UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO.2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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Commission file number 0-15975
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LabOne, Inc.
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10101 Renner Blvd.
Lenexa, Kansas 66219
(913) 888-1770
Incorporated in Delaware
I.R.S. Employer Identification Number: 48-0952323
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 57
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
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.
PAGE 10
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
---- ----
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
On November 13, 1998, LabOne issued a Warrant to USA Managed Care
Organization ("USA MCO) to purchase up to 500,000 shares of Common
Stock of LabOne, par value $0.01 per share, at a purchase price of
$15.44 per share. The Warrant was issued in conjunction with a
Marketing Agreement entered into between LabOne and USA MCO, which is a
specialist in providing managed healthcare consulting services. Under
the Marketing Agreement, USA MCO agreed to market LabOne's LabCard
program for providing clinical laboratory testing services to USA MCO's
clients.
No cash consideration was received by LabOne for the issuance of
the Warrant. The Warrant is exercisable by USA MCO in respect of the
number of shares of common stock of LabOne indicated below for each
calendar quarter prior to March 1, 2004, in which the revenues received
by LabOne during the quarter pursuant to the Marketing Agreement with
USA MCO are within the ranges specified below:
LabOne Quarterly Revenues Number of LabOne
Received under USA MCO Shares Exercisable
Marketing Agreement under the Warrant
-------------------- -----------------
$500,000 to $999,999 5,000 shares
$1,000,000 to $1,499,999 10,000 shares
$1,500,000 to $1,999,999 15,000 shares
$2,000,000 to $2,499,999 20,000 shares
$2,500,000 and above 25,000 shares
The number of shares of common stock issuable upon the exercise of the Warrant
and the purchase price per share are subject to adjustment in the event of
changes in the capital structure of LabOne.
The Warrant and shares of common stock issuable upon the exercise of the
Warrant were not registered under the Securities Act of 1933 in reliance upon
the exemptions from the registration requirements provided by Section 4(2) of
the Act and Rule 506 under Regulation D. NSS is believed to be an "accredited
investor" within the meaning of Regulation D.
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
- ---------------------
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
million for 1998 as compared to an operating loss of $8.3 million in 1997.
PAGE 13
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 for a three year period. At the time of the
purchase, GIB served approximately 5% of the insurance laboratory testing
market. Revenue in 1997 from former GIB customers, including Prudential, was
approximately $3.8 million. SAT revenue increased from $4.7 million in 1996
to $9.4 million in 1997 due to a doubling in testing volumes. Clinical
laboratory revenue increased from $3.9 million in 1996 to $7.5 million in 1997
due to increased testing volumes and higher revenue per patient.
Cost of sales increased $9.3 million, or 28%, for the year as compared to the
prior year. This increase is due primarily to increases in payroll,
laboratory supplies and kit expenses due to the larger specimen volume for
all three business segments. Direct and allocated clinical cost of sales
expenses were $8.3 million as compared to $6.5 million during 1996. Direct
and allocated SAT cost of sales expenses were $7.0 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
million as compared to$5.4 million in 1996. SAT overhead increased from $2.2
PAGE 14
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
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.
PAGE 15
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 (LBM) programs, including BlueCare and the Lab
Card Program, have more than 2.3 million lives enrolled. Revenue from LBM
during the fourth quarter 1998 was $3.2 million or approximately 62% of total
clinical revenue.
The Company's new facility was financed through the City of Lenexa, Kansas,
with industrial revenue bonds. In conjunction with the bonds, LabOne expects
to receive income tax credits through the State of Kansas High Performance
Incentive Plan to be applied against state income taxes for up to 10 years, or
until the credit is completely used. The amount of the credit is expected to
be approximately $4 million, and will lower LabOne's average income tax rate
for the duration of the credit.
On March 8, 1999, LabOne and Lab Holdings, Inc. announced that the Boards of
Directors of both companies had approved an agreement to merge the two
companies. If consummated, the proposed merger will have several effects which
are fully discussed in the Registration Statement on Form S-4 filed by Lab
Holdings with the United States Securities and Exchange Commission on April
13, 1999 (File No. 333-76131), which may be amended from time to time.
