UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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
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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Approximate aggregate market value of voting stock held by non-affiliates
of Registrant: $26,970,000 (based on closing price as of March 1, 1999, of
$11.56). The non-inclusion of shares held by directors, officers and
beneficial owners of more than 5% of the outstanding stock shall not be deemed
to constitute an admission that such persons are affiliates of the Registrant
within the meaning of the Securities and Exchange Act of 1934.
Number of shares outstanding of the only class of Registrant's common
stock as of March 1, 1999: $0.01 par value common - 13,311,450 shares net of
1,688,550 shares held as treasury stock.
The exhibit list for this Form 10-K begins on page 29.
Page 1 OF 86
PART I
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ITEM 1 BUSINESS
General
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LabOne, Inc., 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. (SBSI), hereinafter collectively
referred to as either LabOne or the Company, is the largest provider of life
insurance laboratory testing services in the United States and Canada. (See
Note 8 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 the Company are 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. The Company 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. SBSI 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 the Company 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. The Company does
this through exclusive arrangements with managed care organizations and
through Lab Card(R), a Laboratory Benefits Management (LBM) program.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) 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. The
Company's rapid turnaround times and multiple testing options help clients
reduce downtime for affected employees and meet mandated drug screening
guidelines.
LabOne is currently 80.5% owned by Lab Holdings, Inc. On March 8, 1999,
LabOne and Lab Holdings jointly announced that the Boards of Directors of both
companies had approved an agreement to merge the two companies.
Representatives of Lab Holdings negotiated the merger with a Special Committee
of independent directors of LabOne that was established to represent the
interests of the holders of the 19.5% of common stock of LabOne not owned by
Lab Holdings. The Special Committee, which had the assistance of independent
legal and financial advisors, also approved the merger agreement and
PAGE 2
recommended its approval by the LabOne board and stockholders. The merger is
expected to close in June or July following the satisfaction of a number of
closing conditions. These include approval by the holders of two-thirds of
the outstanding Lab Holdings shares and a majority of the shares voted by
LabOne stockholders other than Lab Holdings and its affiliates. Financing
must also be obtained sufficient to satisfy cash elections after the use of
available cash of LabOne and Lab Holdings. See the Company's Current Report
on Form 8-K dated March 8, 1999 for more information.
Forward Looking Statements
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This Annual report on Form 10-K may contain "forward-looking statements,"
including, but not limited to: projections of revenues, income or loss,
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 assumptions underlying such statements.
Forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause actual results to differ materially from those that
may be expressed or implied in such forward-looking statements, including, but
not limited to, the volume and pricing of laboratory tests performed by the
Company, competition, the extent of market acceptance of the Company's testing
services in the healthcare and substance abuse testing industries, market
acceptance of the Company's Lab Card program, intense competition, the loss of
one or more significant customers, general economic conditions and other
factors detailed from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission, including the
Cautionary Statement filed herewith as exhibit 99.
Services Provided by the Company
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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. The Company 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
PAGE 3
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
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, the Company 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, the Company can obtain attending physician
statements, telephone inspections, motor vehicle reports, and perform claims
investigation through its subsidiary, SBSI.
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. The Company'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. The Company'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
the Company's computer system along with all other completed results.
The Company has established the Lab Card(R) Program, as a vehicle for
delivering outpatient laboratory services. The Lab Card Program is marketed
PAGE 4
to healthcare payers (self-insured groups and insurance companies), allowing
them to avoid price mark-ups and cost shifting. The Lab Card 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 Lab Card 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
(MCOs). The two most significant are Principal Healthcare of Kansas City and
BlueCross BlueShield of Tennessee. With these arrangements the Company
contracts with the MCO, and they direct all testing for their members through
LabOne.
Substance Abuse Testing Services:
LabOne markets substance abuse testing to large companies, third party
administrators and occupational health providers. Certification by SAMHSA
enables the Company 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 the Company. 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
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The following table summarizes the Company's revenues from services provided
to the insurance, clinical and substance abuse testing markets (dollars in
thousands):
Year ended December 31,
1998 1997 1996
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Insurance $ 69,149 68% $ 61,998 79% $ 50,801 85%
Clinical 18,600 18% 7,512 9% 3,942 7%
Substance Abuse 14,478 14% 9,416 12% 4,689 8%
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$ 102,227 $ 78,926 $ 59,432
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(See Note 9 of Notes to Consolidated Financial Statements for operating
income and identifiable assets by segment.)
PAGE 5
Operations
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The Company'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. The Company 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 the Company'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, the company'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.
The Company 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.
Substantially all of the reagents and materials used by the Company in
conducting its testing are commercially purchased and are readily available
from multiple sources.
Regulatory Affairs
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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 OSHA 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
PAGE 6
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 (CAP), the American Association of Bioanalysts and the Centers
for Disease Control. LabOne is accredited by CAP.
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, the Company has developed the
LabOne Compliance Plan, based on the Model Compliance Plan recommended by the
Office of Inspector General (OIG) 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 (CLIA)
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 SAMHSA to perform testing to detect drugs of abuse in federal
employees and in workers governed by federal regulations.
Congress recently enacted the Health Insurance Portability and Accountability
Act of 1996. As a transmitter of health information in electronic form, the
Company will be required to maintain administrative, technical, and physical
safeguards to protect the integrity and confidentiality of healthcare
information against unauthorized uses or disclosures. HIPAA will also require
the Company to convert healthcare information to electronic form that had
previously been required under state law to be maintained in paper form.
Compliance with HIPAA regulations may be required as early as the Fall of
2001.
Sales and Marketing
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LabOne's client base consists primarily of insurance companies in the United
States and Canada. The Company 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 the Company'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 the Company'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. The Company'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.
PAGE 7
Substance abuse marketing efforts are primarily directed at Fortune 1000
companies, occupational health clinics and third party administrators. The
Company'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
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The Company believes that the insurance laboratory testing market in the
United States 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. The Company
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. The Company faces
competition from numerous independent clinical laboratories and hospital- or
physician-owned laboratories. Many of the Company's competitors are
significantly larger and have substantially greater financial resources than
LabOne. The Company is working to establish a solid client base through the
use of Lab Card 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 premier low-cost provider of high-quality
laboratory services to self-insured employers and insurance companies in the
healthcare market. The Company 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 SAMHSA certified. The Company's major
competitors are the three major clinical chains, Laboratory Corporation of
America, Quest Diagnostics and Smith Kline Beecham Laboratories, who
collectively constitute approximately two-thirds of the substance abuse
testing market. The Company's focus is fast turnaround with high-quality,
low-cost service.
PAGE 8
Foreign Markets
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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 the Company's domestic
operations and its subsidiary, Lab One Canada Inc.
Year ended December 31, (in millions)
1998 1997* 1996
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Sales:
United States $95.7 $72.4 $53.1
Canada 6.5 6.6 6.4
Operating Profit:
United States 14.2 2.0 2.4
Canada 0.3 0.6 0.7
Identifiable Assets:
United States 83.8 56.8 62.1
Canada 2.8 3.2 2.7
*1997 operating profit includes a one-time write-off of $6.6 million.
(See Note 1 of Notes to Consolidated Financial Statements.)
Technology Development
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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 the
Company as a whole.
Employees
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As of March 1, 1999, the Company had 895 employees, including 23 part-time
employees, representing an increase of 230 employees from the same time in
1998. The addition of SBSI accounts for approximately 65% of the increase.
None of the Company's employees are represented by a labor union. The Company
believes its relations with employees are good.
ITEM 2. PROPERTIES
On December 26, 1998, the Company 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 the Company's
laboratory, administrative and warehouse functions into one building. The
facility is owned by the Company 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
PAGE 9
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 UPS 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.
SBSI 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 (LSCs). 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.
ITEM 3. 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.
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.
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 financial condition or results of operations of
the Company. No provisions for loss related to litigation are included in the
accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PAGE 10
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock trades on The NASDAQ Stock Market (R) under the
symbol LABS. As of March 1, 1999, the outstanding shares were held by
approximately 1850 shareholders of record.
The Company paid quarterly dividends of $0.18 per common share in both 1998
and 1997. The Board of Directors reviews the dividend policy on a periodic
basis. There are currently no restrictions that would limit the Company's
ability to make future dividend payments.
The following are the high and low prices of the stock for each
quarter of 1998 and 1997:
1998 1997
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High Low High Low
---- --- ---- ---
1st Quarter $18.25 15.75 $20.00 16.25
2nd Quarter 18.50 16.63 18.50 15.25
3rd Quarter 17.13 11.50 18.75 15.38
4th Quarter 16.75 9.25 18.50 15.13
PAGE 11
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial information and
operating data regarding the Company. This information should be read in
conjunction with Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and Item 14. (a) (1) and (2),
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The balance sheet data as of
December 31, 1998, 1997, 1996, 1995 and 1994, and the statement of earnings
data for each of the years in the five-year period ended December 31, 1998,
have been derived from the Company's Consolidated Financial Statements, which
have been audited by KPMG LLP, the Company's independent certified public
accountants.
Years Ended December 31,
(in thousands, except per share amounts)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Earnings Data:
Sales $102,227 78,926 59,432 57,029 60,726
Cost of sales 56,720 42,017 32,717 29,934 29,073
------- ------ ------ ------ ------
Gross profit 45,507 36,909 26,715 27,095 31,653
Selling, general and
administrative expenses 31,028 27,707 23,623 24,908 24,821
Loss provision* -- 6,553 -- -- --
------- ------ ------ ------ ------
Earnings from operations 14,479 2,649 3,092 2,188 6,833
Other income 702 1,122 1,784 2,562 1,700
------- ------ ------ ------ ------
Earnings before income taxes 15,181 3,771 4,877 4,750 8,533
Income taxes 5,962 1,568 2,009 1,953 2,846
------- ------ ------ ------ ------
Net earnings $ 9,219 2,202 2,868 2,797 5,687
======== ====== ====== ====== ======
Diluted earnings
per common share $ 0.69 0.17 0.22 0.21 0.43
======== ====== ====== ====== ======
Dividends per common share $ 0.72 0.72 0.72 0.72 0.72
======== ====== ====== ====== ======
Balance Sheet Data:
Working capital 25,931 35,426 38,817 44,233 48,559
Total assets 86,781 59,973 64,743 70,048 76,758
Long term debt 18,097 - - - -
Stockholders' equity 53,181 51,499 58,449 64,864 71,237
*The 1997 loss provision represents the one-time write-down on the value of
the Company's facilities which are available for sale.
(See Note 1 of Notes to Consolidated Financial Statements.)
PAGE 12
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.)
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
PAGE 13
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.
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
PAGE 14
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
- ------
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
life and health insurers nationwide, and has annual revenues of approximately
$7 million. With 148 employees in the Kansas City area, SBSI provides
PAGE 15
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.
PAGE 16
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. 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 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.
YEAR 2000
- ---------
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.
PAGE 17
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
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
$0.3 million and are not considered a material expense to the Company. These
efforts have not caused delay to the Company's other ongoing information
systems projects. LabOne has not hired any outside consultants or other
independent validation provider at this time, and does not expect to do so.
There can be no assurance that the Company's adjustments to its computer
systems will completely eliminate all Year 2000 problems. Failure to properly
address the Year 2000 problem could have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A foreign currency risk exposure exists due to billing Canadian subsidiary
revenue in Canadian dollars and the direct laboratory expenses associated with
this revenue being incurred in US dollars. This exposure is not considered to
be material. Any future material Canadian currency fluctuations against the
US$ 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See ITEM 14.(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PAGE 18
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of LabOne as of March 26, 1999 are
as follows:
Name Age Position
- ---- --- --------
W. Thomas Grant II 48 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 and Director
Carl W. Ludvigsen, Jr. 46 Executive Vice President - Corporate
M.D., Ph.D., J.D., Development and Chief Medical Officer
FCAP, FCLM
Michael A. Peat, Ph.D. 51 Executive Vice President - Toxicology
Thomas H. Bienvenu II 49 Executive Vice President - Information
Systems and Technology
Judith A. VonFeldt 52 Executive Vice President - Human
Resource
Kurt E. Gruenbacher, 39 Vice President - Finance, Chief
CPA, CMA, CFM Accounting Officer and Treasurer
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
PAGE 19
The terms of office of the directors of LabOne will expire upon the
election of their successors at the 1999 Annual Meeting of Stockholders.
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 Lab Holdings, Inc. from May 1993 to September 1997. Mr. Grant is
also a director of Commerce Bancshares, Inc., Kansas City Power & Light
Company, Response Oncology, Inc., 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 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 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. Ludvigsen has served as Executive Vice President - Corporate
Development and Chief Medical Officer since December 1996. He served as
Executive Vice President - Operations and Chief Operating Officer from
December 1993 to November 1996.
Dr. Peat was appointed 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.
