UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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Commission file number 0-15975
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LabOne, Inc.
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10101 Renner Blvd.
Lenexa, Kansas 66219
(913) 888-1770
Incorporated in Delaware
I.R.S. Employer Identification Number: 48-0952323
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
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(Title of Class)
This Amendment amends and restates only Item 7.
This Amendment contains no exhibits.
Page 1 of 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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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 $62.0 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 SBSI revenue of $1.3 million, 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 $7.0
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 $3.3 million, or 12%,
in 1998 as compared to 1997 primarily due to increases in payroll expenses and
bad debt accruals. Clinical overhead expenditures were $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 $16.3 million as compared to
$16.8 million in 1997.
In 1997, the Company 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.)
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Operating income increased from $2.6 million in 1997 to $14.5 million in 1998.
The insurance services segment operating income increased $2.1 million to
$20.6 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 available to invest. Average
income tax expense was 39.3% of pretax income in 1998 as compared to 41.6% 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 $9.2
million, or $0.69 per share, in 1998 as compared to $2.2 million, or $0.17 per
share, in 1997. Excluding the impact of the write-down in 1997, last year's
net earnings would have been $6.1 million, or $0.46 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. At the time of the purchase, GIB served
approximately 5% of the insurance laboratory testing market. 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 $7.0 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 $7.0 million, or 25%, in 1997 as 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 $1.0 million in
1996 to $2.4 million in 1997.
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Selling, general and administrative expenses increased $4.1 million, or 17%,
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, the Company 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 $2.6 million in 1997,
primarily due to the $6.6 million write-down, partially offset by an increase
in the insurance segment operating income of $5.9 million. The clinical
segment had an operating loss of $8.3 million for 1997 as compared to a loss
of $8.0 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 41.6% of pretax income in
1997 as compared to 41.2% in 1996.
The combined effect of the above factors resulted in net earnings of $2.2
million, or $0.17 per share, in 1997 as compared to $2.9 million, or $0.22 per
share, last year. Excluding the impact of the write-down, net income would
have been $6.1 million, or $0.46 per share, in 1997.
TRENDS
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The following is management's analysis of certain existing trends that have
been identified as potentially affecting the future financial results of the
Company. 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, Inc.
(SBSI) which is operated as a wholly owned subsidiary of the insurance
services division of LabOne. SBSI is a provider of information services to
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life and health insurers nationwide, and has annual revenues of approximately
$7 million. With 148 employees in the Kansas City area, SBSI 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, 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 programs, including BlueCare and the Lab Card
Program, have more than 2.3 million lives enrolled. In the fourth quarter,
revenue from Lab Card accounts that have been active for more than one year
rose 60% over the fourth quarter, 1997.
The Company'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 March 8, 1999, LabOne and Lab Holdings, Inc. announced that the Boards of
Directors of both companies had approved an agreement to merge the two
companies. If consummated, the proposed merger will have several effects which
are fully discussed in the Registration Statement on Form S-4 filed by Lab
Holdings with the United States Securities and Exchange Commission on April
13, 1999 (File No. 333-76131), which may be amended from time to time.
One effect of the merger will be to add transaction goodwill to the balance
sheet of the combined company in an estimated amount ranging from about $22.2
million to $24.9 million. This transaction goodwill reflects the expected
difference between the cost of LabOne shares that Lab Holdings will be treated
as acquiring in the merger and the fair value of the LabOne net assets
allocated to these acquired shares. If the merger is consummated, the combined
company's balance sheet will also include about $6.3 million in existing
historical goodwill that currently is a Lab Holdings asset that resulted from
Holding's prior acquisitions of LabOne stock. Following the merger, this
historical and transaction goodwill is expected to negatively impact reported
earnings of the combined company at an estimated annual rate from about $2.6
million to $2.8 million until the historical goodwill is fully amortized in
April 2003, and thereafter at an estimated annual rate from about $1.1 million
to $1.3 million until the 20th anniversary of the merger. The amounts in this
paragraph are hypothetical assuming that the merger had occurred as shown on
the pro forma financial statements included in the above Registration
Statement. The actual amount of goodwill 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.
5
LIQUIDITY AND CAPITAL RESOURCES
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LabOne's working capital position declined from $35.4 million at December 31,
1997, to $25.9 million at December 31, 1998. This decrease is 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 $9.0 million in 1998.
During 1998, 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. There are no
restrictions that would limit the Company's ability to make future dividend
payments.
During 1998, the Company invested $28.5 million in additional property, plant
and equipment, 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
the Company's new facility, and $3.0 million net cash was used in the purchase
of SBSI. The 1997 amount included land purchased related to the new facility
and the GIB Laboratories acquisition. Future capital asset purchases are
expected to be approximately $4 million to $5 million annually.
The Company had no short-term borrowings during 1998. Management expects to
be able to fund operations and future dividend payments, 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 the Company's new facility 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. The bonds mature over 11 years in
increments of $1.85 million per year plus interest. Total cash and
investments at December 31, 1998, were $10.2 million, as compared to $19.5
million at December 31, 1997.
