UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1999
--------------
Commission file number 0-15975
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LabOne, Inc.
------------
10101 Renner Blvd
Lenexa, Kansas 66219
(913) 888-1770
Incorporated in Delaware
I.R.S. Employer Identification Number: 48-0952323
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 / /
Number of shares outstanding of the only class of Registrant's common stock,
$.01 par value, as of July 30, 1999 - 13,317,211 net of 1,682,789 shares held
as treasury stock.
Page 1 of 15
<TABLE> PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
LabOne, Inc. and Subsidiaries
Consolidated Balance Sheets
<S> <C> <C>
June 30, December 31,
1999 1998
ASSETS --------- ---------
Current assets:
Cash and cash equivalents $5,253,522 10,177,740
Accounts receivable-trade, net of allowance for doubtful
accounts of $2,994,958 in 1999 and $2,326,716 in 1998 18,538,021 18,735,984
Income taxes receivable 2,183,166 282,229
Inventories 1,160,117 1,798,481
Real estate available for sale - 3,515,000
Prepaid expenses and other current assets 2,733,470 2,504,768
Deferred income taxes 2,095,546 3,972,575
---------- ----------
Total current assets 31,963,842 40,986,777
Property, plant and equipment 78,345,672 72,915,797
Less accumulated depreciation 36,001,843 35,983,169
---------- ----------
Net property, plant and equipment 42,343,829 36,932,628
Other assets:
Intangible assets, net of accumulated amortization 6,789,998 7,414,319
Bond issue costs, net of accumulated amortization
of $14,557 in 1999 and $5,823 in 1998 177,950 186,324
Deferred income taxes - noncurrent 110,198 -
Deposits and other assets 216,918 206,127
--------- ----------
Total assets $81,602,375 85,726,175
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,081,257 4,353,733
Retainage and construction payable 694,517 3,809,193
Current portion of long-term debt 1,862,910 1,860,168
Accrued payroll and benefits 3,746,192 4,148,593
Other accrued expenses 411,789 610,315
Other current liabilities 371,983 274,198
---------- ----------
Total current liabilities 12,168,648 15,056,200
Long-term debt 18,093,109 18,097,308
Deferred income taxes - noncurrent 6,906 27,087
---------- ----------
Total liabilities 30,268,663 33,180,595
Stockholders' equity:
Preferred stock, $.01 par value per share;
1,000,000 shares authorized, none issued - -
Common stock, $.01 par value per share; 40,000,000 shares
authorized, 15,000,000 shares issued 150,000 150,000
Additional paid-in capital 14,170,641 14,099,066
Equity adjustment from foreign currency translation (763,921) (849,098)
Retained earnings 58,011,774 59,352,728
---------- ----------
71,568,494 72,752,696
Less treasury stock of 1,682,789 shares in
1999 and 1,688,550 shares in 1998 20,234,782 20,207,116
---------- ----------
Total stockholders' equity 51,333,712 52,545,580
---------- ----------
Total liabilities and stockholders' equity $81,602,375 85,726,175
========== ==========
See accompanying notes to consolidated financial statements and management's discussion and
analysis of financial condition and results of operations.