PAGE 20
Mr. Gruenbacher was appointed 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
Lab Holdings, Inc. Mr. Grant also served as Chairman Emeritus of Lab
Holdings, Inc. from May 1993 to September 1997 and served as Chairman of the
Board of Lab Holdings, Inc. 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 Lab
Holdings, Inc. prior to its spin-off in March 1997. He was Executive Vice
President of Lab Holdings, Inc. from 1993-1997 and served as its Chief
Financial Officer from 1990-1997. Mr. Seward is also a director of Response
Oncology, Inc. and 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.
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.
PAGE 21
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.
PAGE 22
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by LabOne to or on behalf of (i) the person who
served as its chief executive officer during 1998 and (ii) 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>
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Fiscal Stock Option Shares All Other
Principal Position 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 Presi- 1997 209,900 131,173 -0- 16,856
dent, Chief Operating 1996 209,277 75,000 -0- 17,086
Officer and Chief
Financial Officer
Carl W. Ludvigsen,Jr. 1998 239,781 42,661 -0- 21,670
Executive Vice Presi- 1997 230,900 131,173 -0- 21,470
dent-Corporate Devel- 1996 230,277 25,000 -0- 20,634
opment and Chief
Medical Officer
Thomas J. Hespe 1998 165,704 107,261 -0- 21,371
Executive Vice Presi- 1997 159,900 131,173 -0- 21,470
dent-Sales and 1996 159,277 50,000 -0- 20,490
Marketing
Gregg R. Sadler 1998 165,704 107,261 -0- 21,670
Executive Vice Presi- 1997 156,900 131,173 -0- 21,865
dent-Administration 1996 150,277 50,000 -0- 20,923
and Secretary and
President-Insurance
Laboratory Division
</TABLE>
(1) The amounts shown in this column for 1998 consist of (a) 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; (b)
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 (c) 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 $424 for the benefit of Mr. Hespe.
PAGE 23
Aggregate Option Exercises and December 31, 1998 Option Value Table
The following table provides certain information concerning the exercise
of stock options during 1998 by each of the named executive officers and the
number and value of unexercised options held by such persons on December 31,
1998.
<TABLE>
Number of
Shares Value of
Underlying Unexercised
Unexercised In-the-Money
Options on Options on
December 31, 1998 (#) December 31, 1998($)
Shares Options Options Options Options
Acquired on Value Exercis- Unexer- Exercis- Unexer-
Name Exercise (#) Realized able cisable able cisable
------------ -------- ---- ------- ---- -------
<C> <C> <C> <C> <C> <C>
W. Thomas 0 0 42,431 60,000 $ 84,007 $0
Grant II
Robert D. 0 0 122,000 28,000 $ 39,375 $26,250
Thompson
Carl W. . 0 0 81,000 8,000 $ 82,873 $10,000
Ludvigsen, Jr.
Thomas J. 0 0 60,000 40,000 $ 78,750 $52,500
Hespe
Gregg R. 0 0 90,400 9,600 $144,019 $0
Sadler
</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.
PAGE 24
Employment Agreements
LabOne has Employment Agreements with Robert D. Thompson, Carl W.
Ludvigsen Jr., Gregg R. Sadler and Thomas J. Hespe. Dr. Ludvigsen's Agreement
provides for his employment for a two-year term ending in November 1998 and
renewable annually thereafter for successive one-year terms unless LabOne
elects not to extend the Agreement. 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, $230,900 to Dr. Ludvigsen,$150,900 to Mr. Sadler and
$150,900 to Mr. Hespe. In the event that LabOne terminates Messrs. Thompson,
Ludvigsen 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 canceled. The proposed merger of LabOne with and into Lab Holdings,
Inc. 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.
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.
PAGE 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows as of March 26, 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.
Percentage of
Shares Of LabOne Outstanding Shares
Beneficially owned Of LabOne Owned
Beneficial Owner March 26, 1999(1) March 26, 1999
- ---------------- ----------------- --------------
Lab Holdings, Inc. 10,712,200 80.5%
5000 West 95th Street
Shawnee Mission, KS 66207
(1) Lab Holdings, Inc. has sole voting and investment power with respect
to the shares listed.
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows as of March 26, 1999, for each director of
LabOne, each of the executive officers of LabOne named in the Summary
Compensation Table in Item 11 hereof and all directors and executive officers
of LabOne as a group, the total number of shares of common stock of LabOne and
of Lab Holdings, Inc. beneficially owned by such persons.
<TABLE>
Percentage of Percentage of
Outstanding Outstanding
Shares of Shares of Shares of Lab Shares of Lab
LabOne LabOne Holdings Holdings
Beneficially Beneficially Beneficially Beneficially
Beneficial Owner Owned (1),(2) Owned (3) Owned (1) Owned (3)
- ---------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Joseph H. Brewer, M.D. 27,195 * 0 *
William D. Grant 38,695 (4) * 1,086,647(5) 16.7%
W. Thomas Grant II 81,596 (7) * 138,089(6) 2.1%
Thomas J. Hespe 60,831 (7) * 0 *
Carl W. Ludvigsen, Jr., 83,313 (7) * 0 *
M.D.
Richard A. Rifkind, M.D 27,098 * 0 *
Gregg R. Sadler 102,993 (7) * 266 *
Richard S. Schweiker 19,978 * 0 *
James R. Seward 22,156 (4) * 0 *
Robert D. Thompson 127,949 (7) * 0 *
John E. Walker 27,195 (8) * 6,099(8) *
R. Dennis Wright, Esq. 24,378 * 0 *
All directors and 817,198 (7) 5.8% 1,231,101 19.0%
executive officers of
LabOne as a group
(17 persons)
</TABLE>
Less than 1% of outstanding shares
PAGE 26
- -----------------------------------------
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to the shares listed.
(2) 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 shares; R. Dennis Wright, 22,000 shares; and
all directors and executive officers as a group, 719,831 shares.
(3) 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.
(4) Does not include 10,712,200 shares of LabOne Common Stock owned by Lab
Holdings, Inc. (see "Security Ownership of Certain Beneficial Owners of
LabOne" above). Mr. William D. Grant disclaims beneficial ownership of the
shares of LabOne Common Stock owned by Lab Holdings, Inc.
(5) Includes 403,441 shares of Lab Holdings Common Stock held by 3 family
trusts for which William D. Grant serves as a co-trustee with UMB Bank, N.A.,
and in that capacity shares voting and investment power and 28,916 shares
owned by the wife of William D. Grant, as to which he disclaims beneficial
ownership.
(6) Includes 22,442 shares of Lab Holdings Common Stock held by W. Thomas
Grant II as custodian for his children, 45,000 shares held in a family trust
for which W. Thomas Grant II serves as a co-trustee with Laura Gamble and in
that capacity shares voting and investment power, 12,480 shares owned by the
wife of W. Thomas Grant II, as to which he disclaims beneficial ownership.
(7) 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.
(8) All of Mr. Walker's shares are owned by a revocable trust for Mr. Walker's
wife, as to which he disclaims beneficial ownership.
PAGE 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH LAB HOLDINGS, INC.
As of March 26, 1999, Lab Holdings, Inc. beneficially owned 10,712,200
shares, or 80.5%, of the outstanding common stock of LabOne. Lab Holdings,
Inc., 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 Lab Holdings, Inc., with the
officers of LabOne having direct responsibility for all of LabOne's management
and operations.
Lab Holdings, Inc. and LabOne are parties to a Transition Agreement
(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 Lab
Holdings, Inc., directly or indirectly, owns at least 20% of the outstanding
voting shares of LabOne, Lab Holdings, Inc. 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 health
care 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 Lab Holdings, Inc. 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 Lab Holdings, Inc., Lab Holdings, Inc. 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 Lab Holdings, Inc., and any controlling
person of Lab Holdings, Inc., 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, Lab
Holdings, Inc. agrees to indemnify and hold harmless LabOne and any
controlling person of LabOne (other than Lab Holdings, Inc.), 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 Lab Holdings, Inc. (other than the business of LabOne).
PAGE 28
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) and (2) -- The following consolidated financial statements and
schedule are attached as a separate section of this report entitled
"Consolidated Financial Statements and Schedule":
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, December 31, 1998, and 1997
Consolidated Statements of Earnings, Years Ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows, Years Ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
SCHEDULE:
Schedule II - Valuation and qualifying accounts
All other schedules are omitted because they are not applicable, not
required, or the information is included in the Consolidated Financial
Statements or the notes thereto.
(b) Reports on Form 8-K
A Form 8-K current report dated October 14, 1998, was filed with the
Commission reporting under Other Events that LabOne had entered into an
agreement to acquire Systematic Business Services, Inc.
A Form 8-K current report dated October 22, 1998, was filed with the
Commission providing under Other Events a cautionary statement in order to
obtain the benefits of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
A Form 8-K current report dated March 8, 1999, was filed with the
Commission reporting under Other Events that LabOne and Lab Holdings, Inc. had
entered into an agreement to merge the two companies.
(c) Exhibits required by Item 601 of Regulation S-K
(Exhibits follow the Schedule):
PAGE 29
Page
----
3.1* Articles of Incorporation - attached as Exhibit (3) to the
Registrant's Form 10-K Annual Report dated March 28, 1988.
3.2* Certificate of Amendment of Articles of Incorporation -
attached as Exhibit (3.2) to the Registrant's Form 10-K Annual
Report dated March 14, 1994.
3.3* Bylaws - attached as Exhibit (3) to the Registrant's Form
10-K Annual Report dated March 28, 1988.
4.1* Trust Indenture dated as of September 1, 1998, between
the City of Lenexa, Kansas and Intrust Bank, N.A. related to
the issuance of Taxable Industrial Revenue Bonds for the LabOne,
Inc. Facility Project - attached as Exhibit (4.1) to the
Registrant's Quarterly Report on Form 10-Q dated November 13, 1998.
4.2* Lease Agreement dated as of September 1, 1998, between
the City of Lenexa, Kansas and LabOne, Inc. related to the
Trust Indenture - attached as Exhibit (4.2) to the Registrant's
Quarterly Report on Form 10-Q dated November 13, 1998.
4.3* Reimbursement Agreement dated as of September 1, 1998, between
LabOne, Inc. and Commerce Bank, N.A. - attached as Exhibit
(4.3) to the Registrant's Quarterly Report on Form 10-Q dated
November 13, 1998.
4.4* Warrant to Purchase Shares of Common Stock of LabOne, Inc.,
issued to National Support Services, Inc.,- attached as Exhibit (4)
to the Registrant's Quarterly Report on Form 10-Q dated
May 13, 1998.
4.5 Warrant to Purchase Shares of Common Stock of LabOne, Inc.,
issued to USA Managed Care Organization. 57
10.1* Registrant's 1997 Long Term Incentive Plan - attached
as Exhibit (10.1) to the Registrant's Quarterly Report on Form
10-Q dated August 12, 1998. **
10.2* Form of Stock Option Agreement pursuant to the LabOne
1997 Long-Term Incentive Plan.- attached as Exhibit (10.2) to
the Registrant's Quarterly Report on Form 10-Q dated
August 12, 1998. **
10.3 Registrant's Annual Incentive Plan. ** 65
10.4* Registrant's Stock Plan for nonemployee directors -
attached as Exhibit (A) to the Registrant's Proxy Statement
dated April 10, 1992. ***
10.5 Form of Indemnification Agreement between the Registrant
and its directors dated February 12, 1999. 66
10.6* Form of Employment Agreement between the Registrant
and its executive officers and certain key employees - attached
as Exhibit (10) to the Registrant's Form 10-K Annual Report dated
March 28, 1988. **
PAGE 30
Page
----
10.7* Amended Employment Agreement between the Registrant and
Robert D. Thompson- attached as Exhibit (10.11) to the
Registrant's Form 10-K Annual Report dated March 21, 1996. **
10.8* Employment Agreement between the Registrant and
Gregg R. Sadler - attached as Exhibit (10.14) to the
Registrant's Form 10-K Annual Report dated March 14, 1994. **
10.9* Amendment to Employment Agreement between the Registrant
and Gregg R. Sadler- attached as Exhibit (10.13) to the
Registrant's Form 10-K Annual Report dated March 21, 1996. **
10.10*Employment Agreement between the Registrant and
Thomas J. Hespe- attached as Exhibit (10.14) to the
Registrant's Form 10-K Annual Report dated March 21, 1996. **
10.11*Amended Employment Agreement between the Registrant
and Carl W. Ludvigsen, Jr. - attached as Exhibit (10.15) to
the Registrant's Form 10-K Annual Report dated March 7, 1997. **
10.12*Employment Agreement between the Registrant and
Robert F. Thompson - attached as Exhibit (10.17) to the
Registrant's Form 10-K Annual Report dated March 23, 1995. **
10.13*Form of Amendment to Employment Agreement between
the Registrant and Robert F. Thompson - attached as Exhibit
(10.18) to the Registrant's Form 10-K Annual Report dated
March 23, 1995. **
10.14*Registrant's Long Term Incentive Plan as amended - attached
as Exhibit the Registrant's Form 10-K Annual Report dated
March 19, 1992. **
10.15*Amendment to paragraphs 6 (d) and 24 (d) of the Registrant's
Long Term Incentive Plan - attached as Exhibit (10.2) to the
Registrant's Form 10-K Annual Report dated March 14, 1994. **
10.16*Amendment to paragraph 3 of the Registrant's Long Term
Incentive Plan - attached as Exhibit (10.3) to the Registrant's
Form 10-K Annual Report dated March 14, 1994. **
10.17*Amendment to paragraph 3 of the Registrant's Long Term Incentive
Plan - attached as Exhibit (10.4) to the Registrant's Form
10-K Annual Report dated March 21, 1996. **
10.18*Amendment to paragraph 2(a) of the Registrant's Long Term
Incentive Plan- attached as Exhibit (10.5) to the Registrant's
Form 10-K Annual Report dated March 23, 1998. **
11. Statement regarding computation of per share
earnings - see Note 1 of Notes to Consolidated Financial
Statements, "Earnings Per Share."