One effect of the merger will be to add transaction goodwill to the balance
sheet of the combined company in an estimated amount ranging from about $22.2
million to $24.9 million. This transaction goodwill reflects the expected
difference between the cost of LabOne shares that Lab Holdings will be treated
as acquiring in the merger and the fair value of the LabOne net assets
allocated to these acquired shares. If the merger is consummated, the combined
company's balance sheet will also include about $6.3 million in existing
historical goodwill that currently is a Lab Holdings asset that resulted from
Holding's prior acquisitions of LabOne stock. Following the merger, this
historical and transaction goodwill is expected to negatively impact reported
earnings of the combined company at an estimated annual rate from about $2.6
million to $2.8 million until the historical goodwill is fully amortized in
April 2003, and thereafter at an estimated annual rate from about $1.1 million
to $1.3 million until the 20th anniversary of the merger. The amounts in this
paragraph are hypothetical assuming that the merger had occurred as shown on
the pro forma financial statements included in the above Registration
Statement. The actual amount of goodwill incurred in the merger will depend on
the number of combined company shares issued in the merger, the actual amount
of transaction costs and the fair value of the LabOne net assets at the time
of the merger.
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.
Accounts receivable grew from $12.6 million as of December 31, 1997 to $18.7
million as of December 31, 1998, due primarily to an increase in revenue
growth from all three segments. Bad debt expense and reserves increased due
to the increase in total revenue and a shift in revenue toward clinical and
SAT sources.
PAGE 16
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. As of April 1999, the new facility was
completely operational. (See footnote 11 of Notes to Consolidated Financial
Statements). Future capital asset purchases are expected to be
approximately $5 million.
The Company had no short-term borrowings during 1998. Management expects to
be able to fund operations and future dividend payments from a combination of
cash flow from operations, cash reserves, building sales and short-term
borrowings. Interest on the industrial revenue bonds issued to finance the
construction of the Company's new facility is based on a taxable seven day
variable rate which, including letter of credit and remarketing fees, is
approximately 5.8% as of March 1, 1999. The bonds mature over 11 years in
increments of $1.85 million per year plus interest. Total cash and
investments at December 31, 1998, were $10.2 million, as compared to $19.5
million at December 31, 1997.
If the proposed merger between LabOne and Lab Holdings is consummated, the
future dividend policy of the combined company in the merger will be
determined by its new Board of Directors, a majority of whom will be
independent non-management directors. Although nine of the twelve current
LabOne directors are expected to continue as directors of the combined
company, there can be no assurance as to any dividend determinations by that
board in the future. That determination will be subject to the financial
condition, operating results, and liquidity of the combined company and
numerous other factors. In addition, the pursuit by the combined company of
LabOne's growth and diversification strategy, the increased financial leverage
that is expected to result from the merger, changes in the market for LabOne's
products and services, negative impacts caused by other risks described in the
Registration Statement on Form S-4 filed by Lab Holdings with the United
States Securities and Exchange Commission on April 13, 1999
(File No. 333-76131), which may be amended from time to time, or any of them
singly or together with other factors could influence the board of the
combined company to reduce or eliminate the quarterly dividend.
Under the merger agreement, LabOne shareholders (other than Lab Holdings)
may elect to exchange each LabOne share for either one share of the combined
company, $12.75 in cash, or a combination of shares and cash. Cash elections
are subject to an aggregate cash limit of $16.6 million. It is expected that
the combined company will need to borrow up to $13.6 million to satisfy cash
elections in excess of $3 million. Additional cash could be needed if any Lab
Holdings shareholders perfect dissenters' rights. These additional borrowings
will increase annual interest expense and subject the combined company to the
normal risks associated with debt financing. However, the amount of these
borrowings is not expected to have a negative impact on earnings per share
because the increased borrowing expense would be offset by the reduction in
the number of shares of the combined company issued in the merger as a result
of cash elections by LabOne stockholders. The additional financial leverage
PAGE 17
could also impair the ability of the combined company to pursue acquisition
and growth strategies that would otherwise be available or impact future
operating results due to higher debt service in the event that future
acquisitions are completed. The loan agreement that provides for borrowings
to finance the merger and existing LabOne loan agreements do not contain
covenants that will directly prohibit the board of directors of the combined
company from continuing Holdings' quarterly dividends at the current amount.
However, the increased debt combined with other circumstances could cause the
board of the combined company to reduce or discontinue the quarterly dividend.
Other circumstances include negative operating results, acquisition or other
expenditures or commitments incurred to continue LabOne's diversification and
growth strategy, or the effect of general financial covenants contained in the
loan agreement.