Page 2
</TABLE>
<TABLE>
LabOne, Inc. and Subsidiaries
Consolidated Statements of Earnings
<S> <C> <C> <C> <C>
Three months ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Sales $ 28,572,152 25,762,263 55,900,237 49,095,697
Cost of sales 17,003,962 13,831,903 32,655,301 26,790,851
---------- ---------- ---------- ----------
Gross profit 11,568,190 11,930,360 23,244,936 22,304,846
Selling, general and administrative expenses 8,741,997 8,001,910 17,306,082 15,450,322
---------- ---------- ---------- ----------
Earnings from operations 2,826,193 3,928,450 5,938,854 6,854,524
Interest Expense (295,579) - (589,621) -
Interest Income and other 62,781 167,897 154,825 400,796
---------- ---------- ---------- ----------
Earnings before income taxes 2,593,395 4,096,347 5,504,058 7,255,320
Income tax expense 995,626 1,662,908 2,052,890 2,904,690
---------- ---------- ---------- ----------
Net earnings $ 1,597,769 2,433,439 3,451,168 4,350,630
========== ========== ========== ==========
Basic earnings per common share $ 0.12 0.19 0.26 0.33
====== ====== ===== =====
Diluted earnings per common share $ 0.12 0.18 0.26 0.33
====== ====== ===== =====
Dividends per common share $ 0.18 0.18 0.36 0.36
====== ====== ===== =====
Basic weighted average common shares outstanding 13,313,349 13,136,962 13,312,405 13,135,928
========== ========== ========== ==========
Diluted weighted average common shares outstanding 13,333,591 13,327,517 13,335,787 13,323,253
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
Page 3
LabOne, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in comprehensive Retained Treasury stockholders' Comprehensive
stock capital income earnings stock equity income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 $150,000 14,099,066 (849,098) 59,352,728 (20,207,116) 52,545,580
Comprehensive income:
Net earnings 3,451,168 3,451,168 3,451,168
Equity adjustment
from foreign
currency translation 85,177 85,177 85,177
---------
Comprehensive income 3,536,345
=========
Cash dividends
($0.36 per share) (4,792,122) (4,792,122)
Stock options exercised,
net 51,771 (79,875) (28,104)
Directors' stock issued
(5,761 shares) 19,804 52,209 72,013
-------- ---------- --------- ---------- ---------- ----------
Balance at
June 30, 1999 $150,000 14,170,641 (763,921) 58,011,774 (20,234,782) 51,333,712
======== ========== ======= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
Page 4
LabOne, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended
June 30,
1999 1998
--------- ---------
Cash provided by (used for) operations:
Net earnings $ 3,451,168 4,350,630
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization 3,096,106 2,366,687
Provision for loss on accounts receivable 1,281,495 650,405
Loss (gain) on disposal of
property and equipment (842,975) 3,861
Directors' stock compensation 72,013 68,597
Provision for deferred taxes 1,750,721 (135,340)
Changes in:
Accounts receivable (1,083,532) (3,729,762)
Income taxes (1,900,937 (65,573)
Inventories 638,364 574,200
Prepaid expenses and other current assets (228,702) (49,753)
Accounts payable (2,626,235) 745,761
Accrued payroll & benefits (402,401) (581,193)
Accrued expenses 40,557 (25,992)
Other current liabilities 97,785 223
---------- ----------
Net cash provided by operations 3,343,427 4,172,751
---------- ----------
Cash provided by (used for) investment transactions:
Purchases of investments held to maturity - (5,461,090)
Proceeds from maturities of investments held
to maturity - 6,201,894
Property, plant and equipment, net (3,510,988) (6,318,937)
Other (10,791) 56,153
---------- ----------
Net cash used for investment transactions (3,521,779) (5,521,980)
---------- ----------
Cash provided by (used for) financing transactions:
Issuance of treasury stock, net of proceeds
from the exercise of stock options (28,104) 69,092
Payments on long term debt - capital lease (6,003) -
Cash dividends (4,792,122) (4,728,844)
---------- ----------
Net cash used for financing transactions (4,826,229) (4,659,752)
---------- ----------
Effect of foreign currency translation 80,363 (55,505)
---------- ----------
Net decrease in cash and cash equivalents (4,924,218) (6,064,486)
Cash and cash equivalents - beginning of period 10,177,740 18,284,672
---------- ----------
Cash and cash equivalents - end of period $ 5,253,522 12,220,186
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 651,691 -
Income Taxes $2,227,700 3,058,933
========== ==========
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
Page 5
LabOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
The accompanying consolidated financial statements include the accounts of
LabOne, Inc. and its wholly-owned subsidiaries Lab One Canada Inc. and
Systematic Business Services, Inc. (SBSI). All significant intercompany
transactions have been eliminated in consolidation.
The financial information furnished herein as of June 30, 1999 and for the
periods ended June 30, 1999 and 1998 is unaudited; however, in the opinion of
management, it reflects all adjustments, consisting of normal recurring
adjustments, which are necessary to fairly state the Company's financial
position, the results of its operations and cash flows. The balance sheet
information as of December 31, 1998 has been derived from the audited
financial statements as of that date. The financial statements have been
prepared in conformity with generally accepted accounting principles
appropriate in the circumstances, and included in the financial statements
are certain amounts based on management's estimates and judgments.