PAGE 31
Page
----
21. Subsidiaries of Registrant - see Note 1 of Notes
to Consolidated Financial Statements, "Principles of
Consolidation and Basis of Presentation."
24. Powers of Attorney. 79
27. Financial Data Schedule - as submitted electronically
by the Registrant in conjunction with this 1998
Form 10-K.
99. Cautionary Statement under the Safe Harbor
Provisions of the Private Securities Litigation
Reform Act of 1995 80
* Incorporated by reference pursuant to Rule 12b-23
** Management Compensatory Plan
*** Non-Management Director Compensatory Plan
These exhibits may be obtained by stockholders of Registrant upon written
request to LabOne, Inc., 10101 Renner Blvd., Lenexa, KS 66219.
(d) Not applicable
PAGE 32
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LabOne, Inc.
By: /s/ Robert D. Thompson By: /s/ Kurt E. Gruenbacher
---------------------- -----------------------
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: March 30, 1999 Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant on March 30, 1999 in the capacities indicated.
By: /s/ W. Thomas Grant II. By: /s/ Robert D. Thompson
---------------------- ----------------------
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
------------------- -------------------
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
----------------------- ---------------------
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
--------------------- ----------------------
William D. Grant. Richard A. Rifkind
Title: Director Title: Director
By: */s/ Richard S. Schweiker. By: */s/ James R. Seward
------------------------- --------------------
Richard S. Schweiker.. James R. Seward
Title: Director. Title: Director
By: */s/ John E. Walker By: */s/ R. Dennis Wright
------------------- ---------------------
John E. Walker R. Dennis Wright
Title: Director Title: Director
.. *By: /s/ Gregg R. Sadler
-------------------
Gregg R. Sadler
Attorney-in-fact
PAGE 33
LABONE, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Schedule
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
PAGE 34
LABONE, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report 36
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1998
and 1997 37
Consolidated Statements of Earnings, Years ended
December 31, 1998,1997 and 1996 39
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1998, 1997 and 1996 40
Consolidated Statements of Cash Flows, Years
ended December 31, 1998, 1997 and 1996 41
Notes to Consolidated Financial Statements 43
Schedule:
Schedule II - Valuation and Qualifying Accounts 56
PAGE 35
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.
KPMG LLP
Kansas City, Missouri
January 29, 1999, except as to
note 12, which is as of March 8, 1999
PAGE 36
LABONE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 10,177,740 18,284,672
Short-term investments (note 1) - 1,204,638
Accounts receivable, net of allowance
for doubtful accounts of $2,326,716 in
1998 and $968,295 in 1997 18,735,984 12,604,687
Income taxes receivable 282,229 508,704
Inventories 1,798,481 2,203,471
Real estate available-for-sale (note 1) 3,515,000 3,515,000
Prepaid expenses and other current assets 2,504,768 2,279,619
Deferred income taxes (note 5) 3,972,575 3,299,387
----------- -----------
Total current assets 40,986,777 43,900,178
Property, plant, and equipment:
Land 2,379,334 2,379,334
Laboratory equipment 18,101,286 19,044,329
Data processing equipment and software 18,878,942 17,130,254
Office and transportation equipment 5,787,762 4,909,970
Leasehold improvements 700,842 492,684
Construction in progress 27,067,631 -
----------- -----------
72,915,797 43,956,571
Less accumulated depreciation 35,983,169 33,515,280
----------- -----------
Net property, plant, and equipment 36,932,628 10,441,291
----------- -----------
Other assets:
Intangible assets, net of
accumulated amortization (note 2) 8,469,322 5,229,708
Bond issue costs, net of accumulated
amortization of $5,823 186,324 -
Deferred income taxes - noncurrent (note 5) - 321,799
Deposits and miscellaneous 206,127 80,497
----------- -----------
Total assets $ 86,781,178 59,973,473
=========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
PAGE 37
LABONE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1998 and 1997
Liabilities and Stockholders' Equity 1998 1997
------------ ------------
Current liabilities:
Accounts payable $ 4,353,733 3,326,451
Retainage and construction accounts payable 3,809,193 -
Accrued payroll and benefits 4,148,593 4,530,235
Other accrued expenses 610,315 423,396
Other current liabilities 274,198 194,148
Current portion of long-term debt (note 4) 1,860,168 -
----------- -----------
Total current liabilities 15,056,200 8,474,230
Deferred income taxes (note 5) 446,745 -
Long-term debt (note 4) 18,097,308 -
----------- -----------
Total liabilities 33,600,253 8,474,230
----------- -----------
Commitments and Contingencies
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 7) 150,000 150,000
Additional paid-in capital 14,099,066 13,723,250
Accumulated other comprehensive income (849,098) (666,927)
Retained earnings 59,988,073 60,259,272
----------- -----------
73,388,041 73,465,595
Less treasury stock of 1,688,550 shares
in 1998 and 1,874,706 shares in 1997,
at cost 20,207,116 21,966,352
----------- -----------
Total stockholders' equity 53,180,925 51,499,243
----------- -----------
Total liabilities and
stockholders' equity $ 86,781,178 59,973,473
=========== ===========
See accompanying notes to consolidated financial statements.
PAGE 38
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ---------- ----------
Sales $ 102,227,216 78,926,119 59,431,855
Cost of sales 56,719,603 42,017,179 32,716,833
----------- ---------- ----------
Gross profit 45,507,613 36,908,940 26,715,022
Selling, general, and
administrative expenses 31,028,323 27,706,822 23,622,545
Provision for loss on disposal
of assets - 6,553,279 -
----------- ---------- ----------
Earnings from operations 14,479,290 2,648,839 3,092,477
----------- ---------- ----------
Other income (expenses):
Investment income 814,343 1,179,947 1,769,182
Other, net (112,277) (58,245) 14,930
----------- ---------- ----------
Total other income, net 702,066 1,121,702 1,784,112
----------- ---------- ----------
Earnings before income taxes 15,181,356 3,770,541 4,876,589
----------- ---------- ----------
Income taxes (benefit) (note 5):
Current 6,057,345 4,392,742 2,485,473
Deferred (95,356) (2,824,296) (476,783)
----------- ---------- ----------
Total income taxes 5,961,989 1,568,446 2,008,690
----------- ---------- ----------
Net earnings $ 9,219,367 2,202,095 2,867,899
=========== ========== ==========
Basic earnings per share $ 0.70 0.17 0.22
=========== ========== ==========
Diluted earnings per share $ 0.69 0.17 0.22
=========== ========== ==========
See accompanying notes to consolidated financial statements.
PAGE 39
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
Accumulated
other
comprehensive
income -
Additional foreign Compre- Total
Common paid-in currency Retained Treasury hensive stockholders'
stock capital translation earnings stock income equity
--------- ----------- ----------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 150,000 13,377,728 (545,818) 74,040,870 (22,158,451) 64,864,329
Comprehensive income:
Net earnings - - - 2,867,899 - 2,867,899 2,867,899
Adjustment from foreign
currency translation - - 1,859 - - 1,859 1,859
----------
Comprehensive income 2,869,758
==========
Cash dividends ($.72 per share) - - - (9,414,332) - (9,414,332)
Net issuance of 30,149 shares
of treasury stock - 168,393 - - (38,855) 129,538
--------- ----------- ----------- ---------- ------------ ------------
Balance at December 31, 1996 150,000 13,546,121 (543,959) 67,494,437 (22,197,306) 58,449,293
Comprehensive income:
Net earnings - - - 2,202,095 - 2,202,095 2,202,095
Adjustment from foreign
currency translation - - (122,968) - - (122,968) (122,968)
-----------
Comprehensive income 2,079,127
============
Cash dividends ($.72 per share) - - - (9,437,260) - (9,437,260)
Net issuance of 41,129 shares
of treasury stock - 177,129 - - 230,954 408,083
--------- ----------- ----------- ---------- ------------- -----------
Balance at December 31, 1997 150,000 13,723,250 (666,927) 60,259,272 (21,966,352) 51,499,243
Comprehensive income:
Net earnings - - - 9,219,367 - 9,219,367 9,219,367
Adjustment from foreign
currency translation - - (182,171) - - (182,171) (182,171)
----------
Comprehensive income 9,037,196
==========
Cash dividends ($.72 per share) - - - (9,490,566) - (9,490,566)
Issuance of 168,885 shares of
treasury stock related to
acquisition - 275,050 - - 1,724,950 2,000,000
Net issuance of 17,271 shares
of treasury stock - 100,766 - - 34,286 135,052
--------- ----------- ----------- ---------- ------------ ------------
Balance at December 31, 1998 $ 150,000 14,099,066 (849,098) 59,988,073 (20,207,116) 53,180,925
========= =========== ========== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 40
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---------- --------- ---------
Cash provided by (used for) operations:
Net earnings $ 9,219,367 2,202,095 2,867,899
Adjustments to reconcile net earnings to net
cash provided by operations, net of acquisitions:
Depreciation and intangibles amortization 4,168,638 4,770,415 4,014,304
Amortization of investment premiums (36,767) (251,233) (103,146)
Deferred income taxes (96,263) (2,832,976) (476,783)
(Gain) loss on disposal of equipment (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 (5,274,751) (3,005,980) (1,871,421)
Income tax receivable 226,475 (271,331) -
Inventories 404,990 (755,422) 173,093
Prepaid expenses and other current assets (201,551) (442,454) 808,589
Accounts payable 886,932 355,075 863,000
Income taxes payable - - (50,560)
Accrued payroll and benefits (619,281) 1,727,669 830,091
Other accrued expenses 186,919 29,585 (508,486)
Other current liabilities 80,050 68,019 (23,668)
---------- --------- ---------
Net cash provided by operations 8,988,771 8,093,488 6,740,595
---------- --------- ---------
Cash provided by (used for) investment activities:
Purchase of investments held-to-maturity (5,461,090) (15,893,902) (15,752,895)
Proceeds from maturities of investments
held-to-maturity 6,701,893 18,155,062 23,394,571
Property, plant, and equipment additions, net (25,485,294) (6,676,615) (3,225,956)
Acquisition of businesses (note 2) (2,967,883) (4,815,889) -
Deposits and miscellaneous (5,147) (57,295) 17,559
---------- --------- ---------
Net cash provided by (used for)
investment activities (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 72,433 341,249 67,442
Proceeds from bond issue 19,900,000 - -
Bond issue costs (192,147) - -
Payments on long-term debt (1,937) - -
Cash dividends (9,490,566) (9,437,260) (9,414,332)
---------- --------- ---------
Net cash provided by (used for)
financing activities 10,287,783 (9,096,011) (9,346,890)
---------- --------- ---------
Effect of foreign currency translation on cash (165,965) (71,544) 11,976
---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (8,106,932) (10,362,706) 1,838,960
Cash and cash equivalents at beginning of year 18,284,672 28,647,378 26,808,418
---------- --------- ---------
Cash and cash equivalents at end of year $ 10,177,740 18,284,672 28,647,378
========== ========== ==========
Continued)
PAGE 41
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 6,458,641 4,586,078 2,251,320
========== ========== ==========
Interest $ 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.
PAGE 42
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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, Lab
One 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. (Lab Holdings) at December 31, 1998.
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 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:
Buildings 30 years
Laboratory equipment 3 - 5 years
Data processing equipment 3 - 5 years
Office equipment 5 years
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.
PAGE 43
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 straight-line 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 periods of fifteen to twenty 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 over remaining
asset lives. When impairment is indicated, any impairment loss is measured by
the excess of carrying values over fair values. During the fourth quarter of
1997, LabOne decided to dispose of its office and headquarters building and
lab facility, which, net of accumulated depreciation, has been classified as
real estate available-for-sale (note 9). 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. 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.
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.
PAGE 44
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
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:
1998 1997 1996
---------- ---------- ----------
Weighted average common
shares (basic) 13,168,394 13,106,383 13,076,103
Employee stock options 135,174 215,655 190,013
---------- ---------- ----------
Weighted average common shares and
common shares equivalents (diluted) 13,303,568 13,322,038 13,266,116
========== ========== ==========
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 effect 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.
