UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16946
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LAB HOLDINGS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Missouri 43-1039532
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(State or other jurisdiction (IRS Employer Incorporation
of organization) or Identification Number)
P. O. Box 7568
5000 W. 95th Street, Suite 260
Shawnee Mission, Kansas 66207
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (913) 648-3600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1 per share and
common stock rights coupled therewith.
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required 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
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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. X
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Approximate aggregate market value of voting stock held by non-
affiliates of Registrant: $152,182,710 (based on closing price as of
March 20, 1998)
Number of shares outstanding of only class of Registrant's common
stock as of March 20, 1998: $1 par value common - 6,489,103
Documents incorporated by reference:
Portions of Registrant's Proxy Statement for use in connection with
the 1998 Annual Meeting of Shareholders is incorporated by reference
into Part III of this report, to the extent set forth therein, if such
Proxy Statement is filed with the Securities and Exchange Commission
on or before April 30, 1998. If such Proxy Statement is not filed by
such date, the information required to be presented in Part III will
be filed as an amendment to this report. The exhibits for this Form
10-K are listed in Item 14.
PART I.
ITEM 1. BUSINESS.
Lab Holdings, Inc. was organized in Missouri as BMA Properties, Inc.
in 1974 as a 100% owned subsidiary of Business Men's Assurance Company
of America (which was incorporated in 1909). In 1988, BMA Properties,
Inc. was renamed BMA Corporation, and on June 1, 1988, became the
parent company. BMA Corporation changed its name to Seafield Capital
Corporation (Seafield) in 1991. During 1997, Seafield changed its
name to Lab Holdings, Inc. (Lab Holdings or Registrant). Registrant
is a holding company whose primary subsidiary operates in the
insurance and healthcare services areas.
In the past, various operating subsidiaries of Registrant have
provided risk-appraisal laboratory testing services to the insurance
industry, clinical testing services to the healthcare industry, and
comprehensive cancer treatment management. In addition, Lab Holdings
had investments in early-stage healthcare technology companies and
either directly or through subsidiaries, also held interests in energy
investments, marketable securities and real estate.
On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary,
SLH Corporation (SLH). In connection with this distribution and
pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab
Holdings transferred its real estate and energy businesses and
miscellaneous assets and liabilities to SLH. The SLH spin-off was
effected as a taxable dividend by Lab Holdings. As a result of the
SLH distribution, Lab Holdings' principal assets consisted of its
stock holdings in LabOne, Inc. (LabOne) and Response Oncology, Inc.
(Response). See Item 7 and Notes to Consolidated Financial Statements
for additional information.
Lab Holdings had a majority ownership position in Response. Response,
previously 67%-owned by Lab Holdings, is a publicly-traded company
(NASDAQ-ROIX). On February 26, 1997, Lab Holdings converted a $23.5
million Response note receivable and accrued interest into 3,020,536
shares of Response common stock. The conversion increased Lab
Holdings' ownership of Response shares outstanding from 56% at
December 31, 1996 to approximately 67%.
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a discontinued healthcare business in Lab
Holdings' financial statements. The second quarter was the last
period in which Response significantly impacted Lab Holdings'
operating results. The distribution of Response stock was effected as
a taxable dividend by Lab Holdings. See Item 7 and Notes to
Consolidated Financial Statements for additional information.
During 1997, Lab Holdings significantly reduced its corporate
structure and overhead costs as the SLH and Response distributions
were finalized. SLH provides administrative and accounting functions
to Lab Holdings under a services agreement for an annual fee of
$75,000.
Effective June 1, 1997, Lab Holdings terminated its services agreement
with LabOne. This agreement related to services and other matters
among the parties and had been in effect since January 1, 1993.
Lab Holdings did not have any employees as of December 31, 1997.
* * *
The following list shows the Registrant and each subsidiary
corporation of which Registrant owned a majority interest at December
31, 1997, together with the ownership percentage and state or country
of incorporation. See Item 7 and Notes to Consolidated Financial
Statements for additional information.
Lab Holdings, Inc. (Missouri)
LabOne, Inc. (Delaware) 82%
Lab One Canada Inc. (Canada) 100%
Pyramid Diagnostic Services, Inc. (Delaware)
(inactive) 74%
* * *
INSURANCE SERVICES
The following businesses are considered to be in the insurance
services segment: LabOne's insurance testing segment, Agency Premium
Resource, Inc. (APR), and International Underwriting Services, Inc.
(IUS). APR and IUS were sold during 1995.
LABONE, INC.
The Registrant's laboratory testing activities are conducted through
LabOne, Inc. (LabOne), a subsidiary which was 82% owned by the
Registrant and 18% publicly held at December 31, 1997. LabOne is a
publicly-traded stock (NASDAQ-LABS). LabOne, together with its
wholly-owned subsidiary, Lab One Canada Inc., hereinafter collectively
referred to as LabOne, is the largest provider of laboratory services
to the insurance industry in the United States and Canada (See Notes
to Consolidated Financial Statements for financial information
regarding foreign operations). LabOne provides high-quality
laboratory services to self-insured groups, insurance companies,
employers and physicians nationwide.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed by LabOne 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. LabOne also provides testing services on specimens of
individuals applying for individual and group medical and disability
policies.
LabOne's clinical testing services are provided to the healthcare
industry to aid in the diagnosis and treatment of patients.
Additionally, 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. See the Healthcare Segment for additional
information regarding LabOne's clinical and substance abuse testing
services.
LabOne's Insurance Applicant Testing
In order to establish the appropriate level of premium payments or to
determine whether to issue a policy, an insurance company requires
objective means of evaluating the insurance risk posed by policy
applicants. Because decisions of this type are based on statistical
probabilities of mortality and morbidity, an insurance company
generally requires 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 an insurance company with an efficient means of evaluating
the mortality and morbidity risks posed by policy applicants. The use
of standardized blood, urine and oral fluid testing has proven a cost-
effective alternative to individualized physician examinations, which
utilize varying testing procedures and reports.
LabOne's insurance testing services consist of certain specimen
profiles that provide insurance companies with specific information
that may indicate liver or kidney disorders, diabetes, the risk of
cardiovascular disease, bacterial or viral infections and other health
risks. LabOne also offers tests to detect the presence of antibodies
to human immunodeficiency virus (HIV). Standardized laboratory
testing can also be used to verify responses on a policy application
to such questions as whether the applicant is a user of tobacco
products, certain controlled substances or certain prescription drugs.
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. Cocaine use has been associated with increased
risk of accidental death and cardiovascular disorders, and as a result
of the increasing 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.
LabOne offers LabOne NET, a combination network/software product that
provides a connection for insurance underwriters for ordering,
delivery and management of risk assessment information such as
laboratory results, motor vehicle reports and other applicant
information. Additionally, LabOne will handle paramedical examination
paperwork and assist with administration of data for group insurance
underwriting.
The following table summarizes LabOne's revenues from services
provided to the insurance and healthcare (clinical and substance abuse
testing) markets:
Year ended December 31,
1997 1996 1995
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(Dollars in thousands)
Insurance $ 61,998 79% $ 50,801 85% $ 52,544 92%
Clinical 7,512 9% 3,942 7% 2,297 4%
Substance abuse 9,416 12% 4,689 8% 2,188 4%
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Total $ 78,926 $ 59,432 $ 57,029
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LabOne - Operations
LabOne's operations are designed to facilitate the testing of a large
number of specimens and to report the results to its clients,
generally within 24 hours of receipt of specimens. LabOne has
internally developed, custom-designed laboratory and business
processing systems.
It is a centralized network system that provides an automated link
between LabOne's testing equipment, data processing equipment and the
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
database of test results. These summary statistics are useful to the
actuarial and underwriting departments of an insurance client in
comparing that client's test results to the results obtained by
LabOne's entire client base. Company-specific and industry-wide
reports are frequently distributed to clients on subjects such as
coronary risk analysis, cholesterol and drugs of abuse. Additionally,
LabOne's statistical engineering department is capable of creating
customized reports to aid managed care entities or employers in
disease management and utilization tracking to help manage healthcare
costs.
LabOne considers the confidentiality of its test results to be of
primary importance and has established procedures to ensure that
results of tests remain confidential as they are communicated to the
client that requested the tests.
Substantially all of the reagents and materials used by LabOne in
conducting its testing are commercially purchased and are readily
available from multiple sources.
LabOne - Regulatory Affairs/Quality Improvement
The objective of the Regulatory Affairs/Quality Improvement 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(trademark) controls are used
to challenge every aspect of service at LabOne from specimen arrival
through final billing. Approximately 2,000 samples are prepared and
submitted anonymously each month. These samples are especially
designed to challenge 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.
The Office of Inspector General (OIG) of the Department of Health and
Human Services has developed a sample Model Compliance Plan.
Laboratories are being advised to create a similar program to ensure
compliance with anti-fraud and abuse laws and rules governing
federally-financed reimbursement for lab testing services. Even
though only a small portion of LabOne's business encompasses fee-for-
service Medicare/Medicaid, a Chief Compliance Officer and nine Co-
Compliance Officers have been appointed. LabOne is in the process of
developing the LabOne Compliance Plan.
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.
LabOne - Sales and Marketing
LabOne's client base currently consists primarily of insurance
companies in the United States and Canada. LabOne believes that its
ability to provide prompt and accurate results on a cost-effective
basis and its responsiveness to customer needs have been important
factors in servicing existing business.
All of the sales representatives for the insurance market have
significant business experience in the insurance industry or clinical
laboratory-related fields. These representatives call on major
clients several times each year, usually meeting with a medical
director or vice president of underwriting. An important part of
LabOne's marketing effort is directed toward providing its existing
clients and prospects with information pertaining to the actuarial
benefits of, and trends in, laboratory testing. LabOne's sales
representatives and its senior management also attend and sponsor
insurance industry underwriters' and medical directors' meetings.
LabOne - Competition
LabOne believes that the insurance laboratory testing market is
approximately a $100 million to $120 million industry. LabOne
currently services over 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 competitors, Osborn Laboratories, Inc. and Clinical
Reference Laboratory. Effective January 30, 1997, LabOne acquired
certain assets, including customer lists, of GIB Laboratories, Inc., a
subsidiary of Prudential Insurance Company of America. Concurrently,
Prudential's Individual Insurance Group agreed to use LabOne as its
exclusive provider of risk assessment testing services. At the time
of the purchase, GIB served approximately 5% of the insurance
laboratory testing market.
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 1998.
LabOne - Foreign Markets
Lab One Canada Inc. markets insurance testing services to Canadian
clients, with laboratory testing performed in the United States. The
following table summarizes the revenue, profit and assets applicable
to LabOne's domestic operations and its subsidiary, Lab One Canada,
Inc.
Year ended December 31,
1997 * 1996 1995
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(In millions)
Sales:
United States $72.4 $53.1 $50.8
Canada 6.6 6.4 6.2
Operating Profit:
United States 2.0 2.4 1.9
Canada 0.6 0.7 0.3
Identifiable Assets:
United States 56.8 62.1 64.4
Canada 3.2 2.7 5.7
* 1997 United States operating profit includes a one-time write-off of
$6.6 million.
(See Notes to Consolidated Financial Statements)
LabOne - Technology Development
The technology development department evaluates new commercially
available tests and technologies or develops new assays and compares
them to competing products in order to select the most accurate
laboratory procedures. Additionally, LabOne's scientists present
findings to LabOne's clients to aid them in choosing the best tests
available to meet their requirements. Total technology development
expenditures are not considered significant to LabOne as a whole.
LabOne - Employees
As of March 2, 1998, LabOne had 665 full-time employees, representing
an increase of 99 employees from the same time in 1997. None of
LabOne's employees are represented by a labor union. LabOne believes
its relations with employees are good.
AGENCY PREMIUM RESOURCE, INC.
Agency Premium Resource, Inc. (APR) was an insurance premium finance
company serving independent insurance agents. APR provided premium
financing for the commercial customers of these independent insurance
agents. On May 31, 1995, Lab Holdings sold APR. See Item 7 and Notes
to Consolidated Financial Statements for additional information.
INTERNATIONAL UNDERWRITING SERVICES, INC.
International Underwriting Services, Inc. (IUS) offered turnkey
policyholder and underwriting services. This subsidiary operated only
within the life and health insurance industry and provided some or all
of the following services to its customers: product design,
underwriting of applicants, policy issuance, policy service, premium
collection and payment of commissions. On July 17, 1995, Lab Holdings
sold IUS. See Item 7 and Notes to Consolidated Financial Statements
for additional information.
HEALTHCARE SERVICES
The following businesses are considered to be in the healthcare
services segment: LabOne's clinical and substance abuse testing
segments and Pyramid Diagnostic Services, Inc.
LABONE, INC.
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
LabOne believes has significant economic advantages over other
conventional laboratory competitors. LabOne markets its clinical
testing services to the payers of healthcare-insurance companies and
self-insured groups. LabOne does this through exclusive arrangements
with managed care organizations and through Lab Card(registered
trademark), a Laboratory Benefits Management (LBM) 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.
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. LabOne's rapid turnaround times and multiple testing
options help clients reduce downtime for affected employees and meet
mandated drug screening guidelines.
LabOne's Clinical Patient Testing
LabOne began offering laboratory testing services to the healthcare
industry in 1994. 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,
urinalysis, blood cell counts, PAP smears and AIDS-related tests.
Clinical specimens are collected at the physician's office or other
specified sites. LabOne's couriers pick up the specimens and deliver
them to local airports for express transport to the Kansas laboratory.
Specimens are coded for identification and processed. LabOne's
testing menu includes the majority of tests requested by its clients.
Tests not performed in-house are sent to reference laboratories for
testing, and results are transmitted into LabOne's computer system
along with all other completed results.
LabOne has established the Lab Card Program, as well as alliances with
major healthcare providers, as vehicles for delivering out-patient
laboratory services. The Lab Card Program is marketed to healthcare
payers (self-insured groups and insurance companies), allowing them to
avoid price mark-ups and cost shifting. With the Program, companies
save substantially on their outpatient laboratory testing, and
patients pay no out-of-pocket fees when they use their Lab Card.
The clinical laboratory testing market is a $40 billion industry which
is highly fragmented and very competitive. LabOne faces competition
from numerous independent clinical laboratories and hospital- or
physician-owned laboratories. Many of LabOne's competitors are
significantly larger and have substantially greater financial
resources than LabOne. LabOne is working to establish a solid client
base in this environment through the use of Lab Card and the
establishment of exclusive arrangements with large groups and managed
care entities to provide laboratory services.
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. LabOne feels that its superior
quality and centralized, low-cost operating structure enable it to
compete effectively in this market.
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.
LabOne's Substance Abuse Testing Services
LabOne markets substance abuse testing to Fortune 1000 companies,
third party administrators and occupational health providers.
Certification by SAMHSA enables LabOne to offer substance abuse
testing services to federally regulated industries. There are
presently 71 laboratories that are SAMHSA certified.
Specimens for substance abuse testing are typically collected by
independent agencies who use LabOne's forms and collection supplies.