If the proposed merger between LabOne and Lab Holdings is consummated, the
future dividend policy of the combined company in the merger will be
determined by its new Board of Directors, 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, there can be no assurance as to any dividend determinations by that
board in the future. That determination will be subject to the financial
condition, operating results, and liquidity of the combined company and
numerous other factors. In addition, the pursuit by the combined company of
LabOne's growth and diversification strategy, the increased financial leverage
that is expected to result from the merger, changes in the market for LabOne's
products and services, negative impacts caused by other risks described in the
Registration Statement on Form S-4 filed by Lab Holdings with the United
States Securities and Exchange Commission on April 13, 1999
(File No. 333-76131), which may be amended from time to time, or any of them
singly or together with other factors could influence the board of the
combined company to reduce or eliminate the quarterly dividend.
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Under the merger agreement, LabOne shareholders (other than Lab Holdings)
may elect to exchange each LabOne share for either one share of the combined
company, $12.75 in cash, or a combination of shares and cash. Cash elections
are subject to an aggregate cash limit of $16.6 million. It is expected that
the combined company will need to borrow up to $13.6 million to satisfy cash
elections in excess of $3 million. Additional cash could be needed if any Lab
Holdings shareholders perfect dissenters' rights. These additional borrowings
will increase annual interest expense and subject the combined company to the
normal risks associated with debt financing. However, the amount of these
borrowings is not expected to have a negative impact on earnings per share
because the increased borrowing expense would be offset by the reduction in
the number of shares of the combined company issued in the merger as a result
of cash elections by LabOne stockholders. The additional financial leverage
could also impair the ability of the combined company to pursue acquisition
and growth strategies that would otherwise be available or impact future
operating results due to higher debt service in the event that future
acquisitions are completed. The loan agreement that provides for borrowings
to finance the merger and existing LabOne loan agreements do not contain
covenants that will directly prohibit the board of directors of the combined
company from continuing Holdings' quarterly dividends at the current amount.
However, the increased debt combined with other circumstances could cause the
board of the combined company to reduce or discontinue the quarterly dividend.
Other circumstances include negative operating results, acquisition or other
expenditures or commitments incurred to continue LabOne's diversification and
growth strategy, or the effect of general financial covenants contained in the
loan agreement.
YEAR 2000
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LabOne is actively addressing Year 2000 computer concerns. The company has
established an oversight committee which includes management from all parts of
the Company and meets periodically to review progress. The Company'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. The Company
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 the
Company'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, the Company 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
USPS, airlines and other common carriers or express delivery services in the
event of delivery problems with Airborne Express. The Company currently
maintains approximately an eight week supply of most laboratory supplies, and
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does not expect significant problems in obtaining supplies. The Company
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 clients and vendors will be converted to address
Year 2000 problems in a timely and effective manner or that such conversions
will be compatible with the Company's computer systems.
Resources dedicated to the remaining effort are expected to cost less than
$0.3 million and are not considered a material expense to the Company. These
efforts have not caused delay to the Company'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 the Company'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 the
Company's business, financial condition and results of operations.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Registrant has duly caused this Amendment No. 1 to be signed on its
behalf by the undersigned, thereunto duly authorized.
LabOne, Inc.
By: /s/ Robert D. Thompson By: /s/ Kurt E. Gruenbacher
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Robert D. Thompson Kurt E. Gruenbacher
Title: Executive V.P., Chief Title: V.P. Finance, CAO
Operating Officer and and Treasurer
Chief Financial Officer
Date: April 21, 1999 Date: April 21, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 has been signed below by the following persons on behalf
of the Registrant on April 21, 1999 in the capacities indicated.
By: /s/ W. Thomas Grant II. By: /s/ Robert D. Thompson
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W. Thomas Grant II. Robert D. Thompson
Title: Chairman of the Board, President. Title: Executive V.P. , Chief
and Chief Executive Officer Operating Officer and
Chief Financial Officer
By: /s/ Gregg R. Sadler . By: /s/ Thomas J. Hespe
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Gregg R. Sadler.. Thomas J. Hespe
Title: Executive V.P. Administration, Title: Executive V.P. Sales
Secretary and Director. and Director
By: /s/ Kurt E. Gruenbacher By: */s/ Joseph H. Brewer
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Kurt E. Gruenbacher.. Joseph H. Brewer
Title: V.P. Finance, CAO and Treasurer Title: Director
By: */s/ William D. Grant By:. */s/ Richard A Rifkind
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William D. Grant. Richard A. Rifkind
Title: Director Title: Director
By: */s/ Richard S. Schweiker. By: */s/ James R. Seward
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Richard S. Schweiker.. James R. Seward
Title: Director. Title: Director
By: */s/ John E. Walker By: */s/ R. Dennis Wright
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John E. Walker R. Dennis Wright
Title: Director Title: Director
*By: /s/ Gregg R. Sadler
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Gregg R. Sadler
Attorney-in-fact
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