PAGE 45
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(2) Acquisitions and Intangible Assets
- ---------------------------------------
The cost and accumulated amortization of intangible assets at
December 31, 1998 and 1997 are as follows:
1998 1997
------------ ----------
Patent $ 8,000,000 8,000,000
Accumulated amortization 8,000,000 7,782,574
------------ ----------
- 217,426
------------ ----------
Excess of cost over fair value of
assets acquired 12,587,993 8,598,959
Accumulated amortization 4,118,671 3,586,677
------------ ----------
8,469,322 5,012,282
------------ ----------
Intangible assets, net of
accumulated amortization $ 8,469,322 5,229,708
============ ==========
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 purchase price could increase if the
aquired company achieves certain levels of earnings in 1999 and 2000. 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.
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:
1998 1997
----------- ----------
Sales $ 108,239,000 85,032,000
Net earnings 9,869,000 2,434,000
Earnings per share:
Basic 0.74 0.18
Diluted 0.73 0.18
=========== ==========
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 is not intended to be a projection of future results.
PAGE 46
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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. The excess costs over fair value of GIB Laboratories, Inc.
assets acquired was $4,128,275 and is being amortized over fifteen years.
(3) 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>
Amount
at which
Approxi- carried Unrealized Unrealized
Amortized mate in the holding holding
1997 cost market balance gains losses
sheet
- ----------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Held-to-maturity invest-
ments, all with
maturities less than
one year:
Canadian government notes $ 702,495 702,495 702,495 - -
Obligations of states
and political sub-
divisions 502,143 501,541 502,143 - 602
----------- ----------- ----------- ----------- ----------
Total short-term
investments $ 1,204,638 1,204,036 1,204,638 - 602
=========== ========= ========= =========== ==========
</TABLE>
(4) Long-term Debt
Long-term debt consists of the following as of December 31, 1998:
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 irrevo-
cable 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
=============
PAGE 47
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Aggregate maturities of long-term debt as of December 31, 1998 are as follows:
Bonds payable Capital leases Total
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
========== =========== ==========
Interest expense in 1998 amounted to approximately $70,000, net of interest
capitalized as a component of property, plant, and equipment of $314,638.
(5) Income Taxes
------------
The components of income taxes and deferred taxes (benefit) applicable to
temporary differences are as follows (for the years ended December 31):
1998 1997 1996
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 (89,408) (2,339,175) (490,408)
State (31,125) (487,993) (118,293)
Foreign 25,177 2,872 131,918
---------- ---------- ----------
Total deferred (95,356) (2,824,296) (476,783)
---------- ---------- ----------
$ 5,961,989 1,568,446 2,008,690
========= ========= ==========
PAGE 48
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 December31):
1998 1997 1996
--------- --------- ---------
Application of statutory
income tax rate $ 5,161,661 1,281,984 1,658,040
Foreign taxes, net 7,599 72,062 113,803
State income taxes, net 696,534 99,649 151,481
Tax-exempt interest (5,788) (18,730) (44,708)
Other, net 101,983 133,481 130,074
--------- --------- ---------
$ 5,961,989 1,568,446 2,008,690
========= ========= =========
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:
1998 1997
---------- ----------
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 $ 12,878 321,799
Acquired subsidiary cash to accrual adjustment (196,438) -
Other items (263,185) -
---------- ----------
Total deferred noncurrent tax
assets (liabilities), net $ (446,745) 321,799
========== ==========
A valuation allowance for deferred tax assets was not necessary at
December 31, 1998 or 1997.
PAGE 49
1 LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
(6) 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.
(7) 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
s 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.
PAGE 50
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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>
1998 1997 1996
------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
Fixed options shares price shares price shares price
- --------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at begin-
ing 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>
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
PAGE 51
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 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. LabOne has reserved 1,000,000 shares of common stock for
issuance of shares upon exercise of the warrants.
(8) Foreign Operations
------------------
The following summarizes financial information for LabOne's wholly-owned
Canadian subsidiary, Lab One Canada Inc., for the years ended December 31:
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ==========
(9) 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
PAGE 52
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
treatment of patients. Substance abuse testing services are provided to both
regulated and nonregulated employers who employ drug screening guidelines.
Operating income (loss) of each line of business is computed as sales less
identifiable and allocated expenses. 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 are
principally cash and investment securities.
Following is a summary of line of business information as of and for the
years ended December 31, 1998, 1997, and 1996:
1998 1997 1996
------------ ----------- -----------
Sales:
Insurance services $ 69,149,050 61,997,817 50,800,650
Clinical services 18,599,583 7,511,889 3,941,704
Substance abuse testing 14,478,583 9,416,413 4,689,501
------------ ----------- -----------
Total sales $ 102,227,216 78,926,119 59,431,855
============ =========== ===========
Operating income (loss):
Insurance services $ 20,630,337 18,507,849 12,610,224
Clinical services (6,187,744) (8,303,741) (7,967,348)
Substance abuse testing 203,828 (933,832) (1,235,982)
General corporate expenses (167,131) (188,245) (158,830)
Investment income 814,343 1,179,947 1,769,182
Other expense, net (112,277) (6,491,437) (140,657)
------------ ----------- -----------
Earnings before income taxes 15,181,356 3,770,541 4,876,589
------------ ----------- -----------
Income tax expense 5,961,989 1,568,446 2,008,690
Net earnings $ 9,219,367 2,202,095 2,867,899
============ =========== ===========
Identifiable assets:
Insurance services $ 29,295,799 25,020,052 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 $ 86,781,178 59,973,473 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 $ 2,560,962 3,185,661 2,504,472
Clinical services 797,385 940,223 1,141,210
Substance abuse testings 810,291 644,531 368,622
============ =========== ===========
PAGE 53
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(10) Quarterly Financial Data (Unaudited)
------------------------------------
A summary of unaudited quarterly results of operations for 1998 and 1997 is as
follows (in thousands except per share data):
Three months ended
---------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1998:
Sales $ 23,333 25,762 25,834 27,298
Gross profit 10,374 11,931 11,305 11,898
Earnings before income
taxes 3,297 4,234 3,630 4,020
Net earnings 2,000 2,516 2,227 2,476
Basic earnings per share 0.15 0.19 0.17 0.19
Diluted earnings per share 0.15 0.19 0.17 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 2,287 2,853 2,603 (3,972)
Net earnings (loss) 1,359 1,687 1,536 (2,380)
Basic earnings (loss)
per share 0.10 0.13 0.12 (0.18)
Diluted earnings (loss)
per share 0.10 0.13 0.12 (0.18)
Dividends per share 0.18 0.18 0.18 0.18
============ ============ ============= ===========
(11) 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.
PAGE 54
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
Future minimum lease payments and other commitments under these agreements as
of December 31, 1998 are:
Year Amount
---- --------
1999 $ 519,880
2000 346,912
2001 228,510
2002 195,192
2003 162,660
========
Construction Costs
Management estimates cost to complete construction of the new facility to
house its headquarters and lab approximates $1,500,000.
(12) Subsequent Event - Merger Agreement
-----------------------------------
On March 8, 1999, LabOne and Lab 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 Lab
Holdings and the merged entities name will be changed to LabOne, Inc.
Stockholders of Lab Holdings will have their Lab Holdings shares split
immediately before the merger into 1.5 shares of the merged entity.
Stockholders of LabOne, other than Lab 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). LabOne
will use cash from operations 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 Lab Holdings shares and a majority of the shares voted by LabOne
stockholders, other than Lab Holdings and its affiliates, and other closing
conditions.
PAGE 55
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Schedule II
<TABLE>
Additions -
charged to
Balance selling,
at general, and Deductions - Balance
beginning administrative uncollectible at end
Description of year expenses accounts of year
<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>
PAGE 56
Exhibit 24
----------
Power of Attorney
The undersigned hereby appoint Gregg R. Sadler as attorney-in-fact, to execute
in name and on behalf of the undersigned the Form 10-K Annual Report of
LabOne, Inc., to be filed with the Securities and Exchange Commission for its
fiscal year ended December 31, 1998.
Dated: March 1, 1999
/s/ Joseph H. Brewer MD
------------------------------
Joseph H. Brewer, MD, Director
/s/ William D. Grant
------------------------------
William D. Grant, Director
/s/ Richard A. Rifkind
------------------------------
Richard A. Rifkind, MD, Director
/s/ Richard S. Schweiker
------------------------------
Richard S. Schweiker, Director
/s/ James R. Seward
------------------------------
James R. Seward, Director
/s/ John E. Walker
------------------------------
John E. Walker, Director
/s/ R. Dennis Wright
------------------------------
R. Dennis Wright, Director
-79-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
1998 Annual Report on Form 10-K for LabOne, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000816151
<NAME> LABONE, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,177,740
<SECURITIES> 0
<RECEIVABLES> 21,062,700
<ALLOWANCES> 2,326,716
<INVENTORY> 1,798,481
<CURRENT-ASSETS> 40,986,777
<PP&E> 72,915,797
<DEPRECIATION> 35,983,169
<TOTAL-ASSETS> 86,781,178
<CURRENT-LIABILITIES> 15,056,200
<BONDS> 18,097,308
0
0
<COMMON> 150,000
<OTHER-SE> 53,030,925
<TOTAL-LIABILITY-AND-EQUITY> 86,781,178
<SALES> 0
<TOTAL-REVENUES> 102,227,216
<CGS> 0
<TOTAL-COSTS> 56,719,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,502,572
<INTEREST-EXPENSE> 70,127
<INCOME-PRETAX> 15,181,356
<INCOME-TAX> 5,961,989
<INCOME-CONTINUING> 9,219,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,219,367
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.69
</TABLE>
Exhibit 10.3
------------
LabOne Annual Incentive Plan
----------------------------
The Annual Incentive Plan is designed to motivate and reward the
accomplishment of targeted operating results. Prior to the beginning of
the fiscal year, the Compensation 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. 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 ratably 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 the Company's financial and strategic goals for the year,
and is reviewed and approved by the Committee.
65
Exhibit 10.5
------------
LABONE, INC.
INDEMNIFICATION AGREEMENT
-------------------------
This INDEMNIFICATION AGREEMENT (the "Agreement") is made as of February
12, 1999 by and between LABONE, INC., a Delaware corporation (the "Company"),
and DIRECTOR (the "Indemnitee").
--------------
WHEREAS, highly competent persons are reluctant to serve publicly-held
corporations as officers, directors and in certain other capacities unless
they are provided with adequate protection through insurance or indemnification
against claims brought against them as a result of such service;
WHEREAS, Indemnitee is presently serving as a director of the Company and
as a member of the Special Committee of Independent Directors (the "Special
Committee") and/or other committees of the Board of Directors of the Company,
and/or as an officer of the Company, and/or at the request of the Company in
certain other capacities;
WHEREAS, the Company believes that the Indemnitee's continuing service in
such capacities is important to the Company;
WHEREAS, the Company and the Indemnitee have reviewed the indemnification
and exculpation provisions in the Company's governing documents and in the
General Corporation Law of Delaware, have investigated the availability and
sufficiency of liability insurance and have concluded that additional
protection is required to induce persons to serve or to continue to serve the
Company in the foregoing capacities;
WHEREAS, the Board of Directors has determined that this Agreement is
reasonable, prudent and necessary in order to induce and encourage highly
experienced and capable persons such as the Indemnitee to serve or to continue
to serve the Company in the foregoing capacities;
WHEREAS, Indemnitee is willing, subject to certain conditions, including
without limitation the execution and performance of this Agreement by the
Company, to continue to serve in his present capacities and/or to take on
additional service for and on behalf of the Company;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the receipt and sufficiency of which are hereby acknowledged,
the Company and the Indemnitee do hereby agree as follows:
1. Definitions. As used in this Agreement:
-----------
(a) The term "Proceeding" shall include, without limitation, any
threatened, pending or completed action, suit or proceeding, whether brought by
or in the right of the Company or otherwise and whether of a civil, criminal,
administrative or investigative nature.
-66-
(b) The term "Expenses" shall include, without limitation,
attorneys' fees, disbursements, retainers, accounting and witness fees,
travel and deposition costs, expenses of investigations, judicial or
administrative proceedings and appeals, court costs, court reporter fees
and any expenses of establishing a right to indemnification and/or
advancement of expenses pursuant to this Agreement or otherwise. The term
"Expenses" does not include amounts paid in settlement by or on behalf of
Indemnitee or the amount of judgments, fines, penalties or liabilities
incurred by Indemnitee.
(c) References to "other enterprise" shall include, without
limitation, employee benefit plans; references to "fines" shall include,
without limitation, any excise tax, penalty or other amount assessed with
respect to any employee benefit plan pursuant to the Employee Retirement
Income Security Act of 1974, as amended from time to time, the Internal
Revenue Code of 1986, as amended from time to time, any other statute or
the common law; references to "serving at the request of the Company" shall
include, without limitation, any service as a director, officer, employee
or agent which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants, or its beneficiaries.