Specimens are sealed with bar-coded, tamper-evident seals and shipped
overnight to LabOne. Automated systems monitor the specimens
throughout the screening and confirmation process. Negative results
are available immediately after testing is completed. Initial
positive specimens are verified by the gas chromatography/mass
spectrometry method, and results are generally available within 24
hours. Results can be transmitted electronically to the client's
secured computer, printer or fax machine, or the client can use
LabOne's LabLink Dial-In software to retrieve, store, search and print
its drug testing results.
Substance abuse marketing efforts are primarily directed at Fortune
1000 companies, occupational health clinics and third party
administrators. LabOne's strategy is to offer quality service at
competitive prices. The sales force focuses on the ability of LabOne
to offer multiple reporting methods, next flight out options,
dedicated client service representatives and rapid reporting of
results.
LabOne competes in the substance abuse testing market nationwide.
LabOne'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.
PYRAMID DIAGNOSTIC SERVICES, INC.
The Registrant acquired a 52% ownership position in Pyramid Diagnostic
Services, Inc. (Pyramid) in 1992. The original $4 million purchase
price included newly-issued shares, thereby providing expansion
financing to Pyramid. Pyramid ultimately expanded to nine pharmacies
which distributed radiopharmaceuticals and related services to nuclear
medicine departments, clinics and hospitals. During 1993, Registrant
acquired an additional 18% ownership position for $332,000. In 1994,
Registrant's ownership increased by 5% (ownership totaled 74%) with a
$l million investment.
Pyramid entered bankruptcy proceedings in early October 1995 as a
result of an adverse $6 million judgment entered in a lawsuit against
Pyramid. Pyramid's bankruptcy proceedings have not been finalized.
The impact on Registrant's results of operations was the September
1995 write-off of Registrant's investment in Pyramid by recording a
pre-tax expense of approximately $3.3 million and a corresponding tax
benefit of $2.1 million resulting in an after-tax $1.2 million charge
to earnings. See Item 7 and Notes to Consolidated Financial
Statements for additional information.
OTHER BUSINESSES
BMA RESOURCES, INC.
BMA Resources, Inc. (Resources) was a component of the SLH
distribution on March 3, 1997. See Item 7 and Notes to Consolidated
Financial Statements for additional information. Resources held the
Registrant's energy investments at December 31, 1996. No new energy
investments were being made, and it had been the Registrant's intent
to maximize cash flow from Resources to be deployed in healthcare and
insurance services. The investments included oil and gas working
interests (all of which had been sold by June 1996), oil and gas
partnerships and a stock investment in an unconsolidated affiliate.
The oil and gas primarily consisted of partnership interests in Texas
gulf coast oil and gas wells and leasehold interests.
Resources has an approximate 31% equity interest in Syntroleum
Corporation (Syntroleum(registered trademark)). Syntroleum is the
developer and owner of a proprietary process (Syntroleum Process)
designed for use in the conversion of natural gas into synthetic
liquid hydrocarbons (gas to liquids or GTL).
TENENBAUM & ASSOCIATES, INC.
Tenenbaum & Associates, Inc. (TAI) was a component of the SLH
distribution on March 3, 1997. See Item 7 and Notes to Consolidated
Financial Statements for additional information. TAI was a full
service real estate, personal property and sales and use tax
consulting firm providing tax consulting services on a contingency
basis. TAI's core business was commercial real estate.
On May 31, 1995, TAI sold certain assets to Ernst & Young U.S. LP.
TAI retained its accounts receivable as of May 31, 1995. The
agreement provides for Ernst & Young to continue the work-in-process
on current accounts (where formal or informal tax valuation protests
have been filed but not yet resolved). Ernst & Young will earn a fee
for collecting the current accounts and will participate in net cash
collected on certain accounts after third party costs and Ernst &
Young's fees. During June 1995, TAI distributed its remaining assets
to shareholders and filed for dissolution.
REAL ESTATE
Scout Development Corporation (Scout) was a component of the SLH
distribution on March 3, 1997. See Item 7 and Notes to Consolidated
Financial Statements for additional information. Scout held the
Registrant's real estate investments at December 31, 1996 which
consisted of: approximately 1,160 acres of partially developed and
undeveloped land in six locations, three residential development
projects, a multi-story parking garage and a community shopping
center. Real estate assets were located in the following states:
Florida, Kansas, Nevada, New Mexico, Texas, and Wyoming, all of which
were listed for sale.
In 1992, the Registrant's board of directors approved a plan to
discontinue real estate operations. As a result of this decision, a
$6 million after-tax loss provision for estimated write-downs and
costs through final disposition was included in the discontinued real
estate's 1992 loss. Additional after-tax losses of $2.9 million, $6.6
million, and $1.5 million were recorded in 1994, 1995, and 1996,
respectively. These losses resulted from changes in estimated net
realizable value based upon management's analysis of recent sales
transactions and other current market conditions. See Item 7 and
Notes to Consolidated Financial Statements for additional information
concerning discontinued real estate operations.
The location and use of each majority owned property was as follows at
December 31, 1996: Houston, TX - 370 acres and 37 lots; Ft. Worth, TX
- - 761 acres; Olathe, KS - 16 acres; Juno Beach, FL - 6 units; and
Santa Fe, NM - 25 units. In addition, the Registrant had a 49.9%
investment in a joint venture that owns a shopping center and 14 acres
of undeveloped land in Gillette, Wyoming.
Only two properties, one of which was 100% owned and the 49.9% joint
venture referenced above, were categorized as commercial properties.
Registrant's net asset value of these two projects at December 31,
1996 was $2.8 million.
The 100% owned commercial property consisted of an 850-space parking
garage located in downtown Reno, Nevada. The building contains a
total of 144,500 square feet of leasable parking space. Parking
revenue totaled approximately $595,000 or $700 per space or $4.12 per
square foot in 1996. In addition, 8,258 square feet located on the
ground floor of the garage is leased to a retail tenant under a 15-
year lease. Revenue from the retail lease during 1996 was $133,800 or
$16.20 per square foot. In addition to basic rent, the retail tenant
is responsible for its prorata share of real estate taxes and
insurance. During 1996, $5,400 was collected from the retail tenant
for taxes and insurance.
The joint venture commercial property consisted of a retail shopping
center containing approximately 163,000 square feet of net leaseable
area. At the end of 1996, the center was 88% occupied. Rental
revenue totaled $733,000 for 1996. The average annual gross rental
per occupied square foot was $5.62. In addition to rental revenue,
tenants are responsible for their share of common area maintenance
(CAM). During 1996, CAM collections from tenants totaled $83,000.
Information regarding real estate debt is summarized in Note 15 of the
Notes to Consolidated Financial Statements. The detailed information
is as follows:
Balance at
Property Description Rate Maturity 12-31-96
- ---------------------------------------------------------------------
(In thousands)
Gillette, WY
shopping center IRB 2.9%-4.55% 2016 $ 6,170
Olathe, KS
vacant land Mortgage 8.625% 1997 1,194
------
Total $ 7,364
======
In management's opinion, the real estate properties were adequately
covered by insurance with coverages for real and personal property,
commercial general liability, commercial crime, garagekeepers legal
liability, earthquake, flood, windstorm and hail.
On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary,
SLH. In connection with this distribution and pursuant to a
Distribution Agreement between Lab Holdings and SLH, Lab Holdings
transferred its real estate and energy businesses and miscellaneous
assets and liabilities, including two wholly-owned subsidiaries, Scout
and Resources, to SLH. Additionally, SLH assumed liabilities relating
to the transfer assets as well as certain contingent Lab Holdings
liabilities, including Lab Holdings' liability for disputed income
taxes which the Internal Revenue Service claims to be owed by Lab
Holdings for its 1986-1990 tax years and which the State of California
claims to be owed for the 1987-1989 years. See Item 3 and Notes to
Consolidated Financial Statements for additional information.
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a discontinued healthcare business in Lab
Holdings' financial statements. The second quarter was the last
period in which Response significantly impacted Lab Holdings'
operating results. The second quarter discontinued healthcare
operations reflected a non-cash tax expense partially offset by Lab
Holdings' share of Response's earnings. The distribution of Response
stock was effected as a taxable dividend by Lab Holdings in which Lab
Holdings utilized tax loss carryforwards to offset the resulting $3.8
million tax liability in the financial statements. See Notes to
Consolidated Financial Statements for additional information.
As a result of the distributions, Lab Holdings' principal asset
consists of its stock holding in LabOne. See Notes to Consolidated
Financial Statements for additional information.
ITEM 2. PROPERTIES.
Properties of Registrant
On March 3, 1997, Registrant distributed to its shareholders the stock
of SLH. In connection with this distribution, Registrant transferred
the office lease and the real estate subsidiary and other assets and
liabilities to SLH, subject to SLH agreeing to make necessary office
space available to the Registrant to the extent necessary to permit
the Registrant to conduct its operations. See Items 1 and 7 and Notes
to Consolidated Financial Statements for additional information
regarding the SLH distribution.
Registrant had a long-term lease for 13,674 square feet of office
space at 2600 Grand Boulevard in the Crown Center complex in Kansas
City, Missouri. This lease, which began April 1, 1992, is for a ten
year term with a right to cancel after seven years. Registrant's
previously owned real estate subsidiary held diversified types of
properties for sale or investment purposes in various geographical
locations. In certain cases, projects were developed on a joint
venture basis with one or more joint venture partners. Title to
property in such cases was held jointly with such partners or in the
name of the venture. Rights and obligations with respect to such
properties were governed by the terms of the joint venture agreement.
Registrant's former real estate operations are described in greater
detail in Items 1 and 7 and Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
Under the Distribution Agreement and Assignment, SLH assumed the
rights and obligations of Lab Holdings with respect to the following
legal matter.
In 1986, a lawsuit was initiated in the Circuit Court of Jackson
County, Missouri by Lab Holdings' former insurance subsidiary (i.e.,
Business Men's Assurance Company of America) against Skidmore, Owings
& Merrill ("SOM") which is an architectural and engineering firm, and
a construction firm to recover costs incurred to remove and replace
the facade on the former home office building. Because the removal
and replacement costs had been incurred prior to the sale of the
insurance subsidiary, Lab Holdings negotiated with the buyer for an
assignment of the cause of action from the insurance subsidiary. In
September 1993, the Missouri Court of Appeals reversed a $5.7 million
judgment granted in 1992 in favor of Lab Holdings; the Court of
Appeals remanded the case to the trial court for a jury trial limited
to the question of whether or not the applicable statute of
limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. In July 1996,
this case was retried to a judge. On January 21, 1997, the judge
entered a judgment in favor of Lab Holdings. The amount of that
judgment, together with interest is approximately $5.6 million.
Although the judgment has been appealed, counsel for the Company
expects that it will be difficult for the defendants to cause the
judgment to be reversed. The final outcome is not expected for at
least another year. Settlement arrangements with other defendants
have resulted in payments to plaintiff which have substantially offset
legal fees and costs to date of approximately $502,000. Future legal
fees and costs can not reliably be estimated. Pursuant to the
Distribution Agreement, this matter was assigned to SLH Corporation.
In the opinion of management, after consultation with legal counsel
and based upon current available information, this lawsuit is not
expected to have a material adverse impact on the consolidated
financial position or results of operations of Lab Holdings.
Pursuant to the Distribution Agreement, SLH assumed from Lab Holdings
all of the contingent tax liabilities described below and acquired all
rights to refunds, plus any interest related to these tax years. SLH
also assumed all contingent liabilities and refunds related to any
issues raised for the years 1986-1990 whose resolution may extend to
tax years beyond the 1990 tax year.
Lab Holdings received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-
1990 federal income taxes. These notices claimed total federal income
taxes due for the entire five year period in the approximate net
amount of $13,867,000, exclusive of interest thereon.
Lab Holdings filed protests regarding the 1986-1990 notices of
proposed adjustments. In 1997, Lab Holdings received a formal
agreement to the issues and the final tax computation from the IRS.
The agreement provides for a tax refund to SLH of approximately $5.5
million net of interest costs. The agreement was approved by
Congress' Joint Committee on Taxation in January 1998.
In December 1996, the California state auditor sent Lab Holdings an
audit report covering the 1987-1989 taxable years. The State of
California has determined to include, as a "unitary taxpayer," all
majority owned non-life insurance subsidiaries and joint ventures of
Lab Holdings. During 1997, the California Franchise Tax Board sent a
notice of taxes and interest due for the 1987-1989 years of
approximately $1.8 million, which was paid. Pursuant to the
Distribution Agreement, SLH Corporation assumed all potential tax
liabilities and interest thereon regarding the California audit for
the 1987-1989 tax years.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF REGISTRANT.
Following is a list of all executive officers of Registrant as of
March 1, 1998, together with certain related information. There are no
arrangements or understandings among any such persons and any other
persons pursuant to which any was selected as an officer. All such
persons serve at the discretion of the board of directors.
Served as Executive
Officer with
Name Age Position with Registrant Registrant Since
- ----------------------------------------------------------------------
S.K. Fitzwater 51 Vice President, Chief Financial 1990
and Accounting Officer and
Secretary
(see note 1 below)
P.A. Jacobs 56 President and Chief Executive 1980
Officer
(see note 2 below)
W.T. Grant II 47 Chairman, President and Chief 1980
Executive Officer of LabOne, Inc.
(see note 3 below)
Except as noted below, each executive officer of Registrant has held
the executive position noted with Registrant as his principal
occupation for the last five years.
1. Steven K. Fitzwater became Chief Financial Officer in
September 1997. He has been Vice President and Chief Accounting
Officer since August 1990. On April 1, 1993, he assumed the
additional duties of Secretary of the Registrant.
2. P. Anthony Jacobs became Chief Executive Officer in September
1997. He has been President and Chief Operating Officer since May
1993. Prior to May 1993, he had been Executive Vice President and
Chief Operating Officer since 1990.
3. LabOne, Inc. is 82% owned by the Registrant. Effective
February 13, 1998, Registrant's board of directors designated W. T.
Grant II as an Executive Officer of Registrant because LabOne was
determined to constitute a principal business unit of Registrant and
Mr. Grant became the Chairman, President and Chief Executive Officer
of LabOne in October 1995. Mr. Grant is not a corporate officer of
Lab Holdings. He was Chairman of the Board and Chief Executive
Officer of Lab Holdings from May 1993 to September 1997. He had been
President and Chief Executive Officer of Lab Holdings since 1986.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Registrant's common stock is traded in the national over-the-counter
market and is listed in the NASDAQ National Market System maintained
by the National Association of Securities Dealers. As of February 24,
1998, the outstanding shares were held by 1,806 stockholders of
record. High and low sales prices for each quarter of 1997 and 1996
are included in the table of quarterly financial data in Note 16 of
the Notes to Consolidated Financial Statements. Also set forth in the
table are quarterly dividends paid per share. Registrant's payment of
future dividends will be at the discretion of its board of directors
and can be expected to be dependent upon a number of factors,
including future earnings, financial condition, cash needs and general
business conditions. The dividend-paying capabilities of subsidiaries
may be restricted as to their transfer to the parent company.