YEAR 2000
- ---------
LabOne is actively addressing Year 2000 computer concerns. The company has
established an oversight committee which includes management from all parts of
the Company and meets periodically to review progress. The Company's
laboratory operating systems and its business processing systems were
completely rewritten as of 1991 and were brought into compliance with Year
2000 date standards at that time. Non-IT systems, which include security
systems, time clocks and heating and cooling systems, have been replaced with
certified compliant systems as part of construction of the new facility.
Ongoing remediation efforts include regularly scheduled software upgrades and
replacement of personal computers and associated equipment. The Company
expects to complete all remaining internal Year 2000 objectives by the end of
the second quarter, 1999.
LabOne is assessing the Year 2000 preparation and contingency plans of the
Company's clients and vendors. LabOne has material relationships and
dependencies with its primary telecommunications provider, Sprint Corp., its
inbound shipping provider, Airborne Express, and municipal services providers.
In the event of a service interruption, the Company has the ability to switch
telecommunications services to AT&T at any time, and maintains backup
electrical generators capable of meeting its electrical needs. LabOne
currently tracks and controls routing of its inbound specimens and can use
USPS, airlines and other common carriers or express delivery services in the
event of delivery problems with Airborne Express. The Company currently
maintains approximately an eight week supply of most laboratory supplies, and
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
$0.3 million and are not considered a material expense to the Company. These
efforts have not caused delay to the Company's other ongoing information
systems projects. LabOne has not hired any outside consultants or other
independent validation provider at this time, and does not expect to do so.
There can be no assurance that the Company's adjustments to its computer
systems will completely eliminate all Year 2000 problems. Failure to properly
address the Year 2000 problem could have a material adverse effect on the
Company's business, financial condition and results of operations.
PAGE 18
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A foreign currency risk exposure exists due to billing Canadian subsidiary
revenue in Canadian dollars and the direct laboratory expenses associated with
this revenue being incurred in US dollars. This exposure is not considered to
be material. Any future material Canadian currency fluctuations against the
US$ 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
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, President-Clinical Sales
and Marketing and Director
PAGE 19
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,
and President-Substance Abuse Testing
Division
Thomas H. Bienvenu II 49 Executive Vice President - Information
Systems and Technology
Judith A. VonFeldt 52 Executive Vice President - Human
Resource
Kurt E. Gruenbacher, 39 Vice President - Finance, Chief
CPA, CMA, CFM Accounting Officer, Treasurer and
Assistant Secretary
Joseph H. Brewer, M.D. 47 Director
William D. Grant 82 Director
Richard A. Rifkind, M.D. 68 Director
Richard S. Schweiker 72 Director
James R. Seward 46 Director
John E. Walker 60 Director
R. Dennis Wright, Esq. 56 Director
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 President - Clinical Sales and Marketing and Executive Vice
President - Sales and Marketing in 1995. From 1990 to 1995, Mr. Hespe served
as Executive Vice President Sales and Marketing of Allscrips Pharmaceuticals,
Vernon Hills, Illinois, a distributor of managed care pharmaceutical products
and services with annual revenues of approximately $70 million. Mr. Hespe's
responsibilities with Allscrips included developing strategies for market
expansion and developing business with managed care organizations, including
PAGE 20
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 President-Substance Abuse Testing Division and
Executive Vice President - Toxicology in May 1996. Dr. Peat served as Senior
Vice President - Toxicology from 1994 to 1996. Prior to joining LabOne in
1994, Dr. Peat was Vice President of Toxicology of Roche Biomedical
Laboratories, Inc., Research Triangle Park, North Carolina.
Mr. Bienvenu was appointed Executive Vice President - Information Systems
and Technology in May 1997. Mr. Bienvenu served as Senior Vice President -
Information Systems and Technology from 1994 to 1997. He served as Vice
President - Marketing Information Technology from October 1994 to December
1994. Prior to October 1994, he served as Director of Marketing Information
Technology.
Ms. VonFeldt has served as Executive Vice President - Human Resources
since August 1998. She served as Senior Vice President - Human Resources from
May 1997 to August 1998, and as Vice President - Human Resources from
September 1993 to May 1997.
Mr. Gruenbacher was appointed Assistant Secretary in May 1998 and
Treasurer in November 1997. He was appointed Vice President - Finance and
Chief Accounting Officer in May 1995. Mr. Gruenbacher served as Corporate
Controller from 1994 to 1995, and Director, Financial Analysis and Budgets
from 1993 to 1994.