2. Agreement to Serve.
-------------------
The Indemnitee agrees to serve or to continue to serve as a director
(including as a member of any committee of directors) and/or officer of the
Company and/or at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, in each case so long as he or she is duly elected and qualified
to serve in such capacity or until he or she resigns or is removed. The
provisions of this Section relating to service by the Indemnitee shall not be
deemed to affect the terms of any employment or other agreement now or
hereafter in effect between the Company and the Indemnitee governing such
service.
3. Indemnification.
---------------
The Company shall, subject to the provisions of this Agreement, indemnify
the Indemnitee if the Indemnitee is or was involved or is or was threatened
to be made involved as a party, witness or otherwise in any Proceeding
(including, without limitation, any Proceeding by or in the right of the
Company to procure a judgment in its favor), by reason of the fact that the
Indemnitee is or was a director (including a member of any committee of
directors) or officer of the Company, or is or was serving at the request
of the Company as a director (including as a member of any committee of
directors), officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or by reason of any action or
inaction of the Indemnitee while acting in any of the foregoing capacities,
against all Expenses, judgments, fines, penalties, liabilities and amounts
paid in settlement (including without limitation, all interest, assessments
and other charges paid or payable in connection therewith) actually and
reasonably incurred by the Indemnitee in connection with such Proceeding,
provided that no such indemnity shall indemnify Indemnitee on account of
Indemnitee's conduct which was finally adjudged by a court of competent
jurisdiction to have been knowingly fraudulent, deliberately dishonest or
willful misconduct.
-67-
4. No Presumption.
--------------
For purposes of this Agreement, the termination of any Proceeding by judgment,
order, settlement (whether with or without court approval) or conviction, or
upon a plea of nolo contendere, or its equivalent, shall not, of itself,
adversely affect the right of the Indemnitee to indemnification or create a
presumption that Indemnitee did not meet any particular standard of conduct or
have any particular belief or that a court has determined that indemnification
of Indemnitee is not permitted under this Agreement or applicable law.
5. Partial Indemnification.
-----------------------
If the Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for a portion of the Expenses, judgments, fines,
penalties, liabilities or amounts paid in settlement actually and reasonably
incurred by Indemnitee in connection with any Proceeding but not, however, for
the total amount thereof, the Company shall indemnify the Indemnitee for the
portion thereof to which the Indemnitee is entitled.
6. Limitations on Indemnification.
------------------------------
No payments pursuant to this Agreement shall be made by the Company:
(a) To indemnify or advance funds to the Indemnitee for Expenses
with respect to proceedings initiated or brought voluntarily by the Indemnitee
and not by way of defense, except with respect to proceedings brought to
establish or enforce a right to indemnification or advances under this
Agreement or otherwise, but such indemnification or advancement of Expenses may
be provided by the Company in specific cases if the Board of Directors finds it
to be appropriate;
(b) To indemnify the Indemnitee on account of any matter finally
adjudged by a court of competent jurisdiction to be a violation of the
provisions of Section 16 of the Securities Exchange Act of 1934 ("Exchange
Act"), and the rules and regulations promulgated thereunder, as amended from
time to time;
(c) To indemnify the Indemnitee for the return of any remuneration
paid to the Indemnitee that is finally adjudged by a court of competent
jurisdiction to have been illegal or improper; or
(d) To indemnify the Indemnitee with respect to any matter if a
court of competent jurisdiction shall finally determine that such
indemnification is not lawful.
7. Notice and Defense of Proceeding. Within a reasonable time after
receipt by the Indemnitee of actual and not constructive notice of the
commencement of any Proceeding, the Indemnitee shall provide written notice to
the Company of the commencement thereof by delivery of a notice substantially
in the form attached hereto as Exhibit A or in such other form as the Company
may reasonably accept. The omission to so notify the Company will relieve it
from any liability which it may have to the Indemnitee in connection with such
Proceeding under this Agreement, but shall not relieve the Company from any
liability which it may have to Indemnitee otherwise than under this Agreement.
With respect to any such Proceeding:
-68-
(a) The Company shall be entitled to participate in the
Proceeding at its own expense.
(b) Except as otherwise provided below, the Company may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense of the Proceeding, with
legal counsel reasonably satisfactory to the Indemnitee. After notice from
the Company to the Indemnitee of its election to assume the defense of a
Proceeding, the Company will not be liable to the Indemnitee for Expenses
incurred by the Indemnitee in connection with such Proceeding under this
Agreement, including Section 8 hereof, other than Indemnitee's reasonable
costs of investigation or participation in such Proceeding (including, without
limitation, travel expenses) and except as provided below. The Indemnitee
shall have the right to employ Indemnitee's own counsel in any Proceeding, but
the fees and expenses of such counsel incurred after notice from the Company
of its assumption of the defense of the Proceeding shall be at the expense of
the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been
authorized by the Company, (ii) the Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and the Indemnitee
in the conduct of the defense of a Proceeding, or (iii) the Company shall not
in fact have employed counsel to assume the defense of a Proceeding, in each of
which cases the fees and expenses of the Indemnitee's counsel shall be advanced
by the Company as provided in Section 8 hereof. The Company shall not be
entitled to assume the defense of any Proceeding brought by or on behalf of
the Company.
(c) If two or more persons, including the Indemnitee, may be
entitled to indemnification from the Company as parties to any Proceeding, the
Company may require the Indemnitee to use the same legal counsel as the other
parties. The Indemnitee shall have the right to use separate legal counsel in
the Proceeding, but the Company shall not be liable to the Indemnitee under
this Agreement, including Section 8 hereof, for the fees and expenses of
separate legal counsel incurred after notice from the Company of the
requirement to use the same legal counsel as the other parties, unless the
Indemnitee reasonably concludes that there may be a conflict of interest
between the Indemnitee and any of the other parties required by the Company
to be represented by the same legal counsel.
(d) The Company shall not be liable to indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of any Proceeding
effected without its written consent, which shall not be unreasonably withheld.
The Indemnitee shall permit the Company to settle any Proceeding that the
Company assumes the defense of, except that the Company shall not, without the
Indemnitee's written consent, settle any action or claim unless such settlement
includes a provision whereby the parties to the settlement unconditionally
release Indemnitee from all liabilities, damages, costs and expenses in respect
of claims by reason of the settlement or release of the parties in such
Proceeding.
8. Advancement of Expenses.
------------------------
(a) Except as provided in Section 7 hereof, the Expenses incurred
by the Indemnitee in any Proceeding shall be paid by the Company in advance of
the final disposition of the Proceeding at the written request of the
Indemnitee. Except as expressly provided in Section 8(b) hereof, no security
shall be required by the Company in making Expense advances, and such advances
-69-
shall be made without regard to the Indemnitee's ability to repay the amount
advanced and without regard to the Indemnitee's ultimate entitlement to
indemnification under this Agreement or otherwise.
(b) Indemnitee shall make an Expense advance request by delivery
to Company of a signed request substantially in the form attached hereto as
Exhibit B or in such other form as the Company may reasonably accept. As long
as Delaware law requires such an undertaking, the request shall include an
undertaking by Indemnitee to repay any advances to the extent that it is
ultimately determined that the Indemnitee is not entitled to indemnification.
Advances requested by Indemnitee hereunder shall be paid by the Company no
later than ten days after receipt by the Company of the written request. In
the event the Company does not honor Indemnitee's request for an Expense
advance, Indemnitee may bring an action in any court of competent jurisdiction
to enforce the right to the advance, and the Company shall have the burden of
proof in such action to demonstrate that Indemnitee is not entitled to such
advance.
(c) Expenses submitted to the Company for reimbursement must be
reasonable and comply with the then existing billing procedures of the Company
so that the Company can reasonably monitor and audit such Expenses.
9. Claim for Indemnification; Enforcement.
---------------------------------------
(a) In the event that Indemnitee becomes liable for any judgment,
penalty or fine, or pursuant to any settlement agreement, for which
indemnification may be provided under this Agreement, Indemnitee shall deliver
to the Company within a reasonable time a signed request substantially in the
form attached hereto as Exhibit C or in such other form as the Company may
reasonably approve. The Company shall make a determination as to Indemnitee's
right to indemnification and, if applicable, pay Indemnitee's claim, no later
than 60 days after receipt by the Company of the written request for
indemnification. The determination of Indemnitee's right to indemnification
shall be made: (i) by a majority vote of directors who were not parties to the
Proceeding, even though less than a quorum, (ii) if there are no such
directors, or if such directors so direct, or if Indemnitee so requests in
writing at the time the Indemnitee submits the claim for indemnification, by
independent legal counsel in a written opinion, or (iii) by the stockholders of
the Company. Such independent legal counsel shall be selected by the persons
specified in (i), or if there are none or if a majority vote thereof is not
obtainable, by a majority vote of the entire Board of Directors, which
independent legal counsel shall be approved by the Indemnitee in writing (which
approval shall not be unreasonably withheld). The Indemnitee shall be
conclusively presumed to have met the applicable standards of conduct for
indemnification pursuant to this Agreement, unless Indemnitee receives written
notice of a determination that the Indemnitee has not met such applicable
standards of conduct within such 60 day period. If a determination denying
Indemnitee's claim is made by the persons specified in (i) or (iii) above, such
notice shall disclose with particularity the reasons for such determination.
If a determination denying Indemnitee's claim is made by independent legal
counsel, the notice shall include a copy of the related legal opinion of such
counsel.
(b) If a claim for indemnification by Indemnitee under this
Agreement is denied by the Company or is not paid by the Company within 60 days
after receipt by the Company of the written request for indemnification, the
-70-
Indemnitee may bring suit in any court of competent jurisdiction against the
Company to enforce the right to indemnification provided by this Agreement.
The burden of proving that indemnification is not appropriate shall be on the
Company. An actual determination by the directors or stockholders of the
Company or independent legal counsel that the Indemnitee has not met the
applicable standard of conduct shall not be admissible in such action as
evidence that the Indemnitee has not met the applicable standard of conduct.
(c) The Indemnitee shall be entitled to indemnification and
advancement of Expenses as provided in this Agreement with regard to Expenses
incurred in connection with any action by the Indemnitee enforcing the right
to indemnification or advances in whole or in part pursuant to this Agreement
regardless of the outcome of such action, unless a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such action was not made in good faith or was frivolous.
10. Subrogation.
------------
In the event of payment under this Agreement, the Company shall be subrogated
to the extent of such payment to all of the rights of recovery of Indemnitee,
who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
11. Duplication of Payments.
------------------------
(a) The Company will not be liable under this Agreement to make
any payment to Indemnitee in connection with any Proceeding to the extent the
Indemnitee has actually received payment of the claim otherwise payable
hereunder under any insurance policy, the Company's Certificate of
Incorporation or By-laws or otherwise; provided, however, that nothing in
this Section shall affect the liability, if any, of the Company to Lab
Holdings, Inc. ("Lab Holdings") in connection with a claim brought by Lab
Holdings as subrogee of Indemnitee's rights under this Agreement.
(b) Notwithstanding any provision to the contrary, if the
Company denies or has not paid Indemnitee's claim for indemnification within
60 days after receipt by the Company of the written request for
indemnification by the Indemnitee, then Indemnitee may submit a request for
indemnification from Lab Holdings pursuant to the Indemnification Agreement
between Lab Holdings and Indemnitee; provided, however, that the Company's
denial or failure to pay the Indemnitee's claim for indemnity within such 60
day period shall not relieve the Company or Lab Holdings from their
obligations to indemnify Indemnitee under the respective Indemnification
Agreements or otherwise.
12. Maintenance of Liability Insurance.
-----------------------------------
(a) The Company represents that it currently has in effect the
following policy or policies of directors' and officers' liability insurance
(the "D&O Insurance") which cover Indemnitee as an insured:
-71-
INSURER POLICY NO. AMOUNT
------- ---------- ------
Executive Risk Indemnity, Inc. 751-084861-97 $15,000,000
Royal Surplus Lines Insurance Company KS F000197 $10,000,000
(b) The Company hereby covenants and agrees that, as long as
the Indemnitee continues to serve as a director and/or officer of the Company
and/or at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
and thereafter as long as the Indemnitee may be subject to any possible
Proceeding, or is a party or is threatened to be made a party to any
Proceeding, the Company shall promptly obtain and maintain the D&O Insurance
policies in full force and effect to the extent that such policies are
obtainable at an annual cost of not greater than twice the annual premium on
the date hereof, provided that if such coverage is not available for such
amount, the Company shall obtain and maintain as much coverage as possible
for such amount.
(c) In all D&O Insurance policies, the Indemnitee shall be named
as an insured in such a manner as to provide the Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors.
