of sales expenses
were $32.3 million as compared to $26.7 million during 1997. Clinical cost of
sales expenses were $14.5 million as compared to $8.3 million during 1997. SAT
cost of sales expenses were $9.9 million as compared to $7 million during 1997.
These increases are due to increased testing volumes.
As a result of the above factors, gross profit increased $8.6 million, or
23%, from $36.9 million in 1997 to $45.5 million in 1998. Insurance gross profit
increased $1.5 million, or 4%, to $36.9 million in 1998. Clinical gross profit
improved $4.9 million from a loss of $0.8 million in 1997 to a gain of $4.1
million in 1998. SAT gross profit increased $2.2 million to $4.5 million in
1998.
Selling, general and administrative expenses increased $3.4 million, or 12%,
in 1998 as compared to 1997 primarily due to increases in payroll expenses and
bad debt accruals. Bad debt expense increased primarily due to the revenue
growth in clinical and SAT segments which have inherently higher bad debt
experience than the insurance testing segment. Clinical overhead expenditures
were
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$10.3 million as compared to $7.5 million in 1997. SAT overhead increased from
$3.3 million in 1997 to $4.3 million in 1998. These increases are due to the
growth in each segment. The allocation of corporate overhead to the clinical and
SAT segments increased to $5.3 million for the year, as compared to $3.3 million
in 1997, due to the increased share of total revenue for those segments.
Insurance overhead expenditures decreased to $16.8 million as compared to $17.3
million in 1997.
In 1997, LabONE recorded a one-time write-down of $6.6 million on the value
of the laboratory and administrative buildings in anticipation of their sale.
(See Note 1 of Notes to Consolidated Financial Statements.)
Operating income increased from $2.1 million in 1997 to $13.9 million in
1998. The insurance services segment operating income increased $2.0 million to
$20.1 million in 1998. The clinical segment had an operating loss of $6.2
million for 1998 as compared to an operating loss of $8.3 million in 1997. The
SAT segment improved from an operating loss of $0.9 million in 1997 to a gain of
$0.2 million in 1998.
Other income decreased $0.4 million in 1998 as compared to 1997, primarily
due to lower investment income due to less funds being available to invest.
Average income tax expense was 39.3% of pretax income in 1998 as compared to
41.9% in 1997. The reduction is primarily due to an increase in LabONE's income
from U.S. sources taxed at U.S. rates as compared to income taxed at higher
foreign rates.
The combined effect of the above factors resulted in net earnings of $8.9
million, or $0.67 per share, in 1998 as compared to $1.9 million, or $0.14 per
share, in 1997. Excluding the impact of the write-down in 1997, last year's net
earnings would have been $5.8 million, or $0.44 per share.
1997 COMPARED TO 1996
Revenue for the year ended December 31, 1997 was $78.9 million as compared
to $59.4 million in 1996. The increase of $19.5 million, or 33%, is due to
increases in insurance segment revenue of $11.2 million, SAT revenue of $4.7
million and clinical laboratory revenue of $3.6 million. The insurance segment
increased 22% due to an increase in the total number of insurance applicants
tested and an increase in kit revenue, partially offset by a 1% decrease in the
average revenue per applicant. The increase in insurance segment revenue is
primarily due to an increase in market share and changes to testing thresholds.
Effective January 30, 1997, LabONE acquired certain assets, including customer
lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company
of America. Concurrently, Prudential's Individual Insurance Group agreed to use
LabONE as its exclusive provider of risk assessment testing services for a three
year period. At the time of the purchase, GIB served approximately 5% of the
insurance laboratory testing market. Revenue in 1997 from former GIB customers,
including Prudential, was approximately $3.8 million. SAT revenue increased from
$4.7 million in 1996 to $9.4 million in 1997 due to a doubling in testing
volumes. Clinical laboratory revenue increased from $3.9 million in 1996 to $7.5
million in 1997 due to increased testing volumes and higher revenue per patient.
Cost of sales increased $9.3 million, or 28%, for the year as compared to
the prior year. This increase is due primarily to increases in payroll,
laboratory supplies and kit expenses due to the larger specimen volume for all
three business segments. Direct and allocated clinical cost of sales expenses
were $8.3 million as compared to $6.5 million during 1996. Direct and allocated
SAT cost of sales expenses were $7 million as compared to $3.7 million during
1996. These increases are due to increased testing volumes.
As a result of the above factors, gross profit increased $10.2 million, or
38%, from $26.7 million in 1996 to $36.9 million in 1997. Insurance gross profit
increased $7 million, or 25% , in 1997 as
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compared to 1996. Clinical gross profit improved $1.8 million from a loss of
$2.6 million in 1996 to a loss of $0.8 million in 1997. SAT gross profit
increased from $1 million in 1996 to $2.4 million in 1997.
Selling, general and administrative expenses increased $4.6 million, or 19%,
in 1997 as compared to 1996 due primarily to increases in payroll expenses,
travel and amortization expenses. Clinical overhead expenditures were $7.5
million as compared to $5.4 million in 1996. SAT overhead increased from $2.2
million in 1996 to $3.3 million in 1997. These increases are due to the growth
in each segment.
In 1997, LabONE recorded a one-time write-down of $6.6 million on the value
of the laboratory and administrative buildings in anticipation of their sale.
(See Note 1 of Notes to Consolidated Financial Statements.)
Operating income decreased from $3.1 million in 1996 to $2.1 million in
1997, primarily due to the $6.6 million write down, partially offset by an
increase in the insurance segment operating income of $5.4 million. The clinical
segment had an operating loss of $8.3 million for 1997 as compared to a loss of
$8 million in 1996, due to a $0.6 million increase in corporate overhead
allocation over 1996. The SAT segment improved from an operating loss of $1.2
million in 1996 to a loss of $0.9 million in 1997, including a $0.9 million
increase in corporate overhead allocation over last year.
Other income decreased $0.7 million in 1997 as compared to 1996, due to
lower investment income. Average income tax expense was 41.9% of pretax income
in 1997 as compared to 41.2% in 1996.
The combined effect of the above factors resulted in net earnings of $1.9
million, or $0.14 per share, in 1997 as compared to $2.9 million, or $0.22 per
share in 1996. Excluding the impact of the write-down, net income would have
been $5.8 million, or $0.44 per share, in 1997.
TRENDS
The following is management's analysis of certain existing trends that have
been identified as potentially affecting the future financial results of LabONE.
Due to the potential for a rapid rate of change in any number of factors
associated with the insurance and healthcare laboratory testing industries, it
is difficult to quantify with any degree of certainty LabONE's future volumes,
sales or net earnings.
The insurance laboratory testing industry continues to be highly
competitive. The primary focus of the competition has been on pricing. LabONE
continues to maintain its market leadership by providing quality products and
services at competitive prices. Management expects that prices may continue to
decline during 1999 due to competitive pressures. This trend may have a material
impact on earnings from operations.
The total number of insurance applicants tested by LabONE increased 11% in
1998 from the prior year. Approximately 80% of the increase represented oral
fluid HIV tested applicants. The number of oral fluid tested applicants are
expected to further increase in 1999.
Effective October 30, 1998, LabONE acquired Systematic Business Services,
which is operated as a wholly owned subsidiary of the insurance services
division of LabONE. Systematic Business Services is a provider of information
services to life and health insurers nationwide, and has annual revenues of
approximately $7 million. With 148 employees in the Kansas City area, Systematic
Business Services provides telephone inspections, motor vehicle reports,
attending physician statements, and claims investigation services to life
insurance companies. This addition allows LabONE to expand the services it
offers to its insurance industry clients.
In the clinical division, BlueCross BlueShield of Tennessee selected LabONE
to provide routine outpatient laboratory testing services for BlueCare members
throughout Tennessee effective February 1,
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1998. BlueCare is BlueCross BlueShield of Tennessee's plan for Tenncare
participants. Approximately 400,000 BlueCare members are currently covered by
the program. To date, the Laboratory Benefit Management (LBM) programs,
including BlueCare and the LabCard Program, have more than 2.3 million lives
enrolled. Revenue from Lab Benefits Management programs during the first quarter
1999 was $3.5 million or approximately 59% of total clinical revenue.
LabONE's new facility was financed through the City of Lenexa, Kansas, with
industrial revenue bonds. In conjunction with the bonds, LabONE expects to
receive income tax credits through the State of Kansas High Performance
Incentive Plan to be applied against state income taxes for up to 10 years, or
until the credit is completely used. The amount of the credit is expected to be
approximately $4 million, and will lower LabONE's average income tax rate for
the duration of the credit.
On May 14, 1999, LabONE issued to STC Technologies, Inc., a warrant to
purchase 50,000 shares of LabONE common stock at a purchase price of $0.01 per
share, exercisable beginning one year after the date of issuance of the warrant.
The warrant was issued in connection with a Distribution Agreement entered into
between LabONE and STC Technologies. As a result of the issuance of the warrant,
LabONE will record a prepaid expense of $608,000, which will be amortized over
the forty month term of the Distribution Agreement. The amount of the prepaid
expense is based on the LabONE stock price on May 14, 1999 of $12.17 per share
(less $0.01) times the 50,000 shares represented by the warrant.
Under the terms of the merger agreement, the issuance by LabONE of the
warrant to STC Technologies required the prior approval of Lab Holdings. As a
condition to its approval, Lab Holdings required LabONE to agree to repurchase
shares of LabONE common stock to prevent any increase in the total number of
shares outstanding as a result of the exercise of any outstanding option or
warrant prior to the effective time of the merger. If LabONE issues any shares
of LabONE common stock prior to the effective time of the merger upon the
exercise of outstanding options or warrants, LabONE is required to repurchase an
equal number of shares of LabONE common stock, in the open market or otherwise.
If all exercisable, in-the-money options and warrants were exercised prior to
August , 1999, the scheduled effective time of the merger, LabONE's net
repurchase obligation would be approximately $311,355, based upon the closing
price of LabONE common stock of $11.44 per share on June 16, 1999. LabONE also
agreed that if the merger agreement was terminated for any reason prior to the
consummation of the merger, LabONE would acquire 50,000 shares of LabONE common
stock, in the open market or otherwise, prior to the date on which the warrant
issued to STC Technologies becomes exercisable.
LIQUIDITY AND CAPITAL RESOURCES
LabONE's working capital position declined from $35.4 million at December
31, 1997, to $25.9 million at December 31, 1998, to $21.1 million at March 31,
1999. These decreases are primarily due to dividends paid and capital additions,
including building payments, in excess of bond proceeds and cash provided by
operations. Net cash provided by operations increased from $8.1 million in 1997
to $9 million in 1998. Accounts receivable grew from $12.6 million at December
31, 1997 to $18.7 million at December 31, 1998 to $19.7 million at March 31,
1999, due primarily to an increase in revenue growth from all three segments.
Bad debt expense and allowances increased due to the increase in total revenue
and a shift in revenue toward clinical and SAT sources.
During 1998 and the first quarter of 1999, LabONE paid quarterly dividends
of $0.18 per common share. The board of directors reviews this policy on a
periodic basis. The total amount of dividends paid during 1998 was $0.72 per
share, or $9.5 million, which was $0.5 million in excess of net cash provided by
operations. In February 1999, LabONE's board of directors declared a dividend of
$0.18 per common share. This dividend was paid on March 2, 1999, to stockholders
of record as of February 23,
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1999, and totaled approximately $2.4 million. There are no restrictions that
would limit LabONE's ability to make future dividend payments.
Additions to property, plant and equipment, net of the sale of the former
laboratory facility, were $3.9 million in the first quarter 1999, primarily
related to construction and fixtures for the new facility. Net additions in the
first quarter 1998 were $1.7 million. During 1998, LabONE invested $28.5 million
in additional property, plant, equipment and acquisitions as compared to $11.5
million in 1997 and $3.2 million in 1996. Of the amount spent in 1998,
approximately $21.6 million was for construction LabONE's new facility, and $3.0
million net cash was used in the purchase of Systematic Business Services. The
1997 amount included land purchased related to the new facility and the GIB
Laboratories acquisition. The new facility is now completely operational. Future
capital asset purchases are expected to be approximately $5 million annually.
LabONE had no short-term borrowings during 1998. Management expects to be
able to fund operations and future dividend payments, if any, from a combination
of cash flow from operations, cash reserves, building sales and short-term
borrowings. Interest on the industrial revenue bonds issued to finance the
construction of LabONE's new facility is based on a taxable seven day variable
rate which, including letter of credit and remarketing fees, is approximately
5.7% as of May 15, 1999. The bonds mature over 11 years in increments of $1.85
million per year plus interest. Total cash and investments at March 31, 1999,
were $6.9 million, as compared to $10.2 million at December 31, 1998.
On May 14, 1999, Holdings entered into a Line of Credit Loan Agreement with
Commerce Bank, N.A. of Kansas City, Missouri. The line of credit authorizes
Holdings and the combined company following the merger to make unsecured
borrowings of up to $15 million to finance day to day operations of LabONE and
to fund cash elections under the merger agreement. Borrowings will bear interest
at a variable rate equal to (a) the Commerce Bank prime rate or (b) 75 basis
points in excess of the LIBOR rate, with borrower being entitled to select the
applicable rate for each borrowing at the time of each borrowing. All borrowings
mature on October 31, 2000.
YEAR 2000
LabONE is actively addressing Year 2000 computer concerns. LabONE has
established an oversight committee which includes management from all parts of
LabONE and meets periodically to review progress. LabONE's laboratory operating
systems and its business processing systems were completely rewritten as of 1991
and were brought into compliance with Year 2000 date standards at that time.
Non-IT systems, which include security systems, time clocks and heating and
cooling systems, have been replaced with certified compliant systems as part of
construction of the new facility. Ongoing remediation efforts include regularly
scheduled software upgrades and replacement of personal computers and associated
equipment. LabONE expects to complete all remaining internal Year 2000
objectives by the end of the second quarter, 1999.
LabONE is assessing the Year 2000 preparation and contingency plans of
LabONE's clients and vendors. LabONE has material relationships and dependencies
with its primary telecommunications provider, Sprint Corp., its inbound shipping
provider, Airborne Express, and municipal services providers. In the event of a
service interruption, LabONE has the ability to switch telecommunications
services to AT&T at any time, and maintains backup electrical generators capable
of meeting its electrical needs. LabONE currently tracks and controls routing of
its inbound specimens and can use United States Postal Service, airlines and
other common carriers or express delivery services in the event of delivery
problems with Airborne Express. LabONE currently maintains approximately eight
weeks supply of most laboratory supplies, and does not expect significant
problems in obtaining supplies. LabONE continues to review the Year 2000 plans
of these providers, and does not currently expect significant problems in these
areas, however, there can be no assurance that the systems of
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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 LabONE's
computer systems.
Resources dedicated to the remaining effort are expected to cost less than
$0.3 million and are not considered a material expense to LabONE. These efforts
have not caused delay to LabONE's other ongoing information systems projects.
LabONE has not hired any outside consultants or other independent validation
provider at this time, and does not expect to do so.
There can be no assurance that LabONE's adjustments to its computer systems
will completely eliminate all Year 2000 problems. Failure to properly address
the Year 2000 problem could have a material adverse effect on LabONE's business,
financial condition and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A foreign currency risk exposure exists due to billing Canadian subsidiary
revenue in Canadian dollars and the direct laboratory expenses associated with
this revenue being incurred in US dollars. This exposure is not considered to be
material. Any future material Canadian currency fluctuations against the US
dollar could result in a decision to hedge future foreign currency cash flows,
or to increase Canadian prices.
An interest rate risk exposure exists due to LabONE's liability of $20
million in industrial revenue bonds. The interest expense incurred on these
bonds is based on a taxable seven day variable rate, which including letter of
credit and remarketing fees, is approximately 5.8% as of March 1, 1999. This
exposure is not considered material. Any future increase in interest rates would
result in additional interest expense and could result in a decision to enter
into a long-term interest rate swap transaction.
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MANAGEMENT OF LABONE
LABONE DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of LabONE are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
W. Thomas Grant II................. 49 Chairman of the Board of Directors, President,
Chief Executive Officer and Director
Gregg R. Sadler, FSA............... 48 Executive Vice President--Administration, President-- Insurance
Laboratory Division, Secretary and Director
Robert D. Thompson................. 37 Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director
Roger K. Betts..................... 56 Executive Vice President--Sales--Insurance Laboratory Division
Thomas J. Hespe.................... 42 Executive Vice President--Sales and Marketing, President-- Clinical
Sales and Marketing and Director
Michael A. Peat, Ph.D.............. 51 Executive Vice President--Toxicology and President--Substance Abuse
Testing Division
Thomas H. Bienvenu II.............. 49 Executive Vice President--Information Systems and Technology
Judith A. VonFeldt................. 52 Executive Vice President--Human Resources
Kurt E. Gruenbacher,
CPA, CMA, CFM.................... 39 Vice President--Finance, Chief Accounting Officer, Treasurer and
Assistant Secretary
Joseph H. Brewer, M.D.............. 47 Director
William D. Grant................... 82 Director
Richard A. Rifkind, M.D............ 68 Director
Richard S. Schweiker............... 72 Director
James R. Seward.................... 46 Director
John E. Walker..................... 60 Director
R. Dennis Wright, Esq.............. 56 Director
</TABLE>
The terms of office of the directors of LabONE will expire upon the election
of their successors at the LabONE annual meeting. Executive officers serve at
the pleasure of the board of directors.
Mr. W. Thomas Grant II has been a director of LabONE since 1983. Mr. Grant
was appointed Chairman of the board of directors, President and Chief Executive
Officer of LabONE in October 1995. He served as Chairman of the Board of
Holdings from May 1993 to September 1997. Mr. Grant is also a director of
Commerce Bancshares, Inc., Kansas City Power & Light Company, Response Oncology,
Inc. and AMC Entertainment, Inc. He is the son of W. D. Grant.
Mr. Sadler has been a director of LabONE since 1985. Mr. Sadler was
appointed President-- Insurance Laboratory Division in 1994 and Executive Vice
President--Administration in 1993. Mr. Sadler has served as Secretary since
1988.
Mr. Thompson has been a director of LabONE since 1995. Mr. Thompson was
appointed Chief Operating Officer in May 1997 and Executive Vice President
Finance and Chief Financial Officer in
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December 1993. He served as Treasurer from December 1993 to November 1997, and
served as Vice President--Business Development Planning from August 1993 to
December 1993.
Mr. Betts was appointed Executive Vice President--Sales--Insurance
Laboratory Division in 1994. From 1993 to 1994, Mr. Betts served as Senior Vice
President--Sales of the Insurance Laboratory Division.
Mr. Hespe has been a director of LabONE since 1995. Mr. Hespe was appointed
President-- Clinical Sales and Marketing and Executive Vice President--Sales and
Marketing in 1995. From 1990 to 1995, Mr. Hespe served as Executive Vice
President Sales and Marketing of Allscrips Pharmaceuticals, Vernon Hills,
Illinois, a distributor of managed care pharmaceutical products and services
with annual revenues of approximately $70 million. Mr. Hespe's responsibilities
with Allscrips included developing strategies for market expansion and
developing business with managed care organizations, including hospitals,
physicians, HMO organizations, third party administrators, consulting firms,
self-insured employers and insurance companies.
Dr. Peat was appointed President--Substance Abuse Testing Division and
Executive Vice President--Toxicology in May 1996. Dr. Peat served as Senior Vice
President--Toxicology from 1994 to 1996. Prior to joining LabONE in 1994, Dr.
Peat was Vice President of Toxicology of Roche Biomedical Laboratories, Inc.,
Research Triangle Park, North Carolina.
Mr. Bienvenu was appointed Executive Vice President--Information Systems and
Technology in May 1997. Mr. Bienvenu served as Senior Vice
President--Information Systems and Technology from 1994 to 1997. He served as
Vice President--Marketing Information Technology from October 1994 to December
1994. Prior to October 1994, he served as Director of Marketing Information
Technology.
Ms. VonFeldt has served as Executive Vice President Human Resources since
August 1998. She served as Senior Vice President Human Resources from May 1997
to August 1998, and as Vice President--Human Resources from September 1993 to
May 1997.
Mr. Gruenbacher was appointed Assistant Secretary in May 1999 and Treasurer
in November 1997. He was appointed Vice President--Finance and Chief Accounting
Officer in May 1995. Mr. Gruenbacher served as Corporate Controller from 1994 to
1995, and Director, Financial Analysis and Budgets from 1993 to 1994.
Dr. Brewer has been a director of LabONE since 1988. During the past five
years, Dr. Brewer has been an Infectious Disease Specialist at St. Luke's
Hospital, Kansas City, Missouri and an Assistant Clinical Professor of Medicine
at the University of Missouri Kansas City
Mr. William D. Grant has been a director of LabONE since 1989. Mr. Grant is
retired. From August 1990 to December 1997, he served as a consultant to
Holdings and served as Chairman of the Board of Holdings prior to May 1993. He
is the father of W. Thomas Grant II.
Dr. Rifkind has been a director of LabONE since 1987. Dr. Rifkind has been
Chairman of the Sloan-Kettering Institute, New York, New York, a medical
research institution, during the past five years.
Mr. Schweiker has been a director of LabONE since 1995. Mr. Schweiker has
been retired for the past five years. Prior to his retirement, Mr. Schweiker
served as President of the American Council of Life Insurance, Washington, D.C.,
a life insurance trade association. Mr. Schweiker is also a director of Tenet
Healthcare Corporation.
Mr. Seward has been a director of LabONE since 1995. Mr. Seward has been
self-employed as an investment adviser and consultant since August 1998. From
December 1996 to August 1998, Mr. Seward served as President, Chief Executive
Officer and a director of SLH Corporation, Shawnee Mission, Kansas, an asset
management company. SLH Corporation was a wholly-owned subsidiary of
95
<PAGE>
Holdings prior to its spin-off in March 1997. He was Executive Vice President of
Holdings from 1993-1997 and served as its Chief Financial Officer from
1990-1997. Mr. Seward is also a director of Response Oncology, Inc., Syntroleum
Corporation and Concorde Career Colleges.
Mr. Walker has been a director of LabONE since 1984. Mr. Walker retired as
Managing Director-- Reinsurance of Business Men's Assurance Company of America
in 1996. Mr. Walker served as Vice Chairman of the board of directors of LabONE
prior to 1994. He is a director of FBL Financial Group, Inc.
Mr. Wright has been a director of LabONE since 1987. Mr. Wright has been a
partner in the law firm of Morrison & Hecker L.L.P., Kansas City, Missouri,
since September 1998. Mr. Wright was a member of Hillix, Brewer, Hoffhaus,
Whittaker & Wright, L.L.C., Kansas City, Missouri and Chairman of its Executive
Committee prior to its merger with Morrison & Hecker, L.L.P. in September 1998.
Morrison & Hecker, L.L.P. is general counsel to LabONE.
96
<PAGE>
LABONE
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid or accrued by LabONE to or on behalf of:
- the person who served as its chief executive officer during 1998, and
- the four most highly compensated executive officers other than the chief
executive officer serving as of December 31, 1998,
for services rendered in all capacities to LabONE and its subsidiaries for each
of the last three completed fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------
------------------------ STOCK OPTION SHARES ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) GRANTED (#) COMPENSATION ($)(1)
- ------------------------------------------- ----------- ----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
W. Thomas Grant II ........................ 1998 164,769 107,261 -0- 21,670
Chairman of the 1997 86,019 131,173 75,000 9,922
Board of Directors, 1996 -0- -0- -0- -0-
President and Chief
Executive Officer
Robert D. Thompson ........................ 1998 217,627 157,261 -0- 16,696
Executive Vice President, 1997 209,900 131,173 -0- 16,856
Chief Operating and 1996 209,277 75,000 -0- 17,086
Financial Officer
Carl W. Ludvigsen, Jr. .................... 1998 239,781 42,661 -0- 21,670
Executive Vice President-- 1997 230,900 131,173 -0- 21,470
Corporate Development and 1996 230,277 25,000 -0- 20,634
Chief Medical Officer
Thomas J. Hespe ........................... 1998 165,704 107,261 -0- 21,371
Executive Vice 1997 159,900 131,173 -0- 21,470
President--Clinical 1996 159,277 50,000 -0- 20,490
Marketing & Sales Division
Gregg R. Sadler ........................... 1998 165,704 107,261 -0- 21,670
Executive Vice 1997 156,900 131,173 -0- 21,865
President--Administration 1996 150,277 50,000 -0- 20,923
and Secretary & President
Insurance Laboratory Division
</TABLE>
- ------------------------
(1) The amounts shown in this column for 1998 consist of:
- contributions by LabONE to the account of each of the named executive
officers under LabONE's defined contribution pension plan in the amount of
$16,421;
- 50% matching contributions by LabONE under LabONE's profit-sharing 401(k)
plan in the amount of $4,526 to the accounts of each of Messrs. Grant,
Ludvigsen, Hespe and Sadler, and
- insurance premium payments by LabONE with respect to group term life
insurance in the amounts of $723 for the benefit of each of Messrs. Grant,
Ludvigsen and Sadler, $274 for the benefit of Mr. Thompson and $424 for
the benefit of Mr. Hespe.
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<PAGE>
AGGREGATE OPTION EXERCISES AND DECEMBER 31, 1998 OPTION VALUE TABLE
The following table provides certain information concerning the exercise of
stock options during 1998 by each of the named executive officers and the number
and value of unexercised options held by such persons on December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS ON DECEMBER 31, IN-THE-MONEY OPTIONS ON
1998 (#) DECEMBER 31, 1998 ($)
-------------------------- --------------------------
SHARES ACQUIRED VALUE REALIZED OPTIONS OPTIONS OPTIONS OPTIONS
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Thomas Grant II................ 0 0 42,431 60,000 $ 84,007 $ 0
Robert D. Thompson................ 0 0 122,000 28,000 $ 39,375 $ 26,250
Carl W. Ludvigsen, Jr............. 0 0 81,000 8,000 $ 82,873 $ 10,500
Thomas J. Hespe................... 0 0 60,000 40,000 $ 78,750 $ 52,500
Gregg R. Sadler................... 0 0 90,400 9,600 $ 144,019 $ 0
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not employees of LabONE receive an annual retainer fee of
$5,000 in cash and a grant of a number of shares of common stock of LabONE
having a value equal to $10,000, plus $500 for each board and committee meeting
attended and reimbursement for reasonable expenses in attending meetings.
Richard S. Schweiker, a director of LabONE, has agreed to attend national
meetings of insurance underwriters on LabONE's behalf and to make selected
contacts in furtherance of LabONE's business, for which services LabONE will pay
Mr. Schweiker additional fees of $30,000 annually.
EMPLOYMENT AGREEMENTS
LabONE has employment agreements with Robert D. Thompson, Gregg R. Sadler
and Thomas J. Hespe. Messrs. Thompson's and Sadler's agreements are renewable
annually for one-year terms unless LabONE elects not to extend them and Mr.
Hespe's agreement is terminable by LabONE on thirty days' notice. The annual
base salaries provided under the agreements are $200,900 to Mr. Thompson,
$150,900 to Mr. Sadler and $150,900 to Mr. Hespe. In the event that LabONE
terminates Messrs. Thompson or Sadler without cause (as defined in the
agreements), LabONE will pay the terminated officer a lump sum severance payment
equal to his base salary for the balance of the term of the agreement, plus 50%
of one year's annual base salary. If LabONE terminates Mr. Hespe without cause,
LabONE will pay Mr. Hespe a severance payment equal to one year's base salary.