The financial information herein is not necessarily representative of a full
year's operations because levels of sales, capital additions and other factors
fluctuate throughout the year. These same considerations apply to all year-
to-year comparisons. See the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, for additional information not required by this
Quarterly Report on Form 10-Q.
On July 1, 1999, the Company announced a restatement of earnings for the year
ended December 31, 1998. As requested by the staff of the Securities and
Exchange Commission, the Company has changed the amortization schedule from
fifteen years to five years on a customer list acquired during the first
quarter 1997. The Company's original amortization period was based on
historical performance, however the SEC has requested the amortization period
be reduced to five years. This restatement is not the result of any changes
in customer relationships and has no effect on any present or future cash
flows. The effect of this restatement is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30,1998
--------------------------- -------------------------
As Previously As Previously
Reported As Restated Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings before taxes $ 4,233,956 4,096,347 $ 7,530,538 7,255,320
Net earnings 2,516,310 2,433,439 4,516,371 4,350,630
Basic earnings per share 0.19 0.19 0.34 0.33
Diluted earnings per share 0.19 0.18 0.34 0.33
</TABLE>
Effective October 30, 1998, LabOne acquired SBSI, a Missouri corporation.
SBSI provides telephone inspections, motor vehicle reports, attending
physician statements and claims investigation services to life and health
insurers nationwide.
LabOne is currently 80.4% owned by Lab Holdings, Inc. On March 8, 1999,
Page 6
LabOne and Lab Holdings jointly 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 joint proxy statement/prospectus filed by Lab Holdings with
the United States Securities and Exchange Commission on July 2, 1999 (File
No. 333-76131). 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 19.6% 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 recommended its approval by the LabOne board and stockholders. The merger
is expected to close in August pending the 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 at the
annual meetings of shareholders of both LabOne and Lab Holdings.
Forward Looking Statements
--------------------------
This Quarterly report on Form 10-Q may contain "forward-looking statements,"
including projections, 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, 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.
Business Segment Information
----------------------------
The company operates in three lines of business: insurance risk appraisal
testing, clinical diagnostic testing and substance abuse testing. The
following table presents selected financial information for each segment:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Sales:
Insurance $ 18,473,769 17,571,796 36,058,016 34,394,248
Clinical 5,735,698 4,723,128 11,693,224 8,377,171
Substance abuse testing 4,362,685 3,467,339 8,148,997 6,324,278
---------- ---------- ---------- ----------
Total sales $ 28,572,152 25,762,263 55,900,237 49,095,697
========== ========== ========== ==========
Operating income (loss):
Insurance $ 3,795,315 5,435,802 7,809,540 10,510,455
Clinical (1,308,956) (1,509,398) (2,267,734) (3,444,445)
Substance abuse testing (171,734) 40,165 (290,674) (138,622)
General corporate income (expense) 511,568 (38,119) 687,772 (72,864)
--------- --------- ---------- ---------
Total earnings from operations 2,826,193 3,928,450 5,938,854 6,854,524
Other income (expense) (232,798) 167,897 (434,796) 400,796
--------- --------- --------- ---------
Earnings before income taxes $ 2,593,395 4,096,347 5,504,058 7,255,320
========= ========= ========= =========
</TABLE>
Page 7
The Company's new facility was completed in early 1999, and the portions of
the building identifiable to each segment have been allocated to those
segments. Effective the second quarter, the associated depreciation expenses
have been charged to the segments and are included in the operating income or
loss information stated above. There were no other material changes in assets
or in the basis of segmentation or measurement of segment operating income or
loss.
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 $1.9 million. The Texas State Hearing
Attorney has issued a position letter agreeing to amend the audit based on the
exclusion of non-Texas applicants. At this time, the Company is unable to
estimate the possible liability, if any, that may be incurred as a result of
this assessment, but believes the amount will be less than $0.5 million. The
Company continues to appeal this assessment arguing that its services do not
fit within the definition of insurance services under the Texas code.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 % Increase 1999 1998 % Increase
(Decrease) (Decrease)
----------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 28,572,152 25,762,263 11% $55,900,237 49,095,697 14%
Net earnings 1,597,769 2,433,439 (34%) 3,451,168 4,350,630 (21%)
Diluted Earnings per
common share $0.12 0.18 $0.26 0.33
Cash dividends per common share $0.18 0.18 $0.36 0.36
</TABLE>
The Company provides high-quality laboratory testing services to insurance
companies, physicians and employers.