ITEM 6. SELECTED FINANCIAL DATA
December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------
(In thousands except share and per share amounts)
REVENUES $ 78,926 61,878 75,246 86,027 92,171
===============================================
OPERATING EARNINGS (LOSS)
Earnings (loss) from
continuing
operations $ (7,855) (4,226) (1,826) (276) 5,412
Earnings (loss) from
discontinued
healthcare business (2,342) 682 1,078 (1,596) 206
Loss from discontinued
real estate
operations -- (1,452) (6,600) (2,904) --
-----------------------------------------------
Net earnings (loss)$ (10,197) (4,996) (7,348) (4,776) 5,618
===============================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings (loss) from
continuing
operations $ (1.21) (.65) (.28) (.03) .81
Earnings (loss) from
discontinued
healthcare business (.36) .10 .17 (.25) .03
Loss from discontinued
real estate
operations -- (.22) (1.03) (.46) --
-----------------------------------------------
Net earnings (loss)$ (1.57) (.77) (1.14) (.74) .84
===============================================
Cash dividends $ 1.20 1.20 1.20 1.20 1.20
Book value $ 8.74 26.84 28.96 31.50 33.52
Average shares
outstanding 6,488,643 6,433,989 6,714,079
during the year 6,477,878 6,374,837
Shares outstanding 6,489,103 6,461,061 6,733,245
end of year 6,483,934 6,378,261
Total assets $ 74,786 196,783 198,018 234,196 259,575
Long-term debt $ -- -- -- 8 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Introductory remarks about results of operations
The principal assets of Lab Holdings, Inc. (Lab Holdings or
Registrant) consist of a majority ownership of LabOne, Inc. (LabOne)
and approximately $5 million in cash and short term investments.
Lab Holdings had investments in real estate, energy businesses and
miscellaneous assets. On March 3, 1997, Lab Holdings distributed to
its shareholders all of the outstanding shares of common stock of its
wholly-owned subsidiary, SLH Corporation (SLH). In connection with
this distribution and pursuant to a Distribution Agreement between Lab
Holdings and SLH, Lab Holdings transferred its real estate and energy
businesses and miscellaneous assets and liabilities to SLH. The SLH
spin-off was accounted for as a dividend.
Lab Holdings had a majority ownership position in Response Oncology,
Inc. (Response). Response, previously 67%-owned by Lab Holdings, is a
publicly-traded company (NASDAQ-ROIX). On February 26, 1997, Lab
Holdings converted a $23.5 million Response note receivable and
accrued interest into 3,020,536 shares of Response common stock. The
conversion increased Lab Holdings' ownership of Response shares
outstanding from 56% at December 31, 1996 to approximately 67%.
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a discontinued healthcare business in Lab
Holdings' financial statements. The second quarter was the last
period in which Response significantly impacted Lab Holdings'
operating results. The second quarter discontinued healthcare
operations reflected a non-cash tax expense partially offset by Lab
Holdings' share of Response's earnings. The distribution of Response
stock was effected as a taxable dividend by Lab Holdings in which Lab
Holdings utilized tax loss carryforwards to offset the resulting $3.8
million tax liability in the financial statements.
Prior to October 20, 1997, Lab Holdings was named Seafield Capital
Corporation (Seafield). Seafield changed its name to Lab Holdings for
better identification with its primary asset, the 82% ownership of
LabOne.
1997 Compared to 1996
Insurance Services Segment:
The following business is considered to be in the insurance services
segment: LabOne's risk-appraisal laboratory testing for the life
insurance industry.
LabOne, an 82% owned subsidiary of Lab Holdings, is a publicly-traded
company (NASDAQ-LABS). LabOne changed its name from Home Office
Reference Laboratory, Inc. in February 1994. LabOne's clinical
testing services are provided to the healthcare industry to aid in the
diagnosis and treatment of patients. LabOne provides substance abuse
testing services for federally regulated employers and is currently
marketing these services throughout the country to both regulated and
nonregulated employers. See Healthcare Services Segment discussion
below for clinical and substance abuse (SAT) laboratory testing
services.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed by LabOne 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. Testing services are also provided on specimens of
individuals applying for individual and group medical and disability
policies.
Effective January 30, 1997, LabOne acquired certain assets, including
customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America. Concurrently, Prudential's individual
insurance group agreed to use LabOne as its exclusive provider of risk
assessment testing services. At the time of the purchase, GIB served
approximately 5% of the insurance laboratory testing market.
LabOne's total 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.
LabOne's total cost of sales increased $9.3 million (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.
LabOne's total selling, general and administrative expenses increased
$4.1 million (17%) in 1997 as compared to 1996 due primarily to
increases in payroll expenses, travel and amortization expenses.
These increases are due to growth in each segment.
In 1997, LabOne recorded a one-time write-down of $6.6 million on the
value of the laboratory and administrative buildings in anticipation
of their sale. See notes to financial statements for additional
information.
LabOne's operating income decreased from $3.1 million in 1996 to $2.6
million in 1997, primarily due to the $6.6 million write down which
offset the increase in the insurance segment operating income of $5.9
million.
LabOne's other income decreased $700,000 in 1997 as compared to 1996,
due to lower investment income.
Healthcare Services Segment:
The following businesses are included in the healthcare services
segment: LabOne's clinical and substance abuse (SAT) testing
services.
LabOne's 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.
LabOne's total cost of sales increased $9.3 million (28%) for the year
as compared to the prior year primarily reflecting increases in
payroll, laboratory supplies and kit expenses due to the larger
specimen volume for all three business segments. Direct and allocated
clinical cost of sales expenses were $8.3 million as compared to $6.5
million during 1996. Direct and allocated SAT cost of sales expenses
were $7 million as compared to $3.7 million during 1996. These
increases are due to increased testing volumes.
Clinical overhead expenditures were $7.5 million as compared to $5.4
million in 1996. SAT overhead increased from $2.2 million in 1996 to
$3.3 million in 1997. These increases are due to the growth in each
segment.
LabOne's clinical testing segment had an operating loss of $8.3
million for 1997 as compared to a loss of $8 million in 1996, due to a
$600,000 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 $934,000 in 1997, including a $900,000 increase in corporate
overhead allocation over last year.
Other Segment:
Lab Holdings' oil and gas investments were distributed to SLH on March
3, 1997. In 1996, revenues of $2.4 million and expenses of $2.8
million were recorded.
During 1997, Lab Holdings significantly reduced its corporate
structure and overhead costs as the SLH and Response distributions
were finalized. The increase in general and administrative expenses
to $34.8 million in 1997 from $29.8 million in 1996 reflects both
LabOne's increased costs associated with increased testing volumes
discussed above and costs related to Lab Holdings' corporate structure
reductions including position eliminations and related severance. SLH
provides administrative and accounting functions to Lab Holdings under
a services agreement for an annual fee of $75,000.
Investment Income - Net:
Other investments contributing earnings include venture capital and
liquidity investments. The return on short-term investments is
included in the investment income line in the consolidated statements
of operations. Investment income decreased slightly to $4.7 million
in 1997 from $5 million in 1996 primarily reflecting LabOne's decrease
in investment income.
Miscellaneous Items:
Other Income/(Expense) increased to income of $77,000 in 1997 from
expense of $456,000 in 1996. The 1996 expense primarily reflects Lab
Holdings' equity share of Syntroleum's losses partially offset by
other miscellaneous gains.
Taxes:
Tax expense increased approximately $4 million in 1997 reflecting
write-off of approximately $5 million of the deferred income tax
assets related to assets spun-off in the SLH distribution and the
write-off of unused deferred income tax assets not utilized in the
Response distribution.
Consolidated Results:
The combined effect of the above factors resulted in a 1997 loss from
continuing operations of $7.9 million, as compared with a $4.2 million
loss in 1996.
1996 Compared to 1995
Insurance Services Segment:
The following business is considered to be in the insurance services
segment in 1996: LabOne's risk-appraisal laboratory testing for the
life and health insurance industries. Additionally, during 1995's
first six months, the underwriting and policy administration services
and insurance premium finance services businesses were also included
in the insurance services segment.
LabOne insurance segment revenue decreased in 1996 to $50.8 million
from $52.5 million in 1995, primarily due to a 6% reduction in revenue
per applicant, partially offset by an increase in insurance kit
revenue. The total number of applicants tested for the year was
relatively the same as in 1995.
LabOne total cost of sales increased $2.8 million (9%) for the year as
compared to the prior year. This increase is due primarily to
increases in inbound freight expense, kit expense and outside
laboratory services. These were partially offset by a decrease in
rent expense due to the closing of certain LabOne Service Center (LSC)
locations in 1995.
LabOne total selling, general and administrative expenses decreased
$1.3 million (5%) in 1996 as compared to the prior year due primarily
to decreases in depreciation, travel, insurance and legal expenses.
LabOne total operating income increased from $2.2 million in 1995 to
$3.1 million in 1996. The increase is primarily attributable to a
$200,000 increase in the insurance segment operating income and a
$700,000 decrease in the healthcare segment operating loss.
LabOne non-operating income decreased $800,000 primarily due to a
decrease in investment income.
Healthcare Services Segment:
The following businesses are included in 1996's healthcare services
segment: the clinical and substance abuse laboratory testing services
and a comprehensive cancer management company. During 1995's first
nine months, the radiopharmaceuticals and related nuclear medicine
services were also included in the healthcare services segment.
LabOne's healthcare (clinical and substance abuse testing) segment
revenues increased $4.1 million during 1996. Healthcare revenue
increased from $4.5 million in 1995 to $8.6 million in 1996 due to
continued expansion efforts.
LabOne's total cost of sales increased $2.8 million (9%) during 1996
as compared to the prior year. This increase is due primarily to
increases in inbound freight expense, kit expense and outside
laboratory services. These were partially offset by a decrease in
rent expense due to the closing of certain LabOne Service Center (LSC)
locations in 1995. Healthcare cost of sales expenditures for the year
were $10.2 million as compared to $8.6 million in 1995.
LabOne healthcare overhead expenditures increased from $5.8 million in
1995 to $7.6 million in 1996, primarily due to an increase in
allocated overhead and growth in healthcare segment payroll.
LabOne total operating income increased from $2.2 million in 1995 to
$3.1 million in 1996. The increase is primarily attributable to a
$200,000 increase in the insurance segment operating income and a
$700,000 decrease in the healthcare segment operating loss.
Another healthcare subsidiary, Pyramid Diagnostic Services, Inc.
(Pyramid), incurred a loss of $768,000 for the first nine months of
1995. Pyramid entered bankruptcy proceedings in early October 1995 as
a result of an adverse $6 million judgment entered in a lawsuit
against Pyramid. Pyramid's bankruptcy proceedings have not been
finalized. The impact on Lab Holdings' results of operations was the
September 1995 write-off of Lab Holdings' investment in Pyramid by
recording a pre-tax expense of approximately $3.3 million and a
corresponding tax benefit of $2.1 million resulting in an after-tax
$1.2 million charge to earnings. Included with the Pyramid write-off
was $2.3 million of goodwill. Lab Holdings consolidated Pyramid's
nine months 1995 revenues of $7.6 million while expenses consolidated
in 1995 were $7.7 million. See Notes to Consolidated Financial
Statements for additional information.
Other Segment:
Lab Holdings' oil and gas subsidiary contributed revenues of $2.4
million in 1996 as compared to $2 million in 1995. Variances in the
oil and gas prices nationally impact operating results.
The other segment's revenues and expenses in 1995 included the
operating results of a real estate, personal property, sales and use
taxes consulting subsidiary--Tenenbaum and Associates, Inc. (TAI). On
May 31, 1995, TAI sold certain assets to Ernst & Young U.S. LP. TAI
retained its accounts receivable as of May 31, 1995. The agreement
provides for Ernst & Young to continue the work-in-process on current
accounts (where formal or informal protests have been filed but not
yet resolved). Ernst & Young will earn a fee for collecting the
current accounts and will participate in net cash collected on certain
accounts after third party costs and Ernst & Young's fees. During
June 1995, TAI distributed its remaining assets to shareholders and
filed for dissolution.
Consolidated revenues in 1995 for TAI were $5.3 million while TAI
expenses consolidated in 1995 were $4.1 million.
Investment Income - Net:
Other investments contributing earnings include venture capital and
liquidity investments. The return on short-term investments is
included in the investment income line in the consolidated statements
of operations. Investment income totaled $5 million in 1996 and $4.1
million in 1995. Investment income was higher in 1996 reflecting both
realized and unrealized holding gains/losses recorded on trading
securities and improved venture capital operating results. See Notes
to Consolidated Financial Statements for additional investment
information.
Interest Expense:
Interest expense increased to $1 million in 1996 from $107,000 in
1995. During 1996, Lab Holdings incurred $1 million of interest
expense associated with a preliminary state tax audit.
Other Income/(Loss):
The major components of other income/(loss) in 1995 included $1.1
million of losses on subsidiary dispositions and a $3.4 million
provision for Pyramid's bankruptcy. The 1996 expense of $456,000
primarily reflects Lab Holdings' equity share of Syntroleum's losses
partially offset by other miscellaneous gains.
Taxes:
The consolidated effective tax rate in 1996 was impacted primarily by
the accrual of state income taxes, net of federal income tax benefit,
resulting from a California franchise tax audit for the 1987-1989
years. Other items affecting the tax rate were non-deductible
goodwill and a net increase in deferred income tax valuation
allowances.
Consolidated Results:
The combined effect of the above factors resulted in a 1996 net loss
from continuing operations of $4.2 million compared with a $1.8
million net loss from continuing operations in 1995.
Discontinued Operations:
Healthcare Business:
On February 26, 1997, Lab Holdings converted its Response note
receivable and accrued interest into Response common stock. The
conversion increased Lab Holdings' ownership of Response shares
outstanding from 56% at December 31, 1996 to approximately 67%.
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a discontinued healthcare business in Lab
Holdings' financial statements. The distribution of Response stock was
effected as a taxable dividend by Lab Holdings in which Lab Holdings
utilized tax loss carryforwards to offset the resulting $3.8 million
tax liability in the financial statements. The $2.3 million loss from
discontinued healthcare operations in 1997 reflects a $3.8 million
non-cash tax expense net of Lab Holdings' share of Response's
earnings. The second quarter of 1997 was the last period in which
Response significantly impacted Lab Holdings' financial results. For
the seven months ended July 31, 1997, Response's revenues were $50
million, costs and expenses were $46.3 million and net earnings were
$2.1 million. During 1996, Response's revenues were $67.3 million,
costs and expenses were $66.3 million and net earnings were $907,000.
During 1995, Response's revenues were $44.3 million, costs and
expenses were $42.3 million and net earnings were $2.3 million.
Real Estate:
The real estate assets were distributed pursuant to the SLH
Distribution Agreement. Real estate operations are presented as
discontinued operations in Lab Holdings' financial statements.
Net real estate assets distributed on March 3, 1997 were $23 million.