If a change of control of LabONE (as defined in the agreements) occurs at any
time during which the executive officer is in LabONE's full-time employment, and
within one year after such a change in control the executive officer's
employment is terminated for any reason other than permanent disability, death
or normal retirement, LabONE will pay the officer as termination compensation a
lump sum amount equal to three times the officer's average annual compensation
for the most recent five taxable years (subject to certain limitations
prescribed in the Internal Revenue Code) and any remaining term of the officer's
agreement shall be cancelled. The proposed merger of LabONE with and into
Holdings does not constitute a change of control of LabONE within the meaning of
the agreements. Under each agreement, the executive officer agrees not to
compete with LabONE for a period of two years after the termination of his
employment with LabONE.
98
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. W. Thomas Grant II was a member of the compensation committee of the
board of directors of LabONE until his resignation from the committee on
February 14, 1998. Mr. Grant is Chairman of the Board of Directors, President
and Chief Executive Officer of LabONE.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
LabONE's executive compensation program is administered by the compensation
committee, a committee of the board of directors composed of the directors
listed at the end of this report. All issues pertaining to executive
compensation are reviewed by the compensation committee and recommendations are
submitted by the committee to the full board of directors for approval.
COMPENSATION PHILOSOPHY The philosophy governing executive compensation is
based on a belief that management and stockholders have a common goal of
increasing the value of LabONE. The business strategy for achieving this goal is
expressed in LabONE's mission statement: "LabONE is dedicated to maximizing the
return on investment for our stockholders...to providing the lowest-cost,
highest-quality laboratory testing services for our clients...to providing a
working environment that emphasizes accountability for results and rewards
employees based on their contribution to LabONE's success."
Three principal elements of executive compensation--base salary, annual
incentive plan, and stock options--are used to motivate and reward the
accomplishment of annual corporate objectives, reinforce a strong orientation
toward operating excellence, provide variability in individual awards based on
contributions to business results, and maintain a competitive compensation
package to attract, retain and motivate individuals of the highest professional
quality.
BASE SALARY Salary ranges were developed based on a survey initially
conducted in 1986 by an independent consultant and updated in 1989. Base
salaries were targeted at the 60th to 65th percentile of pay for comparable
positions in "All Industrial Base Salaries" surveyed by the consultant. Salary
ranges have been adjusted annually to reflect inflationary increases shown in
industry surveys. Salary ranges have also been adjusted to reflect changes in
job responsibilities. These salary ranges are reviewed annually by a consultant.
In determining base salary levels, the committee considers both the salary
ranges and individual performance evaluations for each executive officer. Base
salary decisions are not based upon any specific financial performance measure
or criterion with respect to LabONE.
ANNUAL INCENTIVE PLAN AND DISCRETIONARY BONUSES The Annual Incentive Plan
is designed to motivate and reward the accomplishment of targeted operating
results. Prior to the beginning of each fiscal year, the committee establishes
an operating earnings goal under the plan based upon the committee's judgment of
reasonable operating earnings growth over the previous fiscal year. No incentive
bonuses are payable under the plan if the minimum operating earnings threshold
is not met. The size of the incentive pool increases pursuant to a formula
established by the committee as operating earnings increase over the minimum
threshold. The incentive pool is distributed in cash to designated officers and
managers at year end according to a pre-established weighting. The weighting is
based upon senior management's subjective evaluations of each individual's
potential contribution to LabONE's financial and strategic goals for the year,
and is reviewed and approved by the committee. Bonuses aggregating $874,336 were
paid to executive officers of LabONE under the Plan in 1998.
LabONE also pays discretionary annual bonuses to executive officers and key
employees of LabONE and its subsidiaries on an irregular basis upon the
recommendation of the committee. In making determinations as to recommended
bonuses, the committee considers the financial condition and the operating
results over the last fiscal year of LabONE, the level of salary, bonus, fringe
and other benefits currently provided to the executive by LabONE and the
individual performance of the executive. The committee's recommendations are
based upon its subjective review of these factors, and
99
<PAGE>
is not based upon any specific criteria or financial performance measure. The
committee recommended a discretionary bonus of $50,000 to one executive officer
in 1998, based principally upon the executive officer's performance in 1998.
STOCK OPTIONS The compensation committee, as well as the board of
directors, believes that significant stock ownership through stock options by
key employees and directors is a major incentive in aligning the interests of
employees and stockholders, because value is only provided if the stock price
increases and because stock options have an effective long-term reward and
retention function.
LabONE administers the 1987 Long-Term Incentive Plan and the 1997 Long-Term
Incentive Plan. Under the plans, ten-year nonqualified stock options are granted
to executive officers and other key employees when they are hired or promoted
into eligible positions, with vesting generally occurring over five years. In
addition to executive officers and employees, each nonemployee director of
LabONE has also received a ten-year nonqualified stock option grant to vest over
four years.
LabONE also has a Stock Plan for Nonemployee Directors under which each
nonemployee director receives annual retainer fees of $5,000 in cash and a grant
of a number of shares of LabONE stock having a value equal to $10,000. The
purpose of the plan is to provide nonemployee directors with an additional
proprietary interest in LabONE's success and progress.
The committee's determination whether to recommend the grant of options to
an executive officer is based upon its subjective and informal review of a
number of factors, including the number of options held by the executive, the
exercise prices of such options, the amount of the executive's total
compensation package, the amounts which the executive is eligible to earn under
the Annual Incentive Plan, the position held by the executive, the duties and
responsibilities of the executive, the past performance of the executive and the
committee's desire to provide a long-term incentive component to the executive's
compensation. The decision to grant options is not based upon any specific
criteria or financial performance measure. The committee recommended the grant
of stock options to purchase 25,000 shares to one officer promoted to an
executive officer position in 1998.
CHIEF EXECUTIVE OFFICER'S COMPENSATION Mr. W. Thomas Grant II, Chairman of
the Board of Directors, President and Chief Executive Officer of LabONE,
receives a salary of $150,000 per annum and a car allowance of $9,000 per annum.
Mr. Grant's salary was established at a level below that of LabONE's other
senior management at Mr. Grant's request. Mr. Grant's base salary and car
allowance were not changed in 1998. Mr. Grant did receive an additional $5,769
in salary in 1998 due to the occurrence of an additional pay period in 1998
under LabONE's bi-weekly payroll system. Mr. Grant also participates in the
Annual Incentive Plan at the base participation level for senior management. Mr.
Grant participation level was established at the base level at Mr. Grant's
request. Based upon 1998 plan results, Mr. Grant received an incentive bonus of
$107,261 in 1998.
DEDUCTIBILITY CAP ON COMPENSATION EXCEEDING $1,000,000 The committee has
considered the potential impact of Section 162(m) of the Internal Revenue Code,
regarding non-deductibility of annual compensation in excess of $1,000,000. The
committee does not believe that Section 162(m) will have any material impact
upon LabONE, given the current salary and bonus levels of executive officers of
the corporation and the treatment in the regulations of compensation under the
corporation's long-term incentive plans. The committee believes that many of the
options currently outstanding are exempt from the deductibility limit under the
transition provisions set forth in the regulations under Section 162(m). It is
the committee's current intention that options granted under the 1997 Long-Term
Incentive Plan will qualify as performance-based compensation and be exempt from
the deductibility
100
<PAGE>
limits of Section 162(m). The committee will continue to evaluate the
advisability of qualifying executive compensation for deductibility under
Section 162(m).
Submitted by the Compensation
Committee
Richard S. Schweiker, Chairman
Joseph H. Brewer
Richard A. Rifkind
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG LABONE,
NASDAQ COMPOSITE INDEX AND PEER GROUP
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LABONE, INC. NASDAQ COMPOSITE PEER GROUP
<S> <C> <C> <C>
1993 $100.00 $100.00 $100.00
1994 $86.99 $97.75 $89.51
1995 $87.36 $138.26 $67.97
1996 $114.58 $170.01 $26.49
1997 $113.31 $208.58 $22.13
1998 $87.91 $293.21 $20.38
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
LabONE, Inc......................... 100.00 86.99 87.36 114.58 113.31 87.91
NASDAQ Composite.................... 100.00 97.75 138.26 170.01 208.58 293.21
Peer Group.......................... 100.00 89.51 67.97 26.49 22.13 20.38
</TABLE>
The table assumes the investment at the close of business on December 31,
1993, of $100 in LabONE's common stock and in the portfolio represented in each
index, and assumes that all dividends were reinvested.
The NASDAQ Composite is a NASDAQ Stock Market index consisting of U.S.
companies that is provided by the Center for Research in Security Prices of the
University of Chicago. LabONE has selected an index of seven testing
laboratories as its peer group: Bio-Reference Labs, Laboratory Corporation of
America, Oncormed, Pharmchem, Psychemedics, Unilab and Universal Standard
Medical. LabONE believes that the peer group index provides an appropriate
comparison.
101
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH HOLDINGS
As of March 26, 1999, Holdings beneficially owned 10,712,200 shares, or
80.5%, of the outstanding common stock of LabONE. Holdings, by virtue of its
ownership of a majority of LabONE's common stock, has control of LabONE and is
able to elect all of the members of LabONE's board of directors. LabONE operates
independently of Holdings, with the officers of LabONE having direct
responsibility for all of LabONE's management and operations.
Holdings and LabONE are parties to a transition agreement pursuant to which
they have agreed to an allocation of certain corporate opportunities and to
mutual indemnification for certain liabilities and expenses. Under the
transition agreement, so long as Holdings, directly or indirectly, owns at least
20% of the outstanding voting shares of LabONE, Holdings agrees to refer to
LabONE any product, service, idea or other corporate opportunity that is within
the scope of LabONE's business. For purposes of this agreement, LabONE's
business is defined as providing laboratory testing services for the insurance
and healthcare industry and the development and implementation of data
processing and communications facilities for receiving test-related instructions
from clients, for conducting laboratory operations and for the collection, use,
storage, retrieval and transmission of test results data by both LabONE and its
clients.
In the event that a majority of the independent, disinterested directors of
LabONE informs Holdings that LabONE does not intend to pursue, or LabONE within
a reasonable time fails to pursue, the consideration and development of any
product, service, idea or other business opportunity referred to it by Holdings,
Holdings is entitled under the transition agreement to consider and develop the
product, service, idea or business opportunity for its own benefit. Under the
agreement, LabONE also agrees to indemnify and hold harmless Holdings, and any
controlling person of Holdings, with respect to certain civil liabilities,
including any and all claims, losses, damages, liabilities, costs and expenses
that arise from or are based on operations of LabONE. Similarly, Holdings agrees
to indemnify and hold harmless LabONE and any controlling person of LabONE,
other than Holdings, with respect to certain civil liabilities, including any
and all claims, losses, damages, liabilities, costs and expenses that arise from
or are based on the operations of Holdings, other than the business of LabONE.
102
<PAGE>
MANAGEMENT OF COMBINED COMPANY AFTER THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS OF COMBINED COMPANY AFTER THE MERGER
Holdings and LabONE have agreed in the merger agreement to take all
necessary action so that as of the effective time the individuals identified
below shall be the directors and executive officers of the combined company. If
prior to the effective time any individual selected to be a director or
executive officer of the combined company is unwilling or unable to serve in
such capacity, any person proposed to fill such vacancy shall be subject to the
approval of Holdings and the special committee.
The board of directors of the combined company is divided into three
classes, with staggered terms of office. The initial term of office of each
Class A Director will expire at the 2000 annual meeting of stockholders of the
combined company, the initial term of office of each Class B Director will
expire at the 2001 annual meeting of stockholders of the combined company and
the initial term of office of each Class C Director will expire at the 2002
annual meeting of stockholders of the combined company. After these expiration
dates the term of each class will expire on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for such class. Each director shall hold office until the
next annual meeting of stockholders for the election of directors of his or her
class and until his or her successor has been duly elected and shall have
qualified. Executive officers serve at the pleasure of the board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
W. Thomas Grant II................................... 49 Chairman of the Board of Directors, President, Chief
Executive Officer and Class C Director
Gregg R. Sadler, FSA................................. 48 Executive Vice President--Administration,
President--Insurance Laboratory Division and
Secretary
Robert D. Thompson................................... 37 Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Class B Director
Roger K. Betts....................................... 56 Executive Vice President--Sales, Insurance Laboratory
Division
Thomas J. Hespe...................................... 42 Executive Vice President--Sales and Marketing,
President--Clinical Sales and Marketing and
Director
Michael A. Peat, Ph.D................................ 51 Executive Vice President--Toxicology and
President--Substance Abuse Testing Division
Thomas H. Bienvenu II................................ 49 Executive Vice President--Information Systems and
Technology
Judith A. VonFeldt................................... 52 Executive Vice President--Human Resources
Kurt E. Gruenbacher, CPA, CMA, CFM................... 39 Vice President--Finance, Chief Accounting Officer,
Treasurer and Assistant Secretary
Joseph H. Brewer, M.D................................ 47 Class B Director
Peter C. Brown....................................... 40 Class C Director
William D. Grant..................................... 82 Class B Director
Richard A. Rifkind, M.D.............................. 68 Class A Director
Richard S. Schweiker................................. 72 Class C Director
James R. Seward...................................... 46 Class A Director
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Janet M. Stallmeyer, R.N............................. 50 Class A Director
Chester B. Vanatta................................... 63 Class B Director
John E. Walker....................................... 60 Class C Director
R. Dennis Wright, Esq................................ 56 Class A Director
</TABLE>
Certain biographical information with respect to the above persons, other
than Peter C. Brown, Janet M. Stallmeyer and Chester B. Vanatta, is described
herein under "Management of LabONE" on page 94.
Peter C. Brown. Mr. Brown has served as Co-Chairman of the Board of AMC
Entertainment, Inc. ("AMCE") since May 1998, as President of AMCE since January
1997 and as Chief Financial Officer of AMCE since November 1991. Mr. Brown
served as Executive Vice President of AMCE from August 1994 to January 1997, and
as Senior Vice President of AMCE from November 1991 to August 1994. AMCE is
located in Kansas City, Missouri and is principally engaged in the motion
picture exhibition business. Mr. Brown also serves as Chairman of the Board of
Trustees of Entertainment Properties Trust, Kansas City, Missouri, a real estate
investment trust. Mr. Brown is a director of AMCE.
Janet M. Stallmeyer. Ms. Stallmeyer has served since January 1995 as
Executive Director of Principal Health Care of Kansas City, Inc., Kansas City,
Missouri, a health maintenance organization. From September 1992 to December
1994, Ms. Stallmeyer served as Executive Director of Principal Health Care of
Louisiana, Inc., New Orleans, Louisiana, a health maintenance organization.
Chester B. Vanatta. Mr. Vanatta is a business consultant. From 1985 until
May 1990, he was an Executive in Residence and the Paul J. Adam Distinguished
Lecturer for the School of Business at the University of Kansas. Mr. Vanatta was
formerly Vice Chairman of Arthur Young & Company (now Ernst & Young), certified
public accountants. Mr. Vanatta is a director of Atlantis Plastics, Inc.
SECURITY OWNERSHIP OF LABONE BEFORE AND AFTER THE MERGER
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF LABONE
The following table shows as of March 31, 1999, the total number of shares
of common stock of LabONE beneficially owned by persons known to be beneficial
owners of more than 5% of the outstanding stock of LabONE. All of the shares of
outstanding stock of LabONE that are owned by Holdings immediately prior to the
effective time of the merger will be cancelled in the merger.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF LABONE OUTSTANDING SHARES OF
BENEFICIALLY LABONE BENEFICIALLY
OWNED OWNED
BENEFICIAL OWNER MARCH 26, 1999 MARCH 26, 1999
- ------------------------------------------------------ ----------------- ---------------------
<S> <C> <C>
Lab Holdings, Inc. ................................... 10,712,200 80.5%
5000 West 95th Street
Shawnee Mission, KS 66207
</TABLE>
Holdings has sole voting and investment power with respect to the shares listed.
104
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT OF LABONE
The following table shows for each director of LabONE, each of the executive
officers of LabONE named in the Summary Compensation Table under "Management of
LabONE," and all directors and executive officers of LabONE as a group, the
total number of shares of common stock of LabONE and of Holdings beneficially
owned by such persons as of March 31, 1999 and the total number of shares of
common stock of the combined company owned after giving effect to the merger.
<TABLE>
<CAPTION>
AMOUNT OF SHARES BENEFICIALLY OWNED
---------------------------------------------------------------------------
COMBINED COMPANY
LABONE HOLDINGS AFTER THE MERGER
BEFORE THE MERGER BEFORE THE MERGER ---------------------
-------------------------- ------------------------ PERCENTAGE
PERCENTAGE PERCENTAGE OF
BENEFICIAL OWNER(1) SHARES(3) OF CLASS(2) SHARES OF CLASS(2) SHARES(3) CLASS(4)
- --------------------------- ----------- ------------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph H. Brewer, M.D...... 27,195 * 0 * 27,195 *
William D. Grant........... 38,695(5) * 1,086,647(6) 16.7% 1,668,665 13.5-15.1%
W. Thomas Grant II......... 81,596(8) * 138,089(7) 2.1% 288,729(8) 2.3-2.6%
Thomas J. Hespe............ 60,831(8) * 0 * 60,831(8) *
Carl W. Ludvigsen, Jr.,
M.D...................... 83,313(8) * 0 * 83,313(8) *
Richard A. Rifkind, M.D.... 27,098 * 0 * 27,098 *
Gregg R. Sadler............ 102,993(8) * 266 * 103,392(8) *
Richard S. Schweiker....... 19,978 * 0 * 19,978 *
James R. Seward............ 22,156 * 0 * 22,156 *
Robert D. Thompson......... 127,949(8) * 0 * 127,949(8) 1.0-1.2%
John E. Walker............. 27,195(9) * 6,099(9) * 36,343(9) *
R. Dennis Wright, Esq...... 24,378 * 0 * 24,378 *
All directors and executive
officers of LabONE as a
group (17 persons)....... 817,198(8) 5.8% 1,231,101 19.0% 2,489,471 20.2-22.6%
</TABLE>
- ------------------------
* Less than 1% of outstanding shares
(1) Unless otherwise indicated, each person has sole voting and investment power
with respect to the shares listed.
(2) For purposes of determining the percentage ownership of each beneficial
owner, the outstanding shares of the respective corporation include shares
that the beneficial owner has the right to acquire within 60 days pursuant
to options granted to such beneficial owner. Percentages for LabONE are
based upon 13,311,450 shares of LabONE common stock outstanding as of March
31, 1999. Percentages for Holdings before the merger are based upon
6,489,103 shares of Holdings common stock outstanding as of March 31, 1999.
(3) Assumes that none of the beneficial owners will elect to exchange LabONE
shares for cash. Includes the following numbers of shares of LabONE common
stock which such persons have the right to acquire within 60 days pursuant
to options granted under the LabONE Long-Term Incentive Plan: Joseph H.
Brewer, 22,000 shares; William D. Grant, 22,000 shares; W. Thomas Grant II,
57,431 shares; Thomas J. Hespe, 60,000 shares; Carl W. Ludvigsen, Jr.,
81,000 shares; Richard A. Rifkind, 22,000 shares; Gregg R. Sadler, 95,200
shares; Richard S. Schweiker, 17,600 shares; James R. Seward, 17,600 shares;
Robert D. Thompson, 126,000 shares; John E. Walker, 22,000
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shares; R. Dennis Wright, 22,000 shares; and all directors and executive
officers as a group, 719,831 shares. These options will be assumed by the
combined company in the merger.
(4) The two percentages for each beneficial owner of the combined company over
1% reflect beneficial ownership assuming that LabONE stockholders other than
Holdings elect all stock (the lower number) and maximum cash (the higher
number).
(5) Does not include 10,712,200 shares of LabONE common stock owned by Holdings
(see "Security Ownership of Certain Beneficial Owners of LabONE" above). Mr.
W.D. Grant disclaims beneficial ownership of the shares of LabONE common
stock owned by Holdings. These shares will be cancelled in the merger.
(6) Includes 586,206 shares of Holdings common stock held by five family trusts
for which William D. Grant shares voting and investment power with UMB Bank,
N.A., and 28,916 shares owned by the wife of William D. Grant, as to which
he disclaims beneficial ownership.
(7) Includes 22,442 shares held by W. T. Grant II as custodian for his children;
includes 45,000 shares held in a family trust for which W. T. Grant II
serves as a co-trustee and in that capacity shares voting and investment
powers; also includes 12,480 shares owned by the wife of W. T. Grant II, as
to which he disclaims beneficial ownership.
(8) Includes the following numbers of shares of LabONE common stock held in
individually directed accounts of the named persons under LabONE's 401(k)
profit-sharing plan, as to which each of such persons has sole investment
power only: W. Thomas Grant II, 22,365 shares; Thomas J. Hespe, 831 shares;
Carl W. Ludvigsen, Jr., 2,313 shares; Gregg R. Sadler, 5,793 shares; Robert
D. Thompson, 1,949 shares; and all directors and executive officers as a
group, 50,872 shares. These shares will be converted into shares of common
stock of the combined company in the merger.
(9) All of Mr. Walker's shares are owned by a revocable trust for Mr. Walker's
wife, as to which he disclaims beneficial ownership.
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LABONE'S ANNUAL MEETING PROPOSALS
ELECTION OF DIRECTORS OF LABONE
GENERAL. The stockholders of LabONE will be asked to elect twelve directors
of LabONE at the LabONE annual meeting. The directors elected at the LabONE
annual meeting shall be elected to serve until the effective time of the merger
or, if the merger is not consummated, until the 2000 annual meeting of
stockholders of LabONE.
If the merger is consummated, at the effective time of the merger LabONE
will be merged into Holdings and all director positions in LabONE will cease to
exist. The merger agreement specifies the persons who shall serve as members of
the board of directors of the combined company commencing at the effective time
of the merger. See "Management of Combined Company After the Merger-- Directors
and Executive Officers of Combined Company After the Merger" on page 103.
The board of directors of LabONE has nominated the following persons for
election to the board of directors of LabONE at the LabONE annual meeting:
Joseph H. Brewer, Peter C. Brown, William D. Grant, W. Thomas Grant II, Richard
A. Rifkind, Richard S. Schweiker, James R. Seward, Janet M, Stallmeyer, Robert
D. Thompson, Chester B. Vanatta, John E. Walker and R. Dennis Wright. Certain
biographical information with respect to each of these persons, other than Peter
C. Brown, Janet M. Stallmeyer and Chester B. Vanatta, is set forth herein under
"Management of LabONE." Certain biographical information with respect to Peter
C. Brown, Janet M. Stallmeyer and Chester B. Vanatta is set forth herein under
"Management of the Combined Company After the Merger". The terms of office of
the present directors of LabONE will expire upon the election of their
successors at the LabONE annual meeting.
It is expected that each of such nominees will be available for election at
the LabONE annual meeting. If any nominee shall be unable to serve or shall
decline to serve, the persons named in the accompanying LabONE Proxy have
discretionary authority to vote for a substitute nominee or nominees designated
by the board of directors of LabONE.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
There were four meetings of the board of directors during 1998. The board of
directors has an audit committee, a compensation committee and an executive
committee. During 1998 the audit committee met four times, the compensation
committee met three times and the executive committee met two times. All
directors attended 75 percent or more of the total number of all meetings of the
board and of committees of which they are members during 1998, with the
exception that Joseph Brewer missed two board meetings and two compensation
committee meetings in 1998.
The audit committee consists of Mr. Seward, Chairman, and Messrs. W. D.
Grant, Walker and Wright. The audit committee reviews LabONE's financial
statements with the independent public accountants, determines the effectiveness
of the audit effort through meetings with the independent public accountants and
officers of LabONE, inquires into the effectiveness of LabONE's internal
controls through discussions with the independent public accountants, reports to
the board on its activities and recommendations, and recommends to the board the
appointment of independent public accountants for the ensuing year.
The compensation committee consists of Mr. Schweiker, Chairman, and Messrs.
Brewer and Rifkind. The purpose of the compensation committee is to oversee
LabONE's compensation structure, incentive plans and other employee benefits.
The compensation committee reviews and recommends adjustments to the officers'
salary structure. It approves cash awards to non-officer employees and
recommends to the board amounts to be set aside and cash awards to be paid to
officers under
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LabONE's cash bonus plan. The committee recommends to the board compensation for
non-officer directors, monitors the administration of employee benefit plans and
reviews significant employee supplementary pension or termination arrangements.
The executive committee consists of Mr. W. Thomas Grant II, Chairman, and
Messrs. Hespe, Sadler, Seward and Thompson. The purpose of the executive
committee is to act on behalf of the board of directors and to serve in an
advisory capacity to management. The executive committee also develops,
recommends and reviews policy guidelines for all investments and borrowings of
LabONE and recommends outside investment management firms to provide services to
LabONE. The executive committee exercises all the powers and authority of the
board in interim periods between meetings of the board, except as limited by
Delaware law, and reports all of its actions to the board.
LabONE does not have a standing nominating committee of the board of
directors or a committee performing a similar function.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers and beneficial owners of more than ten percent of
the common stock of LabONE to file reports of beneficial ownership and reports
of changes in beneficial ownership with the Securities and Exchange Commission
and to provide copies to LabONE. Based solely upon a review of the copies of
such reports provided to LabONE and written representations from directors and
executive officers, LabONE believes that all applicable Section 16(a) filing
requirements for 1998 have been met, except with respect to one late Form 5
filing by W. D. Grant. Mr. Grant initially filed a Form 5 for the 1998 fiscal
year in a timely manner, but the Form 5 omitted a transaction required to be
reported therein. Upon discovery of the omission, Mr. Grant filed a corrected
Form 5 approximately eight days late.
REQUIRED VOTE
Nominees for director of LabONE will be elected by the affirmative vote of a
plurality of shares of LabONE common stock present and entitled to vote, in
person or by proxy, at the LabONE annual meeting. The twelve nominees for
director receiving the greatest number of votes shall be elected as directors.
Stockholders may vote in favor of all nominees, withhold their votes as to all
nominees or withhold their votes as to specific nominees. Votes withheld and
broker non-votes as to the election of directors will not affect the outcome of
the election of directors. If the manner of voting shares of LabONE common stock
is not indicated on the LabONE proxy, such shares will be voted for the election
of the twelve nominees named above as directors.
THE BOARD OF DIRECTORS OF LABONE RECOMMENDS THAT THE STOCKHOLDERS OF LABONE
VOTE "FOR" EACH OF THE NOMINEES FOR DIRECTOR.
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RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS OF LABONE
The board of directors of LabONE has selected KPMG LLP to examine the
accounts of LabONE and its subsidiary for the fiscal year ending December 31,
1999. Representatives of KPMG LLP are expected to be present at the LabONE
annual meeting to make any statement they may desire and to respond to
appropriate questions concerning the audit report. If the merger is consummated,
at the effective time of the merger LabONE will be merged into Holdings and the
separate existence of LabONE will cease. In such case, the accounts of the
combined company will be examined by KPMG LLP as the independent public
accountants for Holdings.
THE BOARD OF DIRECTORS OF LABONE RECOMMENDS THAT STOCKHOLDERS OF LABONE VOTE
"FOR" THE RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS.
DESCRIPTION OF COMBINED COMPANY CAPITAL STOCK
AUTHORIZED SHARES. Upon consummation of the merger, the combined company's
articles of incorporation will authorize the issuance of up to 43,000,000 shares
of stock, consisting of 40,000,000 shares of combined company common stock, $.01
par value per share, and 3,000,000 shares of preferred stock, $.01 par value per
share. Combined company common stock will be issued in the merger to holders of
shares of LabONE common stock who are to receive such stock under the terms of
the merger agreement. No shares of combined company preferred stock will be
issued in the merger. The combined company's board of directors will be
authorized to provide for the issuance of shares of combined company preferred
stock, in one or more series, to establish the number of shares in each series
and to fix the voting powers of the series and the designations, powers,
preferences, and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of each series.