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. Through its subsidiary, SBSI, the
Company 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 to
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
Page 8
competitors. LabOne markets its clinical testing services to the payers of
healthcare--insurance companies and self-insured groups. The Company does
this through Lab Card (registered), a Laboratory Benefits Management program.
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.
The Company's Laboratory Benefits Management programs, including BlueCross
BlueShield of Tennessee and the Lab Card program, have more than 2.3 million
lives enrolled.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration to perform substance abuse testing services for
federally regulated employers and is currently marketing these services
throughout the country to both regulated and nonregulated employers. The
Company's rapid turnaround times and multiple testing options help clients
reduce downtime for affected employees and meet mandated drug screening
guidelines
SECOND QUARTER ANALYSIS
Net sales increased 11% in the second quarter 1999 to $28.6 million from $25.8
million in the second quarter 1998. The increase of $2.8 million is due to
increases in clinical laboratory revenue of $1.0 million, substance abuse
testing (SAT) revenue of $0.9 million and insurance services revenue of $0.9
million.
Clinical diagnostic testing revenue increased from $4.7 million to $5.7
million for the quarter due to a 34% increase in testing volumes partially
offset by a 9% decrease in average revenue per patient related to lower
capitated billing rates. SAT revenue increased from $3.5 million in 1998 to
$4.4 million in 1999 due to a 30% increase in testing volumes as compared to
last year.
The insurance services division revenue increased $0.9 million due to the
addition of SBSI revenue and growth in non laboratory services revenue,
reduced by lower laboratory and kit revenue. SBSI was acquired in October
1998 and contributed revenue of $2.1 million, and non laboratory services
revenue increased $0.4 million. Insurance laboratory testing revenue
decreased $1.1 million as a result of reductions in volume and price and a
retroactive pricing credit. The total number of insurance applicants tested
in the second quarter 1999 decreased by 6% as compared to the same quarter
last year due to competitive pressures. Average revenue per applicant
decreased 1% primarily due to price reductions and a shift in product mix to
lower price products partially offset by increased ancillary test volumes.
Kit and container revenue declined due to a decrease in the number of kits
sold.
Cost of sales increased $3.2 million or 23% in the second quarter 1999 as
compared to the prior year, due to increases in payroll, information services
such as state motor vehicle report fees, and postage expense. A significant
portion of these increases are related to the addition of SBSI and the growth
of the SAT and clinical segments. These increases were partially offset by a
decrease in insurance kit expenses due to lower sales volumes. Clinical cost
of sales expenses were $4.1 million as compared to $3.6 million in the second
quarter 1998. SAT cost of sales expenses were $3.2 million as compared to
Page 9
$2.3 million in the second quarter 1998. Insurance cost of sales expenses
increased from $7.9 million to $9.7 million primarily due to the addition of
SBSI.
As a result of the above factors, gross profit for the quarter decreased $0.4
million or 3% from $11.9 million in 1998 to $11.6 million in 1999. Clinical
gross profit increased $0.5 million on an increase in revenue of $1.0 million.
SAT gross profit was flat as compared to the second quarter last year.
Insurance gross profit, decreased $0.9 million for the quarter.
Selling, general and administrative expenses increased $0.7 million or 9% in
the second quarter 1999 as compared to the prior year due primarily to the
inclusion of SBSI, increases in bad debt and depreciation expenses and moving
expenses. Closure on the sale of the former administrative facility resulted
in a gain of $0.6 million, partially offsetting the increases. Bad debt
expense increased primarily due to the revenue growth in clinical and SAT
segments which have inherently higher bad debt experience than the insurance
testing segment. Insurance expenditures increased to $5.0 million for the
quarter as compared to $4.2 million in 1998 primarily due to the addition of
SBSI. Total clinical costs increased $0.3 million to $3.0 million in 1999
primarily due to an increase in bad debt expense and an increase in corporate
overhead allocations to $0.9 million in 1999 from $0.8 million in 1998. SAT
expenditures were $1.3 million as compared to $1.1 million last year.