Real estate revenues were $3.6 million in 1997's first two months
prior to distribution, compared with $16.3 million in 1996 and $11.5
million in 1995. The real estate sales revenues in 1997 include the
sale of 2 residential units in Florida and New Mexico ($1.2 million);
547 acres of land in Texas ($2.3 million); and 7 residential lots in
Texas ($38,000). The real estate sales revenues in 1996 include the
sale of 40 residential units in New Mexico and Florida ($14.8
million), 20 acres of land in Oklahoma ($275,000). and 1.5 acres of
land in Kansas ($580,000). The real estate sales revenues in 1995
include the sale of 29 residential units or lots in Florida, Missouri,
New Mexico and Texas ($7.9 million) and 302 acres of land in Kansas
and Texas ($2.6 million).
Cost of the real estate sales in 1997 prior to distribution totaled
$3.5 million, compared with a cost of $15.3 million in 1996 and
approximately $10.9 million in 1995, reflecting the mix of real estate
sold during each period as discussed above in the revenue analysis.
Real estate operating expenses totaled $2.7 million in 1996, as
compared with $3.2 million in 1995. The decrease is attributable to a
reduction in expenses associated with the substantial completion of
the residential projects.
In 1992, Lab Holdings' board of directors approved a plan to
discontinue real estate operations. As a result of this decision, a
$6 million after-tax loss provision for estimated write-downs and
costs through final disposition was included in the discontinued real
estate's 1992 loss. Additional after-tax losses of $2.9 million, $6.6
million, and $1.5 million were recorded in 1994, 1995, and 1996,
respectively. These losses resulted from changes in estimated net
realizable value based upon management's analysis of recent sales
transactions and other current market conditions. See Item 1 and
Notes to Consolidated Financial Statements for additional information
concerning discontinued real estate operations.
At December 31, 1996, real estate holdings included residential land,
undeveloped land, single-family housing and commercial structures
located in the following states: Florida, Kansas, Nevada, New Mexico,
Texas and Wyoming, all of which are listed for sale. The total
acreage consisted of approximately 1,160 acres and approximately 68
lots or units for sale.
Listed below is the status of the discontinued real estate operations
as of December 31, 1996:
Land:
North Ft. Worth, TX 297 acres sold, 547 acres listed for sale
Ft. Worth, TX 214 acres listed for sale
Houston, TX 1 acre sold, 30 lots sold, 370 acres and 37
lots listed for sale
Olathe, KS 5.5 acres sold, 16 acres listed for sale
Tulsa, OK 12 acres sold
Land Lease:
Honolulu, HI sold
San Diego, CA sold
Nashville, TN sold
Commercial:
Reno, NV listed for sale
Denver, CO sold
Gillette, WY listed for sale
Residential:
Juno Beach, FL last 2 units listed for sale
Juno Beach, FL last unit and 3 marina slips listed for sale
Santa Fe, NM last 25 units listed for sale with 6 of the
25 units under contract
Mazatlan, Mexico final sales remittance received in 1995
The net real estate asset amounts were influenced from period to
period by several factors including seasonal sales cycles for projects
in Florida and New Mexico, a decision at the end of 1993 to accelerate
the build-out of the New Mexico project and construction on the final
three houses in Florida.
Publicly-Traded Subsidiaries
Lab Holdings has an investment in one majority-owned entity that is
publicly-traded, LabOne. At December 31, 1997, based on the market
price of publicly-traded shares of this subsidiary, pretax unrealized
gains of approximately $138 million on this investment was not
reflected in either Lab Holdings' book value or stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1997, at the holding company level, Lab Holdings had
available for operations approximately $5.3 million in cash and short-
term investments. Primarily as a result of the distribution of SLH in
March 1997 and corporate structure cost reductions, Lab Holdings'
working capital decreased $17.7 million during 1997 to $6.3 million at
December 31, 1997.
On a consolidated basis, Lab Holdings had $24.8 million in cash and
short-term investments at December 31, 1997. Current assets totaled
approximately $50.3 million while current liabilities totaled $8.6
million. Changes in most balance sheet line items resulted primarily
from the SLH and Response stock distributions.
Net cash provided by operations totaled $8.5 million in 1997 compared
with $35.6 million in 1996. During 1997, the loss from continuing
operations included non-cash items of $6.3 million for depreciation
and amortization and a $6.6 million provision by LabOne for loss on
anticipated disposal of assets. The 1997 funds provided additionally
reflect a decrease in trading portfolios of $2.6 million, a $3 million
increase in account receivable and a net change in income taxes and
other of $3.5 million. During 1996, the loss from continuing
operations included a non-cash item of $8.8 million for deprecation
and amortization. The 1996 funds provided additionally reflect a
decrease in trading portfolios of $19.3 million, a $1.5 million
decrease in account receivable and a net change in income taxes and
other of $9.6 million.
Net cash used by investing activities totaled $12.3 million in 1997
primarily representing LabOne's net additions to property, plant and
equipment and intangibles on its purchase of the assets and customer
list of GIB Laboratories, Inc. and purchases supporting expanded
laboratory capacity. Net cash used by investing activities in 1996
totaled $19.1 million reflecting Response's usage of $32.1 million for
its acquisition of physician practices, $9.1 million provided by the
discontinued real estate operations and a net decrease in long-term
investments of $7.6 million.
Net cash used by financing activities totaled $27.4 million in 1997
primarily due to the $19.6 million cash portion of the SLH dividend to
Lab Holdings shareholders and regular cash dividends of $7.8 million.
The 1996 net cash used by financing activities was $8.1 million
primarily reflecting Lab Holdings regular cash dividends to its
shareholders.
Lab Holdings is currently a holding company. Sources of cash are
investment income and sales and subsidiary dividends. There are
currently no restrictions that would limit LabOne's ability to make
future dividend payments. The primary uses of cash for Lab Holdings
are investments, operating expenses and dividends to shareholders.
Prior to the Distribution, Lab Holdings had received notices of
proposed adjustments (the Revenue Agent's Reports) from the Internal
Revenue Service (IRS) with respect to its 1986-1990 federal income
taxes. These notices claimed total federal income taxes due for the
entire five year period in the approximate net amount of $13,867,000,
plus interest. However, Lab Holdings also had claims against the IRS
for refunds relating to a $27 million loss claimed for 1990 on a sale
of a real estate partnership interest which the IRS claimed had not
occurred in 1990. In connection with the Distribution, SLH assumed
from Lab Holdings all its contingent tax liabilities to the IRS and
acquired all of its related rights to refunds as well as any interest
thereon related to the Lab Holdings' 1986-1990 tax years. During
1997, all of the claims and disputes between Lab Holdings and the IRS
for the 1986-1990 years were settled, entitling SLH to a net refund of
$5.5 million.
SLH also assumed Lab Holdings' rights and liabilities with respect to
an audit being conducted by the State of California for Lab Holdings'
1987-1989 taxable years which SLH settled in 1998.
Pursuant to the Distribution Agreement, SLH assumed from Lab Holdings
all of the contingent tax liabilities described above and acquired all
rights to refunds, plus any interest related to these tax years. Lab
Holdings financial statements were not impacted pursuant to rights
transferred to SLH by the Distribution Agreement. SLH also assumed
all contingent liabilities and refunds related to any issues raised
for the years 1986-1990 whose resolution may extend to tax years
beyond the 1990 tax year.
LabOne paid regular quarterly dividends in 1997, 1996 and 1995. As an
82% owner, Lab Holdings has received $7.7 million of cash as dividends
from LabOne in 1997. LabOne's working capital position declined from
$38.8 million at December 31, 1996, to $35.4 million at December 31,
1997. This decrease is the result of dividends paid, capital
additions and the purchase of GIB assets exceeding LabOne's net cash
provided by operations.
During 1997, LabOne invested $11.4 million in additional property,
plant and equipment and the purchase of certain assets and customer
lists of GIB Laboratories, Inc., as compared to $3.2 million in 1996
and $2.9 million in 1995. Of the amount spent in 1997, approximately
$4.8 million was for the GIB purchase, and approximately $2.8 million
was for land acquisition and initial development costs to construct
LabOne's new facility. The new facility project is expected to cost
approximately $27.5 million and is expected to be primarily financed
with an Industrial Revenue Bond (IRB)approved by the City of Lenexa
(Kansas) in August 1997. The IRB is expected to be in place during
the second quarter 1998. LabOne's other capital asset purchases are
expected to be consistent with prior years.
LabOne had no short-term borrowings during 1997 and expects to be able
to fund operations and future dividend payments from a combination of
cash flow from operations and cash reserves. Proceeds from the IRB
will be used to finance the construction of LabOne's new facility.
Interest on the bond will be based on a taxable seven day variable
rate which would have been less than seven percent as of March 2,
1998. LabOne expects to repay the bond over 11 years at $2.5 million
per year plus interest. LabOne's total cash and investments at
December 31, 1997, were $19.5 million, as compared to $31.9 million at
December 31, 1996.
In April 1996, Response obtained an unsecured $10 million loan from
Lab Holdings bearing interest at the rate of prime plus 1%, which
after August 1, 1996, became convertible at the election of Lab
Holdings into shares of Response's common stock. Proceeds of the loan
were used to finance a practice management affiliation. The loan was
exchanged for 909,090 shares of common stock during August 1996.
In October 1996, Response procured a $23.5 million credit facility
from Lab Holdings to finance acquisitions and for working capital. On
February 26, 1997, the $23.5 million loan and accrued interest of
$664,000 was converted into 3,020,536 shares of Response's common
stock at a rate of $8 per share. On July 25, 1997, Lab Holdings
distributed to its shareholders, as a dividend, all 8,077,392 shares
of common stock of Response owned by Lab Holdings.
During 1997, treasury stock issued for exercised options totaled 5,169
shares.
TRENDS
The following analysis of certain existing trends that have been
identified as potentially affecting the future financial results. 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. LabOne
management expects that prices may continue to decline during 1998 due
to competitive pressures. This trend may have a material impact on
earnings from operations.
Currently, there are approximately 13.5 million individual life
insurance policies sold in the United States annually. However,
laboratory services are provided on only approximately 5 million of
these policy applicants. During 1996, the FDA approved an oral fluid
Western blot test as a confirmation for the oral fluid HIV-1 antibody
test. The noninvasive nature of oral specimen collection allows for
lower cost collection, making testing much more affordable on smaller
face value insurance policies. Due to the lower collection expense
associated with oral fluid collection devices, the potential exists
for an expansion of the testing market. The total number of insurance
applicants tested by LabOne increased 22% in 1997 from the prior year.
Approximately one-half of the increase represented oral fluid HIV
tested applicants. Oral fluid tested applicants are expected to
further increase in 1998.
Effective January 30, 1997, LabOne acquired certain assets, including
customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America. Concurrently, Prudential's Individual
Insurance Group agreed to use LabOne as its exclusive provider of risk
assessment testing services. At the time of the purchase, GIB served
approximately 5% of the insurance laboratory testing market.
In the clinical division, BlueCross BlueShield of Tennessee has
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 350,000 BlueCare members are
covered by the program. (LabOne originally announced that the
BlueCare program covered approximately 425,000 lives.) To date,
LabOne's Laboratory Benefit Management programs, including BlueCare
and the Lab Card Program, have more than 1.8 million lives enrolled
with more than 300,000 additional lives awaiting implementation.
LabOne is actively addressing Year 2000 computer concerns. The
company has established an oversight committee which includes
management from all parts of LabOne and meets periodically to review
progress. LabOne expects to complete all internal Year 2000
objectives by the end of 1998 and is assessing the Year 2000
preparation and contingency plans of its clients and vendors. Total
expenses related to this project are not expected to be material. Lab
Holdings does not expect compliant problems.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after
December 15, 1997. This standard requires companies to classify items
of other comprehensive income by their nature in a financial statement
and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position.
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," is effective
for fiscal years beginning after December 15, 1997. Retroactive
application will be required. The Company does not expect this
statement to have a significant effect on segment disclosures.
No other recently issued accounting standards presently exist which
will require adoption in future periods.
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 OF THE REGISTRANT.
See Cross Reference Sheet, "Documents Incorporated by Reference."
ITEM 11. EXECUTIVE COMPENSATION.
See Cross Reference Sheet, "Documents Incorporated by Reference."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
See Cross Reference Sheet, "Documents Incorporated by Reference."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Cross Reference Sheet, "Documents Incorporated by Reference."
Cross Reference Sheet To Documents Incorporated By Reference
Item 10. Directors and Executive Proxy Statement relating to
Officers of the Company Annual Meeting of Shareholders
to be held May 13, 1998, under
the caption "Election of
Directors - Nominees and
Directors whose terms expire
in 1999 and 2000."
Item 11. Executive Compensation Proxy Statement relating to
Annual Meeting of Shareholders
to be held May 13, 1998,
under the captions "Election
of Directors - Compensation of
Executive Officers."
Item 12. Security Ownership of Proxy Statement relating to
Certain Beneficial Annual Meeting of Shareholders
Owners and Management to be held May 13, 1998, under
the captions "Election of
Directors - Security Ownership
of Management and Security
Ownership of Certain
Beneficial Owners."
Item 13. Certain Relationships Proxy Statement relating to
and Related Annual Meeting of Shareholders
Transactions to be held May 13, 1998, under
the caption "Election of
Directors - Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
II. Valuation and Qualifying Accounts and Reserves -
Years ended December 31, 1997, 1996 and 1995
All other schedules are omitted because they are not applicable or the
information is given in the financial statements or notes thereto.
Portions of Registrant's Proxy Statement for use in connection with
the 1998 Annual Meeting of Shareholders are incorporated by reference
into Part III of this report, if such Proxy Statement is filed with
the Securities and Exchange Commission on or before April 30, 1998.
If such Proxy Statement is not filed by such date, the information
required to be presented in Part III will be filed as an amendment to
this report.
(3) Exhibits required by Item 601 of Regulation S-K (see Index to
Exhibits in paragraph (c) infra.)
(b) Reports on Form 8-K.
None.
(c) Index to Exhibits (Exhibits follow the Schedules);
2.1 Distribution Agreement, dated December 20, 1996, between
the Registrant and SLH Corporation (filed as Exhibit 2(a)
to SLH Corporation's Form 10/A (Amendment No. 1) filed
February 4, 1997 (File No. 0-21911) and incorporated herein
by reference).
2.2 Blanket Assignment, Bill of Sale, Deed and Assumption
Agreement, dated as of February 28, 1997, between the
Registrant and SLH Corporation (filed as Exhibit 2(b) to
SLH Corporation's Form 10/A (Amendment No. 1) filed
February 4, 1997 (File No. 0-21911) and incorporated
herein by reference).
3.1 Registrant's Articles of Incorporation, as amended (filed
as Exhibit 3.1 to Amendment No. 1 to Registrant's
Registration Statement on Form S-4, filed April 8, 1988
(File No. 33-20298) and incorporated herein by reference).
3.2 Amendment to Registrant's Articles of Incorporation,
effective May 15, 1991, (filed as Exhibit 3(b) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 0-16946) and incorporated
herein by reference).
3.3 Registrant's Bylaws, as amended (filed as Exhibit 3(c) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 0-16946) and incorporated
herein by reference).
4.1 Form of Rights Agreement dated April 5, 1988, between
Registrant and Morgan Shareholder Services Trust Company,
as Rights Agent (filed as Exhibit 4.1 to Amendment No. 1 to
Registrant's Registration Statement on Form S-4, filed
April 8, 1988 (File No. 33-20298) and incorporated herein
by reference).