DIVIDENDS AND OTHER DISTRIBUTIONS; PREEMPTIVE RIGHTS. Subject to any
superior rights which may be created in any series of combined company preferred
stock which may be issued from time to time in the future, the holders of
combined company common stock shall be entitled to receive dividends as declared
from time to time by the board of directors from funds legally available
therefor, and upon liquidation of the combined company shall be entitled to
share ratably in all assets of the combined company available for distribution
to such holders. Shares of combined company common stock are not redeemable or
convertible, have no preemptive rights and, upon issuance in the merger, will be
fully paid and nonassessable.
VOTING RIGHTS. Shares of combined company common stock will have one vote
per share on each matter submitted to a vote of stockholders, other than the
election of directors. Holders of combined company common stock will have
cumulative voting rights with respect to the election of directors of the
combined company. Cumulative voting permits each stockholder to cast as many
votes as shall equal the number of shares held by such stockholder multiplied by
the number of directors to be elected, and such votes may all be cast for a
single director or may be distributed among the directors to be elected as the
stockholder wishes. Depending upon the number of directors to be elected,
cumulative voting may permit a holder of fewer than 50% of outstanding shares to
cumulate such holder's votes and obtain representation on the board of
directors. The articles of incorporation of the combined company will contain
provisions requiring a super-majority vote for certain stockholder actions. See
"The Proposed Merger--Certain Possible Anti-Takeover Effects of the Amendments
to the Articles of Incorporation and Bylaws of the Combined Company" on page 54.
CLASSIFIED BOARD. The articles of incorporation of the combined company
will provide that the board of directors of the combined company shall be
divided into three classes, as nearly equal in number as possible. One class of
directors will be elected each year to hold office for a three-year term
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and until the successors of such class are duly elected and have qualified. The
impact of this classification of the board of directors on cumulative voting is
that a greater percentage of the voting shares are necessary in any election to
obtain representation on the board of directors, because only one-third of the
directors are elected each year. The classification of the board of directors
together with cumulative voting may also have the effect of delaying, deferring
or preventing a change of control of the combined company.
CERTAIN RESTRICTIONS ON SHARES HELD BY AFFILIATES. Shares of combined
company common stock acquired in the merger will not be restricted securities
within the meaning of SEC Rule 144. However, holders of combined company common
stock who are affiliates of the combined company may resell their shares only if
they register the sale of shares under the Securities Act of 1933 or if they
comply with the requirements of SEC Rule 144 or SEC Rule 144A or another
available exemption, and comply with any applicable state securities laws.
LISTING. Holdings common stock and LabONE common stock currently are listed
for trading on the NASDAQ national market system, and combined company common
stock is expected to be listed for trading on the NASDAQ national market system
following the merger.
CERTAIN PROVISIONS OF COMBINED COMPANY ARTICLES OF INCORPORATION AND BYLAWS THAT
MAY HAVE AN ANTI-TAKEOVER EFFECT
Certain existing provisions of Holdings' articles of incorporation and
by-laws that also will be included in the combined company's articles of
incorporation and bylaws might have the effect of discouraging a potential
acquiror from attempting a takeover of the combined company on terms which some
stockholders might favor, and might reduce the opportunity for the combined
company's stockholders to sell shares at a premium over then-prevailing market
prices. These include provisions relating to a classified board of directors,
removing and appointing directors, "blank-check preferred stock", business
combinations and charter and by-law amendments, which are described below. Other
new provisions that will be included in the combined company's articles of
incorporation and bylaws which could have such an effect are described above
under "The Proposed Merger--Certain Possible Anti-takeover Effects of the
Amendments to the Articles of Incorporation and Bylaws of the Combined Company"
on page 54.
CLASSIFIED BOARD. Holdings presently has a classified board of directors,
and, as noted above, the combined company will have a classified board of
directors. The purpose of the classification of the board of directors is to
help assure continuity and stability in the management of the business and
affairs of the combined company. However, the classification of directors has
the effect of making it more difficult for stockholders to change the
composition of the board of directors of the combined company. At least two
annual meetings of stockholders, instead of one meeting, will be required to
effect a change in a majority of the board of directors. The existence of
cumulative voting may further delay a change in a majority of the board of
directors, if the stockholders attempting to change the composition of the board
of directors do not own a sufficient number of shares to elect a full slate of
directors each year.
"BLANK-CHECK" PREFERRED STOCK. The articles of incorporation of Holdings
authorizes the Holdings board of directors to issue 3,000,000 shares of
preferred stock, in one or more series, to establish the number of shares in
each series and to fix the voting powers of the series and the designations,
powers, preferences, and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of each series. This
provision will be included in the articles of incorporation of the combined
company. The ability to issue preferred stock will provide the board of
directors of the combined company with flexibility in structuring possible
future financings and acquisitions, and in meeting other corporate needs.
However, the board of directors could issue one or more series of combined
company preferred stock that might impede the completion of a future
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merger, tender offer or other takeover attempt. There currently are no plans,
understandings, agreements or arrangements concerning the issuance of preferred
stock of the combined company.
FAIR PRICE PROVISIONS. The articles of incorporation of the combined
company will have a "fair price" provision similar to that found in Holdings'
articles of incorporation. This provision will require stockholder approval, by
affirmative vote of 80% of all shares entitled to vote thereon, voting as a
single class, of certain business combinations with related persons beneficially
owning 10% or more of combined company common stock, unless the business
combination is approved by two-thirds or more of the combined company's
continuing directors and certain minimum fair price and procedural provisions
are satisfied. This provision makes certain business combinations with related
persons more difficult when the requisite board approval has not been obtained
and may therefore have an anti-takeover effect.
AMENDMENT OF CERTAIN CHARTER OR BY-LAW PROVISIONS. Certain of the
provisions of the articles of incorporation and bylaws of the combined company
may be amended only by the affirmative vote of at least 80% of the outstanding
shares of stock entitled to vote thereon, unless the amendments are favorably
recommended by the affirmative vote of a majority of the entire board of
directors. These provisions include those sections of the Articles relating to
the number of directors, management of the combined company and amendments to
the bylaws, the right of the combined company to amend the articles of
incorporation generally and the fair price provisions relating to business
combinations. They also include those sections of the bylaws relating to
meetings of stockholders, the number and classification of directors and powers
of the board of directors, indemnification of directors and advance notice. The
purpose of these provisions generally is to prevent holders of less than a
substantial percentage of outstanding shares from amending provisions of the
articles of incorporation and bylaws that are designed to promote, or to empower
the board of directors to promote, the interests of all stockholders. The
super-majority vote requirements will have the effect of making more difficult
any amendment by stockholders of any of such provisions of the articles of
incorporation or bylaws that have not been approved by a majority of the board
of directors, even if the holders of a majority of the outstanding shares of the
combined company believe that such amendment would be in their best interests.
Holdings' articles of incorporation contain similar provisions, with some
variations.
NUMBER OF DIRECTORS; REMOVING DIRECTORS AND FILLING VACANCIES. The bylaws
of the combined company will permit the Board of Directors to change the number
of directors, except that unless the articles of incorporation are amended there
may not be fewer than three nor more than 15. The bylaws of the combined company
will provide that directors may be removed by stockholders only for cause by a
majority vote of the stockholders entitled to vote on the election of directors,
provided that, under The Missouri General and Business Corporation Law, because
cumulative voting applies, unless the entire board is being removed a director
may not be removed by a stockholder vote if the votes cast against removal would
be sufficient to elect the director if then cumulatively voted at an election of
the entire class of which he is a part. The bylaws of the combined company also
will provide that any vacancies will be filled by an affirmative vote of a
majority of the remaining directors, or, if they are unable to do so, by a vote
of a majority of the stockholders at an annual or special meeting. These
provisions of the combined company's articles of incorporation and bylaws, which
are the same as those found in Holdings' articles of incorporation and bylaws,
may be amended only by the affirmative vote of at least 80% of the outstanding
shares of stock entitled to vote thereon, unless the amendments are approved or
favorably recommended by the affirmative vote of a majority of the entire board
of directors. They could have an anti-takeover effect by preventing or delaying
a stockholder from enlarging the board of directors or removing directors
without cause and filling the resulting vacancies or new directorships with such
stockholder's new nominees.
OTHER PROVISIONS. Certain other provisions of the combined company's
articles of incorporation and bylaws may have an anti-takeover effect. These
include provisions requiring advance notice of
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stockholder nominations and proposals and provisions for special meetings of
stockholders. See "The Proposed Merger--Certain Possible Anti-Takeover Effects
of the Amendments to the Articles of Incorporation and Bylaws of the Combined
Company" on page 54.
STOCKHOLDER RIGHTS PLAN. Holdings previously had a stockholder rights plan,
which expired June 1, 1998. The stockholder rights plan had certain
anti-takeover effects. The rights plan was designed to cause substantial
dilution to any person or group that attempted to acquire Holdings on terms not
approved by the Holdings board of directors. Upon consummation of the merger,
the combined company will not have a rights plan. However, the board of
directors of the combined company will from time to time after the merger
consider the adoption of a stockholder rights plan, and may adopt such a plan in
the future.
COMPARATIVE RIGHTS OF LABONE STOCKHOLDERS
The rights of holders of LabONE common stock are currently governed by the
Delaware General Corporation Law and LabONE's certificate of incorporation and
bylaws adopted thereunder. Following the merger, the rights of those holders of
LabONE common stock who become stockholders of the combined company in the
merger will be governed by Missouri law and by the articles of incorporation and
bylaws of the combined company, as amended in the merger.
Because Holdings owns 80.5% of the outstanding stock of LabONE, a potential
acquirer desiring to acquire control of LabONE without the approval of the Board
of Directors of Holdings would be required to acquire control of Holdings.
Consequently, LabONE stockholders are currently indirectly subject to the
provisions of the articles of incorporation and by-laws of Holdings and Missouri
law that may have an anti-takeover effect. Certain existing provisions of
Holdings' articles of incorporation and bylaws that will be included in the
combined company's articles of incorporation and bylaws and that may have an
anti-takeover effect are described in "Description of the Combined Company
Capital Stock--Certain Provisions of Combined Company Articles of Incorporation
and Bylaws That May Have an Anti-Takeover Effect." Certain amendments to the
combined company's articles of incorporation and bylaws are to be effected in
the merger that may have an anti-takeover effect. These are described in "The
Proposed Merger--Certain Possible Anti-takeover Effects of the Amendments to the
Articles of Incorporation and Bylaws of the Combined Company" on page 54. The
following discussion should be read in conjunction with the discussion contained
in these sections.
The following discussion summarizes certain important differences among the
rights of holders of LabONE common stock and the rights of holders of combined
company common stock upon consummation of the merger. The following summary is
not intended as a complete statement of all such differences, and is qualified
by reference to the full text of the governing documents of LabONE and the
combined company and to Missouri and Delaware law.
CERTAIN DIFFERENCES BETWEEN LABONE'S AND THE COMBINED COMPANY'S CHARTER AND
BY-LAWS.
AUTHORIZED STOCK. LabONE's certificate of incorporation authorizes the
issuance of 40,000,000 shares of LabONE common stock and 1,000,000 shares of
preferred stock, $.01 par value per share, in one or more series. As of March
31, 1999, there were 13,311,450 shares of LabONE common stock issued and
outstanding, and 2,837,927 shares of LabONE common stock reserved for issuance
upon exercise of outstanding options and warrants. No shares of LabONE preferred
stock are outstanding. The combined company's articles of incorporation will
authorize the issuance of 40,000,000 shares of combined company common stock and
3,000,000 shares of combined company preferred stock. See "The Proposed
Merger--Certain Possible Anti-takeover Effects of the Amendments to the Articles
of Incorporation and Bylaws of the Combined Company" on page 54.
CUMULATIVE VOTING. LabONE stockholders do not have cumulative voting rights
with respect to the election of directors. Holders of combined company common
stock will have cumulative voting
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rights. Cumulative voting permits each stockholder to cast as many votes as
shall equal the number of shares held by such stockholder multiplied by the
number of directors to be elected, and such votes may all be cast for a single
director or may be distributed among the directors to be elected as the
stockholder wishes.
CLASSIFIED BOARD. LabONE's entire board of directors is elected annually.
The articles of incorporation of the combined company will provide that the
board of directors of the combined company will be divided into three classes,
as nearly equal in number as possible. One class of directors will be elected
each year to hold office for a three-year term and until the successors of such
class are duly elected and have qualified.
ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND PROPOSALS. The combined
company's bylaws will contain a provision establishing an advance notice
procedure for stockholders wishing to nominate candidates for election as
directors or bring other business before an annual meeting of stockholders. The
bylaws will require stockholders to deliver prior written notice of any
stockholder proposal or nomination to the Secretary of the combined company no
later than ninety days before the meeting date or ten days after the meeting
date is publicly announced, whichever is later. See "The Proposed
Merger-Amendments to Holdings' Articles of Incorporation and Bylaws" on page 52.
LabONE has no comparable requirement.
FAIR PRICE PROVISION. A "fair price" provision in LabONE's certificate of
incorporation requires compliance with certain minimum fair price and procedural
requirements and stockholder approval, by the affirmative vote of two-thirds of
all shares entitled to vote thereon, voting as a single class, of certain
business combinations with related persons who beneficially own 10% or more of
LabONE's common stock, unless the business combination is approved by two-thirds
or more of LabONE's continuing directors. The articles of incorporation of the
combined company will have a "fair price" provision that will require
stockholder approval, by affirmative vote of 80% of all shares entitled to vote
thereon, voting as a single class, of certain business combinations with related
persons beneficially owning 10% or more of combined company common stock, unless
the business combination is approved by two-thirds or more of the combined
company's continuing directors and certain minimum fair price and procedural
provisions are satisfied.
AMENDMENTS TO CHARTER AND BYLAWS. LabONE's certificate of incorporation and
bylaws do not contain any super-majority approval requirements for amendments by
the stockholders to the certificate of incorporation or bylaws, and do not limit
the power of the board of directors to amend the bylaws. Certain of the
provisions of the articles of incorporation and bylaws of the combined company
may be amended only by the affirmative vote of at least 80% of the outstanding
shares of stock entitled to vote thereon, unless the amendments are favorably
recommended by the affirmative vote of a majority of the entire board of
directors.
RIGHT TO CALL SPECIAL MEETINGS OF STOCKHOLDERS. LabONE's bylaws permit
stockholders holding a majority of the issued and outstanding shares of LabONE
common stock to call special meetings of stockholders. Stockholders of the
combined company may not call stockholders' meetings.
NUMBER OF DIRECTORS; REMOVING DIRECTORS AND FILLING VACANCIES. LabONE's
bylaws permit its board of directors to change the number of directors, subject
to the limitation that there may not be more than 22 nor less than three. The
bylaws of the combined company will permit the board of directors to change the
number of directors, except that unless the articles of incorporation are
amended there may not be fewer than three nor more than 15.
LabONE's bylaws and the Delaware General Corporation Law permit the removal
of directors without cause by a majority vote of the stockholders entitled to
vote on the election of directors. The bylaws of the combined company will
provide that directors may be removed by stockholders only for
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cause by a majority vote of the stockholders entitled to vote on the election of
directors. However, under The Missouri General and Business Corporation Law,
because cumulative voting applies, unless the entire board is being removed a
director may not be removed by a stockholder vote if the votes cast against
removal would be sufficient to elect the director if then cumulatively voted at
an election of the entire class of which he is a part. The bylaws of the
combined company also will provide that any vacancies will be filled by an
affirmative vote of a majority of the remaining directors, or, if they are
unable to do so, by a vote of a majority of the stockholders at an annual or
special meeting.
PRESIDING OFFICER AT STOCKHOLDERS' MEETINGS. The bylaws of the combined
company will require that the chairman of the board, the president or a vice
president preside at all stockholder meetings and give such presiding officer
the authority to adjourn the stockholder meeting from time to time on such
presiding officer's own motion. The bylaws of LabONE designate a presiding
officer at stockholders meetings but do not authorize the presiding officer to
unilaterally adjourn the meeting.
LIMITATION OF DIRECTORS' LIABILITY. As permitted under Delaware law, the
certificate of incorporation of LabONE provides that a director shall not be
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for:
- any breach of the director's duty or loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- the unlawful payment of a dividend or the unlawful purchase or redemption
of stock, or
- any transaction from which the director derived an improper personal
benefit. Missouri law does not expressly authorize, and the articles of
incorporation of the combined company will not contain, such a provision.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. LabONE's bylaws provide that
LabONE shall indemnify and advance expenses to the directors and officers of
LabONE to the fullest extent permitted under the Delaware law. Generally, under
the Delaware law, a corporation may indemnify any person made or threatened to
be made a party to any action, suit or proceeding, by reason of the fact that
such person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation in certain capacities
with respect to another enterprise, against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such legal proceeding, if such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe such person's conduct was unlawful. With respect
to any action by or in the right of the corporation, such indemnification is
limited to expenses actually and reasonably incurred by such person and such
indemnification may be made in respect of any claim as to which such person is
adjudged to be liable to the corporation only to the extent that a court
determines that in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses that the court
deems proper. The Delaware law provides that expenses, including attorneys'
fees, incurred by an officer or director in defending any such action, suit or
proceeding may be paid or reimbursed by the corporation in advance of the final
disposition of a proceeding promptly upon receipt by it of an undertaking of
such person to repay such expenses if it shall ultimately be determined that
such person is not entitled to be indemnified by the corporation.
The combined company's bylaws provide that the combined company shall
indemnify and advance expenses to directors and officers of the combined company
to the fullest extent permitted under the Missouri law. The provisions of the
Missouri law governing indemnification and advancement of expenses are
substantially similar to those of the Delaware law, except that the Missouri law
permits a
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Missouri corporation, upon approval of its stockholders, to provide
indemnification for conduct that is not finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct. The Missouri law
provides that expenses may be paid or reimbursed by the corporation in advance
of the final disposition of a proceeding promptly upon receipt by it of an
undertaking by the indemnitee to repay such expenses unless it shall ultimately
be determined that such person is entitled to be indemnified by the corporation.
The provisions of the bylaws of the combined company governing indemnification
and advancement of expenses were previously approved by the stockholders of
Holdings.
The SEC has stated its opinion that, insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling an issuer, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
CERTAIN DIFFERENCES BETWEEN MISSOURI AND DELAWARE CORPORATION STATUTES.
STOCKHOLDER APPROVAL OF CERTAIN CORPORATE TRANSACTIONS. The Delaware Law
requires that a merger, consolidation, disposition of all or substantially all
the assets or voluntary dissolution of a corporation be approved by the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon (except as indicated below). The Missouri Law requires that such
transactions be approved by the affirmative vote of two-thirds (2/3) of the
outstanding shares entitled to vote thereon. Both the Delaware law and the
Missouri law require that mergers be approved by the board of directors, but
only the Delaware law requires board of director approval of dispositions of all
or substantially all of the corporation's assets. Under the Delaware law,
stockholder approval is not required for mergers in which:
- the certificate of incorporation of the surviving corporation is not
amended,
- shares of the surviving corporation outstanding before the merger are
unchanged, and
- new shares to be issued in the merger do not exceed 20 percent of the
shares outstanding before the merger.
AMENDMENT OF CHARTER. Under the Missouri law, proposed amendments to the
articles of incorporation may be submitted directly to the stockholders for
approval without the prior approval of the board of directors. Amendments to the
articles of incorporation must be approved by the affirmative vote of a majority
of the outstanding shares entitled to vote thereon. The Articles of
Incorporation of the combined company require that amendments to certain
provisions of the articles of incorporation or bylaws be approved by the
affirmative vote of 80% of the outstanding shares entitled to vote thereon,
unless a majority of the entire board of directors has favorably recommended the
amendment.
The Delaware law requires that an amendment to a Delaware corporation's
certificate of incorporation first be adopted by the board of directors before
the amendment is submitted to the stockholders for approval by the affirmative
vote of a majority of the outstanding shares entitled to vote thereon. LabONE's
certificate of incorporation contain no provisions requiring approval of greater
than a majority of the shares entitled to vote thereon, with the exception that
amendments to the "fair price" provisions described above are required to be
approved by the affirmative vote of
- two-thirds of all the outstanding shares entitled to vote thereon, and
- two-thirds of the outstanding shares of any class of stock entitled to
vote separately as a class on the matter.
DISSENTERS' APPRAISAL RIGHTS. The Missouri law grants appraisal rights to
dissenting stockholders in connection with mergers, consolidations and
dispositions of all or substantially all of the
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assets of the corporation. The Delaware law grants appraisal rights only in
connection with mergers and consolidations, and grants no appraisal rights with
respect to mergers in which:
- dissenting shares are
(a) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or
(b) held of record by more than 2,000 stockholders, or
- the corporation is the surviving corporation in the merger and no vote of
its stockholders is required under the Delaware law, with certain
exceptions.
ANTI-TAKEOVER STATUTES. The Missouri law contains a control share
acquisition statute and a business combination "moratorium" statute. Both
statutes apply only to Missouri corporations that meet certain tests with
respect to their presence in Missouri. Because the combined company will not
meet these tests, neither of these statutes will apply to the combined company
at the effective time of the merger. The Delaware law contains a business
combination "moratorium" statute that generally prohibits a domestic corporation
from engaging in mergers or other business combinations with any person who is
an "interested stockholder" for a period of three years after the person becomes
an "interested stockholder," unless certain conditions are satisfied.
OTHER CONSTITUENCY STATUTE. The Missouri law and the combined company's
articles of incorporation expressly authorize directors to consider
"non-monetary factors" when analyzing takeover bids. The board of directors is
authorized to consider a number of factors in exercising its business judgment
concerning an acquisition proposal, including without limitation the following:
- the adequacy of the consideration offered in relation to the board's
estimate of the current value of the corporation in a freely-negotiated
sale, the liquidation value of the corporation, and the future value of
the corporation over a period of years as an independent entity,
discounted to current value;
- existing political, economic and other factors bearing on security prices;
- whether the acquisition proposal might violate federal, state or local
laws;
- social, legal and economic effects on employees, suppliers, customers and
others having similar relationships with the corporation, and on the
communities in which the corporation conducts its business;
- the financial condition and earnings prospects of the bidder; and
- the competence, experience and integrity of the bidder.
The Delaware law does not contain a similar provision.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Delaware law permits
stockholders to act without a meeting, without prior notice and without a vote,
if consents in writing setting forth the action so taken are signed by the
holders of outstanding stock having the minimum number of votes that would be
necessary to authorize such action at a meeting at which all shares entitled to
vote with respect to the subject matter thereof were present and voted. The
Missouri law permits such action without a meeting only if written consents
setting forth the action so taken are signed by all of the stockholders entitled
to vote on the matter.
AMENDMENT OF BYLAWS. Under the Missouri law, the power to make, alter,
amend or repeal the bylaws of the corporation is vested in the stockholders,
unless and to the extent that such power is vested in the board of directors by
the articles of incorporation. The combined company's articles of
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incorporation authorize the stockholders and the board of directors to amend the
bylaws, subject to certain restrictions. Under the DGCL, the stockholders have
the power to adopt, amend or repeal bylaws, provided that the corporation may in
its certificate of incorporation confer such authority on the directors as well.
Under the Delaware law, the fact that such power has been conferred on the
directors does not limit the power of the stockholders to adopt, amend or repeal
bylaws. LabONE's certificate of incorporation authorizes the board to amend or
repeal the bylaws without stockholder approval.
INSPECTION OF BOOKS AND RECORDS. The Missouri law grants stockholders the
right to inspect the stockholders' list and books of the corporation under such
regulations as may be prescribed by the corporation's bylaws. The Delaware law
allows any stockowner to inspect the stockowners' list and books of the
corporation for a purpose reasonably related to such person's interest as a
stockholder.
PAYMENT OF DIVIDENDS. Under the Missouri law, the board of directors of a
corporation may declare and the corporation may pay dividends so long as the net
assets of the corporation are not less than its stated capital and the payment
of the dividend would not reduce the net assets of the corporation below its
stated capital. Under the Delaware law, a corporation generally may pay
dividends out of the corporation's surplus or, if the corporation has no
available surplus, out of net profits for the fiscal year in which the dividend
is declared or the preceding fiscal year.
COMPARATIVE RIGHTS OF HOLDINGS STOCKHOLDERS
Holdings is a Missouri corporation and will remain a Missouri corporation
when it becomes the combined company in the merger. The rights of holders of
Holdings common stock will continue to be governed by Missouri law upon
consummation of the merger. However, the articles of incorporation and bylaws of
Holdings will be amended in the following material respects when it becomes the
combined company in the merger:
CHANGE OF NAME. Holdings' name will be changed to "Lab ONE, Inc."
COMMON STOCK. The par value of the common stock will be reduced from $1.00
per share to $.01 per share, and the number of shares of common stock which the
corporation shall have the authority to issue will be increased from 24,000,000
shares to 40,000,000 shares. There are currently issued and outstanding
6,489,103 shares of Holdings common stock. 60,000 additional shares are reserved
for issuance upon exercise of outstanding stock options.
REQUIRED VOTE FOR CERTAIN AMENDMENTS TO ARTICLES AND BYLAWS. The combined
company's articles of incorporation will be amended to require that amendments
to certain additional provisions of the bylaws be approved by the affirmative
vote of at least 80% of the outstanding shares of stock entitled to vote
thereon, unless the amendments are favorably recommended by the affirmative vote
of a majority of the entire board of directors. These provisions include those
relating to who presides at stockholder meetings and the business that may be
conducted at such meetings (including advance notice requirements), the powers
of the board of directors and indemnification of the board of directors. The
amendments also require an 80% vote to adopt provisions which are inconsistent
with specified provisions of the articles of incorporation or bylaws, unless
favorably recommended by a majority of the entire board of directors. Holdings'
present articles of incorporation waives the 80% stockholder vote requirement
only if amendments are favorably recommended by the entire board of directors.
See "The Proposed Merger--Amendments to Holdings' Articles of Incorporation and
Bylaws" on page 52.
FAIR PRICE PROVISIONS. The fair price provisions of the articles of
incorporation of the combined company will be amended to eliminate the concept
of a "Continuing Director Quorum". This change together with other clarifying
changes relating to action by continuing directors, as defined, eliminates a
possible ambiguity in these provisions as to the requisite level of continuing
director approval for certain business combinations.
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The fair price provisions are also amended to include among those business
combinations requiring extraordinary stockholder or continuing director approval
mergers with subsidiaries in which certain additional by-law provisions do not
appear in the by-laws of the surviving corporation or in which the by-laws of
the surviving corporation contain provisions inconsistent with such provisions
and other charter and by-law provisions. The additional by-law provisions
include those relating to who presides at stockholder meetings and the business
that may be conducted at such meetings (including advance notice requirements),
the powers of the board of directors and indemnification of the board of
directors.
SPECIAL STOCKHOLDERS' MEETINGS. Under Holdings' current bylaws, holders of
four-fifths ( 4/5) of the outstanding shares may call a special meeting of
stockholders. Under the amended bylaws of the combined company, stockholders may
not call a special meeting.
PRESIDING OFFICER AT STOCKHOLDERS' MEETINGS. The amended bylaws of the
combined company require that the chairman of the board, the president or a vice
president preside at all stockholder meetings and give such presiding officer
the authority to adjourn the stockholder meeting from time to time on such
presiding officer's own motion. Holdings' present bylaws designate a presiding
officer at stockholders meetings but do not authorize the presiding officer to
unilaterally adjourn the meeting.
ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND PROPOSALS. The combined
company's bylaws will contain new provisions establishing an advance notice
procedure for stockholders wishing to nominate candidates for election as
directors or bring other business before an annual meeting of stockholders. The
bylaws will require stockholders to deliver prior written notice of any
stockholder proposal or nomination to the Secretary of the combined company no
later than ninety days before the meeting date or ten days after the meeting
date is publicly announced, whichever is later. Holdings' bylaws do not contain
such a provision.
CLASSIFIED BOARD. Under the combined company's bylaws, where the number of
directors is not evenly divisible by three, the board of directors will be
empowered to determine which class of directors shall have a number differing
from the other classes. Holdings' bylaws do not contain such a provision.
DIRECTOR QUALIFICATIONS. The age limitation on directors will be eliminated
in the combined company's bylaws.
SPECIAL BOARD MEETINGS. Under the combined company's bylaws, a majority of
the board of directors may call a special meeting. Holdings' bylaws permit a
single director to call a special meeting of the board.
For additional information respecting the changes that will be made to
Holdings articles of incorporation and bylaws, See "The Proposed
Merger--Amendments to Holdings' Articles of Incorporation and Bylaws" on page
52.
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MANAGEMENT OF HOLDINGS
DIRECTORS AND OFFICERS
The directors and executive officers of Holdings are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
P. Anthony Jacobs, CFA..................... 57 President, Chief Executive Officer and
Class C Director
Steven K. Fitzwater........................ 52 Executive Vice President, Chief Operating
and Financial Officer, Treasurer, Secretary
and Class A Director
Linda K. McCoy............................. 48 Vice President and Chief Accounting Officer
John H. Robinson, Jr....................... 48 Chairman of the Board and Class B Director
Lan C. Bentsen............................. 52 Class B Director
W.T. Grant II.............................. 49 Chairman of the Board, President and Chief
Executive Officer of LabONE
</TABLE>
Mr. Jacobs has been a director of Holdings since 1987, President of Holdings
since May 1993 and Chief Executive Officer since September 1997. Mr. Jacobs was
Chief Operating Officer from 1990 to September 1997 and Executive Vice President
prior to May 1993. Mr. Jacobs also is a director of Trenwick Group, Inc.,
Syntroleum Corporation and Response Oncology, Inc.
Mr. Fitzwater has been a director of Holdings since September 1997, and
Executive Vice President, Chief Operating and Financial Officer, Treasurer and
Secretary since May 1998. He was Vice President, Chief Financial and Accounting
Officer, Treasurer and Secretary from September 1997 to May 1998 and was Vice
President, Chief Accounting Officer and Secretary of Holdings from 1990 to
September 1997.
Ms. McCoy has been Vice President and Chief Accounting Officer since May
1998.
Mr. Robinson has been a director of Holdings since 1990 and Chairman of the
Board since September 1997. Mr. Robinson is Vice Chairman of Black & Veatch
(design and construction). Mr. Robinson also is a director of Commerce
Bancshares, Inc. and Coeur d'Alene Mines Corporation (gold and silver mining).
Mr. Bentsen has been a director of Holdings since 1986. He has been the
Executive Vice President of Frontera Resources since 1996 (oil and gas). From
1994 to 1996 he was Managing Partner of Remington Partners (investments) and was
previously Chairman and Chief Executive Officer of Sovereign National
Management, Inc. (property management).
Mr. Grant has been Chairman, President and Chief Executive Officer of LabONE
since November 1995. He was a director of Holdings from 1980 to September 1997,
Chairman and Chief Executive Officer of Holdings from May 1993 to September
1997, and President of Holdings prior to May 1993. Mr. Grant also is a director
of AMC Entertainment Inc., Commerce Bancshares, Inc., Kansas City Power & Light
Company, and Response Oncology, Inc.
COMMITTEES OF THE HOLDINGS' BOARD OF DIRECTORS
The Holdings board has established an audit committee consisting of Messrs.
Bentsen (Chairman) and Robinson and a compensation committee consisting of
Messrs. Robinson (Chairman) and Bentsen.
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During the year ended December 31, 1998, the board met seven times and the
compensation committee met four times. The audit committee held a normally
scheduled December meeting in January 1999. The attendance at committee and
board meetings by all directors in the aggregate was 97% and each director
attended at least 90% of the meetings of the board and the committees of which
the director was a member.
The audit committee recommends to the board of directors the independent
public accountants to audit the books and records of Holdings and its
subsidiaries for the year. It also reviews, to the extent it deems appropriate,
the scope, plan and findings of the independent public accountants' annual
audit, recommendations of the accountants, the adequacy of internal accounting
controls and audit procedures, Holdings' audited financial statements, non-audit
services performed by the independent public accountants, and fees paid to the
independent public accountants for audit and non-audit services.
The compensation committee recommends to the board of directors the
compensation of all officers and administers Holdings' 1997 Directors' Stock
Option Plan . It also recommends to the board of directors the qualifications
for new director nominees, candidates for nomination, and policies concerning
director compensation and length of service. During 1998 cash compensation for
non-employee outside directors was passed on by the full board upon the
recommendation of the employee directors.
COMPENSATION OF DIRECTORS
Non-employee directors of Holdings receive compensation consisting of annual
cash retainers and meeting fees. Each director also receives a one-time option
to purchase 15,000 shares of Holdings' common stock.
CASH COMPENSATION. Directors who are not employees of Holdings are paid an
annual retainer for board service of $15,000 and a fee of $2,000 for each
meeting of the board or a board committee attended. Directors who are employees
of Holdings, which presently consist of Messrs Jacobs and Fitzwater, are not
paid any fee or additional remuneration for services as members of the Holdings
board or any committee thereof.
DIRECTORS' STOCK OPTIONS. Pursuant to Holdings' 1997 Directors' Stock
Option Plan, each director of Holdings received on adoption of the plan in
September 1997, a one-time grant of an option to purchase 15,000 shares of
Holdings' common stock for a purchase price equal to the $26.50 fair market
value of the stock on the date of grant. The options expire ten years from the
date of grant and become exercisable at the rate of 5,000 per year, commencing
with the first anniversary of the date of grant. Unvested options become
exercisable immediately in the case of a liquidation or dissolution, a merger or
consolidation which contemplates that a director will not continue in office
following the transaction or in the case of certain change-in-control events.
Upon termination of the director's term of office, options expire (a) on the
earlier of twelve months following death or the end of the option term in the
case of termination in connection with a merger, consolidation, liquidation,
dissolution or certain change-in-control events, (b) after one year in the case
of termination due to or followed within 90 days by death, and (c) after 90 days
in all other cases.
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COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation received by Holdings' Chief
Executive Officer and the only other executive officers holding office at
December 31, 1998 whose salary and bonus for 1998 aggregated $100,000 or more,
for services rendered in all capacities to Holdings and its subsidiaries for the
last three years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
---------------------- OPTIONS/SARS ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) # ($)(2)
- ------------------------------------- --------- ---------- ---------- ------------- ----------------------
<S> <C> <C> <C> <C> <C>
P. Anthony Jacobs, President ........ 1998 $ 39,583 -0- -0- $ -0-
and Chief Executive Officer 1997 112,423 -0- 18,000(3) 797,259
of Holdings 1996 249,590 -0- 4,000(4) 44,110
W. T. Grant II, Chairman of ......... 1998 164,769 107,261(6) -0- 21,670
the Board, President and 1997 232,363(5) 131,173(6) 78,000(7) 900,255
Chief Executive Officer 1996 331,000 -0- 4,000(4) 25,227
of LabONE
</TABLE>
- ------------------------
(1) Compensation deferred at the election of an executive officer, pursuant to
Holdings' or its subsidiaries' 401(k) Plans, is included in the year earned.
(2) Includes the following contributions paid or accrued to the named
executive's accounts in Holdings', or one of its subsidiaries', as the case
may be, 401(k) Plan and Money Purchase Pension Plan ("MPP"), pursuant to a
Supplemental Retirement Agreement ("SERP") with said executive and for term
life insurance for said executive:
<TABLE>
<CAPTION>
401(K) MPP SERP
------------------------------- ------------------------------- -------------------------------
EXECUTIVE 1998 1997 1986 1998 1997 1996 1998 1997 1996
- --------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Jacobs....................... $ 0 $ 0 $ 4,750 $ 0 $ 0 $ 15,476 $ 0 $ 143,197 $ 22,309
Mr. Grant........................ 4,526 9,922 4,750 16,421 0 15,476 0 38,201 2,914
<CAPTION>
TERM LIFE INS
PREMIUMS
-------------------------------
EXECUTIVE 1998 1997 1996
- --------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Mr. Jacobs....................... $ 0 $ 656 $ 1,575
Mr. Grant........................ 723 870 2,087
</TABLE>
Holdings' 401(k) Plan and Money Purchase Pension Plan were terminated
effective as of December 31, 1996. Mr. Grant received $9,922 pursuant to
LabONE's 401(k) Plan in 1997 and $4,526 in 1998. Also includes severance
payments to Messrs. Grant and Jacobs of $809,851 and $610,802, respectively
and payment of accrued vacation amounts upon termination of employment to
Messrs. Grant and Jacobs of $39,851 and $37,360, respectively.
(3) Consists of options to purchase 15,000 shares of Holdings common stock and
3,000 shares of common stock of LabONE.
(4) Consists entirely of options to purchase shares of common stock of Response
Oncology, Inc. Numbers have been adjusted to reflect a 1 for 5 reverse stock
split effective November 1995.
(5) Since November 1995, Mr. Grant has served as President, Chairman of the
Board and Chief Executive Officer of LabONE, an 80.5% owned subsidiary of
Holdings; however, Mr. Grant had received cash compensation only from
Holdings until June 1, 1997. At such time his employment with Holdings was
terminated. Holdings paid Mr. Grant a base salary of $146,344 from January
1,
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1997 to May 31, 1997. LabONE paid Mr. Grant a base salary of $86,019 from
June 1, 1997 to December 31, 1997.
(6) Reflects cash bonuses paid to Mr. Grant by LabONE for services rendered to
LabONE.
(7) Consists of options to purchase 75,000 shares of common stock of LabONE and
3,000 shares of Response Oncology, Inc.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
The table below provides information on option exercises in 1998 by the
named executive officers and the values of such officers' unexercised options at
December 31, 1998. No options were granted to any of those executive officers
during 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT YEAR-END(#) AT YEAR-END($)
ON VALUE -------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- --------------- --------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
P. Anthony Jacobs............ -0- -0- 5,000(1) 10,000 $ -0- $ -0-
W.T. Grant II................ -0- -0- 42,431(2) 60,000(2) 84,007 -0-
</TABLE>
- ------------------------
(1) Consists entirely of shares of Holdings common stock.
(2) Consists entirely of options to purchase shares of common stock of LabONE
and the value (i.e. market value of underlying securities minus option
exercise price) at December 31, 1998 of such options.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Set forth below is the report of the compensation committee of the board of
directors of Holdings. The report covers all officers of Holdings other than Mr.
Grant, who is the Chairman, President and Chief Executive Officer of LabONE. The
compensation committee did not, and Holdings' Board of Directors also does not,
have responsibility for and in fact does not establish compensation policy for
officers and employees of LabONE. The board of directors of LabONE has its own
compensation committee, which establishes compensation policies for the
executive officers of LabONE.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
compensation committee of the board of directors of Holdings consists John H.
Robinson, Jr. (Chairman) and Lan C. Bentsen. Mr. Robinson and Bentsen, who are
non-employee directors of Holdings, have not been employees or officers of
Holdings or any of its subsidiaries and have had no relationship or transaction
with Holdings requiring disclosure under Item 404 of Regulation S-K.
This report is provided by the committee to assist stockholders in
understanding the committee's philosophy in establishing the compensation of the
Chief Executive Officer and all other executive officers of Holdings for the
year ended December 31, 1998.
OVERVIEW AND COMPENSATION PHILOSOPHY. During 1996, Holdings initiated a
restructuring process that contemplated the distribution of most of its assets
other than LabONE and Response Oncology to Holdings' stockholders through the
SLH Distribution. That distribution was effected on March 3, 1997. In connection
with SLH's move to new facilities and the termination of a lease between SLH and
Holdings on June 1, 1997, Holdings and SLH entered into an agreement under which
SLH hired all of Holdings' existing employees and agreed to provide to Holdings
management and
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administrative services and certain office space for an annual fee of $75,000.
This arrangement was entered into at the time that Holdings was effecting a
second distribution to Holdings' stockholders of all of the common stock of
Response Oncology owned by Holdings. That distribution occurred on July 25,
1997. As a consequence of the SLH and Response distributions and the services
agreement, Holdings had no employees between June 1, 1997, and August 7, 1998.
On August 7, 1998, the services agreement was terminated due to the merger of
SLH and Syntroleum Corporation, thereby necessitating a restaffing of Holdings.
In anticipation of the need to restaff, the compensation committee retained
McDaniel & Associates, Inc., a compensation consultant, in the spring of 1998 to
assist the committee in developing a compensation structure for Holdings'
executive officers, who would become Holdings employees.
In developing a new compensation structure the committee focused on tying
Holdings' business strategy to three basic elements of compensation: (a) base
compensation, (b) severance pay and (c) existing stock option arrangements. The
principal business of Holdings is to manage its investment in LabONE. Although
negotiations for the merger of the two companies had been terminated in 1997,
the committee recognized that the long-term interests of both companies and
stockholder groups was to engage in a combination or some other strategic
transaction. Accordingly, the committee believed that compensation should be
structured to ensure the continuity of management necessary to effectively
pursue this strategy or to pursue other strategies that might develop under the
circumstances.
Consistent with these goals, Mr. Jacobs, the President and Chief Executive
Officer, Mr. Fitzwater, the Executive Vice President, Chief Operating and
Financial Officer, Treasurer and Secretary and Ms. McCoy, the Vice President and
Chief Accounting Officer, were offered employment agreements that provide base
compensation of $100,000, $100,000 and $70,000, respectively, and severance pay
of two years' base salary for Messrs. Jacobs and Fitzwater and one year's base
pay for Ms. McCoy.
The committee also concluded that an amendment to the stock option plan was
necessary to render it effective. Under the plan, options would expire 90 days
following the termination of director status. Since the $26.50 exercise price of
all options granted under the plan was significantly above the market price of
Holdings' stock, it was concluded that benefits under the plan would have no
value should Holdings be successful in implementing its strategy. Accordingly,
the committee recommended an amendment, which was later adopted by the board,
that would permit an optionee that was terminated in connection with a strategic
transaction to exercise the option through the end of the option term, all of
which expire on September 17, 2007.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICERS FOR 1998. The components of
the 1998 compensation of P. Anthony Jacobs, the President and Chief Executive
Officer of Holdings, were also determined in accordance with the above
discussion. Mr. Jacobs base compensation was set at $100,000 under the terms of
an employment agreement as described above. Mr. Jacobs, as a director of
Holdings, is also the holder of options to purchase 15,000 shares of Holdings'
common stock at a price of $26.50 per share. As described above, that option was
amended in August 1998, to extend the option exercise period upon termination of
his status as a director in connection with a merger, consolidation, liquidation
or certain change in control transactions.
This report is being made over the names of John H. Robinson, Jr. and Lan C.
Bentsen, who are the present members of the committee.
PERFORMANCE OF HOLDINGS' COMMON STOCK
The following performance graph compares the performance of Holdings' common
stock during the period beginning on January 1, 1994 and ending December 31,
1998, to a NASDAQ Stock Market index referred to as the "NASDAQ Composite,"
consisting of U.S. companies, and a peer group referred to as the "LabONE PEER
GROUP." The NASDAQ Composite index is one provided by the Center for Research in
Security Prices of the University of Chicago. The LabONE Peer Group is a
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group of seven testing laboratories selected by LabONE (Bio-References Labs,
Laboratory Corp. Of America, Oncormed, Pharmchem, Psychemedics, Unilab and
Universal Standard Medical). The performance graph published by Holdings last
year also included the Russell 2000 Index. This is an index of companies, the
mean of whose market capitalizations approximated that of Holdings before its
1997 distributions of SLH Corporation and Response Oncology, Inc. The Russell
2000 Index was deleted from this year's graph due to the decline in Holdings'
market capitalization as a result of the SLH and Response distributions.
Holdings' total return for 1998 decreased compared to the return reflected by
the Russell 2000 Index.
The graph assumes a $100 investment in Holdings' common stock and in each of
the indexes as of December 31, 1993, and a reinvestment of dividends paid on
those investments throughout the subsequent five year period. Since dividends
are included, the graph reflects the 1997 SLH and Response distributions, the
equivalent cash value of which were $4.78 and $7.31 per share, respectively.
VALUE OF $100 INVESTMENTS
AT DECEMBER 31, 1993 AND AT EACH SUBSEQUENT DECEMBER 31, THROUGH
DECEMBER 31, 1998, ASSUMING REINVESTMENT OF DIVIDENDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LAB HOLDINGS, INC. NASDAQ COMPOSITE INDEX LABONE PEER GROUP
<S> <C> <C> <C>
1993 $100.00 $100.00 $100.00
1994 $99.67 $97.75 $89.51
1995 $102.30 $138.26 $67.97
1996 $120.53 $170.01 $26.49
1997 $108.45 $208.58 $22.13
1998 $86.74 $293.21 $20.38
</TABLE>
<TABLE>
<CAPTION>
YEAR END DATA 1993 1994 1995 1996 1997 1998
- ------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lab Holdings, Inc................................ $ 100.00 $ 99.67 $ 102.30 $ 120.53 $ 108.45 $ 86.74
NASDAQ Composite Index........................... 100.00 97.75 138.26 170.01 208.58 293.21
LabONE Peer Group................................ 100.00 89.51 67.97 26.49 22.13 20.38
</TABLE>
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<PAGE>
SECURITY OWNERSHIP OF HOLDINGS MANAGEMENT
The following table and notes thereto indicate the shares of common stock of
Holdings and of LabONE, known to Holdings to be beneficially owned as of March
31, 1999, respectively, by each director (including the nominees for election as
a directors) of Holdings, each of the executive officers named in the Summary
Compensation Table beginning on page 97, and by all directors and executive
officers of Holdings as a group. The table also reflects beneficial ownership in
the combined company as if the merger had occurred at March 31, 1999.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMBINED
SHARES OF HOLDINGS COMMON COMPANY
COMMON STOCK STOCK OF LABONE BENEFICIALLY
BENEFICIALLY PERCENTAGE BENEFICIALLY OWNED AFTER
NAME OWNED(1)(3) OF CLASS(2) OWNED(1)(4)(5) MERGER PERCENTAGE(8)
- -------------------------------- ---------------------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Lan C. Bentsen.................. 6,000 -- 0 9,000 --
Steven K. Fitzwater............. 6,932 -- 5 10,403 --
W. T. Grant II(6)............... 138,089 2.1% 81,596(7) 288,729 2.3-2.6%
P. Anthony Jacobs............... 6,780 -- 0 10,170 --
John H. Robinson, Jr............ 6,652 -- 0 9,978 --
All directors, nominees and
executive officers as a group
of six........................ 164,453 2.5% 81,601(7) 328,280 2.7-3.0%
</TABLE>
- ------------------------
(1) A beneficial owner of a security includes a person who, directly or
indirectly, has or shares voting or investment power with respect to such
security. Voting power is the power to vote or direct the voting of the
security and investment power is the power to dispose or direct the
disposition of the security. Each person listed has stated that he, either
alone or with his spouse, has sole voting power and sole investment power
with respect to the shares shown as beneficially owned, except as otherwise
indicated.
(2) The percentages represent the total number of shares of common stock shown
in the adjacent column divided by the number of issued and outstanding
shares of common stock as of December 31, 1998 (6,489,103 shares).
Percentages of less than one percent are omitted.
(3) Shares of Holdings common stock shown as beneficially owned include shares
issuable upon the exercise of stock options granted under the Lab Holdings,
Inc. 1997 Directors' Stock Option Plan that were exercisable on December 31,
1998 or that become exercisable within 60 days thereafter, as follows: 5,000
shares for each of Messrs Bentsen, Fitzwater, Jacobs and Robinson and 20,000
shares for all directors and executive officers as a group.
(4) Shares of LabONE stock shown as beneficially owned include shares issuable
upon the exercise of stock options granted under the LabONE Long-Term
Incentive Plan that were exercisable on December 31, 1998 or that become
exercisable within 60 days thereafter, as follows: W. T. Grant II, 57,431
shares; and all directors and executive officers as a group, 57,431 shares.
(5) Percentages of shares beneficially owned are less than 1% for all directors
and executive officers, individually and as a group; the shares shown as
beneficially owned do not include 10,712,200 shares of LabONE owned by
Holdings as to which each director of Holdings has shared voting and
investment power as a member of Holdings' board of directors. Each board
member disclaims beneficial ownership of the LabONE shares owned by
Holdings.
(6) Includes 22,442 shares held by W. T. Grant II as custodian for his children;
includes 45,000 shares held in a family trust for which W. T. Grant II
serves as a co-trustee and in that capacity shares
125
<PAGE>
voting and investment powers; also includes 12,480 shares owned by the wife
of W. T. Grant II, as to which he disclaims beneficial ownership.
(7) Includes the 22,365 shares of LabONE common stock held in an individually
directed account of Mr. Grant under LabONE's 401(k) profit-sharing plan, as
to which Mr. Grant has sole investment power only.
(8) Assumes that none of the beneficial owners will elect to exchange LabONE
shares for cash. The two percentages for each beneficial owner of the
combined company reflect percentage of beneficial ownership over 1% assuming
that LabONE stockholders other than Holdings elect all stock (the lower
number) or maximum cash (the higher number).
SECURITY OWNERSHIP OF CERTAIN OTHER BENEFICIAL OWNERS OF HOLDINGS COMMON STOCK
The following table indicates the shares of Holdings common stock
beneficially owned by the only persons (other than persons set forth in the
preceding table) known to Holdings or its management as beneficially owning more
than five percent of Holdings' common stock as of March 31, 1999. The table also
reflects beneficial ownership in the combined company as if the merger had
occurred at March 31, 1999.
<TABLE>
<CAPTION>
SHARES OF
COMBINED
COMPANY
BENEFICIALLY AFTER
AMOUNT AND NATURE PERCENT OF OWNED AFTER MERGER
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS(1) MERGER(3) PERCENTAGE(3)
- -------------------------------------- ---------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
American Century Companies, Inc. Total - 682,100(2) 10.5% 1,023,150 8.3-9.3%
4500 Main Street sole voting power - 682,100
P. O. Box 418210 shared voting power - 0
Kansas City, Missouri 64141-9210 sole disposition power - 682,100
shared disposition power - 0
Wallace R. Weitz & Company Total - 881,454(2) 13.58% 1,322,181 10.7-12.0%
9290 West Dodge Rd., Suite 405 sole voting power - 881,454
Omaha, Nebraska 68114 shared voting power - 0
sole disposition power - 881,454
shared disposition power - 0
The Southern Fiduciary Group, Inc. Total - 467,192(2) 7.2% 700,788 5.7-6.3%
2325 Crestmoor Road, Suite 202 sole voting power - 76,000
Nashville, Tennessee shared voting power - 0
sole disposition power - 391,192
shared disposition power - 0
William D. Grant Total - 1,086,647(4) 16.7% 1,668,665 13.5-15.1%
One Ward Parkway, Suite 130 sole voting power - 500,441
Kansas City, Missouri 64112 shared voting power - 586,206
sole disposition power - 500,441
shared disposition power - 586,206
</TABLE>
- ------------------------
(1) The percentage represents the total number of shares of common stock shown
in the adjacent column divided by the number of issued and outstanding
shares of common stock as of December 31, 1998.
(2) As reported in a Schedule 13G filed by the owner as of December 31, 1998.
126
<PAGE>
(3) Number of shares reflect total shares only from prior column and does not
take into account shares of LabONE common stock that may be beneficially
owned, other than 38,695 shares of LabONE common stock beneficially owned by
W.D. Grant. Mr. Grant has represented that he does not intend to elect cash
for any LabONE shares beneficially owned by him. The two percentages for
each beneficial owner of the combined company reflect percentage of
beneficial ownership assuming that LabONE stockholders other than Holdings
elect all stock (the lower number) or maximum cash (the higher number).
(4) Based on information furnished by W.D. Grant as of March 31, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AGREEMENTS AND TERMINATION OF INTERIM SERVICES
AGREEMENT. Effective August 7, 1998, Holdings entered into employment
agreements with Mr. Jacobs, Mr. Fitzwater and Ms. McCoy, all of whom are
executive officers of Holdings. Each employment agreement provides for
employment of the executive officer for a term commencing on August 7, 1998, and
continuing until the third anniversary of that date (the second anniversary in
the case of Ms. McCoy's agreement). The term is extended for successive one year
periods on each anniversary of the agreement unless notice of non-extension is
given by either party to the other prior to that anniversary.
The initial base compensation payable under the employment agreements is
$100,000 for each of Mr. Jacobs and Mr. Fitzwater and $70,000 for Ms. McCoy. It
is subject to adjustment annually by the board of directors, provided that base
salary may not be decreased by more than five percent year to year.
If the officer is terminated for cause or voluntarily terminates his
employment with Holdings, then, Holdings will not be obligated to pay the
officer any amounts of compensation or benefits following the date of
termination. A voluntary termination does not include a resignation tendered at
the request of the board or following or in connection with a merger,
consolidation, liquidation, dissolution or certain change in control events. If
the officer is terminated without cause, Holdings will continue to pay the
officer amounts equal to his base compensation, as in effect at the time of the
termination without cause, for the remaining term of this employment agreement,
but in no event may the payments continue for a period of more than two years
following the termination in the case of Mr. Jacobs and Mr. Fitzwater and for
more than one year in the case of Ms. McCoy. In that case, Holdings will also
reimburse the officer for the cost of the officer's health insurance as in
effect at the date of termination. The merger agreement described elsewhere in
this report contemplates that each of the officers will tender their
resignations at the closing of the merger. Under the employment agreements,
those resignations will effect terminations of the employment agreements,
without cause so that each will be entitled to receive payments of their base
compensation and health insurance benefits as described above. Copies of the
employment agreements are appended to Holdings' Form 10-Q for the quarter ended
September 30, 1998.
127
<PAGE>
HOLDINGS ANNUAL MEETING PROPOSALS
PROPOSAL TO AMEND ARTICLES OF INCORPORATION
PROPOSAL 1 ON HOLDINGS PROXY CARD
GENERAL
The Holdings board of directors recommends to the Holdings stockholders that
they adopt an amendment to paragraph B.4 of Article X of Holdings' articles of
incorporation so that, as amended, such paragraph will provide as follows.
"Any action required to be taken by vote of the Continuing
Directors shall be effective only if taken at a meeting at
which a "Continuing Director Quorum" is present, which
term shall mean two-thirds of the Continuing Directors
capable of exercising the powers conferred upon them under
the provisions of the Articles of Incorporation or the
Bylaws of the Corporation or by law."
The purpose of this amendment is to change the definition of "Continuing
Director Quorum" from nine continuing directors, as defined in Article X, to
two-thirds of the Continuing Directors. The affirmative vote, in person or by
proxy, by the holders of a majority of the outstanding Holdings common stock is
required to adopt the articles amendment. If the articles amendment is approved,
the requisite affirmative vote of stockholders for the merger will be 66 2/3%
instead of 80%. Adoption of the articles amendment is a condition to the
effectiveness of the merger agreement and consummation of the merger.
BACKGROUND FOR THE ARTICLES AMENDMENT.
Article X of Holdings' articles of incorporation is a "fair price" provision
which applies to certain "business combinations" involving "related persons", as
therein defined. One type of business combination to which Article X applies is
a merger of Holdings into a subsidiary that will have the effect, directly or
indirectly, of increasing the proportionate share of Holdings common stock owned
by any person beneficially owning 10% of Holdings' outstanding common stock.