(d) In addition to the other obligations of the Company under
this Agreement, and not in limitation thereof, if the Company, acting under
paragraph (b) of this Section 12, is unable to maintain in effect the D&O
Insurance policies, the Company shall indemnify and hold harmless Indemnitee
to the full extent of the coverage which would otherwise have been provided
for the benefit of Indemnitee pursuant to the D&O Insurance policies.
13. Change in Control.
------------------
In the event that the Company shall be a constituent corporation in a
consolidation or merger, whether the Company is the resulting or surviving
corporation or is absorbed, or if there is a change in control of the Company
as defined in this Section, Indemnitee shall stand in the same position under
this Agreement with respect to the resulting, surviving or changed corporation
as he would have with respect to the Company if its separate existence had
continued or if there had been no change in control of the Company. "Change
in control" shall include any change in the ownership of a majority of the
capital stock of the Company or in the composition of a majority of the
members of the Board of Directors of the Company.
14. Non-Exclusivity, etc.
---------------------
The rights of Indemnitee hereunder shall be in addition to any other rights
to which the Indemnitee may be entitled under the Company's Certificate of
Incorporation, Bylaws, any agreement, vote of stockholders or disinterested
directors, provision of Delaware law, insurance policy or otherwise, both as
to action in Indemnitee's official capacity and as to action in another
capacity on behalf of the Company while holding such office, and such rights
shall continue as to Indemnitee even though Indemnitee may have ceased to be
a director or officer of the Company or ceased to serve at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. To the extent that a
change in the Delaware General Corporation Law (whether by statute or judicial
-72-
decision) permits greater rights to indemnification and advancement of
expenses by agreement than would be afforded currently under this Agreement,
it is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits so afforded by such change.
15. Deposit of Funds in Trust.
--------------------------
In the event that the Company decides to voluntarily dissolve or to file a
voluntary petition for relief under applicable bankruptcy, moratorium or
similar laws, then not later than 10 days prior to such dissolution or filing,
the Company shall deposit in trust for the exclusive benefit of Indemnitee a
cash amount equal to all amounts previously authorized to be paid to
Indemnitee hereunder, such amounts to be used to discharge the Company's
obligations to Indemnitee hereunder. Any amount in such trust not required
for such purpose shall be returned to the Company. This Section 15 shall not
apply to any dissolution of the Company in connection with a transaction as
to which Section 13 hereof applies.
16. Change in Other Rights.
-----------------------
The Company will not adopt any amendment to the Certificate of Incorporation
or By-Laws of the Company the effect of which would be to deny, diminish or
encumber the Indemnitee's rights to indemnification, advancement of expenses,
exculpation or maintenance of the D&O Insurance hereunder, under such other
documents or under applicable law, as applied to any act or failure to act
occurring in whole in or part prior to the date upon which any such amendment
was approved by the Board of Directors or the stockholders, as the case may
be. Notwithstanding the foregoing, if the Company adopts any amendment to
the Certificate of Incorporation or By-Laws the effect of which is to so
deny, diminish or encumber such rights, such amendment will apply only to
acts or failures to act occurring entirely after the effective date thereof.
17. Separability.
-------------
Each provision of this Agreement is a separate and distinct agreement and
independent of the others, so that if any provision hereof shall be held to
be invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the
other provisions hereof. To the extent required, any provision of this
Agreement may be modified by a court of competent jurisdiction to preserve
its validity and to provide the Indemnitee with the broadest possible
indemnification permitted under Delaware law.
18. Savings Clause.
---------------
If this Agreement or any provision hereof is invalidated on any ground by any
court of competent jurisdiction, the Company shall nevertheless indemnify the
Indemnitee as to any Expenses, judgments, fines, penalties, liabilities and
amounts paid in settlement actually and reasonably incurred by the Indemnitee
in connection with any Proceeding to the fullest extent permitted by any
applicable provision of this Agreement that has not been invalidated and to
the fullest extent permitted under Delaware law.
19. Amendments.
-----------
No amendment, waiver, modification, termination or cancellation of this
-73-
Agreement shall be effective unless in writing signed by the party against
whom enforcement is sought. The rights to indemnification and advancement
of expenses afforded to the Indemnitee hereby are contract rights and may
not be diminished, eliminated or otherwise affected by amendments to the
Certificate of Incorporation, Bylaws or by other agreements, including D&O
Insurance policies.
20. Counterparts.
-------------
This Agreement may be executed in one or more counterparts, all of which shall
be considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each party and delivered to the other.
21. Successors and Assigns.
-----------------------
This Agreement shall be binding upon, and shall inure to the benefit of
the Indemnitee and his heirs, executors, administrators and personal
representatives, and the Company and its successors and assigns.
22. Notices.
--------
All notices, requests and other communications under this Agreement shall be in
writing and shall be deemed to have been duly given (a) upon delivery by hand
to the party to whom the notice, request or other communication shall have been
directed or (b) on the third business day after the date on which it is mailed
by certified or registered mail with postage prepaid, addressed as follows:
(i) if to the Indemnitee, to the address indicated on the
signature page, below said Indemnitee's signature, and
(ii) if to the Company, to:
LabOne, Inc.
10310 W. 84th Terrace
Lenexa, Kansas 66214
Attention: Secretary
or to such other address as either shall designate in writing.
23. Governing Law.
--------------
This Agreement shall be governed and interpreted in accordance with the laws
of the State of Delaware, without giving effect to the principles of conflict
of laws thereof.
24. Prior Agreement.
----------------
The prior Indemnification Agreement between the Company and the Indemnitee
is superseded by this Agreement and is no longer in effect.
IN WITNESS WHEREOF, the parties have executed this Indemnification
Agreement as of the date first written above.
LABONE, INC.
By:
---------------------------
-74-
-----------------------------
DIRECTOR
"Indemnitee"
Address of Indemnitee:
-75-
Exhibit A
LABONE, INC.
NOTICE OF
COMMENCEMENT OF PROCEEDING
--------------------------
1. This notification is provided pursuant to the Indemnification Agreement,
dated as of February 12, 1999 (the "Indemnification Agreement"), between
LabOne, Inc., a Delaware corporation (the "Company"), and the undersigned.
2. I have received actual notice of a Proceeding with respect to which I may
have certain rights under the Indemnification Agreement. The following is a
description of the Proceeding and my involvement in the Proceeding (as a party,
witness or otherwise):
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3. I have attached such documents relating to the matter described above as
are reasonably available to me and are reasonably necessary to determine
whether the Proceeding is subject to the terms of the Indemnification
Agreement.
-------------------------------
Name: DIRECTOR
Date:
------------------
-76-
Exhibit B
LABONE, INC.
REQUEST FOR
ADVANCEMENT OF EXPENSES
-----------------------
1. This Request is submitted pursuant to the Indemnification Agreement,
dated as of February 12, 1999 (the "Indemnification Agreement"), between
LabOne, Inc., a Delaware corporation (the "Company"), and the undersigned.
2. I am requesting advancement of Expenses (as defined in the Indemnification
Agreement) which I have incurred or will incur in connection with a Proceeding
(as defined in the Indemnification Agreement) for which I may be entitled to
indemnification pursuant to the Indemnification Agreement.
3. I hereby undertake to repay this advancement of Expenses if it is
ultimately determined that I am not entitled to be indemnified by the
Company under the Indemnification Agreement.
4. The Expenses for which advancement is requested are, in general, all
Expenses related to
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5. I have attached such documents relating to the matter described above as
are reasonably available to me and are reasonably necessary to determine
whether and to what extent I am entitled to advances of Expenses under the
Indemnification Agreement.
-------------------------------
Name: DIRECTOR
Date:
------------------
-77-
Exhibit C
LABONE, INC.
INDEMNIFICATION CLAIM
---------------------
1. This Indemnification Claim is submitted pursuant to the Indemnification
Agreement, dated as of February 12, 1999 (the "Indemnification Agreement"),
between LabOne, Inc., a Delaware corporation (the "Company"), and the
undersigned.
2. I am requesting indemnification in connection with a Proceeding (as
defined in the Indemnification Agreement) in which I was or am involved or
am threatened to be made involved.
3. With respect to all matters related to any such Proceeding or claim, I
believe that I am entitled to be indemnified pursuant to the provisions of
the Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I am
requesting indemnification against liabilities which have or may arise out of
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5. To the extent known to me, the amount requested for indemnification is
as follows
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6. I have attached such documents supporting this request as are reasonably
available to me and are reasonably necessary to determine whether and to what
extent I am entitled to indemnification under the Indemnification Agreement.
-------------------------------
Name: DIRECTOR
Date:
------------------
-78-
Exhibit 4.5
-----------
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,AS AMENDED, OR ANY STATE
SECURITIES LAWS AND CANNOT BE OFFERED, SOLD, HYPOTHECATED, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION OR THE AVAILABILITY OF
AN EXEMPTION FROM REGISTRATION UNDER SUCH LAWS AS PROVIDED IN THIS WARRANT
No. of Shares: 500,000 Warrant No. A-2
Original Issue Date: November 13, 1998
WARRANT
To Purchase Shares of Common Stock of
LabOne, Inc.
This certifies that, for value received, USA Managed Care Organization,
("USA MCO") is entitled to purchase from LABONE, INC., a Delaware corporation
(the "Company"), from time to time prior to the Expiration Date in accordance
with the terms and conditions hereof, up to 500,000 shares of Common Stock of
the Company at a Purchase Price per share set forth below. The number of
shares of Common Stock purchasable hereunder and the Purchase Price therefor
are subject to adjustment as hereinafter set forth in Section 6.
1. CERTAIN DEFINITION.
------------------
For all purposes of this Warrant the following terms shall have the
meanings indicated:
(a) "Common Stock" shall mean the Company's presently authorized shares
of Common stock, par value $0.01 per share, and any other securities into
which or for which the Common Stock may be converted or exchanged pursuant to
a plan of recapitalization, reorganization, merger, sales of assets or
otherwise.
(b) "Company" shall mean LABONE, INC., a Delaware corporation, and any
company which shall succeed to, or assume, the obligations of said corporation
hereunder.
(c) "Expiration Date" shall mean 12:01 o'clock a.m. Central Daylight
Time on December 31, 2003, which is twenty (20) calendar quarters plus
forty-five (45) days after the date hereof.
(d) "Lab Revenues" shall mean all revenues received by the Company
during the applicable calendar quarter, pursuant to the Marketing Agreement
between USA MCO and the Company dated October 19, 1998,and Third Party
Administrator Agreement between Fountainhead Administrators, Inc., Atlas
Administrators, Inc., and the Company dated October 19, 1998, ("Agreements").
Revenues paid to the Company from the Agreements may only be counted once in
determining the exercise of Warrants in Section 2 hereof.
(e) "Purchase Price" or "Purchase Price per share" shall mean the
purchase price per Warrant Share (as defined below), which shall equal $15.44,
being the closing sale price or, if no sales were reported, then average of
the closing bid and asked prices of the Common Stock, as reported by the
NASDAQ Stock market, on the last business day prior to the date of the
-57-
Warrant, as such purchase price may thereafter be adjusted from time to time
pursuant to the provisions of Section 6 hereof (rounded to the nearest whole
cent).
(f) "Warrantholder" or "Registered Holder" shall mean USA MCO, or its
registered transferee.
(g) "Warrant" shall mean this Warrant and all Warrants issued in
exchange therefor or replacement thereof.
(h) "Warrant Shares" shall mean the share of Common Stock purchasable by
the Registered Holder upon the exercise of the Warrant pursuant to Section 2
hereof, as adjusted from time to time pursuant to Section 6 hereof.
All terms used in this Warrant which are not defined in Section 1 have
the meanings respectively set forth therefor elsewhere in this Warrant.
2. Exercise of Warrant.
--------------------
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised only within sixty (60) days after the end of each applicable
calendar quarter and prior to the Expiration Date as follows:
(i) for each calendar quarter in which the Lab Revenues
reach $500,000 and are less than $1,000,000, this Warrant
may be exercised in respect of 5,000 shares of Common Stock
subject to this Warrant;
(ii) for each calendar quarter in which the Lab Revenues
reach $1,000,000 and are less than $1,500,000, this Warrant
may be exercised in respect of 10,000 shares of Common Stock
subject to this Warrant;
(iii) for each calendar quarter in which the Lab Revenues
reach $1,500,000 and are less than $2,000,000, this Warrant
may be exercised in respect of 15,000 shares of Common Stock
subject to this Warrant;
(iv) for each calendar quarter in which the Lab Revenues
reach $2,000,000 and are less than $2,500,000, this Warrant
may be exercised in respect of 20,000 shares of Common Stock
subject to this Warrant;
(v) for each calendar quarter in which the Lab Revenues
reach $2,500,000 or greater, this Warrant may be exercised in
respect of 25,000 shares of Common Stock subject to this
Warrant;
The foregoing rights to exercise shall be limited to one of the categories
set forth in 2(a)(i)-(v), above, as applicable each calendar quarter.