4.2 Form of Certificate of Serial Designation of Series A
Preferred Stock (filed as Exhibit 4.2 to Amendment No. 1 to
Registrant's Registration Statement on Form S-4, filed
April 8, 1988, (File No. 33-20298) and incorporated herein
by reference).
4.3 Amendment No. 1 to the Rights Agreement, dated November 14,
1988, between Registrant and Morgan Shareholder Services
Trust Company, as Rights Agent (filed as Exhibit 1 to the
Registrant's current report on Form 8-K filed November 18,
1988 (File No. 0-16946) and incorporated herein by
reference).
4.4 Amendment No. 2 to the Rights Agreement, dated May 15,
1991, between Registrant and First Chicago Trust Company of
New York, as Rights Agent (filed as Exhibit 4(d) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 0-16946) and incorporated
herein by reference).
4.5 Notice and Agreement Respecting Removal of Rights Agent and
Appointment of Successor Rights Agent (filed as Exhibit
4(e) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991 (File No. 0-16946) and
incorporated herein by reference).
10.1* Registrant's 1997 Directors' Stock Option Plan effective
September 17, 1997.***
10.2* Form of Option Agreement with directors under the
Directors' Stock Option Plan.***
10.3 Form of Indemnification Agreement between Registrant and
its directors and corporate/executive officers (filed as
Exhibit 10(i) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989 (File No. 0-16946) and
incorporated herein by reference).
10.4 Services Agreement, dated January 1, 1993, among Registrant
and LabOne, Inc., relating to services and other matters
among the parties (filed as Exhibit 10.17 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 0-16946) and incorporated herein by
reference).
10.5 Long-Term Incentive Plan of LabOne, Inc., approved May 16,
1991 with amendments adopted May 21, 1993 and November 9,
1993 (filed as Exhibit 10.21 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993 (File No.
0-16946) and incorporated herein by reference).**
10.6 Amendment to LabOne's Long Term Incentive Plan, effective
February 10, 1995 (filed as Exhibit 10.31 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995 (File No. 0-16946) and incorporated herein by
reference).**
10.7 Amendment to LabOne's Long Term Incentive Plan, effective
May 9, 1997 (filed as Exhibit 10.5 to LabOne, Inc. Annual
Report on Form 10-K for the year ended December 31, 1997
(File No. 0-15975) and incorporated herein by reference).**
10.8 LabOne's Stock Plan for non-employee directors (filed as
Exhibit 10.23 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 (File No. 0-
16946) and incorporated herein by reference).**/***
10.9 LabOne's Annual Incentive Plan (filed as Exhibit 10.6 to
LabOne, Inc. Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-15975) and incorporated
herein by reference).**
10.10 Facilities Sharing and Interim Services Agreement, dated as
of February 28, 1997, between the Registrant and SLH
Corporation (filed as Exhibit 10(a) to SLH Corporation's
Registration Statement on Form 10/A (Amendment No. 1) filed
February 4,1997 (File No. 0-21911) and incorporated herein
by reference).
10.11 Tax Sharing Agreement, dated as of February 28, 1997,
between the Registrant and SLH Corporation (filed as
Exhibit 10(b) to SLH Corporation's Registration Statement
on Form 10/A (Amendment No. 1) filed February 4, 1997 (File
No. 0-21911) and incorporated herein by reference).
10.12* Sublease and Services Agreement, dated as of June 1, 1997,
between Registrant and SLH Corporation.
11 Statement regarding computation of per share earnings - see
Note l of Notes to Consolidated Financial Statements,
"Earnings Per Share."
13 Annual Report to Shareholders for the year ended December
31, 1997 - To be furnished.
21 Subsidiaries of Registrant (reference is made to Item 1
hereof).
27 Financial Data Schedule - as filed electronically by the
Registrant in conjunction with this 1997 Form 10-K.
99.1 Proxy Statement for 1998 Annual Shareholders meeting - To
be furnished.
99.2 SLH Corporation Registration Statement on Form 10 (filed as
SLH Corporation's Registration Statement on Form 10/A
(Amendment No. 2) on February 12, 1997 (file No. 0-21911)
and incorporated herein by reference).
* These documents may be obtained by stockholders of Registrant
upon written request to: Lab Holdings, Inc., P.0. Box 7568, Shawnee
Mission, KS 66207.
** Management Compensatory Plan
*** Non-Management Director Compensatory Plan
(d) Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LAB HOLDINGS, INC.
By: /s/ P. Anthony Jacobs
-----------------------------
P. Anthony Jacobs
Title: President, Chief Executive
Officer and Director
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons who serve
Registrant in the capacities and on the dates indicated.
By: /s/ John H. Robinson, Jr. By: /s/ Lan C. Bentsen
----------------------------- -----------------------------
John H. Robinson, Jr. Lan C. Bentsen
Title: Chairman of the Board Title: Director
and Director Date: March 20, 1998
Date: March 20, 1998
By: /s/ Steven K. Fitzwater
-----------------------------
Steven K. Fitzwater
Title: Vice President, Chief
Financial and Accounting
Officer, Secretary and
Director
Date: March 20, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Lab Holdings, Inc.:
We have audited the consolidated financial statements of Lab Holdings,
Inc. and subsidiaries as listed in Item 14(a)(1). In connection with
our audits of the consolidated financial statements, we also have
audited the financial statement schedule as listed in Item 14(a)(2).
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 financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall 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 Lab Holdings, Inc. and subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, 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, present fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 20, 1998
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
- ---------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 22,129 53,328
Short-term investments 2,648 6,836
Accounts and notes receivable 12,608 10,585
Current income taxes 1,400 (724)
Inventories 2,203 1,360
Real estate available for sale 3,515 --
Prepaid expenses and other current assets 2,459 2,239
Deferred income taxes 3,386 2,161
---------------------
Total current assets 50,348 75,785
Property, plant and equipment 10,441 17,371
Investments:
Securities -- 4,019
Oil and gas -- 1,040
Intangible assets 13,058 12,427
Deferred income taxes 858 5,520
Other assets 81 1,723
Net assets of discontinued healthcare business -- 48,432
Net assets of discontinued real estate operations -- 30,466
---------------------
$ 74,786 196,783
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,367 3,736
Accrued payroll and benefits 4,530 4,053
Other accrued expenses 423 2,162
Other current liabilities 303 589
---------------------
Total current liabilities 8,623 10,540
Accrued payroll and benefits -- 236
Other accrued expenses -- 250
Other liabilities -- 414
---------------------
Total liabilities 8,623 11,440
---------------------
Minority interests 9,476 11,319
---------------------
Stockholders' equity:
Preferred stock of $1 par value.
Authorized 3,000,000 shares; none issued -- --
Common stock of $1 par value.
Authorized 24,000,000 shares;
issued 7,500,000 shares 7,500 7,500
Paid-in capital 1,772 1,748
Equity adjustment from foreign
currency translation (544) (439)
Retained earnings 78,103 195,329
---------------------
86,831 204,138
Less cost of 1,010,897 shares of treasury stock
(1996-1,016,066 shares) 30,144 30,114
---------------------
Total stockholders' equity 56,687 174,024
---------------------
Commitments and contingencies
---------------------
$ 74,786 196,783
=====================
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
- ---------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(In thousands except
per share amounts)
REVENUES
Insurance services $ 61,998 50,801 55,862
Healthcare services 16,928 8,631 12,112
Other -- 2,446 7,272
----------------------------------
Total revenues 78,926 61,878 75,246
COSTS AND EXPENSES
Insurance services 26,666 22,625 23,598
Healthcare services 15,351 10,092 16,104
Other -- 2,771 6,357
Provision for loss on disposal
of assets 6,553 -- --
Selling, general and
administrative 34,765 29,767 36,702
----------------------------------
Earnings (loss) from operations (4,409) (3,377) (7,515)
Investment income - net 4,671 5,004 4,119
Interest expense (11) (1,044) (107)
Other income (expense) 77 (456) (4,367)
----------------------------------
Earnings (loss) before income taxes 328 127 (7,870)
----------------------------------
Taxes on income (benefits):
Current (429) 3,131 (1,429)
Deferred 8,207 670 (5,134)
----------------------------------
Total 7,778 3,801 (6,563)
----------------------------------
Earnings (loss) before
minority interests (7,450) (3,674) (1,307)
Minority interests 405 552 519
----------------------------------
Loss from
continuing operations (7,855) (4,226) (1,826)
Earnings (loss) from
discontinued healthcare
business (2,342) 682 1,078
Loss from discontinued real
estate operations -- (1,452) (6,600)
----------------------------------
NET LOSS $ (10,197) (4,996) (7,348)
==================================
Basic and diluted loss per share of common stock:
Loss from
continuing operations $ (1.21) (.65) (.28)
Earnings (loss) from discontinued
healthcare business (.36) .10 .17
Loss from discontinued real
estate operations -- (.22) (1.03)
----------------------------------
NET LOSS $ (1.57) (.77) (1.14)
==================================
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(In thousands)
Common stock:
Balance, beginning and
end of year $ 7,500 7,500 7,500
----------------------------------
Paid-in capital:
Balance, beginning of year 1,748 1,747 1,002
Exercise of stock options 24 1 745
----------------------------------
Balance, end of year 1,772 1,748 1,747
----------------------------------
Foreign currency translation:
Balance, beginning of year (439) (447) (561)
Net change during year (105) 8 114
----------------------------------
Balance, end of year (544) (439) (447)
----------------------------------
Retained earnings:
Balance, beginning of year 195,329 208,098 223,169
Net loss (10,197) (4,996) (7,348)
Dividends* and distributions (107,029) (7,773) (7,723)
----------------------------------
Balance, end of year 78,103 195,329 208,098
----------------------------------
Less treasury stock:
Balance, beginning of year 30,114 29,814 30,177
Net issuance pursuant to stock
option plans (1997-5,169;
1996-22,873; 1995-82,800) 30 300 (363)
----------------------------------
Balance, end of year 30,144 30,114 29,814
----------------------------------
STOCKHOLDERS' EQUITY $ 56,687 174,024 187,084
==================================
*Cash dividends per share amounted to $1.20 in 1997, 1996 and 1995.
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (7,855) (4,226) (1,826)
Adjustments to reconcile loss from
continuing operations to net cash
provided by continuing operations:
Depreciation and amortization 6,277 8,760 10,192
Earnings applicable to minority
interests 405 552 519
Provision for loss on disposal
of assets 6,553 -- --
Change in trading portfolio, net 2,645 19,318 (6,339)
Change in accounts receivable (2,980) 1,458 4,437
Change in accounts payable (18) 134 (451)
Income taxes and other, net 3,491 9,558 (4,110)
-----------------------------
Net cash provided by continuing
operations 8,518 35,554 2,422
Net cash used by discontinued
healthcare business (1,006) (32,140) --
Net cash provided by discontinued
real estate operations 581 9,107 1,196
-----------------------------
Total cash provided by operations 8,093 12,521 3,618
-----------------------------
INVESTING ACTIVITIES
Sales of investments available for sale 1,350 4 83
Purchases of investments held
to maturity (15,894) (15,753) (65,569)
Maturities of investments held
to maturity 18,155 23,395 69,459
Additions to property, plant
and equipment, net (6,683) (3,252) (3,040)
Acquisition of assets (4,816) -- --
Oil and gas investments -- (351) (391)
Net increase (decrease) in notes
receivable -- 183 (2,507)
Proceeds from sale of subsidiaries, net -- -- 12,054
Proceeds of securitization -- -- 1,500
Other, net (3,948) (302) (3,017)
-----------------------------
Net cash provided (used) by
investing activities (11,836) 3,924 8,572
-----------------------------
FINANCING ACTIVITIES
Payments under line of credit
agreements, net -- -- (2,759)
Payment of capital lease -- -- (2)
Regular quarterly dividends paid (7,787) (7,773) (7,723)
Cash portion of SLH dividend (19,590) -- --
Net issuance of treasury stock pursuant to
stock option plans (7) (299) 1,108
-----------------------------
Net cash used by financing activities (27,384) (8,072) (9,376)
-----------------------------
Effect of foreign currency translation (72) 12 21
-----------------------------
Net decrease in cash and cash
equivalents (31,199) 8,385 2,835
Cash and cash equivalents at
beginning of year 53,328 44,943 42,108
-----------------------------
Cash and cash equivalents at
end of year $ 22,129 53,328 44,943
=============================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 934 25 124
=============================
Income taxes, net $ 2,676 (3,487) (1,693)
=============================
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Lab Holdings, Inc. (formerly Seafield Capital Corporation)
and all majority-owned subsidiaries and joint ventures. Investments
in affiliated companies of 20% to 50% in which Lab Holdings, Inc. (Lab
Holdings) does not have a controlling interest are accounted for by
the equity method. All significant intercompany transactions have
been eliminated in consolidation. Certain 1996 and 1995 amounts have
been reclassified for comparative purposes with no effect on net
earnings.
At December 31, 1997, Lab Holdings' principal asset consists of its
82% ownership of LabOne, Inc. (LabOne), a publicly-traded company.
In April 1996, Lab Holdings loaned $10 million to its subsidiary,
Response Oncology, Inc., which was converted into 909,090 shares of
Response common stock at the election of Lab Holdings in August 1996.
In October 1996, Lab Holdings provided to Response a $23.5 million
credit facility to finance acquisitions and for working capital. This
credit facility was converted into Response common stock in February
1997, increasing Lab Holdings' ownership to approximately 67%.
In July 1997, Lab Holdings' Board of Directors declared a dividend to
Lab Holdings' shareholders of all shares of common stock of Response
owned by Lab Holdings. For each shareholder of record on July 11,
1997, 1.2447625 shares of Response common stock were distributed on
July 25, 1997 for each share of Lab Holdings common stock outstanding.
The distribution of all shares of Response stock to Lab Holdings'
shareholders was effected as a dividend. The Lab Holdings
shareholders paid no consideration for any shares of Response stock
received in the distribution.
Lab Holdings' investment in Response and Response's earnings are shown
as a discontinued business in the accompanying financial statements.
See Notes 2 and 15 for additional information.
On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary,
SLH Corporation (SLH). For each shareholder of record on February 24,
1997, one share of SLH common stock was distributed for each four
shares of Lab Holdings common stock owned. In connection with this
distribution and pursuant to a Distribution Agreement between Lab
Holdings and SLH, Lab Holdings transferred its real estate and energy
businesses and miscellaneous assets and liabilities, including two
wholly-owned subsidiaries, Scout Development Corporation (Scout) and
BMA Resources, Inc. (Resources), to SLH. The spinoff was accounted
for as a dividend.
Under the Distribution Agreement and Assignment, SLH assumed rights
and obligations of Lab Holdings with respect to a 1986 lawsuit
initiated by Lab Holdings' former insurance subsidiary to recover
costs incurred to remove and replace the facade on the former home
office building. Pursuant to the Distribution Agreement and
Assignment, SLH also assumed from Lab Holdings all contingent tax
liabilities and rights to refunds and interest relating to any tax
issues raised for the years 1986-1990. Management believes that final
resolution of these matters will not have any impact on the financial
position or results of operations of Lab Holdings.