William D. Grant, a director of LabONE, beneficially owns more than 10% of
Holdings' outstanding common stock and also owns 38,695 shares of LabONE common
stock. Mr. Grant has represented to LabONE that he will elect to receive stock
for his shares of LabONE common stock in the merger, and therefore the merger
may be deemed to have the effect of increasing his proportionate interest in
Holdings relative to other Holdings stockholders who do not own LabONE common
stock.
If the merger is a business combination under Article X, then it generally
can only be effected under one of the following conditions:
a if the merger is approved by the affirmative vote of the holders of 80%
of the outstanding Holdings common stock;
b if the per share fair market value of the Holdings shares retained by
Holdings stockholders in the merger equals or exceeds the greater of:
- the highest price per share offered or paid by Mr. Grant at any time
after March 8, 1994, which, based on Form 4s filed by him in August
of 1994, appears to be $36.80,
- a price that includes the same or greater premium over the market
price of Holdings common stock immediately prior to announcement of
the merger as the greatest premium (if any) paid over market price by
Mr. Grant at any time after March 8, 1994, and
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<PAGE>
- the value determined as fair to Holdings stockholders (other than Mr.
Grant) by an investment banking firm selected by a two-thirds vote of
the "Continuing Directors", as defined in Article X, or by the
Missouri Director of Insurance; or
c if the merger is approved by a two-thirds vote of the "Continuing
Directors", taking into consideration various matters, including the
current market price of Holdings common stock, the current value of
Holdings in a freely negotiated transaction and the Continuing Directors
estimate of Holdings future value as a independent going concern.
Holdings notes that because historical market prices exceed current values,
the value of the shares to be retained by Holdings stockholders in the merger
likely will not satisfy the condition described in clause b above.
Although the merger has been approved by a unanimous vote of Holdings' board
of directors, and although Holdings believes that each of its four directors is
a "Continuing Director" as defined in Article X, action taken by such persons in
approving a business combination is effective only when taken at a meeting at
which a "Continuing Director Quorum" is present. As defined in Article X, this
term means nine continuing directors, which is five more persons than presently
serve on the Holdings board of directors. Because of the manner in which
"Continuing Director Quorum" is defined, it is not possible to satisfy the
condition described in clause (c) above with the current board complement.
Current management is not certain why two-thirds was not originally used as
a defining term for continuing director quorum in Holdings' articles of
incorporation instead of the number nine, but believes the reason may have been
that initial plans for Holdings called for a 14 member board, and the number
nine was selected to avoid confusion over a resulting fraction. In any event,
over the years the size of Holdings' board has been reduced so that the
continuing director quorum provision of Article X does not work under current
conditions.
Article XI of Holdings articles of incorporation permit the amendment of
Article X by the affirmative vote of a majority of Holdings' outstanding common
stock when such amendment is recommended by a unanimous vote of the entire
Holdings board. In light of the opinion of its financial advisor as to the
fairness of the terms of the merger to Holdings and its own deliberations
concerning the merger, the Holdings board of directors has unanimously approved
the articles amendment and directed that it be submitted to the stockholders for
their approval at the annual meeting. Holdings believes that if the articles
amendment is approved, the conditions of clause (c) above will have been
satisfied.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ARTICLES
AMENDMENT.
PROPOSAL TO ELECT TWO HOLDINGS DIRECTORS
THE PROPOSAL TO ELECT TWO DIRECTORS IS INCLUDED ONLY TO SATISFY LEGAL
REQUIREMENTS IN CONNECTION WITH THE HOLDINGS ANNUAL MEETING AND TO PROVIDE
DIRECTORS IN THE EVENT THE MERGER IS NOT CONSUMMATED. UPON COMPLETION OF THE
MERGER, THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED COMPANY WILL BE AS
DESCRIBED UNDER "MANAGEMENT OF LABONE AND MANAGEMENT AFTER THE MERGER."
GENERAL
Two directors are to be elected at the annual meeting for terms expiring on
the earlier of the effective time of the merger or until the annual meeting of
stockholders in 2002. Absent written instructions to the contrary, proxies
representing shares of Holdings common stock will be voted FOR the election of
each of the persons listed below as directors of Holdings for a term of three
years and until their successors are duly elected and qualified. However, if the
merger is consummated, P. Anthony Jacobs, Steven K. Fitzwater, Lan C. Bentsen,
and John H. Robinson, Jr. will resign as
129
<PAGE>
members of the Holdings board of directors and, pursuant to the merger
agreement, the persons listed as holding director positions under "Management of
Combined Company After the Merger" on page 103 will become directors of the
combined company to hold office until their successors are duly elected and
qualified at the applicable annual meeting of stockholders. See "Management of
Combined Company After the Merger-Directors and Executive Officers of Combined
Company After the Merger" on page 103.
If any nominee for director should be unable or decline to serve, the
authority provided in the proxy to vote for the election of directors will be
exercised to vote for a substitute or substitutes. As of the date of this joint
proxy statement/prospectus, Holdings has no knowledge that any of the nominees
will be unable or will decline to serve. None of the nominees has any family
relationship among themselves or with any executive officer of Holdings.
INFORMATION CONCERNING NOMINEES TO THE HOLDINGS BOARD OF DIRECTORS
Set forth below are the names and descriptions of the backgrounds of the
nominees for election as directors of Holdings. Each of Holdings' two nominees
for election to the Holdings board of directors is currently serving as a
director of Holdings and each has agreed to serve if elected.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------- --- -------------------
<S> <C> <C>
John H. Robinson, Jr........................................... 48 Class B Director
Lan C. Bentsen................................................. 52 Class B Director
</TABLE>
MR. ROBINSON has been a director since 1990 and has been Chairman of the
Board since September 1997. He is Managing Partner of Black & Veatch (design and
construction). Mr. Robinson also is a director of Commerce Bancshares, Inc. and
Coeur d'Alene Mines Corporation (gold and silver mining).
MR. BENTSEN has been a director since 1986. He has been the Executive Vice
President of Frontera Resources since 1996 (oil and gas). From 1994 to 1996 he
was Managing Partner of Remington Partners (investments). Prior to its sale in
1994, Mr. Bentsen was Chairman and Chief Executive Officer of Sovereign National
Management, Inc. (property management).
There are no family relationships, of first cousin or closer, among
Holdings' directors or executive officers, by blood, marriage or adoption.
VOTE
Directors will be elected by a favorable vote of a plurality of the shares
of voting stock present and entitled to vote, in person or by proxy, at the
annual meeting. Accordingly, abstentions or broker non-votes as to the election
of directors will not affect the election of the candidates receiving the
plurality of votes. Shares may be voted cumulatively and therefore each Holdings
stockholder may cast two votes for each share owned. Unless instructed to the
contrary, the shares represented by the proxies will be voted FOR the election
of the two nominees named above as directors.
130
<PAGE>
PROPOSAL TO RATIFY HOLDINGS'
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The board of directors of Holdings has appointed the firm of KPMG LLP as
Holdings' independent public accountants for 1999. KPMG LLP has been the
Holdings' independent public accountants since inception. A representative of
KPMG LLP will be available at the annual meeting and will have the opportunity
to make a statement if he or she desires to do so and to respond to appropriate
questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND RATIFICATION
OF THE APPOINTMENT OF KPMG LLP AS HOLDINGS' INDEPENDENT PUBLIC ACCOUNTANTS FOR
THE 1999 FISCAL YEAR.
EXPERTS
The financial statements and the related financial statement schedules
included in the Holdings Annual Report on Form 10-K for the year ended December
31, 1998, that are incorporated herein by reference, have been audited by KPMG
LLP, independent public accountants, as stated in their reports included in the
Form 10-K, and have been incorporated by reference herein in reliance upon such
reports given upon the authority of that firm as experts in accounting and
auditing.
The audited financial statements of LabONE included in this joint proxy
statement/prospectus and elsewhere in the registration statement have been
audited by KPMG LLP, independent public accountants, as indicated by their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
Representatives of KPMG LLP are expected to be present at the annual
meetings of Holdings and LabONE, where they will have the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions.
LEGAL MATTERS
The legality of the Holdings common stock to be issued pursuant to the
merger has been passed upon for Holdings by Lathrop & Gage L.C., Kansas City,
Missouri. Lathrop & Gage L. C. also will pass upon federal income tax matters in
connection with the merger. See "The Proposed Merger-- Federal Income Tax
Consequences" on page 46.
FUTURE STOCKHOLDER PROPOSALS
If the merger is not consummated, it is currently anticipated that the
annual meeting of stockholders of Holdings will be held on or about May 11,
2000. Holdings stockholders who wish to present proposals for action at the
Holdings annual meeting should submit their proposals to Holdings at 5000 West
95th Street, Suite 260, Shawnee Mission, Kansas 66207. Proposals must be
received by Holdings no later than December 13, 1999, for consideration for
inclusion in next year's proxy statement and proxy. In addition, proxies
solicited by Holdings management may cover discretionary authority to vote on
matters which are not included in the proxy statement but which are raised at
the annual meeting by stockholders unless Holdings receives written notice of
the matters at that address on or before March 1, 2000.
If the merger is not consummated, it is currently anticipated that the
annual meeting of stockholders of LabONE will be held on or about May 11, 2000.
LabONE stockholders who wish to present proposals for action at the LabONE
annual meeting should submit their proposals to LabONE at 10101 Renner
Boulevard, Lenexa, Kansas 66219. Proposals must be received by LabONE no later
than December 13, 1999 for consideration for inclusion in next year's proxy
statement and proxy. In addition, proxies solicited by LabONE management may
cover discretionary authority to vote on matters
131
<PAGE>
which are not included in the proxy statement but which are raised at the annual
meeting by stockholders unless LabONE receives written notice of the matters at
that address on or before February 23, 2000.
If the merger is consummated, it is currently anticipated that the annual
meeting of stockholders of the combined company will be held on or about May 11,
2000. Stockholders who wish to present proposals for action at this annual
meeting should submit their proposals to the combined company at LabONE, Inc. at
10101 Renner Boulevard, Lenexa, Kansas 66219. Proposals must be received no
later than February 11, 2000 for consideration for inclusion in next year's
proxy statement and proxy. In addition, proxies solicited by the combined
company's management may cover discretionary authority to vote on matters which
are not included in the proxy statement but which are raised at the annual
meeting by stockholders unless the combined company receives written notice of
the matters at that address on or before March 1, 2000.
WHERE YOU CAN FIND MORE INFORMATION
Holdings and LabONE each file annual, quarterly and other reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information we file at
the Securities and Exchange Commission's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the Securities and
Exchange Commission at 1-900-SEC-0330 for further information on the public
reference rooms. Our Securities and Exchange Commission filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the Securities and Exchange Commission at
"http://www.sec.gov."
Holdings has filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the Holdings common stock to be issued to
LabONE stockholders in the merger. This document is a part of the registration
statement and constitutes a prospectus of Holdings in addition to being a proxy
statement of Holdings and LabONE for the Holdings meeting and the LabONE
meeting. As allowed by Securities and Exchange Commission rules, this document
does not contain all the information you can find in the registration statement
or the exhibits to the registration statement.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this document, which means that we can disclose
important information to you by referring you to another document filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. This document
incorporates by reference the documents set forth below that we have previously
filed with the Securities and Exchange Commission. These documents contain
important information about Holdings and its finances.
<TABLE>
<CAPTION>
HOLDINGS SEC FILINGS (FILE NO.0-16946) PERIOD OR DATE OF EVENT
- ----------------------------------------------------------------------------- -----------------------------------
<S> <C>
Annual Report on Form 10-K/A, filed July 2, 1999............................. Year ended December 31, 1998
Quarterly Report on Form 10-Q/A, filed July 2, 1999.......................... Quarter ended March 31, 1999
Current Report on Form 8-K, filed March 8, 1999.............................. March 7, 1999
</TABLE>
<TABLE>
<CAPTION>
LABONE SEC FILINGS (FILE NO.0-15975) PERIOD OR DATE OF EVENT
- ----------------------------------------------------------------------------- -----------------------------------
<S> <C>
Annual Report on Form 10-K/A, filed July 2, 1999............................. Year ended December 31, 1998
Quarterly Report on Form 10-Q/A, filed July 2, 1999.......................... Quarter ended March 31, 1999
Current Report on Form 8-K, filed March 8, 1999.............................. March 8, 1999
</TABLE>
132
<PAGE>
Holdings is also incorporating by reference additional documents that it
files with the Securities and Exchange Commission between the date of this
document and the date of the meetings.
Holdings has supplied all information contained or incorporated by reference
in this document relating to Holdings and LabONE has supplied all such
information relating to LabONE.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us or the
Securities and Exchange Commission. Documents incorporated by referenced are
available from us without charge, excluding all exhibits unless we have
specifically incorporated by reference an exhibit in this document. Stockholders
may obtain documents incorporated by reference in this document by requesting
them in writing or by telephone from the appropriate party at the following
addresses:
<TABLE>
<CAPTION>
LAB HOLDINGS, INC. LABONE, INC.
- ----------------------------------- -----------------------------------
<S> <C>
5000 West 95th Street, Suite 260 10101 Renner Blvd
Shawnee Mission, Kansas 66207 Lenexa, Kansas 66219
(913) 648-3600 (913) 888-1770
</TABLE>
If you would like to request documents from us, please do so by July 23,
1999 in order to receive them before the meetings.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT TO VOTE ON THE HOLDINGS PROPOSAL AND THE LABONE
PROPOSAL. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS DATED JULY
2, 1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS DOCUMENT
IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS
DOCUMENT TO STOCKHOLDERS OF HOLDINGS AND LABONE NOR THE ISSUANCE OF HOLDINGS
COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
133
<PAGE>
INDEX TO LABONE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT..................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets--March 31, 1999 (unaudited) and December 31, 1998 and 1997................... F-3
Consolidated Statements of Earnings--Three months ended March 31, 1999 and 1998 (unaudited) and Years
ended December 31, 1998, 1997 and 1996................................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity--Three months ended March 31, 1999 (unaudited)
and Years ended December 31, 1998, 1997 and 1996....................................................... F-6
Consolidated Statements of Cash Flows--Three months ended March 31, 1999 and 1998 (unaudited) and Years
ended December 31, 1998, 1997 and 1996................................................................. F-7
Notes to Consolidated Financial Statements............................................................... F-9
SCHEDULE:
Schedule II--Valuation and Qualifying Accounts........................................................... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LabONE, Inc.:
We have audited the accompanying consolidated balance sheets of LabONE, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of earnings, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1998. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LabONE, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 2, the accompanying consolidated financial statements
as of December 31, 1998 and 1997 and for the years then ended have been
restated.
/s/ KPMG LLP
Kansas City, Missouri
June 30, 1999
F-2
<PAGE>
LABONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AS RESTATED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
MARCH 31, ------------ ------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 6,918,256 10,177,740 18,284,672
Short-term investments (note 1)..................................... -- -- 1,204,638
Accounts receivable, net of allowance for doubtful accounts of
$2,863,670 in 1999, $2,326,716 in 1998 and $968,295 in 1997....... 19,696,648 18,735,984 12,604,687
Income taxes receivable............................................. 177,799 282,229 508,704
Inventories......................................................... 1,360,762 1,798,481 2,203,471
Real estate available-for-sale (note 1)............................. 1,793,207 3,515,000 3,515,000
Prepaid expenses and other current assets........................... 2,488,127 2,504,768 2,279,619
Deferred income taxes (note 6)...................................... 3,284,203 3,972,575 3,299,387
------------- ------------ ------------
Total current assets.............................................. 35,719,002 40,986,777 43,900,178
------------- ------------ ------------
Property, plant, and equipment:
Land................................................................ 2,379,334 2,379,334 2,379,334
Buildings........................................................... 28,144,419 -- --
Laboratory equipment................................................ 19,478,787 18,101,286 19,044,329
Data processing equipment and software.............................. 18,518,331 18,878,942 17,130,254
Office and transportation equipment................................. 5,498,070 5,787,762 4,909,970
Leasehold improvements.............................................. 235,002 700,842 492,684
Construction in progress............................................ 2,107,048 27,067,631 --
------------- ------------ ------------
76,360,991 72,915,797 43,956,571
Less accumulated depreciation......................................... 34,652,381 35,983,169 33,515,280
------------- ------------ ------------
Net property, plant, and equipment.................................. 41,708,610 36,932,628 10,441,291
------------- ------------ ------------
Other assets:
Intangible assets, net of accumulated amortization (note 3)......... 7,102,158 7,414,319 4,725,141
Bond issue costs, net of accumulated amortization of $5,823......... 181,957 186,324 --
Deferred income taxes--noncurrent (note 6).......................... -- -- 522,505
Deposits and miscellaneous.......................................... 210,550 206,127 80,497
------------- ------------ ------------
Total assets...................................................... $ 84,922,277 85,726,175 59,669,612
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LABONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AS RESTATED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
MARCH 31, ------------ ------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 5,310,712 4,353,733 3,326,451
Retainage and construction accounts payable......................... 3,473,065 3,809,193 --
Accrued payroll and benefits........................................ 3,083,031 4,148,593 4,530,235
Other accrued expenses.............................................. 566,871 610,315 423,396
Other current liabilities........................................... 344,044 274,198 194,148
Current portion of long-term debt (note 5).......................... 1,862,602 1,860,168 --
------------- ------------ ------------
Total current liabilities......................................... 14,640,325 15,056,200 8,474,230
Deferred income taxes (note 6)........................................ 169,377 27,087 --
Long-term debt (note 5)............................................... 18,094,181 18,097,308 --
------------- ------------ ------------
Total liabilities................................................. 32,903,883 33,180,595 8,474,230
------------- ------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value per share; 1,000,000 shares
authorized, none issued........................................... -- -- --
Common stock, $0.01 par value per share; 40,000,000 shares
authorized, 15,000,000 shares issued (note 8)..................... 150,000 150,000 150,000
Additional paid-in capital.......................................... 14,099,066 14,099,066 13,723,250
Accumulated other comprehensive income.............................. (833,623) (849,098) (666,927)
Retained earnings................................................... 58,810,067 59,352,728 59,955,411
------------- ------------ ------------
72,225,510 72,752,696 73,161,734
Less treasury stock of 1,688,550 shares in 1999 and 1998 and 1,874,706
shares in 1997, at cost............................................. 20,207,116 20,207,116 21,966,352
------------- ------------ ------------
Total stockholders' equity........................................ 52,018,394 52,545,580 51,195,382
------------- ------------ ------------
Total liabilities and stockholders' equity........................ $ 84,922,277 85,726,175 59,669,612
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LABONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(AS RESTATED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- --------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales............................... $ 27,328,085 23,333,434 102,227,216 78,926,119 59,431,855
Cost of sales....................... 15,651,339 12,958,948 56,719,603 42,017,179 32,716,833
------------- ------------- -------------- ------------- -------------
Gross profit...................... 11,676,746 10,374,486 45,507,613 36,908,940 26,715,022
Selling, general, and administrative
expenses.......................... 8,564,085 7,448,411 31,578,759 28,211,389 23,622,545
Provision for loss on disposal of
assets............................ -- -- -- 6,553,279 --
------------- ------------- -------------- ------------- -------------
Earnings from operations.......... 3,112,661 2,926,075 13,928,854 2,144,272 3,092,477
------------- ------------- -------------- ------------- -------------
Other income (expenses):
Investment income................. 87,675 232,899 814,343 1,179,947 1,769,182
Other, net........................ (289,673) -- (112,277) (58,245) 14,930
------------- ------------- -------------- ------------- -------------
Total other income, net......... (201,998) 232,899 702,066 1,121,702 1,784,112
------------- ------------- -------------- ------------- -------------
Earnings before income taxes.... 2,910,663 3,158,974 14,630,920 3,265,974 4,876,589
------------- ------------- -------------- ------------- -------------
Income taxes (benefit) (note 6):
Current........................... 225,765 1,271,335 6,057,345 4,392,742 2,485,473
Deferred.......................... 831,498 (29,553) (314,308) (3,025,002) (476,783)
------------- ------------- -------------- ------------- -------------
Total income taxes.............. 1,057,263 1,241,782 5,743,037 1,367,740 2,008,690
------------- ------------- -------------- ------------- -------------
Net earnings.................... $ 1,853,400 1,917,192 8,887,883 1,898,234 2,867,899
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Basic earnings per share............ $ 0.14 0.15 0.67 0.14 0.22
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Diluted earnings per share.......... $ 0.14 0.14 0.67 0.14 0.22
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LABONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AS RESTATED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME--FOREIGN
COMMON ADDITIONAL CURRENCY RETAINED TREASURY COMPREHENSIVE
STOCK PAID-IN CAPITAL TRANSLATION EARNINGS STOCK INCOME
--------- --------------- ---------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995........ $ 150,000 13,377,728 (545,818) 74,040,870 (22,158,451)
Comprehensive income:
Net earnings...................... -- -- -- 2,867,899 -- 2,867,899
Adjustment from foreign currency
translation..................... -- -- 1,859 -- -- 1,859
---------------
Comprehensive income............ 2,869,758
---------------
---------------
Cash dividends ($.72 per share)..... -- -- -- (9,414,332) --
Net issuance of 30,149 shares of
treasury stock.................... -- 168,393 -- -- (38,855)
--------- --------------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1996........ $ 150,000 13,546,121 (543,959) 67,494,437 (22,197,306)
Comprehensive income:
Net earnings...................... -- -- -- 1,898,234 -- 1,898,234
Adjustment from foreign currency
translation..................... -- -- (122,968) -- -- (122,968)
---------------
Comprehensive income............ 1,775,266
---------------
---------------
Cash dividends ($.72 per share)..... -- -- -- (9,437,260) --
Net issuance of 41,129 shares of
treasury stock.................... -- 177,129 -- -- 230,954
--------- --------------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1997........ $ 150,000 13,723,250 (666,927) 59,955,411 (21,966,352)
Comprehensive income:
Net earnings...................... -- -- -- 8,887,883 -- 8,887,883
Adjustment from foreign currency
translation..................... -- -- (182,171) -- -- (182,171)
---------------
Comprehensive income............ 8,705,712
---------------
---------------
Cash dividends ($.72 per share)..... -- -- -- (9,490,566) --
Issuance of 168,885 shares of
treasury stock related to
acquisition....................... -- 275,050 -- -- 1,724,950
Net issuance of 17,271 shares of
treasury stock.................... -- 100,766 -- -- 34,286
--------- --------------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1998........ $ 150,000 14,099,066 (849,098) 59,352,728 (20,207,116)
Comprehensive income:
Net earnings...................... -- -- -- 1,853,400 -- 1,853,400
Adjustment from foreign currency
translation..................... -- -- 15,475 -- -- 15,475
---------------
Comprehensive income............ 1,868,875
---------------
---------------
Cash dividends ($0.18 per share).... -- -- -- (2,396,061) --
--------- --------------- -------- ----------- ------------
BALANCE AT MARCH 31, 1999........... $ 150,000 14,099,066 (833,623) 58,810,067 (20,207,116)
--------- --------------- -------- ----------- ------------
--------- --------------- -------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT DECEMBER 31, 1995........ 64,864,329
Comprehensive income:
Net earnings...................... 2,867,899
Adjustment from foreign currency
translation..................... 1,859
Comprehensive income............
Cash dividends ($.72 per share)..... (9,414,332)
Net issuance of 30,149 shares of
treasury stock.................... 129,538
-------------
BALANCE AT DECEMBER 31, 1996........ 58,449,293
Comprehensive income:
Net earnings...................... 1,898,234
Adjustment from foreign currency
translation..................... (122,968)
Comprehensive income............
Cash dividends ($.72 per share)..... (9,437,260)
Net issuance of 41,129 shares of
treasury stock.................... 408,083
-------------
BALANCE AT DECEMBER 31, 1997........ 51,195,382
Comprehensive income:
Net earnings...................... 8,887,883
Adjustment from foreign currency
translation..................... (182,171)
Comprehensive income............
Cash dividends ($.72 per share)..... (9,490,566)
Issuance of 168,885 shares of
treasury stock related to
acquisition....................... 2,000,000
Net issuance of 17,271 shares of
treasury stock.................... 135,052
-------------
BALANCE AT DECEMBER 31, 1998........ 52,545,580
Comprehensive income:
Net earnings...................... 1,853,400
Adjustment from foreign currency
translation..................... 15,475
Comprehensive income............
Cash dividends ($0.18 per share).... (2,396,061)
-------------
BALANCE AT MARCH 31, 1999........... 52,018,394
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LABONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AS RESTATED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
------------ ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash provided by (used for) operations:
Net earnings...................................... $ 1,853,400 1,917,192 8,887,883 1,898,234 2,867,899
Adjustments to reconcile net earnings to net cash
provided by operations, net of acquisitions:
Depreciation and intangibles amortization....... 1,406,681 1,221,894 4,719,074 5,274,982 4,014,304
Amortization of investment premiums............. -- (2,008) (36,767) (251,233) (103,146)
Provisions for loss on accounts receivable...... 604,749 226,274 1,502,571 571,192 493,760
Deferred income taxes........................... 831,498 (29,551) (315,215) (3,033,682) (476,783)
(Gain) loss on disposal of equipment............ (287,107) 127 (18,606) (120,087) 155,587
Provision for loss on disposal of assets........ -- -- -- 6,553,279 --
Directors' stock compensation................... -- -- 62,619 66,834 62,096
Changes in:
Accounts receivable........................... (1,565,413) (3,019,852) (6,777,322) (3,577,172) (2,365,181)
Income tax receivable......................... 104,430 1,113,197 226,475 (271,331) --
Inventories................................... 437,719 309,781 404,990 (755,422) 173,093
Prepaid expenses and other current assets..... 16,641 (8,219) (201,551) (442,454) 808,589
Accounts payable.............................. (464,305) 1,002,187 886,932 355,075 863,000
Income taxes payable.......................... -- -- -- -- (50,560)
Accrued payroll and benefits.................. (1,065,562) (1,551,064) (619,281) 1,727,669 830,091
Other accrued expenses........................ 1,041,712 126,706 186,919 29,585 (508,486)
Other current liabilities..................... 69,846 (8,364) 80,050 68,019 (23,668)
------------ ----------- ------------- ----------- -----------
Net cash provided by operations............. 2,984,289 1,300,308 8,988,771 8,093,488 6,740,595
------------ ----------- ------------- ----------- -----------
Cash provided by (used for) investment activities:
Purchase of investments held-to-maturity.......... -- (4,467,421) (5,461,090) (15,893,902) (15,752,895)
Proceeds from maturities of investments
held-to-maturity................................ -- 701,894 6,701,893 18,155,062 23,394,571
Property, plant, and equipment additions, net..... (3,854,833) (1,724,596) (25,485,294) (6,676,615) (3,225,956)
Acquisition of businesses (note 3)................ -- -- (2,967,883) (4,815,889) --
Deposits and miscellaneous........................ (4,423) 537 (5,147) (57,295) 17,559
------------ ----------- ------------- ----------- -----------
Net cash provided by (used for) investment
activities.................................... (3,859,256) (5,489,586) (27,217,521) (9,288,639) 4,433,279
------------ ----------- ------------- ----------- -----------
Cash provided by (used for) financing activities:
Issuance of treasury stock, net of proceeds from
exercise of stock options....................... -- 69,090 72,433 341,249 67,442
Proceeds from bond issue.......................... -- -- 19,900,000 -- --
Bond issue costs.................................. -- (192,147) -- --
Payments on long-term debt........................ (2,966) -- (1,937) -- --
Cash dividends.................................... (2,396,061) (2,364,400) (9,490,566) (9,437,260) (9,414,332)
------------ ----------- ------------- ----------- -----------
Net cash provided (used for) financing
activities.................................... (2,399,027) (2,295,310) 10,287,783 (9,096,011) (9,346,890)
------------ ----------- ------------- ----------- -----------
Effect of foreign currency translation on cash...... 14,510 9,338 (165,965) (71,544) 11,976
------------ ----------- ------------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................... (3,259,484) (6,475,250) (8,106,932) (10,362,706) 1,838,960
Cash and cash equivalents at beginning of period.... 10,177,740 18,284,672 18,284,672 28,647,378 26,808,419
------------ ----------- ------------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 6,918,256 11,809,422 10,177,740 18,284,672 28,647,379
------------ ----------- ------------- ----------- -----------
------------ ----------- ------------- ----------- -----------
(Continued)
</TABLE>
F-7
<PAGE>
LABONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AS RESTATED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
------------ ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes...................................... $ 162,464 109,155 6,458,641 4,586,078 2,251,320
------------ ----------- ------------- ----------- -----------
------------ ----------- ------------- ----------- -----------
Interest.......................................... $ 326,590 240,586
------------ ----------- ------------- ----------- -----------
------------ ----------- ------------- ----------- -----------
Supplemental schedule of noncash investing and
financing activities for the year ended December
31, 1998:
Details of acquisition:
Fair value of assets acquired................... $ 6,223,162
Liabilities assumed............................. (645,198)
Stock issued.................................... (2,000,000)
-------------
Cash paid..................................... 3,577,964
Less: cash acquired............................. 610,081
-------------
Net cash paid for acquisition................. $ 2,967,883
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
LabONE, Inc. (LabONE or the Company), and its wholly-owned subsidiaries, LabONE
Canada Inc. and Systematic Business Services, Inc. All significant intercompany
transactions have been eliminated in consolidation. LabONE was 80.5%-owned by
Lab Holdings, Inc. (Holdings) at December 31, 1998.