Anything in this Warrant to the contrary notwithstanding, this Warrant may
not be exercised at any time after a breach of any of the Agreements referred
-58-
to in Section 1 d), unless and until such breach is cured under the
applicable provisions, if any, of such Agreements. Any specific references
or terms about this Warrant contained in any such Agreement shall and is
incorporated into the terms hereof.
(b) In order to exercise this Warrant in whole or in part, the
Registered Holder shall complete the "Notice of Intention to Exercise Warrant"
attached hereto (the "Notice Form"), and deliver this Warrant, the completed
Notice Form and either cash, a cashier's check payable to the order of the
Company or a wire transfer of funds in an amount equal to the then aggregate
Purchase Price of the Warrant Shares being purchased, to the Corporate
Secretary of the Company at the Company's office located at 10310 West 84th
Terrace, Lenexa, Kansas 66214 (or such other office or agency of the Company
as the Company may designate by written notice in writing to the Registered
Holder). In no event may the Warrantholder exercise the Warrant with respect
to more than 500,000 shares of Common Stock in the aggregate, subject as
provided in this Warrant.
3. Delivery of Stock Certificate, Etc. Upon Exercise.
-------------------------------------------------
As soon as practicable after exercise of this Warrant, the Company shall
cause to be issued and delivered to the Registered Holder (a) a certificate
or certificates representing the aggregate number of shares of Common Stock
specified in said Notice Form, all of which shares shall be duly authorized
and validly issued, fully paid and nonassessable, (b) cash in lieu of any
fractional share based upon the fair market value of a share of Common Stock,
as determined by the Company and (c) any other securities or property
(including cash) to which such Registered Holder is entitled upon such
exercise pursuant to the terms of this Warrant. Each stock certificate
representing shares of Common Stock so issued and delivered shall be
registered in the name of the Registered Holder or, subject to the provision
of Section 4 and 5 hereof, such other name as shall be designated by the
Registered Holder. Such certificate or certificates shall be deemed to have
been issued and the Warrantholder or any other person so designated to be
named therein shall be deemed to have become a holder of record of such
shares of Common Stock only as of the date the certificate representing
such shares is issued by the Company.
4. Ownership and Transfer of Warrant and Warrant Shares.
----------------------------------------------------
(a) Registered Holder. The Company may deem and treat the Registered
Holder of this Warrant as the holder and owner hereof (notwithstanding any
notations of ownership or writing hereon made by anyone other than the
Company) for all purposes, notwithstanding any notice to the contrary, until
presentation of this Warrant for registration of transfer as provided in
this Section 4.
(b) No Transfer. This Warrant may not be sold, transferred, or
assigned by the Registered Holder in whole or in part at any time.
-59-
5. Compliance with Securities Laws.
-------------------------------
(a) Accredited Investor. By acceptance of this Warrant, the
Registered Holder represents and warrants that it is an "accredited
investor" within the meaning of Rule 501(a) of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), the
Registered Holder being a corporation with total assets in excess of
$5,000,000 not formed for the specific purpose of acquiring the Warrant
or the Warrant Shares.
(b) Investment Intent. By Acceptance of this Warrant, the
Registered Holder represents and warrants that it is acquiring this
Warrant and any Warrant Shares for its own account and for the purpose
of investment and not with a view to the sale or distribution thereof.
The Registered Holder understands that this Warrant and the Warrant
Shares that may be issued upon exercise of this Warrant will not have
been registered under the Securities Act or any state securities law
(the Company being under no obligation to effect such registration) and
that this Warrant and the Warrant Shares must be held indefinitely unless
a subsequent disposition thereof is registered under the Securities Act
and applicable state securities laws or is exempt from registration as
provided herein.
(c) Limitation on Transfer. By acceptance of this Warrant, the
Registered Holder represents, covenants, and agrees that it will not sell
or otherwise dispose of this Warrant or of the Warrant Shares in the
absence of (i) registration under the Securities Act and applicable state
securities laws or (ii) an opinion acceptable in form and substance to the
Company from counsel reasonably satisfactory to the Company, or an opinion
of counsel to the Company, to the effect that no registration is required
for such disposition.
(d) Restrictive Legend. Each Warrant shall bear on the face thereof
a legend substantially in the form of the notice set forth on the first page
of this Warrant. Upon exercise of any part of the Warrant and the issuance
of any Warrant Shares, the Company shall instruct its transfer agent to
enter stop transfer orders with respect to such Warrant Shares, and the
certificates representing such Warrant Shares shall have stamped or
imprinted thereon or affixed thereto a legend to the following effect:
The securities represented by this certificate have not
been registered under the Securities Act of 1933 or any state
securities laws and may not be sold, transferred or otherwise
disposed of in the absence of registration under such laws or
an opinion in form and substance acceptable to the Company
from counsel reasonably satisfactory to the Company to the
effect that no such registration is required.
(e) State Securities Laws. This Warrant has been offered to and
accepted by the Registered Holder at its principal executive office in
the State of Texas and has not been offered to the Registered Holder in
any other State.
-60-
6. Adjustments to the Purchase Price and Number of Warrant Shares.
--------------------------------------------------------------
(a) Subdivision of Stock, etc. In the event of a stock dividend
or other distribution payable in Common Stock, or any stock split or
subdivision of Common Stock into a greater number of shares, the number
of Warrant Shares subject to the Warrant immediately prior to such event
shall be proportionately increased and the Purchase Price in effect
immediately prior to such event shall be proportionately reduced, and in
the event that the outstanding shares of Common Stock of the Company shall
be combined into a smaller number of shares, the number of Warrant Shares
subject to the Warrant immediately prior to such combination shall be
proportionately reduced and the Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
(b) Reorganization, Consolidation, Merger, etc. In the event that
the Company shall (a) effect a reorganization or recapitalization pursuant
to which all of the outstanding shares of Common Stock are converted into
or exchanged for other securities or property (including cash), (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person in such
a way that holders of Common Stock shall be entitled to receive securities
or property (including cash) with respect to or in exchange for Common
Stock; then in each such case, the Warrant holder, upon the exercise hereof
as provided in Section 2 at any time after the consummation of such
reorganization or recapitalization, consolidation, merger or sales of assets,
as the case may be, shall be entitled to receive (and the Company shall be
required to deliver) in lieu of the Warrant Shares issuable upon such
exercise prior to such and other securities and property (including cash)
to which such holder would have been entitled upon such consummation, if
such Warrantholder had so exercised this Warrant immediately prior thereto.
The above provision shall apply to successive reorganizations,
recapitalizations, consolidations, mergers or transfers described therein.
7. Notice of Record Date, etc. In the event of
--------------------------
(a) any taking by the Company of a record of the holders of Common
Stock for the purpose of determining the holders thereof who are entitled
to receive any dividend (excluding any cash dividend payable out of
earnings or earned surplus of the Company), or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any transfer of all or substantially all of the assets of the
Company to or consolidation or merger of the Company with or into any
other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each event the Company shall cause to be mailed to the
Warrantholder a notice containing a brief description of the proposed
action and stating the date on which either a record is to be taken for
the purpose of such dividend, distribution or rights, or the date upon
-61-
which such transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place and the time, if any is to be fixed, as of
which the holders of Common Stock or other securities shall receive cash
or other property deliverable upon such transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall also state
that the action in question or the record is subject to the effectiveness
of a registration statement under the Securities Act or a favorable vote
of stockholders, if either is required. Such notice shall be mailed to
the Warrant holder at least ten (10) days prior to the date specified in
such notice on which any such action is to be taken or the record date,
whichever is earlier.
8. Reservation of Warrant Shares.
-----------------------------
During the term of this Warrant, the Company shall at all times reserve
and keep available from its authorized but unissued and treasury shares
such number of shares of its Common Stack as shall be issuable upon
exercise of the Warrant.
9. Notices.
-------
Any notice or other document required or permitted to be given or
delivered to the Registered Holder shall be delivered at, or sent
certified or registered mail to the Registered Holder at the last
address shown on the books of the Company maintained for the registry
and transfer of the Warrants.
10. No Rights as Stockholder.
------------------------
This Warrant shall not entitle the Registered Holder to any voting or
other rights as a stockholder of the Company.
11. Replacement of Warrant.
----------------------
Upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant and, in the case
of such loss, theft or destruction, upon delivery of an indemnity bond
reasonably satisfactory in form and amount to the Company or, in the case
of any such mutilation, upon surrender and cancellation of such Warrant,
the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
12. Law Governing.
-------------
This Warrant shall be governed by, and construed and enforced in
accordance with, the laws of the State of Delaware (excluding the
choice of law provisions thereof).
-62-
13. Miscellaneous.
-------------
This Warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by
the party (or any predecessor in interest thereof) against which
enforcement of the same is sought. The headings in this Warrant are
for purposes of reference only and shall not effect the meaning or
construction of any of the provisions hereof.
IN WITNESS WHEREOF, this Warrant is executed effective as of the
day and year first above written.
LABONE, INC.
By:
/s/ W. Thomas Grant II
- -----------------------
W. Thomas Grant II
Its Chairman of the Board, President,
and Chief Executive Officer
-63-
NOTICE OF INTENTION TO EXERCISE WARRANT
------------
The undersigned hereby notifies LabOne, Inc. that he has elected
to exercise its right under the within Warrant to purchase
shares of Common Stock, and has effected a wire transfer to LabOne, Inc.
or enclosed herewith cash or a cashier's check payable to LabOne, Inc. in
the total amount of $ in payment of the Purchase Price for
shares. The certificate(s) representing the shares of Common Stock being
purchased should be delivered in the denominations and to the persons
described below:
No. of
Name Address Shares
- ---- --------- ------
Date: By:
-------------------- ----------------------------------
(Signature)
----------------------------------
(Print Name)
----------------------------------
(Title)
-64-
Exhibit 99
----------
CAUTIONARY STATEMENT UNDER THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements which have been made and which may
be made from time to time by the Company, or by its officers, directors or
employees acting on its behalf, that are not statements of historical fact,
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include, without
limitation, any statement specifically identified by the Company as a forward-
looking statement. Examples of forward-looking statements include, but are
not limited to: (i) projections of revenues, income or loss, earnings or loss
per share, capital expenditures, the payment or non-payment of dividends,
capital structure and other financial items, (ii) statements of plans and
objectives of the Company or its management or Board of Directors, including
plans or objectives relating to the products or services of the Company, (iii)
statements of future economic performance, and (iv) statements of assumptions
underlying the statements described in (i), (ii) and (iii). Forward-looking
statements can often be identified by the use in such statements of forward-
looking terminology, such as "believes," "expects," "may," "will," "should,"
"could," "intends," "plans," "estimates" or "anticipates," or the negative
thereof, other variations thereon or comparable terminology.
Forward-looking statements made by or on behalf of the Company involve
risks and uncertainties which may cause actual results to differ materially
from those in such statements. The Company cautions investors that any
forward-looking statement made by the Company is not a guarantee of future
performance or results.
Any forward-looking statement made by or on behalf of the Company speaks
only as of the time at which the statement is made. The Company does not
undertake to publicly update or correct any forward-looking statement made by
or on behalf of the Company.
The list set forth below of factors which could cause actual results to
differ materially from those discussed in forward-looking statements made by
or on behalf of the Company is not exhaustive. Other factors not identified
herein could also have such an effect.
Important factors which could cause actual results to differ materially
from those discussed in forward-looking statements made by or on behalf of the
Company include the following:
Insurance Testing.
- ------------------
A substantial portion of the Company's revenues and net earnings are
derived from the Company's provision of risk appraisal laboratory services to
the insurance industry. The tests performed by the Company are specifically
designed to assist an insurance company in objectively evaluating the
mortality and morbidity risks posed by policy applicants. The majority of the
testing is performed on specimens of individual life insurance policy
applicants. The Company also provides testing services on specimens of
individuals applying for individual and group medical and disability policies.
-80-
The Company's results of operations from insurance testing services are
subject to a number of risks and uncertainties, including, without limitation,
the number of life insurance applications written in the industry, the policy
amount thresholds at which insurance companies order tests, the type and cost
of tests requested by insurance companies (i.e. blood, urine, saliva, hair,
etc.), innovations in the types and cost of tests available for testing which
are approved by the Food and Drug Administration, the prices which the Company
can charge for performing tests, the nature and extent of competition in the
industry and the extent to which insurance companies maintain in-house testing
facilities. Changes in these factors are generally beyond the Company's
control and are difficult to predict. As a result of these and other risks
and uncertainties, future results of the Company's insurance testing
operations may be materially better or worse than expected or projected.
Expansion into New Markets.
- ---------------------------
The Company's growth strategy entails expanding its laboratory testing
services to include: (a) testing for the healthcare industry and (b) substance
abuse testing. The Company began offering testing services in these areas in
1994.
With respect to testing services for the healthcare industry, the Company
provides clinical testing services to aid in the diagnosis and treatment of
patients. The Company markets its clinical testing services to the payers of
healthcare - insurance companies and self-insured groups - through exclusive
arrangements with managed care organizations and through the Lab Card Program.