In 1992, Lab Holdings' board of directors approved a plan for the
discontinuance of real estate. The real estate operations are
presented as discontinued in the accompanying consolidated financial
statements. See Note 15 for additional information.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits in banks, money
market investments and overnight investments that are stated at cost,
which approximates market value.
Certain highly liquid short-term investments previously designated as
trading securities have been reclassified to cash equivalents to more
accurately reflect the nature of the investments and to conform with
the current year presentation.
INVESTMENT SECURITIES
Investment securities consist of equity securities, debt securities
and debt obligations of the United States government and state and
political subdivisions. Short-term investments are securities with
maturities of less than one year.
The classification of debt and equity securities as trading, available
for sale or held to maturity is made at the time of purchase. Trading
securities are stated at fair value and unrealized holding gains and
losses are included in operations. Marketable equity securities and
all debt securities which are classified as available for sale are
stated at market value, with unrealized gains and losses, if any,
excluded from operations and reported in a separate component of
stockholders' equity. Securities which Lab Holdings has the intent
and ability to hold to maturity are stated at amortized cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of all asset and liability financial
instruments (for which it is practical to estimate fair values)
approximate their carrying amounts at December 31, 1997 and 1996.
Fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. The company calculates the fair value of financial
instruments using appropriate market information and valuation
methodologies. See note 8 for additional information regarding
investments for which it is not practical to estimate fair values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost with depreciation
provided over the useful lives. Upon sale or retirement, the costs
and related accumulated depreciation are eliminated from the accounts.
Any resulting gains or losses are included in the results of
operations. See Note 4 for additional information on depreciation.
OIL AND GAS INVESTMENTS
Lab Holdings' oil and gas investments were accounted for using the
full cost method. All costs incurred in acquisition and development
were capitalized. Depletion was computed on the units of production
method based on all proved reserves. All general operating costs were
expensed as incurred. The oil and gas investments were included in
the net assets distributed to SLH.
INTANGIBLE ASSETS
Goodwill is recorded at acquisition as the excess of cost over fair
value of net assets acquired and is being amortized on a straight-line
basis over appropriate periods up to twenty years. On a periodic
basis, Lab Holdings estimates the fair value of the business to which
goodwill relates in order to ensure that the carrying value of
goodwill has not been impaired.
IMPAIRMENT OF LONG-LIVED ASSETS
When facts and circumstances indicate potential impairment, Lab
Holdings evaluates the recoverability of carrying values of long-lived
assets 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 approximately $6.6 million related to
the anticipated sale was recorded.
DISPOSITIONS
In July 1997, Lab Holdings' Board of Directors declared a dividend to
Lab Holdings' shareholders of all shares of common stock of Response
owned by Lab Holdings. The distribution of all shares of Response
stock to Lab Holdings' shareholders was effected as a dividend. The
Lab Holdings shareholders paid no consideration for any shares of
Response stock received in the distribution. See Notes 2 and 15 for
additional information.
On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary,
SLH. The distribution of all shares of SLH stock to Lab Holdings'
shareholders was effected as a dividend. The Lab Holdings
shareholders paid no consideration for any shares of SLH stock
received in the distribution. In connection with this distribution
and pursuant to a Distribution Agreement between Lab Holdings and SLH,
Lab Holdings transferred its real estate and energy businesses and
miscellaneous assets and liabilities, including two wholly-owned
subsidiaries, Scout and Resources, to SLH.
Lab Holdings sold its 80.1% owned insurance premium finance
subsidiary, Agency Premium Resource, Inc., during the second quarter
of 1995. The sale generated an after-tax gain of $1.5 million.
Lab Holdings completed an asset sale by its 79% owned real estate,
personal property and sales and use tax consulting subsidiary,
Tenenbaum and Associates, Inc., during the second quarter of 1995.
This subsidiary then distributed its assets to shareholders and filed
for dissolution. The effect of the sale, distribution and dissolution
was an after-tax gain of $500,000.
Lab Holdings sold its 80% owned underwriting and policy administration
services subsidiary, International Underwriting Services, Inc., during
the third quarter of 1995. The sale generated an after-tax gain of $1
million.
Lab Holdings's 74% owned radiopharmaceuticals subsidiary, Pyramid
Diagnostic Services, Inc. (Pyramid), entered voluntary bankruptcy in
the fourth quarter of 1995 as a result of an adverse judgment in a
lawsuit. Lab Holdings fully reserved its investment in this
subsidiary and recorded an after-tax loss of $1.2 million. Lab
Holdings expects the Pyramid bankruptcy to be finalized in 1998 with
no further financial consequences to Lab Holdings.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
OTHER INCOME/(EXPENSE)
The components of "Other income/(expense)" on the Consolidated
Statements of Operations are as follows:
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
(In thousands)
Loss on dispositions of subsidiaries $ -- -- (1,068)
Provision for subsidiary bankruptcy -- -- (3,382)
Other 77 (456) 83
---------------------------
$ 77 (456) (4,367)
===========================
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which revised the calculation and presentation
provisions of Accounting Principles Board Opinion 15 and related
interpretations. SFAS No. 128 became effective for the year ended
December 31, 1997. 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 adoption of this standard did not
have any significant impact on the Company's reported earnings per
share.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after
December 15, 1997. This standard requires companies to classify items
of other comprehensive income by their nature in a financial statement
and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position.
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," is effective
for fiscal years beginning after December 15, 1997. Retroactive
application will be required. The Company does not expect this
statement to have a significant effect on segment disclosures.
No other recently issued accounting standards presently exist which
will require adoption in future periods.
NOTE 2 - DISPOSITIONS
On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary,
SLH Corporation, on the basis of one share of common stock of SLH for
each four shares of Lab Holdings common stock held. In connection
with this distribution and pursuant to a Distribution Agreement
between Lab Holdings and SLH, Lab Holdings transferred its real estate
and energy businesses and miscellaneous assets and liabilities,
including two wholly-owned subsidiaries, Scout and Resources, to SLH.
The net assets distributed to SLH totaled approximately $47.9 million
on the date of distribution and approximately $36 million at December
31, 1996. The spinoff was accounted for as a 1997 dividend.
In April 1996, Lab Holdings loaned $10 million to Response which was
converted into 909,090 shares of Response common stock at the election
of Lab Holdings in August 1996. In October 1996, Lab Holdings
provided to Response a $23.5 million credit facility to finance
acquisitions and for working capital. This credit facility was
converted into Response common stock in February 1997, increasing Lab
Holdings' ownership to approximately 67%.
In July 1997, Lab Holdings' Board of Directors declared a dividend to
Lab Holdings' shareholders of all shares of common stock of Response
owned by Lab Holdings. For each shareholder of record on July 11,
1997, 1.2447625 shares of Response common stock were distributed on
July 25, 1997 for each share of Lab Holdings common stock outstanding.
The distribution of all shares of Response stock to Lab Holdings'
shareholders was effected as a dividend. The Lab Holdings
shareholders paid no consideration for any shares of Response stock
received in the distribution.
As a result of the distributions, Lab Holdings' principal asset
consists of its stock holdings in LabOne.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In October 1997, LabOne purchased approximately 54 acres of land at
Renner Ridge Corporate Park in Lenexa, Kansas. LabOne is planning to
construct a 262,000 square foot facility to house all of its
corporate, laboratory and warehouse operations. Construction is
expected to be completed in the early part of 1999. This project is
expected to cost approximately $27.5 million and is expected to be
primarily financed with an industrial revenue bond.
Under the Distribution Agreement and Assignment, SLH assumed the
rights and obligations of Lab Holdings with respect to the following
legal matter.
In 1986, a lawsuit was initiated in the Circuit Court of Jackson
County, Missouri by Lab Holdings' former insurance subsidiary (i.e.,
Business Men's Assurance Company of America) against Skidmore, Owings
& Merrill ("SOM") which is an architectural and engineering firm, and
a construction firm to recover costs incurred to remove and replace
the facade on the former home office building. Because the removal
and replacement costs had been incurred prior to the sale of the
insurance subsidiary, Lab Holdings negotiated with the buyer for an
assignment of the cause of action from the insurance subsidiary. In
September 1993, the Missouri Court of Appeals reversed a $5.7 million
judgment granted in 1992 in favor of Lab Holdings; the Court of
Appeals remanded the case to the trial court for a jury trial limited
to the question of whether or not the applicable statute of
limitations barred the claim. The Appeals Court also set aside $1.7
million of the judgment originally granted in 1992. In July 1996,
this case was retried to a judge. On January 21, 1997, the judge
entered a judgment in favor of Lab Holdings. The amount of that
judgment, together with interest is approximately $5.6 million.
Although the judgment has been appealed, counsel for the Company
expects that it will be difficult for the defendants to cause the
judgment to be reversed. The final outcome is not expected for at
least another year. Settlement arrangements with other defendants
have resulted in payments to plaintiff which have substantially offset
legal fees and costs to date of approximately $502,000. Future legal
fees and costs can not reliably be estimated. Pursuant to the
Distribution Agreement, this matter was assigned to SLH Corporation.
In the opinion of management, after consultation with legal counsel
and based upon current available information, this lawsuit is not
expected to have a material adverse impact on the consolidated
financial position or results of operations of Lab Holdings.
Pursuant to the Distribution Agreement, SLH assumed from Lab Holdings
all of the contingent tax liabilities described below and acquired all
rights to refunds, plus any interest related to these tax years. SLH
also assumed all contingent liabilities and refunds related to any
issues raised for the years 1986-1990 whose resolution may extend to
tax years beyond the 1990 tax year.
Lab Holdings received notices of proposed adjustments (Revenue Agent's
Reports) from the Internal Revenue Service (IRS) with respect to 1986-
1990 federal income taxes. These notices claimed total federal income
taxes due for the entire five year period in the approximate net
amount of $13,867,000, exclusive of interest thereon.
Lab Holdings filed protests regarding the 1986-1990 notices of
proposed adjustments. In 1997, Lab Holdings received a formal
agreement to the issues and the final tax computation from the IRS.
The agreement provides for a tax refund to SLH of approximately $5.5
million net of interest costs. The agreement was approved by
Congress' Joint Committee on Taxation in January 1998.
In December 1996, the California state auditor sent Lab Holdings an
audit report covering the 1987-1989 taxable years. The State of
California has determined to include, as a "unitary taxpayer," all
majority owned non-life insurance subsidiaries and joint ventures of
Lab Holdings. During 1997, the California Franchise Tax Board sent a
notice of taxes and interest due for the 1987-1989 years of
approximately $1.8 million, which was paid. Pursuant to the
Distribution Agreement, SLH Corporation assumed all potential tax
liabilities and interest thereon regarding the California audit for
the 1987-1989 tax years.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT AND ACCOUNTS AND NOTES
RECEIVABLE
A summary of property, plant and equipment is as follows:
Rate of December 31,
Depreciation 1997 1996
------------------------------------
(In thousands)
Property, plant and equipment 3% - 33% $ 43,956 55,318
Less accumulated depreciation 33,515 37,947
-----------------
$ 10,441 17,371
=================
A summary of accounts and notes receivable is as follows:
December 31,
1997 1996
-----------------
(In thousands)
Accounts receivable $ 13,626 11,346
Note receivable -- 261
Allowance for doubtful accounts (1,018) (1,022)
-----------------
$ 12,608 10,585
=================
The interest rate on the note receivable was 6.7% in 1996.
NOTE 5 - SEGMENT DATA
The following table shows segment information from continuing
operations:
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(In thousands)
REVENUES:
Insurance $ 61,998 50,801 55,862
Healthcare 16,928 8,631 12,112
Other -- 2,446 7,272
----------------------------------
Total revenues $ 78,926 61,878 75,246
==================================
OPERATING EARNINGS (LOSS):
Insurance $ 17,035 11,138 10,987
Healthcare (9,238) (9,203) (11,663)
Other -- (431) (3,858)
General corporate expenses (5,774) (4,725) (7,037)
Investment income 4,671 5,004 4,119
Other income (expense) (6,355) (612) (311)
Interest expense (11) (1,044) (107)
----------------------------------
Earnings (loss) before income taxes
and minority interests 328 127 (7,870)
Income taxes (7,778) (3,801) 6,563
Minority interests (405) (552) (519)
----------------------------------
Loss from continuing
operations $ (7,855) (4,226) (1,826)
==================================
IDENTIFIABLE ASSETS:
Insurance $ 32,848 34,543 36,716
Healthcare 8,507 7,345 6,598
Net assets of discontinued
healthcare business -- 48,432 15,362
Net assets of discontinued
real estate operations -- 30,466 42,215
Other 33,431 75,997 97,127
----------------------------------
Total identifiable assets $ 74,786 196,783 198,018
==================================
Operating earnings (loss) are revenues less expenses other than
corporate and interest expense, net of intersegment transactions.
Depreciation and amortization amounts for 1997, 1996 and 1995 were
$4,329,000, $6,982,000 and $6,854,000, respectively. Goodwill
amortization for 1997, 1996 and 1995 was $1,948,000, $1,778,000 and
$3,338,000, respectively. Capital expenditures and depreciation and
amortization expense for the significant segments are as follows:
1997 1996 1995
----------------------------------
(In thousands)
Capital Expenditures:
Insurance $ 3,308 2,558 1,356
Healthcare 1,415 668 1,783
General corporate 2,553 -- --
Depreciation and amortization:
Insurance $ 4,658 3,977 4,821
Healthcare 1,585 1,510 2,772
NOTE 6 - INCENTIVE STOCK OPTION PLAN
Lab Holdings has a Directors' Stock Option Plan which provides for the
granting of non-qualified stock options for not more than 90,000
shares of the Company's common stock. The plan entitles each director
to purchase 15,000 shares at the fair market value at the date of
grant. All options have ten year terms and become exercisable as
follows: one-third on the first, second and third year anniversary
dates of the grant. During 1997, options for 60,000 shares were
granted.
During 1997, Lab Holdings terminated three Stock Option Plans which
had provided for Qualified and Nonqualified Stock Options, Stock
Appreciation Rights (SAR's) and restricted stock awards to key
employees and directors. The plans entitled the grantee to purchase
shares at prices ranging from 75% to 110% of the fair market value at
date of grant during terms up to ten years. All options were awarded
at 100% of fair market value. SAR's entitled the holder to elect to
receive the appreciated value in cash. Restricted stock awards were
rights to receive or retain shares in payment of compensation earned
or to be earned.
Additionally, Lab Holdings maintained a Stock Purchase Plan under
which each participant's contribution was matched at a rate of 50%.
Lab Holdings common stock was purchased on the open market each month.
Of the 100,000 shares registered under this plan, 62,904 shares were
eligible for issuance at December 31, 1996. During 1997, 3,121 shares
were issued and this plan was terminated.
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations (APB 25).
As such, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise
price. Effective December 31, 1995, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," (FAS 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, FAS 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 future 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 FAS 123.