UNAUDITED QUARTERLY INFORMATION
Quarterly financial information provided herein as of March 31, 1999 and
1998 and for the periods ended March 31, 1999 and 1998 is unaudited; however, in
the opinion of management, it reflects all adjustments, consisting of normal
recurring adjustments, which are necessary to fairly state the Company's
financial position, the results of its operations and cash flows. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances, and included in the financial
statements are certain amounts based on management's estimates and judgments.
The quarterly financial information provided herein is not necessarily
representative of a full year's operations because levels of sales, capital
additions and other factors fluctuate throughout the year. These same
considerations apply to all year-to-year comparisons.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits in banks, marketable
securities with original maturities of three months or less, money market
investments and overnight investments that are stated at cost, which
approximates market value.
INVESTMENT SECURITIES
LabONE determines the appropriate classification of debt and equity
securities at the time of purchase. Debt securities are classified as
held-to-maturity when LabONE has the intent and ability to hold the securities
to maturity. Held-to-maturity securities are stated at amortized cost and
investment income is included in earnings.
INVENTORIES
Inventories consist of completed specimen collection kits and various
materials used in the assembly of specimen collection kits for sale to clients.
Inventory is valued at the lower of cost (first-in, first out) or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment additions are recorded at cost which includes
interest capitalized during construction, when material. Facilities leased
pursuant to revenue bond financing transactions
F-9
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are accounted for as purchases with the cost of the leased property included in
property, plant, and equipment and the related obligation included in long-term
debt.
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings....................................................... 30 years
3 - 5
Laboratory equipment............................................ years
3 - 5
Data processing equipment....................................... years
Office equipment................................................ 5 years
</TABLE>
Depreciation on the former facilities was suspended after the recognition of
the impairment loss was recorded in December 1997. Depreciation expense for the
years ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Cost of sales......................................... $ 2,080,725 1,768,973 1,241,284
Selling, general and administrative................... 1,329,642 2,003,885 2,027,750
------------ ---------- ----------
Total............................................... $ 3,410,367 3,772,858 3,269,034
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
On December 26, 1998, the substance abuse testing laboratory started to move
to the new facility. Construction in process was transferred and depreciation
expense was recorded as portions of the new facility were completed and put into
use in 1999.
COST OF BORROWINGS
Expenses directly related to the issuance of debt are deferred and amortized
over the period the debt is expected to be outstanding using the interest
method.
INTANGIBLE ASSETS
Intangible assets are recorded at their acquisition cost, net of
amortization. The patent process utilized in coating the plates on which blood
and urine testing is performed was amortized on a straightline basis over the
estimated life of the patent (184 months at date of acquisition). The excess of
cost over fair value of net assets acquired is being amortized on a straight
line basis over twenty years. Customer lists acquired are being amortized over
five years.
IMPAIRMENT OF LONG-LIVED ASSETS
When facts and circumstances indicate potential impairment, LabONE evaluates
the recoverability of carrying values of long-lived assets, including
intangibles, using estimates of undiscounted future cash flows at the lowest
level for which there are identifiable cash flows. When impairment is indicated,
any impairment loss is measured by the excess of carrying values over fair
values. The fair value is the amount at which the asset could be bought or sold
in a current transaction between willing parties. During December 1997, LabONE
decided to dispose of its office and headquarters building and lab
F-10
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
facility, which, net of accumulated depreciation, has been classified as real
estate available-for-sale. LabONE plans to dispose of these facilities after
moving to our new facility in early 1999. An impairment loss of $6,553,279
related to the anticipated sale was recorded in 1997 which reduced the carrying
value to $3,515,000. No depreciation expense was recorded after the write-down
of the facilities. At December 31, 1998, the Company has entered into real
estate sales contracts to sell all real estate available-for-sale for
$4,530,000. On March 25, 1999, LabONE closed on the sale of its former
laboratory facility, resulting in a net gain of $287,000. The gain resulted from
the sales price of $2.0 million being greater than originally anticipated. The
$2.5 million sale of the former administration building is scheduled to be
closed on June 1, 1999.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could affect the estimates. The fair market
value of LabONE's financial instruments at December 31, 1998 and 1997
approximates their carrying values.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares and diluted earnings per share is computed using the weighted
average number of common shares and dilutive stock options.
F-11
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table reconciles the weighted average common shares used in
the basic earnings per share calculation and the weighted average common shares
and common share equivalents used in the diluted per share calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
(basic)............................... 13,311,450 13,134,883 13,168,394 13,106,383 13,076,103
Employee stock options.................. 28,021 184,062 135,174 215,655 190,013
------------ ------------ ------------ ------------ ------------
Weighted average common shares and
common shares equivalents (diluted)... 13,339,471 13,318,945 13,303,568 13,322,038 13,266,116
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
FINANCIAL STATEMENT PRESENTATION
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, which established standards for reporting and display of
comprehensive income and its components. SFAS No. 130 became effective for the
year ended December 31, 1998. The presentation of previous periods has been
changed to reflect the provisions of this statement.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which established standards for reporting
operating segments. SFAS No. 131 became effective for the year ended December
31, 1998. This statement did not affect the presentation of segment information.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, effective for LabONE's quarter ending
September 30, 1999. Retroactive application will not be required. The Company
does not expect this statement to have a significant impact on the Company's
financial position or results of operations.
(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As requested by the staff of the Securities and Exchange Commission in the
second quarter of 1999 the Company conducted a review of the useful lives of
certain intangible assets which arose in 1997 in connection with the acquisition
described in the last paragraph of Note 3. The Company concluded that the lives
of such assets should be changed from fifteen to five years. The accompanying
F-12
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(2) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 and 1998 financial statements have been retroactively restated for this
change. The effect of the restatement is as follows (see Note 11 for restated
quarterly data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
YEAR ENDED YEAR ENDED
1999 1998 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- ------------------------- ------------------------- -------------------------
AS AS AS AS
PREVIOUSLY PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings before
taxes.............. $3,048,272 2,910,663 3,296,583 3,158,974 15,181,356 14,630,920 3,770,541 3,265,974
Net earnings........ 1,947,023 1,853,400 2,000,063 1,917,192 9,219,367 8,887,883 2,202,095 1,898,234
Earnings per share:
Basic............. 0.15 0.14 0.15 0.15 0.70 0.67 0.17 0.14
Diluted........... 0.15 0.14 0.15 0.14 0.69 0.67 0.17 0.14
</TABLE>
(3) ACQUISITIONS AND INTANGIBLE ASSETS
The cost and accumulated amortization of intangible assets at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Patent............................................................. $ 8,000,000 8,000,000
Accumulated amortization......................................... 8,000,000 7,782,574
------------ ----------
-- 217,426
------------ ----------
Customer list...................................................... 4,128,275 4,128,275
Accumulated amortization......................................... 1,582,505 756,850
------------ ----------
2,545,770 3,371,425
------------ ----------
Excess of cost over fair value of assets acquired.................. 8,459,718 4,470,684
Accumulated amortization......................................... 3,591,169 3,334,394
------------ ----------
4,868,549 1,136,290
------------ ----------
Intangible assets, net of accumulated amortization................. $ 7,414,319 4,725,141
------------ ----------
------------ ----------
</TABLE>
Effective October 30, 1998, LabONE acquired Systematic Business Services,
Inc. (SBSI) for approximately $5.7 million. SBSI is a provider of information
support services to insurance underwriters. The purchase was comprised of $3.7
million of cash and the issuance of 168,885 shares of LabONE stock having a fair
market value of $2 million. The acquisition was accounted for using the purchase
method of accounting. The excess of the aggregate purchase price over the fair
market value of net assets acquired of approximately $4 million is being
amortized over twenty years.
LabONE is obligated to pay to the prior owner of SBSI, 20% of SBSI's income
before taxes (as defined) greater than a target amount approximately equal to
1998 pretax income for each of SBSI's fiscal years ending in 1999 and 2000. Any
amounts paid under this obligation will result in additional excess purchase
price for reporting purposes.
F-13
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(3) ACQUISITIONS AND INTANGIBLE ASSETS (CONTINUED)
The operating results of SBSI have been included in the consolidated
statements of earnings from the date of acquisition. The following unaudited pro
forma consolidated results of operations of the Company for the years ended
December 31, 1998 and 1997 assumes the SBSI acquisition occurred as of January
1, 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Sales.......................................................... $ 108,239,000 85,032,000
Net earnings................................................... 9,538,000 2,130,000
Earnings per share:
Basic........................................................ 0.72 0.16
Diluted...................................................... 0.72 0.16
-------------- ------------
-------------- ------------
</TABLE>
Pro forma data does not purport to be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented, and it not intended to be a projection of future results.
Effective January 30, 1997, LabONE acquired certain assets, including
customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance
Company of America, for $4,815,889. Concurrently, Prudential's Individual
Insurance Group agreed to use LabONE as its exclusive provider of risk
assessment testing services for a period of three years. Of the total amount
paid to Prudential, $4,128,275 was classified as customer lists and is being
amortized over five years.
(4) INVESTMENT SECURITIES
LabONE held no investment securities at December 31, 1998. A summary of
investment securities information relating to quoted market values and
unrealized holding gains and losses at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
AMOUNT AT
WHICH
CARRIED IN UNREALIZED UNREALIZED
AMORTIZED APPROXIMATE THE BALANCE HOLDING HOLDING
1997 COST MARKET SHEET GAINS LOSSES
- ------------------------------------------------ ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Held-to-maturity investments, all with
maturities less than one year:
Canadian government notes..................... $ 702,495 702,495 702,495 -- --
Obligations of states and political
subdivisions................................ 502,143 501,541 502,143 -- 602
------------ ------------ ----------- --- ---
Total short-term investments................ $ 1,204,638 1,204,036 1,204,638 -- 602
------------ ------------ ----------- --- ---
------------ ------------ ----------- --- ---
</TABLE>
F-14
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(5) LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Taxable industrial revenue bonds, Series 1998A, principal payable annually
through September 1, 2009, interest payable monthly at a rate adjusted
weekly based on short-term United States treasury obligations (5.14% at
December 31, 1998), secured by the Company's facility and an irrevocable
bank letter of credit...................................................... $20,000,000
Various capital leases, principal and interest payable monthly through May
2003, interest ranging from 7% to 12%, collateralized by office
equipment.................................................................. 54,446
----------
Total long-term debt................................................... 20,054,446
Less:
Current portion............................................................ 1,860,168
Unamortized discount....................................................... 96,970
----------
Long-term debt, net.................................................... $18,097,308
----------
----------
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
CAPITAL
BONDS PAYABLE LEASES TOTAL
------------- ------------- ------------
<S> <C> <C> <C>
1999................................................................. $ 1,850,000 10,168 1,860,168
2000................................................................. 1,850,000 13,551 1,863,551
2001................................................................. 1,850,000 14,933 1,864,933
2002................................................................. 1,850,000 11,188 1,861,188
2003................................................................. 1,800,000 4,606 1,804,606
Thereafter........................................................... 10,800,000 -- 10,800,000
------------- ------ ------------
$20,000,000 54,446 20,054,446
------------- ------ ------------
------------- ------ ------------
</TABLE>
Interest expense in 1998 amounted to approximately $70,000, net of interest
capitalized as a component of property, plant, and equipment of $314,638.
F-15
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(6) INCOME TAXES
The components of income taxes and deferred taxes (benefit) applicable to
temporary differences are as follows (for the years ended December 31):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Current:
Federal................................................................ $ 4,853,744 3,452,979 1,878,022
State.................................................................. 1,086,479 633,839 347,809
Foreign................................................................ 117,122 305,924 259,642
------------ ----------- ----------
Total current........................................................ 6,057,345 4,392,742 2,485,473
------------ ----------- ----------
Deferred:
Federal................................................................ (267,903) (2,502,795) (490,408)
State.................................................................. (71,582) (525,079) (118,293)
Foreign................................................................ 25,177 2,872 131,918
------------ ----------- ----------
Total deferred....................................................... (314,308) (3,025,002) (476,783)
------------ ----------- ----------
$ 5,743,037 1,367,740 2,008,690
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
Total income taxes differ from the amounts computed by applying the federal
statutory income tax rate of 34% to earnings before income taxes for the
following reasons (for the years ended December 31):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Application of statutory income tax rate................................ $ 4,974,513 1,110,431 1,658,040
Foreign taxes, net...................................................... 7,599 72,062 113,803
State income taxes, net................................................. 669,832 75,172 151,481
Tax-exempt interest..................................................... (5,788) (18,730) (44,708)
Other, net.............................................................. 96,881 128,805 130,074
------------ ---------- ----------
$ 5,743,037 1,367,740 2,008,690
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-16
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that create significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Deferred current income tax assets (liabilities):
Unrealized loss on real estate available-for-sale.................................... $ 2,541,126 2,606,698
Accrued vacation..................................................................... 303,180 253,832
Accrued medical claims............................................................... 63,644 79,554
Bad debts............................................................................ 925,635 384,600
Inventory adjustment................................................................. 40,830 26,673
Other items.......................................................................... 98,160 (51,970)
------------ ----------
Total deferred current income tax assets, net...................................... $ 3,972,575 3,299,387
------------ ----------
------------ ----------
Deferred noncurrent tax assets (liabilities):
Depreciation and amortization........................................................ $ 432,536 522,505
Acquired subsidiary cash to accrual adjustment....................................... (196,438) --
Other items.......................................................................... (263,185) --
------------ ----------
Total deferred noncurrent tax assets (liabilities), net............................ $ (27,087) 522,505
------------ ----------
------------ ----------
</TABLE>
A valuation allowance for deferred tax assets was not necessary at December
31, 1998 or 1997.
In conjunction with building its new facility, LabONE has applied for the
Kansas High Performance Incentive Program (HPIP) credit. If LabONE qualifies for
the program as certified by the state of Kansas, LabONE will receive a credit
available to offset all or a portion of its 1999 Kansas income tax liability
related to operations of the new facility. Any unused portion of the credit can
be carried forward for a period of ten years, provided LabONE continues to meet
requirements of the program. HPIP credits which may be available to LabONE over
the next ten years are estimated to aggregate approximately $4,000,000.
F-17
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(7) BENEFIT PLANS
LabONE maintains a money purchase pension plan for all employees who have
completed one-half year of service and have attained age twenty and one-half
years. The plan is a defined contribution plan under which LabONE contributes a
percentage of a participant's annual compensation. LabONE's contributions to the
plan were $1,803,000, $1,422,000 and $1,187,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
LabONE has a profit sharing plan for all employees who have completed six
months of service and a minimum of 500 hours of service and have attained the
age of twenty and one-half years. LabONE contributes on behalf of each
participant an amount equal to 50% of the participant's annual contributions,
but not in excess of 5% of the participant's annual compensation. LabONE
contributions are invested in LabONE common stock. LabONE's contributions to the
plan for the years ended December 31, 1998, 1997 and 1996 were $663,000,
$558,000 and $509,000, respectively.
(8) STOCK OPTIONS AND WARRANTS
LabONE has a long-term incentive plan which provides for granting awards,
including stock options, for not more than 3,150,000 shares of LabONE common
stock. LabONE has granted certain stock options which entitle the grantee to
purchase shares for a price equal to the fair market value at date of grant with
option periods up to ten years.
The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations (APB 25). As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On December 31, 1995, the Company
adopted Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK BASED COMPENSATION, (SFAS 123) which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternately, SFAS 123 allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and
subsequent years as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB 25
and provide the pro forma disclosure provisions of SFAS 123.
F-18
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(8) STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the status of the Company's stock option plan as of December
31, 1998, 1997 and 1996 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 1,614,068 $ 14.30 1,459,559 $ 13.63 1,572,167 $ 13.07
Granted.................................... 330,859 15.02 253,316 17.36 314,297 16.39
Exercised.................................. (40,300) 10.64 (71,907) 10.84 (120,305) 10.67
Forfeited.................................. (66,700) 17.87 (26,900) 15.95 (306,600) 14.74
---------- ---------- ----------
Outstanding at end of year................. 1,837,927 14.38 1,614,068 14.30 1,459,559 13.63
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at year-end............ 968,683 13.44 820,609 12.94 718,705 12.21
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes information about stock options at December
31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 9.88 - 9.88 188,583 2.0 $ 9.88 188,583 $ 9.88
11.13 - 11.63 420,513 5.2 11.44 313,513 11.38
13.38 - 14.13 154,397 6.3 13.93 85,618 13.95
14.38 - 14.38 205,859 6.7 14.38 120,000 14.38
14.75 - 15.22 241,000 9.3 15.04 24,000 14.75
15.50 - 16.63 305,885 7.9 16.42 117,877 16.44
16.69 - 23.88 321,690 7.4 18.65 119,092 19.96
----------- -----------
$ 9.88 - 23.88 1,837,927 6.5 14.38 968,683 13.44
--
--
- ---------------- ----------- ----------- ----------- -----------
- ---------------- ----------- ----------- ----------- -----------
</TABLE>
The weighted average per share fair value of stock options granted during
1998, 1997 and 1996 was $3.54, $5.08 and $4.77, respectively, on the date of
grant using the Black Scholes option-pricing model with the following weighted
average assumptions: 1998--expected dividend yield of 4.8%, risk-free interest
rate of 5.0%, expected volatility factor of 33.9% and an expected life of six
years; 1997--expected dividend yield of 4.2%, risk-free interest rate of 6.3%,
expected volatility factor of 35.4% and an expected life of six years;
1996--expected dividend yield of 4.4%, risk-free interest rate of 6.0%, expected
volatility factor of 36.6% and an expected life of six years.
Since the Company applies APB 25 in accounting for its plans, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company recorded compensation cost based on the fair value
of options at the grant date the Company's net earnings and earnings per
F-19
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(8) STOCK OPTIONS AND WARRANTS (CONTINUED)
share would have been reduced by approximately the following: $515,000, or $.04
per share, in 1998; $416,000, or $.03 per share, in 1997; and $199,000, or $.02
per share, in 1996.
Pro forma net earnings reflect only options granted in 1998, 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net earnings amounts presented
above because compensation costs are reflected over the options' vesting period
of five years for the 1998, 1997, and 1996 options. Compensation cost for
options granted prior to January 1, 1995 is not considered.
LabONE entered marketing agreements with two companies during 1998. In
conjunction with these agreements, LabONE granted warrants for the purchase of
1,000,000 shares of common stock at an exercise price equal to the fair value of
the stock at the grant date (500,000 shares at $17.00 and 500,000 shares at
$15.44). A portion of the warrants become exercisable each quarter for five
years provided certain conditions are met including achievement of certain
levels of revenues. The Company will recognize expense, measured as the excess
of fair value of the warrants over the exercise price, on the date such warrants
become exercisable. No warrants became exercisable in 1998. LabONE has reserved
1,000,000 shares of common stock for issuance of shares upon exercise of the
warrants.
(9) FOREIGN OPERATIONS
The following summarizes financial information for LabONE's wholly-owned
Canadian subsidiary, LabONE Canada Inc., for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................................ $ 6,462,814 6,564,786 6,379,505
Operating earnings.................................. 314,112 644,842 718,567
Total assets........................................ 2,841,854 3,192,854 2,668,434
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(10) BUSINESS SEGMENT INFORMATION
The Company operates principally in three lines of business: insurance,
clinical testing, and substance abuse testing. The insurance line of business
involves risk-appraisal laboratory testing and information services to the
insurance industry. The tests performed and information provided by the Company
are specifically designed to assist an insurance company in objectively
evaluating the risks posed by policy applicants. Clinical testing services are
provided to the health care industry to aid in the diagnosis and treatment of
patients. Substance abuse testing services are provided to both regulated and
nonregulated employers who employ drug screening guidelines.
F-20
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(10) BUSINESS SEGMENT INFORMATION (CONTINUED)
Operating income (loss) of each line of business is computed as sales less
identifiable and allocated expenses. All expenses that can be identified as
specific to a certain segment of business are charged to that segment. All
shared resources and expenses are totaled and allocated to each segment based on
the relative revenue of each segment each month. Allocated expenses include
administrative salaries, information systems support, accounting, human
resources and facilities. In computing operating income (loss) of lines of
business, none of the following items have been added or deducted: general
corporate expenses, investment income or other income (expenses). Identifiable
assets by line of business are those assets that are used in the Company's
operations in each line of business. General corporate assets at December 31,
1997 and 1996 were primarily cash and investments, income taxes receivable,
deferred income taxes and real estate available for sale. At December 31, 1998,
general corporate assets were primarily construction in progress (the new
facility), cash, income taxes receivable, deferred income taxes and real estate
available for sale.
F-21
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(10) BUSINESS SEGMENT INFORMATION (CONTINUED)
Following is a summary of line of business information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- --------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales:
Insurance services............. $ 17,584,247 16,822,452 69,149,050 61,997,817 50,800,650
Clinical services.............. 5,957,526 3,654,043 18,599,583 7,511,889 3,941,704
Substance abuse testing........ 3,786,312 2,856,939 14,478,583 9,416,413 4,689,501
------------- ------------- -------------- ------------- -------------
Total sales.................. $ 27,328,085 23,333,434 102,227,216 78,926,119 59,431,855
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Operating income (loss):
Insurance services............. $ 4,014,225 5,074,654 20,079,901 18,003,282 12,610,224
Clinical services.............. (958,778) (1,935,046) (6,187,744) (8,303,741) (7,967,348)
Substance abuse testing........ (118,940) (178,786) 203,828 (933,832) (1,235,982)
General corporate expenses....... 176,154 (34,748) (167,131) (188,245) (158,830)
Investment income, net........... 92,526 233,636 814,343 1,179,947 1,769,182
Other expense, net............... (294,524) (737) (112,277) (6,491,437) (140,657)
------------- ------------- -------------- ------------- -------------
Earnings before income taxes... 2,910,663 3,158,974 14,630,920 3,265,974 4,876,589
Income tax expense............... 1,057,263 1,241,782 5,743,037 1,367,740 2,008,690
------------- ------------- -------------- ------------- -------------
Net earnings................. $ 1,853,400 1,917,192 8,887,883 1,898,234 2,867,899
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Identifiable assets:
Insurance services........................................... $ 28,240,796 24,515,485 24,327,970
Clinical services............................................ 5,492,624 3,512,587 4,022,258
Substance abuse testing...................................... 6,448,663 4,994,104 3,323,245
General corporate assets..................................... 45,544,092 26,446,730 33,069,702
-------------- ------------- -------------
Total assets............................................... $ 85,726,175 59,669,612 64,743,175
-------------- ------------- -------------
-------------- ------------- -------------
Capital expenditures:
Insurance services........................................... $ 2,089,869 3,308,320 2,558,275
Clinical services............................................ 501,380 468,538 162,814
Substance abuse testing...................................... 423,664 946,268 504,867
General corporate............................................ 22,470,381 2,553,218 --
-------------- ------------- -------------
-------------- ------------- -------------
Depreciation and amortization:
Insurance services........................................... $ 3,111,398 3,690,228 2,504,472
Clinical services............................................ 797,385 940,223 1,141,210
Substance abuse testing...................................... 810,291 644,531 368,622
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
F-22
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1998 and 1997 is
as follows (see Note 2):
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Sales.................................... $ 23,333 25,762 25,834 27,298
Gross profit............................. 10,374 11,931 11,305 11,898
Earnings before income taxes............. 3,159 4,096 3,493 3,883
Net earnings............................. 1,917 2,433 2,144 2,393
Basic earnings per share................. 0.15 0.19 0.16 0.18
Diluted earnings per share............... 0.14 0.18 0.16 0.18
Dividends per share...................... 0.18 0.18 0.18 0.18
----------- --------- ------ ------
----------- --------- ------ ------
1997:
Sales.................................... $ 17,740 20,307 19,728 21,151
Gross profit............................. 8,290 9,671 9,064 9,884
Earnings (loss) before income taxes...... 2,196 2,715 2,465 (4,110)
Net earnings (loss)...................... 1,304 1,604 1,453 (2,463)
Basic earnings (loss) per share.......... 0.10 0.12 0.11 (0.19)
Diluted earnings (loss) per share........ 0.10 0.12 0.11 (0.19)
Dividends per share...................... 0.18 0.18 0.18 0.18
----------- --------- ------ ------
----------- --------- ------ ------
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
TAX ASSESSMENT
The Comptroller of the State of Texas has conducted an audit of LabONE for
sales and use tax compliance for the years 1991 through 1997 and contends that
LabONE'S insurance laboratory services are taxable under the Texas tax code. The
Texas Comptroller has issued a tax audit assessment, including interest and
penalties, of approximately $1,900,000. The Company has appealed this assessment
arguing that its services do not fit within the definition of insurance services
under the Texas code. The assessment is under review by the Texas State Hearing
Attorney. At this time, the Company is unable to estimate the possible
liability, if any, that may be incurred as a result of this assessment.
LEASES
LabONE has several noncancelable operating leases, primarily for land and
buildings, and other commitments that expire through 2003, including a lease for
office space from an entity owned by an employee. Rental expense for these
operating leases during 1998, 1997, and 1996 amounted to $538,000, $486,000, and
$626,000, respectively.
F-23
<PAGE>
LABONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(UNAUDITED AS TO MARCH 31, 1999 AND 1998 INFORMATION)
(AS RESTATED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments and other commitments under these agreements
as of December 31, 1998 are:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------- ----------
<S> <C>
1999 $ 519,880
2000 346,912
2001 228,510
2002 195,192
2003 162,660
----------
----------
</TABLE>
CONSTRUCTION AND EQUIPMENT COSTS
At December 31, 1998, management estimates additional cost to complete
construction of the new facility and to acquire related equipment approximates
$3.5 million, substantially all of which will be paid in the first half of 1999.
The move to the new facility was completed in April 1999.