Dr. Brewer has been a director of LabOne since 1988. During the past
five years, Dr. Brewer has been an Infectious Disease Specialist at St. Luke's
Hospital, Kansas City, Missouri and an Assistant Clinical Professor of
Medicine at the University of Missouri - Kansas City.
Mr. William D. Grant has been a director of LabOne since 1989. Mr. Grant
is retired. From August 1990 to December 1997, he served as a consultant to
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
PAGE 21
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.
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 are hereby incorporated by reference to LabOne's Form 10-K
Annual Report Filed March 30,1999.):
PAGE 29
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.
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. **
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.
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
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
21. Subsidiaries of Registrant - see Note 1 of Notes
to Consolidated Financial Statements, "Principles of
Consolidation and Basis of Presentation."
24. Powers of Attorney.
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.
* 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 Amendment No. 2 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: May 27, 1999 Date: May 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 has been signed below by the following persons on behalf of
the Registrant on May 27, 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)
Provision for loss on accounts receivable 1,502,571 571,192 493,760
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 (6,777,322) (3,577,172) (2,365,181)
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
On December 26, 1998, the substance abuse testing laboratory started to move
to the new facility. Construction in progress was transferred and
depreciation expense was recorded as portions of the new facility were
completed and put into use in 1999.
PAGE 43
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Cost of Borrowings
Expenses directly related to the issuance of debt are deferred and amortized
over the period the debt is expected to be outstanding using the interest
method.
Intangible Assets
Intangible assets are recorded at their acquisition cost, net of amortization.
The patent process utilized in coating the plates on which blood and urine
testing is performed was amortized on a 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. 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
PAGE 44
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares and diluted earnings per share is computed using the weighted
average number of common shares and dilutive stock options.
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 excess of the aggregate purchase price
over the fair market value of net assets acquired of approximately $4 million
is being amortized over twenty years.
LabOne is obligated to pay to the prior owner of SBSI, 20% of SBSI's income
before taxes (as defined) greater than a target amount approximately equal to
1998 pretax income for each of SBSI's fiscal years ending in 1999 and 2000.
Any amounts paid under this obligation will result in additional excess
purchase price for reporting purposes.
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 for a period of three years. 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
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
life of six years; 1997 - expected dividend yield of 4.2%, risk-free interest
PAGE 51
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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. The Company will recognize expense, measured as the
excess of fair value of the warrants over the exercise price at the date such
warrants become exercisable. 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
PAGE 52
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Company are specifically designed to assist an insurance company in
objectively evaluating the risks posed by policy applicants. Clinical testing
services are provided to the health care industry to aid in the diagnosis and
treatment of patients. Substance abuse testing services are provided to both
regulated and nonregulated employers who employ drug screening guidelines.
Operating income (loss) of each line of business is computed as sales less
identifiable and allocated expenses. All expenses that can be identified as
specific to a certain segment of business are charged to that segment. All
shared resources and expenses are totaled and allocated to each segment based
on the relative revenue of each segment each month. Allocated expenses
include administrative salaries, information systems support, accounting,
human resources and facilities. In computing operating income (loss) of lines
of business, none of the following items have been added or deducted: general
corporate expenses, investment income or other income (expenses).
Identifiable assets by line of business are those assets that are used in the
Company's operations in each line of business. General corporate assets at
December 31, 1997 and 1996 were primarily cash and investments. At December
31, 1998, general corporate assets were primarily construction in progress
(the new facility) and cash.
PAGE 53
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 testing 810,291 644,531 368,622
============ =========== ===========
PAGE 54
(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 55
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 and Equipment Costs
At December 31, 1998, management estimates additional cost to complete
construction of the new facility and to acquire related equipment approximates
$3,500,000, substantially all of which will be paid in the first half of 1999.
The move to the new facility was completed in April 1999.
(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 56
LABONE, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended 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
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended
December 31,1998 $ 968,295 1,502,572 144,151 2,326,716
============== ============== ============= ==============
Year ended ,
December 31,1997 $ 657,558 521,193 210,456 968,295
============== ============== ============= ==============
Year ended
December 31, 1996 $ 329,995 493,760 166,197 657,558
============== ============== ============= ==============
</TABLE>
PAGE 57