Earnings from operations decreased from $3.9 million in the second quarter
1998 to $2.8 million in 1999. The clinical segment improved $0.2 million to
an operating loss of $1.3 million. The SAT segment declined $0.2 million to a
loss of $0.2 million in the second quarter 1999. The insurance segment,
including SBSI, declined $1.6 million to an operating profit of $3.8 million.
The corporate segment retained an operating income of $0.5 million for the
quarter primarily related to the gain on the sale of the former administrative
facility. The gain resulted from the sales price of $2.5 million being
greater than originally anticipated.
Non operating expense increased $0.4 million primarily due to interest
expense on the industrial revenue bonds and a reduction in capital available
for investment. The effective income tax rate declined from 41% in the second
quarter 1998 to 38% in 1999.
The combined effect of the above factors resulted in net earnings of $1.6
million or $0.12 per share in the second quarter 1999 as compared to $2.4
million or $0.18 per share in the same period last year.
YEAR-TO-DATE ANALYSIS
Revenue in the six month period ended June 30, 1999 was $55.9 million as
compared to $49.1 million in the same period last year. The increase of $6.8
million is due to increases in clinical revenue of $3.3 million, SAT revenue
of $1.8 million and insurance revenue of $1.7 million
Clinical laboratory revenue increased 40% from $8.4 million during the first
six months of 1998 to $11.7 million for the same period in 1999 due to
increased testing volumes. SAT revenue increased from $6.3 million in 1998 to
$8.1 million in 1999 due to a 33% increase in testing volumes.
The total number of insurance applicants tested in the six month period
decreased by 5% as compared to last year, while average revenue per applicant
declined 2%. Kit and container revenue decreased $1.1 million due primarily
to a decrease in the number of kits sold.
Page 10
Cost of sales increased $5.9 million year to date as compared to the prior
year. This increase is due primarily to increases in payroll expenses,
insurance information services and inbound freight. A significant portion of
these increases are related to the addition of SBSI and the growth of the SAT
and clinical segments. These increases were partially offset by a decrease in
insurance kit expenses due to lower sales volumes. Clinical cost of sales
expenses were $8.0 million as compared to $7.0 million during the first six
months of 1998. SAT cost of sales expenses were $6.0 million as compared to
$4.4 million during 1998.
As a result of the above factors, gross profit for the first six months
increased from $22.3 million in 1998 to $23.2 million in 1999. Clinical gross
profit improved from $1.4 million in 1998 to $3.7 million in 1999. SAT gross
profit increased to $2.2 million in the first six months of 1999 from $1.9
million last year.
Selling, general and administrative expenses increased $2.7 million (18%) in
the six month period ended June 30, 1999 as compared to the prior year due to
the addition of SBSI and increases in depreciation expenses, bad debt accruals
and moving expenses. Clinical expenditures were $6.0 million as compared to
$4.9 million in 1998. SAT expenses increased from $2.1 million in 1998 to
$2.5 million in 1999. The overhead allocation to the clinical and SAT
segments for the period was $3.1 million as compared to an allocation of $2.4
million in 1998.
Operating income decreased from $6.9 million in the first six months of 1998
to $5.9 million in 1999. The insurance segment had operating income of $7.8
million as compared to $10.5 million in the first six month of last year. The
clinical segment had an operating loss of $2.3 million for the six month
period ended June 30, 1999 as compared to an operating loss of $3.4 million in
1998. The SAT segment had an operating loss of $0.3 million in 1999 as
compared to an operating loss of $0.1 million in 1998. The corporate segment
retained an operating income of $0.7 million for the first six months
primarily related to gains on sale of the former laboratory and administrative
facilities.
Interest expense on the industrial revenue bonds was $0.6 million in the first
six months of 1999. Investment income decreased $0.3 million primarily due to
less funds available for investment. The effective income tax rate declined
from 40% in 1998 to 37% in 1999.