(13) SUBSEQUENT EVENT--MERGER AGREEMENT
On March 8, 1999, LabONE and Holdings jointly announced that the Board of
Directors of both companies have approved an agreement to merge the two
companies. Under the merger agreement, LabONE is to be merged into Holdings and
the merged entity's name will be changed to LabONE, Inc. Stockholders of
Holdings will have their Holdings shares split immediately before the merger
into 1.5 shares of the merged entity. Stockholders of LabONE, other than
Holdings, will be entitled to elect to have each of their existing LabONE shares
exchanged for one share of the merged entity or $12.75 in cash or a combination
of cash and shares up to a limit of $16.6 million in cash (approximately 50% of
eligible shares). The combined company will use Holdings' existing cash and
additional borrowings, if necessary, to cover the purchase of shares from
stockholders that choose the cash election option. The merger is subject to
approval by the holders of two-thirds of the outstanding Holdings shares and a
majority of the shares voted by LabONE stockholders, other than Holdings and its
affiliates, and other closing conditions.
F-24
<PAGE>
SCHEDULE II
LABONE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AS RESTATED)
<TABLE>
<CAPTION>
ADDITIONS--
CHARGED TO
BALANCE SELLING,
AT GENERAL, AND DEDUCTIONS-- BALANCE
BEGINNING ADMINISTRATIVE UNCOLLECTIBLE AT END
DESCRIPTION YEAR EXPENSES ACCOUNTS OF YEAR
- ---------------------------------------------------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1998............................ $ 968,295 1,502,572 144,151 2,326,716
---------- ------------- ------------ ------------
---------- ------------- ------------ ------------
Year ended December 31, 1997............................ $ 657,558 521,193 210,456 968,295
---------- ------------- ------------ ------------
---------- ------------- ------------ ------------
Year ended December 31, 1996............................ $ 329,995 493,760 166,197 657,558
---------- ------------- ------------ ------------
---------- ------------- ------------ ------------
</TABLE>
F-25
<PAGE>
[LOGO]
10101 RENNER BOULEVARD
LENEXA, KANSAS 66219
WWW.LABONE.COM
<PAGE>
EXHIBIT 99.3
LabONE, Inc.
10101 Renner Boulevard
Lenexa, Kansas 66219
The undersigned hereby appoints W. Thomas Grant II and Gregg R.
Sadler, and each of them, jointly and severally, as proxies, with full power
of substitution, for the undersigned at the Annual Meeting of Stockholders of
LabONE, Inc. at 10101 Renner Boulevard, Lenexa, Kansas, on August 9, 1999, at
3:00 p.m. C.D.T., and at any adjournment or postponement, to vote the shares
of common stock the undersigned would be entitled to vote, if personally
present, upon the proposals stated on the reverse side of this proxy
card, the election of Directors and any other matter brought before the
meeting, all as set forth in the Joint Proxy Statement/Prospectus delivered
with respect to the Annual Meeting.
(Continued and to be signed on reverse side)
<PAGE>
PLEASE SIGN, DATE AND MAIL YOUR PROXY CARD
BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
LABONE, INC.
AUGUST 9, 1999
<PAGE>
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ON
PROPOSALS 1 AND 3 AND "GRANTED" ON PROPOSAL 2
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
1. Proposal to adopt the Agreement and Plan of Merger, as amended and
restated, dated as of March 7, 1999 and the transactions contemplated
thereby.
2. The election of the following nominees as Directors, as Authority Authority WITHHELD to
set forth in the Joint Proxy Statement/Prospectus (or a GRANTED to vote for all nominees
substitute nominee or nominees designated by the Board vote for all
of Directors if any of them becomes unavailable): nominees
Joseph H. Brewer, M.D., Peter C. Brown, William D. Grant,
W. Thomas Grant II, Richard A., Rifkind, M.D., Richard S.
Schweiker, James R. Seward, Robert D. Thompson,
Chester B. Vanatta, John E. Walker, R. Dennis Wright
and Janet M. Stallmeyer, R.N.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, LINE THROUGH THAT NOMINEE'S NAME IN
THE LIST ABOVE.)
FOR AGAINST ABSTAIN
3. Ratification of the appointment of KPMG LLP as independent public
accountants.
</TABLE>
THIS PROXY CONFERS DISCRETIONARY AUTHORITY TO VOTE UPON CERTAIN
MATTERS, AS DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS.
UNLESS OTHERWISE MARKED, THE PROXY WILL BE DEEMED MARKED "FOR" ON
PROPOSALS 1 AND 3 AND MARKED "GRANTED" ON PROPOSAL 2 AND VOTED
ACCORDINGLY.
This Proxy is solicited by the Board of Directors.
(Please sign, date and return this Proxy in the enclosed envelope.)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SIGNATURE _______________ DATE __________ , 1999 SIGNATURE _______________ DATE __________ , 1999
(SIGNATURE IF HELD JOINTLY)
</TABLE>
(Note: Please sign exactly as name appears hereon. Executors, administrators,
trustees, etc., should so indicate when signing, giving full title as
such. If a signer is a corporation, execute in full corporation name by
authorized officer. If shares are held in the name of two or more
persons, all should sign.)
<PAGE>
EXHIBIT 99.4
[LOGO]
LETTER OF TRANSMITTAL AND FORM OF ELECTION
FOR HOLDERS OF COMMON STOCK OF LABONE, INC. WHO WISH TO RECEIVE THEIR MERGER
CONSIDERATION IN THE FORM OF CASH
TO ACCOMPANY CERTIFICATES REPRESENTING COMMON STOCK OF LABONE, INC. WHEN
SUBMITTED IN CONNECTION WITH THE MERGER OF LABONE, INC. WITH AND INTO LAB
HOLDINGS, INC.
STOCKHOLDERS WHO WISH TO RECEIVE THEIR MERGER CONSIDERATION IN THE FORM OF
SURVIVING CORPORATION COMMON STOCK SHOULD NOT COMPLETE OR RETURN THIS FORM.
This form (the "Letter of Transmittal and Form of Election") is to accompany
the certificate(s) for shares of common stock, par value $.01 per share, of
LabONE, Inc. ("LabONE Common Stock") when submitted in order to make an
unconditional election to receive cash (an "Election to Receive Cash"), subject
to possible proration, in connection with the proposed merger (the "Merger") of
LabONE, Inc. ("LabONE") with and into Lab Holdings, Inc. ("Holdings") pursuant
to the Agreement and Plan of Merger, as amended and restated, dated as of March
7, 1999 (the "Merger Agreement").
In order for an Election to Receive Cash to be effective, this Letter of
Transmittal and Form of Election, or a facsimile hereof, together with the
certificate(s) representing shares of LabONE Common Stock (the "LabONE Common
Stock Certificate(s)") described in Box I below (unless such shares are
delivered by book-entry transfer to the Disbursing Agent's account at the
Book-Entry Transfer Facility (as defined below)) or a proper guarantee of
delivery thereof, must be properly completed in accordance with the terms and
conditions set forth herein and received by American Stock Transfer & Trust
Company (the "Disbursing Agent"), at the address set forth below, no later than
10:00 a.m., New York City Time, on August 9, 1999, the date of the LabONE
Stockholders Meeting (the "Election Date").
TO: AMERICAN STOCK TRANSFER & TRUST COMPANY, DISBURSING AGENT
<TABLE>
<S> <C> <C>
BY MAIL: BY FACSIMILE: BY HAND OR OVERNIGHT COURIER:
American Stock Transfer & (718) 234-5001 American Stock Transfer &
Trust Company Trust Company
40 Wall Street CONFIRM BY 40 Wall Street
46th Floor TELEPHONE: 46th Floor
New York, NY 10005 1-800-937-5449 New York, NY 10005
Attn: Reorganization (718) 921-8200 Attn: Reorganization
Department Department
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL AND FORM OF ELECTION TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. ELIGIBLE
INSTITUTIONS (AS DEFINED IN INSTRUCTION D(7)) MAY DELIVER A GUARANTEE OF
DELIVERY BY FACSIMILE. SEE BOX V AND INSTRUCTION D(1).
FOR INFORMATION OR ADDITIONAL COPIES OF THIS LETTER OF TRANSMITTAL CONTACT
GEORGESON & COMPANY INC., WALL STREET PLAZA, NEW YORK, NEW YORK 10005. BANKS AND
BROKERS CALL COLLECT (212) 440-9800. ALL OTHERS CALL TOLL FREE: (800) 223-2064.
<PAGE>
Ladies and Gentlemen:
In connection with the proposed merger of LabONE with and into Holdings, the
undersigned hereby submits the LabONE Common Stock Certificate(s) listed below
and elects to have shares of LabONE Common Stock represented by such LabONE
Common Stock Certificate(s), as designated in Box I, converted into (i) the
right to receive cash from the Surviving Corporation in an amount equal to
$12.75 (the "Cash Price Per Share") for all of such shares or (ii) the right to
receive the Cash Price Per Share for a stated whole number of such shares and to
receive Surviving Corporation Common Stock for the balance of such shares. In
the event that the amount payable in cash to all LabONE stockholders who make an
Election to Receive Cash exceeds $16,600,000 (the "Maximum Cash Payment
Amount"), the undersigned understands that he or she will receive a combination
of cash and shares of common stock, par value $0.01 per share, of the Surviving
Corporation ("Surviving Corporation Common Stock") for the shares as to which
the undersigned has made an Election to Receive Cash, as provided in the Merger
Agreement.
The undersigned's Election to Receive Cash is subject to (i) the terms,
conditions and limitations set forth in the Joint Proxy Statement/Prospectus
dated July 2, 1999, relating to the Merger (the "Proxy Statement"), receipt of
which is acknowledged by the undersigned, (ii) the terms of the Merger
Agreement, a conformed copy of which appears as Appendix A to the Proxy
Statement and (iii) the instructions included in this Letter of Transmittal and
Form of Election. In this regard, the undersigned understands and agrees as
follow:
(i) Its Election to Receive Cash will be properly made only if the
Disbursing Agent receives at its designated office, by 10:00 a.m., New York
City Time, on the Election Date, this Letter of Transmittal and Form of
Election, properly completed and signed (or in the case of a book entry
transfer, an Agent's Message), together with certificates for the shares of
LabONE Common Stock to which such Letter of Transmittal and Form of Election
relates, properly endorsed or otherwise in proper form for transfer (or
confirmation of a book-entry transfer into the Disbursing Agent's account at
the Book-Entry Transfer Facility) or accompanied by an appropriate guarantee
of delivery of such certificates from an Eligible Institution. Failure to
deliver certificates (or confirmation of book-entry transfer) covered by a
guarantee of delivery within three trading days after the date of execution
of such guarantee of delivery shall be deemed to invalidate any otherwise
properly made Election to Receive Cash.
(ii) The undersigned may revoke this Letter of Transmittal and Form of
Election only by written notice received by the Disbursing Agent prior to
10:00 a.m., New York City Time, on the Election Date. Further, this Letter
of Transmittal and Form of Election shall automatically be revoked if the
Disbursing Agent is notified in writing by Holdings and LabONE that the
Merger has been abandoned. If a Form of Election is revoked, the certificate
or certificates (or guarantees of delivery, as appropriate) for the shares
of LabONE Common Stock to which this Letter of Transmittal and Form of
Election relates shall be promptly returned to the undersigned by the
Disbursing Agent.
(iii) The Surviving Corporation has the discretion, which it may delegate
in whole or in part to the Disbursing Agent, to determine whether this
Letter of Transmittal and Form of Election has been properly completed,
signed and submitted and to disregard any defects it determines are
immaterial. The decision of Surviving Corporation or the Disbursing Agent on
such matters shall be conclusive and binding. Neither Holdings, LabONE, the
Surviving Corporation nor the Disbursing Agent shall be under any obligation
to notify any person of any defect in this Letter of Transmittal and Form of
Election. If Surviving Corporation or Disbursing Agent shall determine that
the undersigned's purported Election to Receive Cash was not properly made,
such purported election shall be deemed to be of no force and effect, the
undersigned shall be deemed to have made a Stock Election and the shares
submitted herewith shall be converted into shares of
2
<PAGE>
Surviving Corporation Common Stock. The Surviving Corporation reserves the
right to waive any defects in a Letter of Transmittal and Form of Election
but is under no obligation to do so.
(iv) If the Maximum Cash Payment Amount is exceeded, the Disbursing
Agent shall make all computations as to the proration contemplated by the
Merger Agreement, and any such computation shall be conclusive and binding
on the Undersigned.
The undersigned authorizes and instructs you, as Disbursing Agent, to
deliver to the Surviving Corporation LabONE Common Stock Certificate(s)
submitted herewith (or to transfer ownership of such shares on the account books
maintained by the Book Entry Transfer Facility to, or upon the order of, the
Surviving Corporation) and to receive on behalf of the undersigned, in exchange
for the shares of LabONE Common Stock represented thereby, the Cash Price Per
Share payable and, if applicable, a certificate for the shares of Surviving
Corporation Common Stock issuable (the "Surviving Corporation Common Stock
Certificate"), in respect of those shares of LabONE Common Stock in connection
with the Merger. If the LabONE Common Stock Certificate(s) is not delivered
herewith (and no book-entry transfer made), there is furnished below a guarantee
of delivery of such LabONE Common Stock Certificate(s) from an Eligible
Institution (as defined below).
The undersigned represents and warrants (and if more than one, each
undersigned represents and warrants jointly and severally) that the undersigned
has full power and authority to assign and transfer the shares evidenced by the
LabONE Common Stock Certificate(s) surrendered and that the Surviving
Corporation will acquire good title to such LabONE shares, free and clear of all
liens, restrictions, charges, encumbrances, pledges, security interests or other
obligations affecting the assignment or transfer of the LabONE shares and will
not be subject to any adverse claim. All authority conferred or agreed to be
conferred in this Letter of Transmittal and Form of Election shall not be
affected by, and shall survive, the death or incapacity of the undersigned, and
any obligation of the undersigned under this Letter of Transmittal and Form of
Election shall be binding upon successors, assigns, heirs, executors,
administrators and legal representatives of the undersigned.
Upon request, the undersigned agrees to execute and deliver any additional
documents deemed reasonably necessary or desirable by the Surviving Corporation
or the Disbursing Agent to complete the exchange of the LabONE Common Stock
Certificate(s). If required by Instruction D(7), the LabONE Common Stock
Certificate(s) submitted with this Letter of Transmittal and Form of Election is
duly endorsed or in a form otherwise acceptable for transfer on the books of
LabONE.
Unless otherwise indicated under Special Payment Instructions below, please
make any check payable to the order of, and (if applicable) register any
Surviving Corporation Common Stock Certificate in the name of, the registered
holder(s) of the shares of LabONE Common Stock represented by the LabONE Common
Stock Certificate(s) surrendered with this Letter of Transmittal and Form of
Election. Similarly, unless otherwise indicated under Special Delivery
Instructions, please mail any check payable and (if applicable) any Surviving
Corporation Common Stock Certificate issuable in exchange for the shares of
LabONE Common Stock represented by the LabONE Common Stock Certificate(s)
submitted with this Letter of Transmittal and Form of Election to the registered
holder(s) of the shares of LabONE Common Stock at the address or addresses shown
in Box I on the next page.
3
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Please list in Box I below all the LabONE Common Stock Certificates
representing any shares of LabONE Common Stock for which you wish to make an
Election to Receive Cash (all of which should be submitted with this Letter of
Transmittal and Form of Election unless arrangements are made for delivery of
such shares by book-entry transfer to the Disbursing Agent's account at the
Book-Entry Transfer Facility). If there is not enough space below to list all
the LabONE Common Stock Certificates surrendered, please attach a separate
sheet. Submit a separate Letter of Transmittal and Form of Election for shares
of LabONE Common Stock registered in different names (see Instruction D(4)). You
may elect to receive cash for any whole number of shares, whether all or any
portion of the shares of LabONE Common Stock that you hold. Please indicate in
the space provided the number of whole shares of LabONE Common Stock represented
by each LabONE Common Stock Certificate surrendered for which an Election to
Receive Cash is being made. ANY SHARES OF LABONE COMMON STOCK FOR WHICH AN
ELECTION TO RECEIVE CASH IS NOT PROPERLY MADE PRIOR TO 10:00 A.M., NEW YORK CITY
TIME, ON THE ELECTION DATE, OR FOR WHICH SUCH AN ELECTION HAS BEEN PROPERLY
REVOKED PRIOR TO 10:00 A.M., NEW YORK CITY TIME, ON THE ELECTION DATE, WILL BE
CONVERTED INTO SURVIVING CORPORATION COMMON STOCK AT THE EFFECTIVE TIME OF THE
MERGER. DO NOT COMPLETE THIS LETTER OF TRANSMITTAL AND FORM OF ELECTION FOR ANY
SHARES THAT YOU WANT CONVERTED INTO SURVIVING CORPORATION COMMON STOCK. AT THE
EFFECTIVE TIME OF THE MERGER, LABONE SHARES AS TO WHICH NO ELECTION TO RECEIVE
CASH HAS BEEN MADE WILL BE AUTOMATICALLY CONVERTED INTO AND WILL REPRESENT AN
EQUIVALENT NUMBER OF SHARES OF SURVIVING CORPORATION COMMON STOCK.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
BOX I: ELECTION TO RECEIVE CASH FOR LABONE COMMON STOCK CERTIFICATE(S) SURRENDERED
- -----------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF
REGISTERED HOLDER(S)
(PLEASE FILL IN IF LABEL IS NOT AFFIXED) LABONE COMON STOCK CERTIFICATE(S) ENCLOSED
- -----------------------------------------------------------------------------------------------
TOTAL NUMBER OF
SHARES
REPRESENTED BY
EACH NUMBER OF WHOLE
LABONE COMMON CERTIFICATE (OR SHARES FOR
STOCK COVERED BY A WHICH A CASH
CERTIFICATE GUARANTEE OF ELECTION IS
NUMBER(S)* DELIVERY) MADE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
TOTAL SHARES:
- -----------------------------------------------------------------------------------------------
*Not required if certificates will be delivered
using guarantee of delivery procedures.
- -----------------------------------------------------------------------------------------------
DELIVERY BY BOOK-ENTRY TRANSFER
See Instruction A-1
/ / Check here if LabONE certificates are being delivered by Book-Entry Transfer to the
Disbursing Agent's account on the book-entry transfer facilities at the Depository Trust
Company ("Book-Entry Transfer Facility") and complete the following:
Account number Transaction Code No.
- --------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
BOX II: SPECIAL PAYMENT
INSTRUCTIONS
(SEE INSTRUCTIONS D(6) AND D(7))
TO BE COMPLETED ONLY IF THE CHECK IS TO BE MADE PAYABLE TO THE ORDER OF,
OR (IF APPLICABLE) THE SURVIVING CORPORATION COMMON STOCK CERTIFICATE IS TO
BE ISSUED TO, A PERSON OTHER THAN THE PERSON IN WHOSE NAME THE LABONE COMMON
STOCK CERTIFICATE(S) SUBMITTED FOR EXCHANGE HEREWITH IS REGISTERED.
Issue the Merger consideration (whether cash or Surviving Corporation
Common Stock) to:
Name _______________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
(INCLUDING ZIP CODE)
__________________________________________________________________________
(TAX IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
- --------------------------------------------------------------------------------
BOX III: SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS D(8))
TO BE COMPLETED ONLY IF THE CHECK OR (IF APPLICABLE) THE SURVIVING
CORPORATION COMMON STOCK CERTIFICATE IS TO BE SENT TO AN ADDRESS OTHER THAN
THE ADDRESS OF THE REGISTERED HOLDER(S) SET FORTH IN BOX I ABOVE, OR IF BOX
II IS COMPLETED, TO AN ADDRESS OTHER THAN THE ADDRESS APPEARING IN BOX II.
Mail the Merger consideration (whether cash or Surviving Corporation
Common Stock) to:
Name _______________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
(INCLUDING ZIP CODE)
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
BOX IV: SIGN HERE AND, IF REQUIRED UNDER INSTRUCTION D(7),
HAVE SIGNATURES GUARANTEED BY AN ELIGIBLE INSTITUTION
(SEE INSTRUCTIONS D(1) AND D(7) CONCERNING SIGNATURE GUARANTEE)
----------------------------------------------------------------------------
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(SIGNATURE(S) OF OWNER(S))
Must be signed by registered holder(s) exactly as name(s) appears on the
LabONE Common Stock Certificate(s) or by person(s) authorized to become
registered holder(s) by the LabONECommon Stock Certificate(s) and documents
transmitted herewith. If signature is by a trustee, executor, administrator,
guardian, officer of a corporation, attorney-in-fact or any other person
acting in a fiduciary capacity, set forth full title in such capacity. See
Instruction D(3).
Name(s): ___________________________________________________________________
(PLEASE PRINT)
Name(s): ___________________________________________________________________
(PLEASE PRINT)
Name(s): ___________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
(AREA CODE AND TELEPHONE NUMBER(S))
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
(EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER(S))
Dated: __________________, 1999
----------------------------------------------------------------------------
SIGNATURES(S) GUARANTEED:
(SEE INSTRUCTIONS D(7))
The undersigned hereby guarantees the signature(s) which appear(s) on
The letter of Transmittal and Form of Election.
Dated: ________________________
(NAME OF ELIGIBLE INSTITUTION ISSUING GUARANTEE)
[PLEASE PRINT]
(AFFIX MEDALLION STAMP ABOVE)
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
BOX V: GUARANTEE OF DELIVERY
(ELIGIBLE INSTITUTIONS ONLY)
TO BE USED ONLY IF LABONE COMMON STOCK CERTIFICATE(S) IS NOT
SURRENDERED HEREWITH
Eligible Institutions May Deliver this Guarantee of Delivery by Facsimile
Transmission:
(718) 921-8335
Confirm Facsimile by Telephone:
(718) 921-8208
The undersigned is an Eligible Institution, and guarantees to deliver to
the Disbursing Agent the LabONE Common Stock Certificate(s) to which this
Letter of Transmittal and Form of Election relates, duly endorsed or in form
otherwise acceptable for transfer on the books of LabONE, within three (3)
trading days after the date of execution of this Guarantee of Delivery.
____________________________________________________________________________
(FIRM--PLEASE PRINT)
__________________________________________________________________________
(AUTHORIZED SIGNATURE)
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
(ADDRESS)
__________________________________________________________________________
(AREA CODE AND TELEPHONE NUMBER)
__________________________________________________________________________
(CONTACT NAME)
/ / Check here if LabONE certificates will be delivered by book-entry
transfer to the Disbursing Agent's account at the Depository Trust
Company.
Account Number ____________
NOTICE OF DELIVERY UNDER GUARANTEE
(TO BE COMPLETED UPON DELIVERY OF SHARES PURSUANT TO A
GUARANTEE OF DELIVERY)
Name (s) of Registered Holder (s): _________________________________________
Window Ticket No. (if any): ________________________________________________
Date of Execution of Guarantee of Delivery: ________________________________
Name of Institution which provided Guarantee of Delivery: __________________
/ / Check here if delivered by book-entry transfer to the Disbursing
Agent's Account at the Book-Entry Transfer Facility.
Account Number: _______________ Transaction Code Number: ______________
- --------------------------------------------------------------------------------
7
<PAGE>
THE FOLLOWING BACKUP WITHHOLDING FORM SHOULD BE COMPLETED. SEE PAGE 13,
PARAGRAPH 11, AND PAGES 15-18 FOR INSTRUCTIONS.
PAYER'S NAME: AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<C> <S> <C>
- -----------------------------------------------------------------------------------------
SUBSTITUTE PART I--PLEASE Social Security Number
FORM W-9 PROVIDE YOUR TIN IN or _________________
Department of the Treasury THE BOX AT THE RIGHT Employer Identification Number
Internal Revenue Service AND CERTIFY BY
SIGNING AND DATING
BELOW.
-------------------------------------------------------
Part II--Please check / / Awaiting TIN
Payer's Request for Taxpayer the box at the right
Identification Number and if you have applied
Certification for, and are awaiting
receipt of, your TIN
- -----------------------------------------------------------------------------------------
PART III--CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me, and
(2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that
I am subject to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified
by the IRS that you are subject to backup withholding because you have failed to report
all interest and dividends on your tax returns. However, if after being notified by the
IRS that you were subject to backup withholding you received another notification from
the IRS that you are no longer subject to backup withholding, do not cross out item (2).
(Also see the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9).
SIGNATURE: ____________________________ DATE: ___________________________, 1999
PRINT NAME: __________________________________________________________________
----------------------------------------------------------------------------------------
</TABLE>
IF YOU CHECKED THE BOX IN PART II OF THE SUBSTITUTE FORM W-9, YOU MUST SIGN AND
DATE THE FOLLOWING CERTIFICATION:
- --------------------------------------------------------------------------------
CERTIFICATION OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify, under penalty of perjury, that a taxpayer identification number
has not been issued to me, and that I mailed or delivered an application to
receive a taxpayer identification number to the appropriate IRS center or
social security administration office (or I intend to mail or deliver an
application in the near future). I understand that if I do not provide a
taxpayer identification number to the payer, 31 percent of all payments made
to me pursuant to this merger shall be retained until I provide a taxpayer
identification number tot he payer and that, if I do not provide my taxpayer
identification number within sixty (60) days, such retained amounts shall be
remitted to the IRS as backup withholding and 31 percent of all reportable
payments made to me thereafter will be withheld and remitted to the IRS until
I provide a taxpayer identification number.
SIGNATURE ____________________________ DATE ___________________________, 1999
PRINT NAME: __________________________________________________________________
------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE ELECTION. PLEASE REVIEW THE
"GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE
FORM W-9" THAT BEGIN ON PAGE 15 FOR ADDITIONAL DETAILS.
8
<PAGE>
INSTRUCTIONS
A. SPECIAL CONDITIONS.
1. TIME IN WHICH TO ELECT. Any Election to Receive Cash will have been
properly made only if the Disbursing Agent has received at the address set
forth above, by 10:00 a.m., New York City Time, on the date of the LabONE
Stockholders Meeting (the "Election Date"), this Letter of Transmittal and
Form of Election or a facsimile hereof, properly completed and signed (or in
the case of a book-entry transfer, an Agent's Message), together with
certificates for the shares of LabONE Common Stock to which the Letter of
Transmittal and Form of Election relates, properly endorsed or otherwise in
proper form for transfer (or confirmation of a book-entry transfer into the
Disbursing Agent's account at the Book-Entry Transfer Facility). Holders of
shares of LabONE Common Stock whose LabONE Common Stock Certificate(s) are
not immediately available, or holders who cannot complete the procedure for
book-entry transfer on a timely basis, may also make an effective Election
to Receive Cash by completing this Letter of Transmittal and Form of
Election or facsimile hereof and having the Guarantee of Delivery box (Box
V) properly completed and duly executed by an Eligible Institution, provided
such LabONE Common Stock Certificate(s) or a confirmation of a book-entry
transfer of such shares, if such procedure is available, into the Disbursing
Agent's account at the Book-Entry Transfer facility, is in fact delivered to
the Disbursing Agent within three (3) trading days after the date of
execution of the guarantee of delivery. In addition, at the time the
certificates are delivered (or book-entry transfer is effected) pursuant to
the guarantee of delivery, the guarantor must submit to the Disbursing Agent
another Letter of Transmittal and Form of Election with only the section
entitled "Notice of Delivery Under Guarantee" properly completed (or must
otherwise provide such information to the Disbursing Agent). If the
guarantor fails to deliver the certificates (or effect book-entry transfer)
in accordance with the guaranteed delivery procedures contained herein,
without limitation of other recourse, any purported Election to Receive Cash
with respect to the LabONEshares subject to such guarantee will be void. The
term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Disbursing Agent and forming a
part of a book-entry confirmation, which states that the Book-Entry Transfer
Facility has received an express acknowledgment from the participant in the
Book-Entry Transfer Facility delivering the LabONE shares that such
participant has received and agrees to be bound by the terms of this Letter
of Transmittal and Form of Election and that the Surviving Corporation may
enforce such agreement against the participant. HOLDERS OF SHARES OF LABONE
COMMON STOCK WHO DO NOT MAKE AN EFFECTIVE ELECTION, OR WHO PROPERLY REVOKE
SUCH AN ELECTION, PRIOR TO THE ELECTION DATE, WILL BE DEEMED TO HAVE MADE A
STOCK ELECTION AND THEIR SHARES WILL BE CONVERTED INTO SURVIVING CORPORATION
COMMON STOCK AT THE EFFECTIVE TIME OF THE MERGER. SEE INSTRUCTION B.