The Lab Card Program provides laboratory testing at substantial savings, which
savings are shared with the patient to create an incentive for the patient to
direct laboratory work to the company. Prior to the Company's adoption of the
Program in 1994, the Program was untested in the marketplace. The Program
will be successful only to the extent that the Company can continue to
convince potential customers of its efficacy and value, patients direct
laboratory work to the Company and competitors do not adopt equivalent or
superior marketing programs.
With respect to substance abuse testing, the Company is certified by the
Substance Abuse and Mental Health Services Administration (SAMHSA) to perform
substance abuse testing for federally regulated employers. The Company is
currently marketing substance abuse testing services throughout the country to
both regulated and non-regulated employers, including Fortune 1000 companies,
third party administrators and occupational health providers.
Although the Company has met with initial success in marketing its
testing services in the healthcare and substance abuse testing industries,
there can be no assurance that the Company will be able to continue increasing
its market share in these industries or that the Company's provision of
testing services in these industries will become profitable. The Company's
continued expansion in, and results of operations from, these industries is
subject to a number of risks and uncertainties, including, without limitation,
the nature and extent of competition, the Company's ability to comply with
additional regulatory and certification requirements applicable to testing
in these industries, the extent of future efforts in the healthcare industry
to control or reduce costs, and the Company's ability to successfully market
its services to new customers in new markets.
-81-
Cost Reduction Efforts in the Healthcare Industry.
- --------------------------------------------------
The clinical testing industry has been affected by the growth of managed
care organizations and the efforts of third party payers to control the
utilization and costs of health care services. Managed care organizations
have become a significant force in the health care industry. Managed care
providers typically contract with a limited number of clinical laboratories
and negotiate discounts to the fees charged by such laboratories in an effort
to control costs. Many managed care providers have used capitated payment
contracts, pursuant to which the managed care provider and the laboratory
agree to a per member, per month payment to cover an agreed upon schedule
of laboratory tests during the month, regardless of the number or cost of
those tests actually performed. The effect of capitated payment contracts
is to shift the risks of additional testing beyond that covered by
the capitated payment to the clinical laboratory. As a result of the
expansion of managed care, many clinical laboratories have experienced
declines in test utilization and per-test revenue. In addition, Medicare,
Medicaid and insurance companies have increased efforts to control the cost
and delivery of health care services, including testing services. These
efforts have also reduced prices, added costs and decreased test utilization
in the clinical laboratory industry. There is a substantial risk that further
reductions in reimbursement rates of third-party payers will occur. The
Company believes that it can effectively compete with existing clinical
laboratories in providing low cost testing services to managed care companies
and third party payers. Even if the Company is successful in marketing its
services to managed care companies and insurance companies, continued cost-
cutting efforts may further erode the volume of testing and profit margins in
the industry and adversely affect the Company's clinical laboratory
operations.
Competition.
- ------------
The Company currently services over half of the insurance laboratory
testing market. The Company has two other main competitors, Osborn
Laboratories, Inc. and Clinical Reference Laboratory. The insurance testing
industry is highly competitive. The primary focus of the competition is
pricing. This continued competition has resulted in a decrease in the average
price per test charged by the Company. The clinical laboratory testing market
is highly fragmented and very competitive. The Company faces competition from
numerous independent clinical laboratories and hospital-owned or physician-
owned laboratories. Many of the Company's competitors are significantly
larger and have substantially greater financial resources than the Company.
The Company competes in the substance abuse testing market nationwide. The
Company's major competitors are the three major clinical chains, Laboratory
Corporation of America, Quest Diagnostics and SmithKline Beecham Laboratories,
who collectively service approximately two-thirds of the substance abuse
testing market. The principal methods of competition in the clinical
laboratory and substance abuse testing markets are price and timeliness
of service. The Company's competitors may take actions to meet the
Company's marketing programs and other initiatives, and may be willing to
accept lower margins and to reduce prices in order to more effectively compete
in the Company's industries. As a result of such actions, the Company could
fail to achieve sales and revenues increases or otherwise fail to meet its
anticipated results. There can be no assurance that increased competition in
the Company's industries will not have a material adverse effect on the
Company's business, financial condition and results of operations.
-82-
Certification.
- --------------
The Company's laboratory is currently certified to conduct laboratory
testing under the Clinical Laboratory Improvement Amendments of 1988
(collectively, as amended, CLIA '88), by the Substance Abuse and Mental Health
Services Administration (SAMHSA) and by all other states that require separate
licensure. The Company is also accredited by the College of American
Pathologists (CAP). Certification and accreditation is essential to the
Company's business because some of its customers are required to use certified
laboratories, and many of its customers look to certification and
accreditation as an indication of accuracy and reliability of results. In
order to remain certified and accredited, the Company is subject to frequent
inspections and proficiency testing challenges. Failure to meet any of the
numerous certification requirements to which the Company is subject could
result in suspension or loss of certification. Such suspension or loss of
certification could have a material adverse effect on the Company.
General Economic Conditions.
- ----------------------------
Demand for the Company's services is dependent on general economic
conditions. The Company generally conducts fewer tests for the insurance
industry during periods of recession. In addition, recessions and economic
slow-downs generally result in fewer new hires, and therefore may lead to
fewer pre-employment drug tests for public and private employer customers.
Because expenses associated with maintaining the Company's testing work force
are relatively fixed over the short term, the Company's profit margins tend to
increase in periods of higher testing volume and decrease in periods of lower
testing volume.
Fluctuations in Quarterly Operating Results
- -------------------------------------------
The Company's quarterly operating results will be influenced by a host of
factors, which include those discussed herein and the following: regulatory
matters; the extent to which the Company's services gain market acceptance in
new markets; competition; changes in the mix of testing services provided in a
given quarter; changes in pricing policies by the Company and by its
competitors; acquisition costs and restructuring and other charges associated
with acquisitions; the Company's success in implementing its growth strategy;
personnel changes; and general economic conditions. As a result of the
influence of these factors, the Company's results of operations may fluctuate
from quarter to quarter, and the Company's results of operations in any
particular quarter may be materially better or worse than expected or
projected.
Legal Proceedings.
- ------------------
In the ordinary course of its business, claims are made against the
Company by individuals alleging false positive or false negative reports. To
date, the Company has not experienced any material liability related to these
claims, although there can be no assurance that the Company will not at some
time in the future experience significant liability in connection with such
claims. The Company believes that its liability insurance coverage is
adequate for its business. However, there can be no assurance that the
Company's existing insurance coverage limits will be adequate to protect the
Company from any liabilities it might incur in connection with its operations.
Any liabilities in excess of coverage could have a material adverse affect on
the Company's business, results of operations and financial condition.
-83-
Dependence on Key Personnel.
- ----------------------------
The Company is dependent upon a number of key management and technical,
sales and marketing personnel. The loss of a number of key employees could
have a material adverse effect on the Company. The Company believes that its
future success will depend in part upon its continued ability to attract,
retain and motivate highly skilled personnel.
Governmental Regulation.
- ------------------------
Operation of Clinical Laboratory.
---------------------------------
The clinical laboratory industry is subject to significant governmental
regulation at the Federal, state and local levels. Virtually all clinical
laboratories, including the laboratory owned by the Company, are required to
be certified or licensed under CLIA, the Medicare and Medicaid programs and
various state and local laws, and may be subject to periodic inspections by
regulatory agencies. In 1992, the Department of Health and Human Services
issued regulations implementing CLIA '88 which establish quality standards for
the conduct of different categories of laboratory tests. The potential
penalties for failure to comply with these regulations include denial of the
right to conduct business, significant fines and criminal penalties. The
Company is also subject to state regulations which may impose more stringent
requirements than federal law. Although the Company has instituted programs
to ensure that its operations meet all applicable regulatory requirements,
there can be no assurance that the Company will always be able to comply with
all of such requirements. The loss of a license, imposition of a fine or
future changes in such Federal, state and local laws and regulations could
have a material adverse effect on the Company.
Medicare/Medicaid Regulations.
------------------------------
A small portion of the Company's revenues from clinical laboratory
services are received from Medicare or Medicaid programs. Although the
Company does not expect the percentage of its revenues derived from Medicare
and Medicaid reimbursements to increase substantially in the future, to the
extent that such revenues do increase, the Company's results of operations may
be affected by Medicare and Medicaid reimbursement policies. In 1984,
Congress established a Medicare fee schedule for clinical laboratory services
performed for patients under Part B of the Medicare program.
Subsequently, Congress imposed a national ceiling on the amount that can
be paid under the fee schedule. Since 1984, Congress has periodically reduced
the ceilings on Medicare reimbursement to clinical laboratories from
previously authorized levels. In addition, state Medicaid programs are
prohibited from paying more than the Medicare fee schedule for clinical
laboratory services provided to Medicaid recipients. It is impossible to
predict if additional Medicare reductions will be implemented.
The Federal government has adopted policies for administration of
Medicare payments to clinical laboratories for the most frequently performed
automated blood chemistry profiles. The policies establish a consistent
nationwide standard for the content of automated blood chemistry profiles and
require laboratories performing certain profiles to obtain and provide
documentation of the medical necessity of tests included in the profiles for
each Medicare beneficiary. The Company incurs additional costs in complying
with these regulations.
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Future changes in Federal, state and local regulations affecting
government reimbursement of clinical laboratory testing could have an adverse
effect on the Company. The materiality of any such adverse effect will depend
in part upon the extent to which the Company receives its revenues from
Medicare and Medicaid programs.
Fraud and Abuse Regulations.
----------------------------
A wide array of fraud and abuse provisions apply to clinical laboratories
participating in Medicare and Medicaid programs. Penalties for violations of
these laws include exclusion from participation in Medicare/Medicaid programs
and civil and criminal penalties. Even though only a small portion of the
Company's business encompasses fee-for-service Medicare/Medicaid, LabOne has
appointed a Chief Compliance Officer and nine Co-Compliance Officers.
Additionally, the Company has developed the LabOne Compliance Plan, based on
the Model Compliance Plan recommended by the Office of Inspector General (OIG)
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.
Drug Testing.
-------------
Drug testing for certain public sector employees is regulated by SAMHSA,
which has established detailed quality standards for drug testing on employees
of federal government contractors and certain other entities. Certification
by SAMHSA is essential to the Company's substance abuse testing business. See
"Certification."
Environmental and Occupational Safety.
--------------------------------------
The Company is subject to various federal, state and local laws and
regulations concerning the environment and occupational safety and health,
including laws and regulations relating to the handling, transportation and
disposal of specimens, infectious and hazardous waste and radioactive
materials. The Company is subject to extensive regulation relating to
workplace safety for healthcare employers whose workers may be exposed to
blood-borne pathogens such as HIV. Although the Company is not aware of any
material non-compliance with such laws and regulations, any failure to comply
could subject the Company to denial of the right to conduct business, fines,
criminal and civil penalties and civil liability. The Company cannot predict
what environmental or health and safety legislation or regulations will be
enacted in the future or how existing or future laws or regulations will be
administered or interpreted, nor can it predict the amount of future
expenditures which may be required in order to comply with any environmental
or health and safety laws or regulations.
Dividends.
- ----------
The Company has paid quarterly dividends with respect to shares of Common
Stock over the past several years. Declaration and payment of dividends are
subject to the discretion of the Company's Board of Directors and may be made
only from funds legally available therefor. The Board of Directors reviews
the Company's dividend policy on a periodic basis. The Company's ability to
pay dividends depends upon the Company's financial condition and results of
operations. The Company has paid dividends per share in excess of earnings
per share in recent years. There can be no assurance that the Company will be
able to, or will continue to, declare and pay dividends with respect to shares
of Common Stock.
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Single Facility.
- ----------------
The Company's testing operations are contained in a single facility
located in Lenexa, Kansas. Although the Company has a full-time alternative
power source in the event of an electrical power shortage and has taken
steps to limit the possibility of a fire, the facility is subject to
risk of fire, earthquake, tornado, telecommunications failure and similar
events. Even though the Company does carry business interruption insurance to
compensate for losses which might occur, the occurrence of such an event with
respect to the Company's testing facility could materially adversely affect
the Company's business, results of operations and financial condition.
Year 2000 Computer Concerns.
- ----------------------------
The Company is actively addressing Year 2000 computer concerns. The
Company has established an oversight committee which includes management from
all parts of the Company and meets periodically to review progress. The
Company'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 eight weeks supply of most laboratory supplies, and
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. Additionally, 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.
Supplies.
- ---------
The Company's operations require the supply of insurance testing kits,
testing agents and other laboratory supplies. The Company has several
suppliers for most of these materials. There can be no assurance, however,
that the Company will not experience shortages of such materials or be forced
to seek alternative sources of supply. In addition, there can be no assurance
that prices for such materials will remain stable. Any shortages of such
materials may result in service delays and increased costs which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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