The combined effect of the above factors resulted in net earnings of $3.5
million or $0.26 per share in the six month period ended June 30, 1999 as
compared to $4.4 million or $0.33 per share in the same period last year.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------------------------------
LabOne's working capital position decreased by $6.1 million to $19.8 million
at June 30, 1999 from $25.9 million at December 31, 1998. This decrease is
primarily due to dividends paid and capital additions exceeding cash provided
by operations. Cash flow from operations decreased by $0.8 million year to
date primarily due to lower net income.
Additions to property, plant and equipment, net of the sale of the former
laboratory and administrative facilities, were $3.5 million in the first six
Page 11
months of 1999, primarily related to construction and fixtures for the new
facility. Net additions in the first six months of 1998 were $6.3 million.
Capital additions are expected to be approximately $5.0 million annually.
In May 1999, LabOne's Board of Directors declared a dividend of $0.18 per
common share. This dividend was paid on June 2, 1999, to stockholders of
record as of May 25, 1999, and totaled approximately $2.4 million. The board
reviews the dividend payment policy on a periodic basis. There are currently
no restrictions that would limit the Company's ability to make future dividend
payments.
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 eleven 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 July 2, 1999 (File No. 333-
76131), 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
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. Existing 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 agreements.
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 $22.4
million to $25.1 million. This transaction goodwill reflects the expected
difference between the cost of LabOne shares that Lab Holdings will be treated
Page 12
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 $6.0 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.
The total number of shares of LabOne stock held in treasury at June 30, 1999
was approximately 1.7 million at a total cost of $20.2 million or $12.02 per
share. The Company had no short-term borrowings in the second quarter 1999.
The Company expects to fund operations and future dividend payments from a
combination of cash flows from operations, cash reserves and short term
borrowings. Proceeds from the industrial revenue bond have been used to
finance the construction of the Company's new facility project. Interest on
the bond is based on a taxable seven day variable rate and is currently
approximately 6.0%. The Company expects to repay the bond over 11 years at
$1.85 million per year plus interest. The first principle payment of $1.85
million is due September 1, 1999. At June 30, 1999, LabOne had total cash and
investments of $5.3 million as compared to $10.2 million at December 31, 1998.
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 in the past ten years and were brought into compliance
with Year 2000 date standards at that time. As part of construction of the
new facility, certified compliant security systems, time clocks and heating
and cooling systems (non-IT systems) were installed. As of 4/1/99 all mission
critical systems meet LabOne's compliance criteria. The Company is currently
engaged in a comprehensive system validation, running production systems in a
year 2000 simulation. This effort will continue through the balance of 1999
as updates are made to our systems.
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 the
United States Postal Service, airlines and other common carriers or express
delivery services in the event of delivery problems with Airborne Express.
The Company currently maintains approximately 8 weeks supply of most
laboratory supplies, and does not expect significant problems in obtaining
supplies. The Company continues to review the Year 2000 plans of these
Page 13
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
$0.2 million and are not considered a material expense to the Company. These
efforts have not caused delay to the Company's other ongoing information
systems projects. LabOne has not hired any outside consultants or other
independent validation provider at this time, and does not expect to do so.
There can be no assurance that the Company's adjustments to its computer
systems will completely eliminate all Year 2000 problems. Failure to properly
address the Year 2000 problem could have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A foreign currency risk exposure exists due to billing Canadian subsidiary
revenue in Canadian dollars and the direct laboratory expenses associated with
this revenue being incurred in US dollars. This exposure is not considered to
be material. Any future material Canadian currency fluctuations against the
US$ 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 day variable rate, which including letter of credit
and remarketing fees, is approximately 6.0% as of July 30, 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.
PART II. OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule - as filed electronically by the Registrant in
conjunction with this second quarter 1999 Form 10-Q.
(b) Reports on Form 8-K
None
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LabOne, Inc.
Date: July 30, 1999 By /s/ Kurt E. Gruenbacher
------------------------
Kurt E. Gruenbacher,
V.P. Finance, CAO
and Treasurer
Date: July 30, 1999 By /s/ Robert D. Thompson
------------------------
Robert D. Thompson,
Executive V.P., Chief
Operating Officer and
Chief Financial Officer
Page 15
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