2. REVOCATION OF ELECTION TO RECEIVE CASH. Any holder of LabONE Common Stock
who has made an Election to Receive Cash by submitting a Letter of
Transmittal and Form of Election to the Disbursing Agent may revoke such
election by written notice received by the Disbursing Agent prior to 10:00
A.M., New York City Time, on the Election Date. Such notice must specify the
person in whose name the LabONE certificates to be withdrawn had been
deposited, the number of LabONE shares to be withdrawn, the name of the
registered holder thereof and the serial numbers shown on the certificates
representing the LabONE shares to be withdrawn. If a Letter of Transmittal
and Form of Election is revoked, the LabONE Common Stock Certificate(s) (or
guarantee of delivery, as appropriate) to which the Letter of Transmittal
and Form of Election relates will be promptly returned to the LabONE
stockholder submitting the same to the Disbursing Agent. Upon any such
revocation, unless a duly completed Letter of Transmittal and Form of
Election is thereafter submitted in accordance with the procedures set forth
in the Proxy/Statement
9
<PAGE>
Prospectus, such LabONE shares shall be converted into Surviving Corporation
Common Stock in the Merger.
3. TERMINATION OF ELECTION AND RETURN OF LABONE COMMON STOCK CERTIFICATES IF
MERGER ABANDONED. All Letters of Transmittal and Forms of Election will be
automatically revoked if the Disbursing Agent is notified in writing by
Holdings and LabONE that the Merger has been abandoned. In such case, all
LabONE Common Stock Certificates (or guarantees of delivery, as appropriate)
to which the Letters of Transmittal and Forms of Election relate will be
promptly returned to the LabONE stockholders who submitted the same to the
Disbursing Agent. LabONEshares held through the Depository Trust Company are
all expected to be available for sale or transfer promptly following
termination.
B. EFFECTIVENESS OF ELECTIONS OF ELECTION AND PRORATION PROCEDURES.
This Letter of Transmittal and Form of Election enables you to elect to
receive cash, subject to possible proration, in exchange for your shares of
LabONE Common Stock. You may use this Letter of Transmittal and Form of Election
to make an Election to Receive Cash (i) with respect to all of the shares of
LabONE Common Stock that you hold or (ii) with respect to any whole number of
shares constituting a portion of the shares of LabONE Common Stock that you
hold. If you fail to properly make an Election to Receive Cash or fail to submit
to the Disbursing Agent a properly completed and signed and properly and timely
submitted Letter of Transmittal and Form of Election, you will be deemed to have
made a Stock Election and will receive Surviving Corporation Common Stock as
Merger consideration. If the aggregate amount of cash requested by holders of
LabONE Common Stock pursuant to effective Elections to Receive Cash exceeds
$16,600,000 ( the" Maximum Cash Payment Amount"), you will not receive the full
amount of cash to which you otherwise would be entitled, but will receive a
combination of cash and Surviving Corporation Common Stock. The allocation of
cash and shares of Surviving Corporation Common Stock that you will receive for
each share of LabONE Common Stock for which an effective Election to Receive
Cash has been made will depend on the proration procedures to be applied as
described below.
At the effective time of the Merger (the "Effective Time"), each share of
LabONE Common Stock for which an effective Election to Receive Cash is made will
be converted into the right to receive, subject to possible proration, cash in
an amount equal to $12.75 (the "Cash Price Per Share"). Each share of
LabONECommon Stock for which an effective Election to Receive Cash is not
properly made, or for which such an election has been properly revoked, will be
converted into one (1) share of Surviving Corporation Common Stock.
CASH PRORATION. In the event that the amount of cash requested exceeds the
Maximum Cash Payment Amount (as defined below), each share of LabONE Common
Stock for which an Election to Receive Cash is made (each a "Cash Election
Share") will be converted into the right to receive a prorated amount of cash
and Surviving Corporation Common Stock. The Maximum Cash Payment Amount, which
is the maximum aggregate amount of cash to be paid to holders of LabONE Common
Stock in the Merger, will be equal to $16,600,000. If the product of (x) the
number of Cash Election Shares and (y) the Cash Price Per Share exceeds the
Maximum Cash Payment Amount, then each Cash Election Share shall be converted
into the right to receive:
(1) an amount in cash (rounded to the nearest cent and subject to
adjustment), without interest, equal to the product of (A) $12.75 and (B) a
fraction ("Cash Fraction"), the numerator of which shall be $16,600,000 and
the denominator of which shall be the aggregate amount payable (except for
the Maximum Cash Payment Amount limitation) with respect to all Cash
Election Shares; and
(2) a number of shares of Surviving Corporation Common Stock equal to the
product of (A) one (1) multiplied by (B) a fraction equal to one (1) minus
the Cash Fraction. If the product resulting from the application of clauses
(2)(A) and (B) results in a fractional share (taking into account all
10
<PAGE>
Cash Election Shares held by a holder), then the number of shares to be
issued such holder shall be rounded up to the nearest whole number of shares
and the amount of cash payable to such holder under clause (1) shall be
reduced by $12.75 less the value of such fractional share.
If the aggregate amount payable with respect to all Cash Election Shares is less
than the Maximum Cash Payment Amount, then each Cash Election Share will be
converted into the right to receive the Cash Price Per Share.
IN CONNECTION WITH MAKING AN ELECTION TO RECEIVE CASH, A HOLDER OF LABONE COMMON
STOCK SHOULD READ THE PROXY STATEMENT CAREFULLY, INCLUDING THE DESCRIPTION OF
THE PRORATION, ELECTION AND EXCHANGE PROCEDURES SET FORTH UNDER "THE PROPOSED
MERGER--EXCHANGE OF LABONE SHARES AND CASH ELECTIONS" AND THE INFORMATION
CONTAINED IN THE PROXY STATEMENT UNDER "THE MERGER--FEDERAL INCOME TAX
CONSEQUENCES."
AS A RESULT OF THE PRORATION PROCEDURES SET FORTH IN THE MERGER AGREEMENT,
HOLDERS OF SHARES OF LABONE COMMON STOCK MAY RECEIVE SHARES OF SURVIVING
CORPORATION COMMON STOCK AND/OR CASH IN AMOUNTS THAT VARY FROM THE AMOUNTS SUCH
HOLDERS ELECT TO RECEIVE. SUCH HOLDERS WILL NOT BE ABLE TO CHANGE THE AMOUNTS OF
CASH OR SHARES OF SURVIVING CORPORATION COMMON STOCK ALLOCATED TO THEM PURSUANT
TO SUCH PROCEDURES.
C. MAILING OF CHECKS AND SURVIVING CORPORATION COMMON STOCK CERTIFICATES.
As soon as practicable after the Effective Time of the Merger and the
surrender to the Disbursing Agent, pursuant to these instructions, of the
LabONECommon Stock Certificate(s) for Cash Election Shares registered to a
particular record holder or holders, the Disbursing Agent will mail cash
payments by check and, if applicable, Surviving Corporation Common Stock
Certificate(s) to the holder or holders with respect to each Cash Election
Share.
HOLDERS OF SHARES OF LABONE COMMON STOCK WHO DO NOT MAKE AN EFFECTIVE ELECTION
TO RECEIVE CASH, OR WHO PROPERLY REVOKE SUCH AN ELECTION, PRIOR TO THE ELECTION
DATE, WILL BE DEEMED TO HAVE MADE A STOCK ELECTION AND THEIR SHARES WILL BE
CONVERTED INTO SURVIVING CORPORATION COMMON STOCK AT THE EFFECTIVE TIME OF THE
MERGER.
D. GENERAL.
1. EXECUTION AND DELIVERY. This Letter of Transmittal and Form of Election or
a facsimile hereof must be properly completed, dated and signed in Box IV,
and must be delivered, together with the LabONE Common Stock Certificate(s)
representing the shares of LabONE Common Stock for which an Election to
Receive Cash is made (or with a duly executed guarantee of delivery of such
LabONECommon Stock Certificate(s)) to the Disbursing Agent at the
appropriate address set forth above.
The method of delivery of all documents to be delivered to the Disbursing
Agent is at the option of the stockholder. The risk of loss of, and title
to, the LabONE Common Stock Certificate(s) shall pass only upon delivery of
such LabONECommon Stock Certificate(s) to the Disbursing Agent. If sent by
mail, registered mail, return receipt requested and properly insured, is
suggested.
2. INADEQUATE SPACE. If there is insufficient space on this Letter of
Transmittal and Form of Election to list all the LabONE Common Stock
Certificates you are submitting to the Disbursing Agent, please attach a
separate list.
11
<PAGE>
3. SIGNATURES. The signature (or signatures, in the case of LabONE Common
Stock Certificates owned by two or more joint holders) on this Letter of
Transmittal and Form of Election should correspond exactly to the name(s) as
written on the face of the LabONE Common Stock Certificate(s) submitted
unless the shares of LabONE Common Stock described on this Letter of
Transmittal and Form of Election have been assigned by the registered
holder(s), in which event this Letter of Transmittal and Form of Election
should be signed in exactly the same form as the name of the last transferee
indicated on the transfers attached to or endorsed on the LabONE Common
Stock Certificate(s).
If this Letter of Transmittal and Form of Election is signed by a person or
persons other than the registered owners of the LabONE Common Stock
Certificate(s) listed, the LabONE Common Stock Certificate(s) must be
endorsed or accompanied by appropriate stock powers, in either case signed
exactly as the name(s) of the registered owner(s) appears on the LabONE
Common Stock Certificate(s).
If this Letter of Transmittal and Form of Election, any LabONE Common Stock
Certificate or any stock power is signed by a trustee, executor,
administrator, guardian, officer of a corporation, attorney-in-fact or any
other person acting in a representative or fiduciary capacity, the person
signing must give such person's full title in such capacity and appropriate
evidence of authority to act in such capacity must be forwarded with this
Letter of Transmittal and Form of Election.
4. SHARES REGISTERED IN DIFFERENT NAMES. If shares of LabONE Common Stock are
registered in different names on several LabONE Common Stock Certificates,
it will be necessary to complete, sign and submit a separate Letter of
Transmittal and Form of Election for each different registration. For
example, if some LabONE Common Stock Certificates are registered in your
name, some are registered in your spouse's name and some are registered
jointly, three separate Letter of Transmittal and Form of Elections must be
submitted.
5. LOST, STOLEN OR DESTROYED LABONE COMMON STOCK CERTIFICATES. If your
LabONECommon Stock Certificate(s) has been lost, stolen or destroyed, please
contact the Disbursing Agent's Lost Securities Department at (718) 921-8200.
You will then be instructed as to the steps you must take in order to
receive cash payments by check and, if applicable, Surviving Corporation
Common Stock Certificate(s) in accordance with the Merger Agreement.
6. CHECKS AND SURVIVING CORPORATION COMMON STOCK CERTIFICATES IN SAME NAME. If
the check is to be made payable to the order of, and (if applicable) the
Surviving Corporation Common Stock Certificate is to be issued to, the
person(s) whose name(s) appears on the LabONE Common Stock Certificate(s)
submitted with this Letter of Transmittal and Form of Election, endorsement
of the LabONECommon Stock Certificate(s) or separate stock power(s) is not
required.
7. CHECKS AND SURVIVING CORPORATION COMMON STOCK CERTIFICATES IN DIFFERENT
NAME. If the check is to be made payable to the order of, and (if
applicable) the Surviving Corporation Common Stock Certificate is to be
issued to, a person other than the person in whose name the LabONE Common
Stock Certificate(s) submitted for exchange herewith is registered, such
exchange will not be made by the Disbursing Agent unless the LabONE Common
Stock Certificate(s) submitted is endorsed or in a form otherwise acceptable
for transfer on the books of LabONE, Box II is completed and the signature
is guaranteed in Box IV by a by an eligible guarantor institution (an
"Eligible Institution") pursuant to Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934 (generally a member firm of the New York
Stock Exchange or any bank or trust company which is a member of the
Medallion Program). Public notaries cannot execute acceptable guarantees of
signatures. In the event of a transfer of ownership of LabONECommon Stock
that is not registered in the transfer records of LabONE, the check may be
made payable to the order of, and (if applicable) a Surviving Corporation
Common Stock Certificate may be issued to, a person other than the person in
whose name the LabONE Common Stock Certificate(s) so surrendered is
12
<PAGE>
registered only if the person requesting such payment and (if applicable)
issuance pays any transfer or other taxes required by reason of such payment
or issuance or establishes to the satisfaction of Surviving Corporation that
such tax has been paid or is not applicable.
8. SPECIAL DELIVERY INSTRUCTIONS. If the check and (if applicable) the
Surviving Corporation Common Stock Certificate is to be sent to an address
other than the address of the registered holder set forth in Box I or, if
Box II is completed, to an address other than the address appearing in Box
II, indicate such address in Box III.
9. MISCELLANEOUS. A single check and (if applicable) a single Surviving
Corporation Common Stock Certificate will be issued with respect to all
shares of LabONE Common Stock represented by the LabONE Common Stock
Certificate(s) surrendered with this Letter of Transmittal and Form of
Election to the person(s) in whose name the LabONE Common Stock
Certificate(s) so surrendered is registered, or to the person(s) designated
in Box II, if applicable (See Instruction D(7)).
The determination of the Disbursing Agent whether or not Elections to
Receive Cash have been properly made or revoked and when Elections to
Receive Cash and revocations were received by it shall be binding.
10. STOCK TRANSFER TAXES. The Surviving Corporation shall bear the liability
for any stock transfer taxes applicable to the issuance and delivery of
checks and Surviving Corporation Common Stock Certificates in connection
with the Merger; provided, however, that in the event of a transfer of
ownership of LabONE Common Stock that is not registered in the transfer
records of LabONE, the person requesting that a check be made payable to the
order of, and (if applicable) that a Surviving Corporation Common Stock
Certificate be issued to, a person other than the person in whose name the
LabONE Common Stock Certificate(s) surrendered is registered shall pay the
amount of any transfer or other taxes required by reason of such payment and
(if applicable) issuance to a person other than the registered holder of
such LabONE Common Stock Certificate or establish to the satisfaction of
Surviving Corporation that such tax has been paid or is not applicable.
11. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W-9. Under the
"backup withholding" provisions of Federal income tax law, the Disbursing
Agent may be required to withhold 31% of the sum of the amount of cash, if
any, that otherwise would be delivered to holders of LabONE Common Stock
Certificates surrendered with this Letter of Transmittal and Form of
Election. To prevent backup withholding, each holder should complete and
sign the Substitute Form W-9 included in this Letter of Transmittal and Form
of Election and either: (a) provide the correct taxpayer identification
number ("TIN") and certify, under penalties of perjury, that the TIN
provided is correct (or that such holder is awaiting a TIN), and that (i)
the holder has not been notified by the Internal Revenue Service ("IRS")
that the holder is subject to backup withholding as a result of failure to
report all interest or dividends, or (ii) the IRS has notified the holder
that the holder is no longer subject to backup withholding; or (b) provide
an adequate basis for exemption. If the box in Part 2 of the substitute Form
W-9 is checked, the Disbursing Agent will retain 31% of the sum of the
amount of cash, if any, that otherwise would be delivered to a holder during
the sixty (60) day period following the date of the Substitute Form W-9. If
the holder furnishes the Disbursing Agent with such holder's TIN within
sixty (60) days of the date of the Substitute Form W-9, the Disbursing Agent
will remit such amounts retained during the sixty (60) day period to the
holder and no further amounts will be retained or withheld from payments
made to the holder thereafter. If, however, the holder has not provided the
Disbursing Agent with such Holder's TIN within such sixty (60) day period,
the Disbursing Agent will remit such previously retained amounts to the IRS
as backup withholding and will withhold 31% of the sum of the amount of
cash, if any, that otherwise would be delivered to the holder thereafter
until the holder furnishes a TIN to the Disbursing Agent. In general, if a
holder is an individual, the TIN is
13
<PAGE>
the Social Security Number of such individual. If the Disbursing Agent is
not provided with the correct TIN or an adequate basis for exemption, the
holder may be subject to a $50 penalty imposed by the IRS and backup
withholding at a rate of 31%. Certain holders (including, among others, all
corporations and certain foreign individuals) are not subject to the backup
withholding and reporting requirements. In order to satisfy the Disbursing
Agent that a foreign individual qualifies as an exempt recipient, such
holder must submit a statement (generally, IRS Form W-8), signed under
penalties of perjury, attesting to that individual's exempt status. A form
for such statements can be obtained from the Disbursing Agent. For further
information concerning backup withholding and instructions for completing
the Substitute Form W-9 (including how to obtain a TIN if you do not have
one and how to complete the Substitute Form W-9 if LabONECommon Stock is
held in more than one name or is not in the name of the actual owner),
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
Failure to complete the Substitute Form W-9 will not, by itself, cause
LabONECommon Stock to be deemed invalidly tendered, but may require the
Disbursing Agent to withhold 31% of the sum of the amount of cash, if any,
that would otherwise be delivered to the holder. Backup withholding is not
an additional Federal income tax. Rather, the Federal income tax liability
of a person subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes, a refund
may be obtained by the LabONE stockholder upon the filing of a U.S. Federal
income tax return.
12. ADDITIONAL COPIES. Additional copies of this Letter of Transmittal and Form
of Election may be obtained from the Disbursing Agent by calling
1-800-937-5449 or from Georgeson & Company Inc., Wall Street Plaza, New
York, New York 10005. Banks and Brokers call collect (212) 440-9800. All
others call toll free: (800) 223-2064.
14
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
HOW TO GET A TIN
If you don't have a taxpayer identification number (a "TIN"), apply for one
immediately. To apply, get Form SS-5, Application for a Social Security Number
Card (for individuals), from your local office of the Social Security
Administration, or Form SS-4, Application for Employer Identification Number
(for businesses and all other entities), from your local IRS office. In some
cases, individuals who become U.S. resident aliens for tax purposes are not
eligible to obtain a Social Security Number ("SSN"). These individuals must
apply for an individual taxpayer identification number ("ITIN") on Form W-7,
Application for IRS Individual Taxpayer Identification Number, unless they have
an application pending for a SSN.
If you do not have a TIN, check the box in Part II of the Substitute Form W-9,
sign and date the form, and give it to the requester. Generally, you will then
have 60 days to get a TIN and give it to the requester. If the requester does
not receive your TIN within 60 days, backup withholding, if applicable, will
begin and continue until you furnish your TIN.
NOTE: Checking the box in Part II of the Substitute Form W-9 means that you
have already applied for a TIN or that you intend to apply for one soon.
As soon as you receive your TIN, complete a Form W-9, include your TIN, sign and
date the form, and give it to the requester.
SPECIFIC INSTRUCTIONS
NAME. If you are an individual, you must generally enter the name shown on your
social security card. However, if you have changed your last name, for instance,
due to marriage, without informing the Social Security Administration of the
name change, please enter your first name, the last name shown on your social
security card, and your new last name.
SOLE PROPRIETOR. You must enter your individual name (enter either your SSN or
your employer identification number ("EIN") in Part 1). You may also enter your
business name or "doing business as" name on the business name line. Enter your
name as shown on your social security card and business name as it was used to
apply for your EIN on Form SS-4.
PART I--TIN
You must enter your TIN in the appropriate box. If you are a sole proprietor,
you may enter either your SSN or your EIN. If you are a resident alien and you
do not have and are not eligible to get a SSN, your TIN is your ITIN. Enter it
in the social security box number. Also see the chart on the attached page for
further clarification of TIN and name combinations. If you do not have a TIN,
follow the instructions under "How to Get a TIN" above.
PART II--FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
Individuals (including sole proprietors) are not exempt from backup withholding.
Corporations are exempt from backup withholding for certain payments. If you are
exempt from backup withholding, you should still complete this form to avoid
possible erroneous backup withholding. Enter your correct TIN in Part 1 and sign
and date the form.
If you are a nonresident alien or a foreign entity not subject to backup
withholding, give the requester a completed Form W-8, Certificate of Foreign
Status.
Payees exempt from backup withholding on payments made in connection with the
Exchange Offer include:
(i) a corporation;
(ii) an organization exempt from tax under Section 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), or an individual retirement
account, or a custodial account under Section 403(b)(7) of the Code;
(iii) the United States or any of its agencies or instrumentalities;
15
<PAGE>
(iv) a state, the District of Columbia, a possession of the United States,
or any of their political subdivisions or instrumentalities;
(v) a foreign government or any of its political subdivisions, agencies or
instrumentalities; (vi)an international organization or any of its agencies or
instrumentalities;
(vii) a foreign central bank of issue;
(viii) a dealer in securities or commodities required to register in the
United States or a possession of the United States;
(ix) a futures commission merchant registered with the Commodity Futures
Trading Commission;
(x) a real estate investment trust;
(xi) an entity registered at all times during the tax year under the
Investment Company Act of 1940;
(xii) a common trust fund operated by a bank under Section 584(a) of the
Code;
(xiii) a financial institution; or
(xiv) a person registered under the Investment Advisors Act of 1940 who
regularly acts as a broker,
PRIVACY ACT NOTICE--Section 6109 of the Code requires you to give your correct
TIN to persons who must report certain payments to the IRS. The IRS uses the
numbers for identification purposes. You must provide your TIN whether or not
you are required to file tax returns. Payers must generally withhold 31% of
taxable interest, dividend, and certain other payments to a payee who does not
furnish a taxpayer identification number to a payer. Certain penalties may also
apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you
fail to furnish your TIN to a requester, you are subject to a penalty of $50 for
each such failure unless your failure is due to reasonable cause and not to
willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no backup
withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT
16
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the
Payer. Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the requester.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
GIVE THE SOCIAL GIVE THE EMPLOYER
FOR THIS TYPE OF SECURITY FOR THIS TYPE OF IDENTIFICATION NUMBER
ACCOUNT: NUMBER OF-- ACCOUNT: OF--
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. An individual's The individual
account
2. Two or more The actual owner of 6. A valid trust, Legal entity (Do not
individuals the account or, if estate, or pension furnish the
(joint account) combined funds, the trust identifying number of
first individual on the personal
the account(1) representative or
trustee unless the
legal entity itself is
not designated in the
account title.)(4)
3. Custodian account The minor(2)
of a minor (Uniform
Gift to Minors Act)
4. a. The usual The grantor-trustee(1) 7. Corporate account The corporation
revocable saving
trust account
(grantor is also
trustee)
b. So-called trust The actual owner(1) 8. Association, club, The organization
account is not a religious,
legal or valid charitable,
trust under State educational or
law other tax-exempt
organization
5. Sole proprietorship The owner(3) 9. Partnership The partnership
account
10. A broker or The broker or nominee
registered nominee
11. Account with the The public entity
Department of
Agriculture in the
name of a public
entity (such as a
State or local
government, school
district, or
prison) that
receives
agricultural
program payments
- -------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a SSN, that person's number must be
furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
your employer identification number.
(4) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
18
<PAGE>
EXHIBIT 99.7
To: Participants in LabONE, Inc. Profit Sharing 401(k) Plan
This communication relates to the proposed merger of LabONE, Inc. with and
into Lab Holdings, Inc. If your accounts in the LabONE Profit Sharing 401(k)
Plan (the "Plan"), other than the LabONE Matching Account, hold LabONE common
stock, then you may direct the plan trustee to elect to have all or any whole
number of such shares converted into the right to receive cash from the combined
company in the merger in an amount equal to $12.75 per share (a "Cash
Election"). The merger will convert into combined company common stock (a) all
LabONE common stock in your LabONE Matching Account and (b) all LabONE common
stock in other Plan accounts for which you issue no direction to the Plan
trustee.
If the amount payable in cash to all shares of LabONE common stock for which
Cash Elections are made exceeds $16,600,000, then your Plan account(s) will
receive a combination of cash and shares of combined company common stock for
shares as to which a Cash Election is made, as provided in the merger agreement.
Cash Elections are subject to (i) the terms, conditions and limitations set
forth in the Joint Proxy Statement/Prospectus dated July 2, 1999, relating to
the merger and (ii) the terms of the merger agreement, a conformed copy of which
appears as Appendix A to the proxy statement.
You may use the attached Direction Form for 401(k) Participant to direct the
Plan trustee to make a Cash Election. A direction to the trustee will be
properly made only if the form is properly completed and received by American
Stock Transfer & Trust Company ("Disbursing Agent") at the address set forth
below, no later than 5:00 p.m., New York City Time, on August 3, 1999. You may
revoke or modify a direction to the Plan trustee only by written notice received
by the Disbursing Agent, at the address set forth below, no later than 5:00
p.m., New York City Time, on August 3, 1999. The Disbursing Agent will tabulate
the directions and communicate to the Trustee of the Plan, Chase Manhattan Bank.
The LabONE Profit Sharing 401(k) Plan ("Plan") provides that all LabONE
matching contributions shall be invested in LabONE, Inc. common stock.
Therefore, all LabONE common stock in LabONE Matching Accounts will be converted
into combined company common stock and is ineligible for a Cash Election.
Cash proceeds received in your Plan account because of a Cash Election will
be held in the American Century Premium Capital Reserve Fund under the Plan
until you give subsequent instructions. Once you are notified of the receipt of
the cash proceeds, you should take steps to direct the investment of the cash
proceeds in the Plan investment alternative(s) of your choice.
DISBURSING AGENT NAME AND ADDRESS BY FACSIMILE: (718) 921-8335
BY MAIL, HAND DELIVERY, OR OVERNIGHT COURIER:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 WALL STREET, 46TH FLOOR
NEW YORK, NY 10005
ATTENTION: CARLOS PINTO
<PAGE>
DIRECTION FORM FOR 401(K) PARTICIPANT
DIRECTION TO THE LABONE PROFIT SHARING 401(K) PLAN TRUSTEE
TO ELECT TO RECEIVE CASH FOR LABONE COMMON STOCK
CREDITED TO PLAN ACCOUNTS OTHER THAN
LABONE MATCHING ACCOUNT
Set forth below is the number of shares of LabONE common stock with respect
to which you may direct the Trustee to elect to receive cash for such LabONE
common stock, subject to the prorations as described in the merger documents.
<TABLE>
<S> <C>
NUMBER OF
[NAME OF PARTICIPANT] WHOLE SHARES
</TABLE>
AVAILABLE FOR ELECTION TO RECEIVE CASH
Please check the box below if you are directing the Trustee to make such
election and complete the second box stating the number of shares to which your
direction is made. [If you prefer your account to receive combined company stock
for all these shares, do not return this form.]
/ / I direct the LabONE Profit Sharing 401(k) Plan Trustee to elect to receive
cash for _________ whole shares of LabONE common stock in my Plan Accounts other
than LabONE Matching Account, subject to proration described in the merger
documents.
I acknowledge receipt of the proxy statement.
------------------------------
Name of Participant
------------------------------
Signature of Participant
Date
- ----------------------------
------------------------------------
Social Security Number