A summary of the status of the Company's stock option plan as of
December 31, 1997, 1996 and 1995 and changes during the years then
ended is presented below:
Weighted Options
Number of Average Exercisable
Shares Exercise Price at Year-end
- ---------------------------------------------------------------------
Outstanding
December 31, 1994 575,263 23.055 552,422
Exercised 392,263 23.509
--------
Outstanding
December 31, 1995 183,000 28.368 173,665
Exercised 112,915 26.539
Terminated or forfeited 1,500 29.250
--------
Outstanding
December 31, 1996 68,585 31.359 68,585
Granted 60,000 26.500
Exercised (68,585) 32.817
--------
Outstanding
December 31, 1997 60,000 26.500 --
========
The following table summarizes information about stock options at
December 31, 1997.
Options outstanding Options Exercisable
------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (yrs) Price Exercisable Price
- -------- ------------------------------------ ---------------------
$26.50 60,000 10.00 $26.50 -- --
The difference between the per share exercise price and the cost per
share of the treasury stock issued for stock options exercised
increased paid-in capital by $24,000 in 1997 and $1,000 in 1996.
The weighted-average per share fair value of stock options granted
during 1997 was $6.08 on the date of grant using the Black Scholes
option-pricing model with the following weighted average assumptions:
expected dividend yield of 4.5%, risk-free interest rate of 5.5%,
expected volatility factor of 33.7% and an expected life of four
years.
Since the Company and its subsidiary, LabOne, apply APB 25 in
accounting for their plans, no compensation cost has been recognized
for stock options in the financial statements. Had the Company and
LabOne recorded compensation cost based on the fair value at the grant
date for the stock options under SFAS 123, the Company's pro forma net
loss would have been $10,599,000, $5,157,000 and $7,407,000 in 1997,
1996 and 1995, respectively. Pro forma basic and diluted earnings per
share would have been $1.63, $.79 and $1.15 in 1997, 1996 and 1995,
respectively.
Pro forma net earnings reflect only options granted in 1997, 1996 and
1995. 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 1997,
1996 and 1995 options. Compensation cost for options granted prior to
January 1, 1995 is not considered.
NOTE 7 - LEASE COMMITMENTS
Included with the assets and liabilities transferred to SLH in the
Distribution were several operating leases for office space and
equipment. LabOne has several noncancelable operating leases,
primarily for land and buildings, and other commitments that expire
through 2000. Rental expense for these operating leases during 1997,
1996 and 1995 amounted to $529,000, $1,175,000 and $1,323,000,
respectively. Because of the relocation of LabOne's facilities, the
warehouse lease, with scheduled lease payments of $125,000 in 1998,
has been renewed through February 1999 and is not expected to be
renewed thereafter.
Future minimum lease payments and other commitments under these
agreements as of December 31, 1997 are as follows:
Year Amount
-------------------------
(In thousands)
1998 $ 425
1999 222
2000 120
NOTE 8 - INVESTMENT SECURITIES
A summary of investment securities information relating to quoted
market values and holding gains and losses at December 31, 1997 and
1996 is in the following table.
Amount at
Which
Amortized Market Shown in
Cost Value Balance Holding Holding
Sheet Gains Losses
- ----------------------------------------------------------------------
(In thousands)
December 31, 1997
- -----------------
Held to Maturity
- ----------------
Obligations of states
and political
subdivisions $ 502 501 502 -- 1
Canadian
government
notes 703 703 703 -- --
------------------------------------------------------
$ 1,205 1,204 1,205 -- 1
======================================================
At December 31, 1997, all debt securities will mature within one year.
December 31, 1996
- -----------------
Available for Sale
- ------------------
Preferred
stock $ 3,515 3,515 3,515 -- --
======================================================
Held to Maturity
- ----------------
Obligations of states
and political
subdivisions $ 2,506 2,500 2,506 -- (6)
Canadian
government
notes 746 746 746 -- --
------------------------------------------------------
$ 3,252 3,246 3,252 -- (6)
======================================================
Information about proceeds from sales of available for sale securities
and the gross realized gains and losses on those sales is summarized
in the following table. Cost is determined by specific identification
for computing realized gains and losses.
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
(In thousands)
Proceeds $ 4,365 3 83
==================================
Gross realized gains $ 3,015 -- 34
==================================
Gross realized losses -- (1) (3)
$ ==================================
Trading securities primarily include United States treasury securities
and common stock and totaled approximately $1.4 million and $4 million
at December 31, 1997 and 1996, respectively. The changes in net
unrealized holding gains and losses on trading securities that have
been included in operations are losses of $213,000, $7,000 and
$485,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Included in the preferred stock available for sale at December 31,
1996 was an investment in Oclassen Pharmaceuticals, Inc. with a
carrying value of $2.5 million. Oclassen was a privately owned
pharmaceutical manufacturer which entered into an agreement and plan
of merger with a wholly-owned subsidiary of Watson Pharmaceuticals,
Inc. (Watson), a publicly traded company. The merger was approved by
stockholders on February 26, 1997 and resulted in Lab Holdings owning
approximately 184,000 shares of Watson. Lab Holdings sold 100,000
shares of Watson on February 28, 1997 resulting in a gain of $3
million. The remaining 84,000 shares were transferred to SLH as part
of the Distribution. The other preferred stock investment at December
31, 1996 was Norian Corporation, a privately owned developer of
proprietary bone substitute technology with a carrying value of
$1,015,000. There was no public market for this investment and it
also was transferred to SLH as part of the Distribution.
At December 31, 1997, based on the market price of publicly traded
shares of LabOne, the Company's 82% owned subsidiary, pretax
unrealized gains of approximately $138 million ($21.27 per share) on
this investment were not reflected in either Lab Holdings' book value
or stockholders' equity.
NOTE 9 - INCOME TAXES
Lab Holdings and those subsidiaries that are eligible file a
consolidated U.S. federal income tax return.
During 1995, Lab Holdings generated approximately $6.6 million, in
current capital losses that exceeded capital gains. In 1997, Lab
Holdings utilized approximately $5 million of these losses after
netting current year capital gains and losses. The remaining losses
expire in the year 2001. When it becomes more likely than not that a
deferred tax asset will not be realized, a valuation allowance is
accrued against that deferred tax asset.
The components of the provision (benefit) for income taxes on income
from continuing operations are as follows:
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(In thousands)
Current:
Federal $ (1,372) 1,722 (1,785)
State 637 1,150 186
Foreign 306 259 170
----------------------------------
(429) 3,131 (1,429)
----------------------------------
Deferred:
Federal 7,718 104 (4,203)
State 486 434 (1,025)
Foreign 3 132 94
----------------------------------
8,207 670 (5,134)
----------------------------------
$ 7,778 3,801 (6,563)
==================================
The reconciliation of income tax attributable to continuing operations
computed at the federal statutory tax rate (34%) to income tax expense
(benefit) is as follows:
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(In thousands)
Computed expected tax
expense(benefit) $ 111 43 (2,676)
State income taxes, net of federal
benefit and state valuation
allowance changes 741 1,045 (564)
Goodwill amortization 664 604 1,118
Tax exempt interest and dividends (19) (45) (137)
Tax benefits not available for
subsidiary losses -- 276 309
Losses on sale of subsidiaries -- -- (4,239)
Deferred tax on unremitted earnings
of foreign subsidiaries -- -- 175
Foreign taxes on repatriation of
foreign source income -- 219 --
Other, net (324) (171) (518)
Increase in federal valuation
allowance, and write-off of
deferred tax assets 6,533 1,716 --
Utilization of federal net
operating loss -- -- (115)
Foreign tax in excess of U.S. rate 72 114 84
----------------------------------
Actual income tax expense
(benefit) $ 7,778 3,801 (6,563)
==================================
The significant components of deferred income tax assets and
liabilities are as follows:
December 31, 1997 1996
- ---------------------------------------------------------------------
(In thousands)
Current deferred income tax assets (liabilities):
Valuation allowances on
investments and real estate $ 2,654 14
Allowance on accounts receivable 380 402
Excess book expense accruals 341 513
State income tax deficiency -- 248
Interest accrual on state income tax -- 382
Other 11 516
State net operating loss
carryforwards -- 1,017
---------------------
Gross current deferred income
tax assets 3,386 3,092
Current valuation allowance -- (931)
---------------------
Net current deferred income
tax assets 3,386 2,161
---------------------
Non-current deferred income tax assets (liabilities):
Valuation allowances -- 2,114
Excess book (tax) expense accruals -- 408
Excess book (tax)partnership expenses -- 192
Excess book (tax) oil and gas expenses -- 519
Excess book (tax) depreciation and
amortization 386 238
Alternative minimum tax credit 577 293
Other (81) (7)
Federal capital loss carryforwards 431 2,953
Federal net operating loss
carryforwards 524 1,050
State net operating loss
carryforwards & capital losses 1,399 254
---------------------
Gross non-current deferred
income tax assets 3,236 8,014
Valuation allowance for non-current
deferred income tax assets (2,378) (2,494)
---------------------
Net non-current deferred
income tax assets (liabilities) 858 5,520
---------------------
Net deferred income tax
assets (liabilities) $ 4,244 7,681
=====================
The valuation allowance as of January 1, 1996 was approximately
$1,178,000. The valuation allowance increased during 1996 by
$2,247,000 and decreased during 1997 by approximately $1,047,000.
NOTE 10 - INTANGIBLE ASSETS
The cost and accumulated amortization of intangible assets are as
follows:
December 31, 1997 1996
- ----------------------------------------------------------------------
(In thousands)
Goodwill - excess of cost over fair value
of net assets acquired $ 27,070 24,246
Less accumulated amortization 14,229 12,558
--------------------
12,841 11,688
--------------------
Laboratory patent, antibodies, antigens,
and nicotine screens 8,000 8,000
Less accumulated amortization 7,783 7,261
--------------------
217 739
--------------------
Intangible assets, net of accumulated
amortization $ 13,058 12,427
====================
Effective January 30, 1997, LabOne acquired certain assets, including
customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential
Insurance Company of America, for $4.8 million. Concurrently,
Prudential's Individual Insurance Group agreed to use LabOne as its
exclusive provider of risk assessment testing services. The excess
costs over fair value of GIB Laboratories, Inc. assets acquired was
$4.1 million.
Any excess of the cost over the fair value of the net assets purchased
is being amortized on a straight line basis over 15 to 20 years. The
laboratory patent process is being amortized over 184 months from date
of acquisition.
NOTE 11 - FOREIGN OPERATIONS
The following summarizes financial information for LabOne's wholly-
owned Canadian subsidiary, Lab One Canada Inc.:
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
(in thousands)
Revenues $6,565 6,380 6,224
Operating earnings 645 719 289
Total assets 3,193 2,668 5,747
NOTE 12- EARNINGS PER SHARE
There were no adjustments to the loss available to common stockholders
used in the computation of basic and diluted loss per share for all
years presented.
The weighted average common shares outstanding were used to calculate
both the basic and diluted loss per share because of the Company's
loss from continuing operations for all years presented. The
computation of diluted loss per share did not assume the exercise of
employee stock options because to include the common share equivalents
would have been antidilutive. Common share equivalents would have
been 1,459, 10,939 and 57,291 for 1997, 1996 and 1995, respectively.
NOTE 13- RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with SLH whereby SLH will
provide accounting and administrative services and record storage
space for Lab Holdings. Under this agreement, Lab Holdings will pay
$75,000 annually for these services and storage space.
During 1997, Lab Holdings purchased certain common stock investments
for its trading portfolio for a total purchase price of approximately
$1.2 million. At the same time, SLH sold an identical number of
shares of these securities. These sales were accomplished through
stock brokers at market rates.
NOTE 14 - BENEFIT PLANS
Effective December 31, 1996, Lab Holdings terminated its 401(k)
savings plan and its money purchase pension plan. Lab Holdings and
participating subsidiaries made matching contributions to the 401(k)
savings plan of $43,000 for 1996 and $109,000 for 1995. Matching
contributions to the money purchase pension plan by Lab Holdings and
participating subsidiaries were $100,000 for 1996 and $143,000 for
1995.
In 1997, Lab Holdings terminated its stock purchase plan. Matching
contributions for this plan amounted to $32,000, $44,000 and $39,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
LabOne maintains a profit sharing plan qualifying under Section 401(k)
of the Internal Revenue Code. LabOne also has a defined contribution
plan. LabOne contributed $1,980,000, $1,769,000 and $1,675,000 to the
plans for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 15- DISCONTINUED OPERATIONS
Operations of Discontinued Healthcare Business
In July 1997, Lab Holdings' Board of Directors declared a dividend to
Lab Holdings' shareholders of all shares of common stock of Response
owned by Lab Holdings. Therefore, the activities of Response have
been presented as discontinued operations.
A summary of the discontinued healthcare business follows:
Seven Months Ended Year Ended December 31,
July 31, 1997 1996 1995
- ---------------------------------------------------------------------
(In thousands)
Revenues $ 50,007 67,353 44,298
=====================================
Earnings before income tax $ 1,579 931 1,078
Income tax 3,921 249 --
-------------------------------------
Net earnings (loss) $ (2,342) 682 1,078
=====================================
Net Assets of the Discontinued Healthcare Business
A summary of the net assets of the discontinued healthcare business
follows:
December 31, 1996
- ---------------------------------------------------------------------
(In thousands)
Assets
Current assets $ 31,718
Management service agreements 101,963
Other non-current assets 13,306
-------
Total assets 146,987
-------
Liabilities
Current liabilities 16,674
Notes payable 39,611
Deferred tax liability 25,127
Other non-current liabilities 498
Minority interests 16,645
-------
Total liabilities 98,555
-------
Net Assets $ 48,432
=======
Operations of Discontinued Real Estate Segment
In 1992, Lab Holdings' board of directors approved a plan to
discontinue real estate operations. On March 3, 1997, Lab Holdings
transferred its real estate assets to its wholly-owned subsidiary, SLH
Corporation, in connection with the distribution of all of the
outstanding shares of SLH to Lab Holdings shareholders.
A summary of discontinued real estate operations follows:
Year Ended December 31, 1996 1995
- ---------------------------------------------------------------------
(In thousands)
Revenues $ 16,365 11,486
====================
Loss (2,200) (10,000)
Income tax benefits (748) (3,400)
--------------------
Net loss $ (1,452) (6,600)
====================
Net Assets of Discontinued Real Estate Segment
A summary of the net assets of the discontinued real estate operations
follows:
December 31, 1996
- ----------------------------------------------------------------------
(In thousands)
Assets
Current assets $ 264
Real estate - current 1,223
Real estate - non-current 24,202
Other non-current assets 6,645
-------
Total assets 32,334
-------
Liabilities
Current liabilities 1,868
-------
Net Assets $ 30,466
=======
Included in current liabilities is a note payable of $1.2 million.
The Company was also obligated under recourse debt (with an unpaid
balance of $6,170,000 at December 31, 1996) of an affiliate accounted
for on the equity method.
NOTE 16- QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1997 quarterly financial data is as follows:
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1997 1997 1997 1997
- ----------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 17,740 20,308 19,728 21,150
========================================
Earnings (loss) from
continuing operations $ (2,821) (4,286) 1,333 (2,081)
Earnings (loss) from
discontinued healthcare
business 604 (2,946) -- --
----------------------------------------
Net earnings (loss) $ (2,217) (7,232) 1,333 (2,081)
========================================
Basic and diluted earnings (loss) per share:
Earnings (loss) from
continuing operations $ (.43) (.66) .21 (.32)
Earnings (loss) from
discontinued healthcare
business .09 (.45) -- --
----------------------------------------
Net earnings (loss) $ (.34) (1.11) .21 (.32)
========================================
Cash dividends paid
per share $ .30 .30 .30 .30
========================================
Stock prices:
High $ 42 1/8 35 3/4 35 3/4 26 1/2
Low $ 32 1/2 31 3/4 23 20
Summarized 1996 quarterly financial data is as follows:
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1996 1996 1996 1996
- ----------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 13,294 15,837 15,406 17,341
========================================
Earnings (loss) from
continuing operations $ (321) (163) 284 (4,026)
Earnings (loss) from
discontinued healthcare
business 207 349 413 (287)
Loss from discontinued real
estate operations -- -- -- (1,452)
----------------------------------------
Net earnings (loss) $ (114) 186 697 (5,765)
========================================
Basic and diluted earnings (loss) per share:
Earnings (loss) from
continuing operations $ (.05) (.02) .04 (.62)
Earnings (loss) from
discontinued healthcare
business .03 .05 .07 (.05)
Loss from discontinued real
estate operations -- -- -- (.22)
----------------------------------------
Net earnings (loss) $ (.02) .03 .11 (.89)
========================================
Cash dividends paid
per share $ .30 .30 .30 .30
========================================
Stock prices:
High $ 38 39 1/2 37 3/4 39 1/2
Low $ 33 1/2 36 33 1/2 33 7/8
The 1996 fourth quarter loss includes a $750,000 accrual for estimated
state income tax and $1 million of estimated interest expense as a
result of a California franchise tax audit of prior years. Also
included in the 1996 fourth quarter loss is a net increase in deferred
income tax valuation allowances of $1.7 million.
Stock prices shown above have not been adjusted to reflect effects of
the SLH and Response distributions. See Note 15 for a description of
discontinued operations which affected the results of operations for
the quarters shown above. Quarterly earnings (loss) per share amounts
may not add to the annual earnings (loss) per share amounts due to the
effect of common stock equivalents and the timing of treasury stock
purchases and net earnings (loss).
LAB HOLDINGS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts and Reserves
- -------------------------------------------------------------------
Additions
-----------------
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- End of
Description of Year Expenses Describe Deductions* Year
- ----------------------------------------------------------------------
(In thousands)
Year ended December 31, 1997
Accounts and notes receivable -
allowance for
doubtful
accounts $ 1,022 571 -- 575 1,018
Year ended December 31, 1996
Accounts and notes receivable -
allowance for
doubtful
accounts $ 1,234 717 -- 929 1,022
Year ended December 31, 1995
Accounts and notes receivable -
allowance for
doubtful
accounts $ 702 830 -- 298 1,234
* Uncollectible accounts written-off
Exhibit 10.1
LAB HOLDINGS, INC.
1997 DIRECTORS' STOCK OPTION PLAN
1. PURPOSE
The Lab Holdings, Inc. 1997 Directors' Stock Option Plan is
designed to enable Directors of the Company to acquire or
increase their ownership of the $1.00 par value common stock of
the Company on reasonable terms. The opportunity so provided is
intended to foster in participants a strong incentive to exert
maximum effort for the continued success and growth of the
Company and its Subsidiaries and the enhancement of shareholders'
interests.
2. DEFINITIONS
When used herein, the following terms shall have the meaning set
forth below:
2.1 "Board" means the Board of Directors of Lab Holdings, Inc.
2.2 "Book Value" of property referred to in subsection 7.3
hereof means book value as determined in accordance with
generally accepted accounting principles.
2.3 "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
2.4 "Company" means Lab Holdings, Inc.
2.5 "Director" means a member of the Board.
2.6 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.7 "Fair Market Value" means (i) with respect to the Company's
Shares, the closing sales price of the Shares, as reported
on the National Market System of the Nasdaq Stock Market,
or, if not so reported, the closing sales price as reported
by any other appropriate reporting system of general
circulation, on the date for which the value is to be
determined, or if there is no closing sales price on such
date, then on the last date for which transactions in Shares
were so reported prior to the date on which the value is to
be determined; and (ii) with respect to property referred to
in subsection 7.3 hereof, the value of such property as
determined by independent, third party appraisal.
2.8 "Grantee" means a person to whom an Option is
granted.
2.9 "Non-Qualified Stock Option" or "NQSO" means an
Option awarded under the Plan which by its terms
and conditions does not meet the terms and
conditions established by Code 422A.
2.10 "Option" means the right to purchase, at a price,
for a term, under conditions, and for cash or
other considerations fixed by the Plan, a number
of Shares specified by the Plan. An Option can
only be an NQSO.
2.11 "Plan" means the Company's 1997 Directors' Stock
Option Plan.
2.12 "Pre-Owned Shares" means Shares owned by a Grantee
at the time of the exercise of an Option, and if
they are Shares which the Grantee acquired through
the exercise of an Option under the Plan, such
Shares have been owned for more than six months
prior to the Option exercise.
2.13 "Resigning Directors" means those directors whose
resignations as such are effective on the date
upon which a definitive Proxy Statement is filed
with the Securities and Exchange Commission
respecting a Special Meeting of Company
shareholders, called for the purpose of
considering and voting upon a proposal to amend
the Company's Articles of Incorporation to change
the Company's name to Lab Holdings, Inc.
2.14 "Securities Act" means the Securities Act of 1933,
as amended.
2.15 "Shares" means shares of the Company's $1.00 par
value common stock or, if by reason of the
adjustment provisions hereof any rights under an
Option granted under the Plan pertain to any other
security, such other security.
2.16 "Subsidiary" means any business, whether or not
incorporated, in which the Company, at the time an
Option is granted or in other cases at the time of
reference, owns directly or indirectly not less
than 50% of the equity interest.
2.17 "Successor" means the legal representative of the
estate of a deceased Grantee or the person or
persons who shall acquire the right to exercise an
Option, by assignment, bequest or inheritance or
by reason of the death of the Grantee, as provided
in accordance with subsection 6.7 hereof.
2.18 "Tax Date" means the date on which the amount of
tax to be withheld with respect to an Option is
determined.
2.19 "Term" means the period during which a particular
Option may be exercised.
2.20 "Unit" means (i) the lowest number of Shares
required to be purchased to permit the issuance
with such Shares of a whole security of another
type, if any, issuable pursuant to subsection 7.2
hereof upon exercise of an Option and (ii) such
other whole security.
3. ELIGIBILITY
Each person who is a Director on the Effective Date of
the Plan under Section 9 hereof, other than Resigning
Directors, and each person who becomes a Director
thereafter during the term of the Plan shall be
entitled (subject to any limitations imposed by Section
4 hereof) to participate in the Plan. A Director is
entitled to participate whether or not he is also an
officer of the Company and whether elected by
shareholders or appointed to fill a vacancy created by
the resignation of a Director or the expansion of the
Board.
4. SHARES SUBJECT TO PLAN
The Company hereby reserves 90,000 Shares for issuance
in connection with Options under the Plan, subject to
adjustment under Section 7 hereof. The Shares so
issued may be unreserved Shares held in the treasury,
however acquired, or Shares which are authorized but
unissued. Any Shares subject to issuance upon exercise
of Options but which are not issued because of a
surrender, lapse, expiration or termination of any such
Option prior to issuance of the Shares shall once again
be available for issuance in satisfaction of other
Options. Shares withheld pursuant to a tax withholding
election permitted under Section 13 hereof, and any
Shares owned by a Grantee which are used in the
exercise of an Option under subsection 8.3 hereof
shall be deemed issued under the Plan.
5. GRANT OF OPTIONS
Each person who is a Director as of the Effective Date
of the Plan under Section 9 hereof shall, as of the
Effective Date, receive a grant of Options respecting
15,000 Shares, and each Director who first becomes a
Director after the Effective Date shall, on the date he
first becomes a Director, receive a grant of Options
respecting 15,000 Shares, in all cases without further
action by the Board or otherwise. Such Options shall
be in the form set forth as Exhibit A hereto. No
person shall receive more than one grant respecting
15,000 Shares.
6. TERMS AND CONDITIONS OF OPTIONS
All Options under the Plan shall be granted subject to
the following terms and conditions:
6.1 The purchase price of each Share subject to an
Option shall be 100% of the Fair Market Value of
the Shares on the effective grant date of such
Option.
6.2 Options shall expire on the tenth anniversary of
the effective date of grant.
6.3 Options shall be vested (i.e., exercisable) as
follows: As to 5,000 shares, on and after the
twelve month anniversary of the date of grant; as
to another 5,000 shares, on and after the twenty-
four month anniversary of the date of grant; and
as to the final 5,000 shares, on and after the
thirty-six month anniversary of the date of grant.
6.4 Notwithstanding subsection 6.3 hereof, in the
event of the death of an Option holder during his
term as a Director, all outstanding unvested
Options held by him shall become immediately
exercisable.
6.5 After the termination of an Option holder's term
as a Director for any reason, the Option shall be
exercisable only as to those Shares and other
securities, if any, which were subject to the
exercise of such Option on the date of termination
(including those shares and other securities, if
any, subject to the exercise as a consequence of
subsection 6.4 hereof).
6.6 Options, whether vested or not, shall expire to
the extent unexercised on the date which is 90
days after the date a Director's term as a
Director shall terminate; provided however, that
in the event of the death of a Director during
such person's term as a Director or during the 90-
day period following expiration of such term, such
Options shall expire to the extent unexercised by
such person's Successor on that date which is 12
months after the date of death.
6.7 Each Grantee may name, from time to time, any
beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit
or rights under the Plan is to be paid or
transferred in case of his death before he
receives any or all of such benefit or exercises
such rights. Each designation will revoke all
prior designations by the same Grantee, and will
be effective only when filed by the Grantee in
writing during his lifetime with the Company's
Secretary. In the absence of any such
designation, benefits or rights remaining unpaid
or unexercised at the Grantee's death shall be
paid to or shall be exercisable by his estate,
subject to the terms hereof.
6.8 Notwithstanding subsection 6.3 hereof, all
outstanding unvested Options shall become
exercisable immediately if any of the following
events occur:
6.8.1 Any "person" (as defined in Sections
13(d) and 14(d) of the Exchange Act) is or
becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company
representing twenty-five percent (25%) or
more of the combined voting power of the
Company's then outstanding securities,
provided that this provision shall not apply
to the direct, indirect or beneficial
ownership of Shares by descendants of W. T.
Grant or their spouses, or
6.8.2 At any time there shall cease to be a
majority of the Board comprised as follows:
individuals (other than Resigning Directors)
who on the Effective Date of this Plan under
Section 9 hereof constitute the Board, and
any new Director(s) whose election by the
Board or nomination for election by the
Company's shareholders was approved by a vote
of at least two-thirds (2/3) of the Directors
then still in office who either were
Directors on the Effective Date of this Plan
or whose election or nomination for election
was previously so approved, or
6.8.3 The requisite percentage of the
Company's shareholders shall approve a plan
of complete liquidation and dissolution of
the Company.
6.9 Notwithstanding anything in subsection 6.3 hereof,
all outstanding unvested Options held by a Grantee
shall become exercisable immediately upon the
approval by the requisite percentage(s) of
shareholders of all constituent companies to a
merger or consolidation involving the Company if,
but only if, by the terms of the agreement of
merger or consolidation or other contemporaneous
related document said Grantee's term as a Director
of the Company is not to continue after
consummation of the merger or consolidation or is
specifically limited in time to a period which
does not extend at least until the thirty-six
month anniversary of the date of grant.
6.10 In the event of the dissolution or liquidation of
the Company, each outstanding Option shall
terminate to the extent that it shall not have
been exercised prior to the effective time of such
event.
7. ADJUSTMENTS IN EVENT OF CHANGES IN CAPITALIZATION
7.1 In the event that a dividend shall be declared
upon the Shares of the Company payable in Shares,
the number of Shares then subject to any Option
outstanding under the Plan and the number of
Shares reserved for Options pursuant to the Plan
but not yet subject to Options shall be adjusted
by adding to each such Share the number of Shares
which would be distributable in respect thereof if
such Shares had been outstanding on the date fixed
for determining the shareholders of the Company
entitled to receive such Share dividend.
7.2 In the event that a dividend shall be declared
upon the Shares of the Company payable in an
equity security of the Company other than the
Shares, each Option outstanding under the Plan and
the number and type of securities issuable under
the Plan shall be changed so that thereafter there
shall be issuable upon the exercise of Options
then outstanding or thereafter granted, in
addition to Shares, such number of such other
equity security that would have been distributable
in respect of Shares subject to outstanding
Options or issuable under the Plan had such Shares
been outstanding on the date fixed for determining
the shareholders of the Company entitled to
receive such equity security dividend.
7.3 In the event that a dividend shall be declared
upon Shares (or other securities that, with the
Shares, comprise a Unit) of the Company payable in
cash or other property (other than Shares or other
equity securities of the Company) and the
aggregate amount of the cash or Book Value of the
property payable to shareholders pursuant to such
dividend exceeds 10% of the Company's total assets
on a consolidated basis, the Option exercise price
for each Share (or Unit, if applicable) subject to
an Option shall be reduced on the date following
the payment date of such dividend by the aggregate
amount of cash and the Fair Market Value of any
other property payable with respect to each
outstanding Share pursuant to such dividend.
7.4 In the event that the outstanding Shares shall be
changed into or exchanged for a different number
or kind of shares or other securities of the
Company or of another entity, whether through
reorganization, recapitalization, split-up,
combination of shares, merger, consolidation or
otherwise, then there shall be substituted for
each Share subject to any outstanding Option and
for each Share reserved for Options pursuant to
the Plan but not yet subject to Options the number
and kind of shares or other securities into which
each outstanding Share shall have been so changed
or for which each such share shall have been
exchanged.
7.5 In the case of any substitution or adjustment as
provided for in subsections 7.1, 7.2 or 7.4
hereof, the Option price set forth in each
outstanding Option for each Share covered thereby
prior to such substitution or adjustment will be
the Option price for all Shares or other
securities which shall have been substituted for
such Share or to which such Share shall have been
adjusted pursuant to such subsections.
7.6 In the case of any adjustment provided for in
subsection 7.2 hereof, the Option may thereafter
only be exercisable as to Units and the Option
exercise price for each Unit will be the aggregate
of the Option exercise price for the Shares
included within the Unit.
7.7 No adjustment or substitution provided for in this
Section 7 shall require the Company to sell or
issue a fraction of a Share or other equity
security, and the total substitution or adjustment
with respect to each outstanding Option shall be
limited accordingly. Upon any adjustment made
pursuant to this Section, the Company will, upon
request, deliver to the Option holder or to such
person's Successor a certificate of its Chief
Financial Officer setting forth, with respect to
such Option, the Option price thereafter in effect
and the number and kind of Shares or other
securities thereafter purchasable thereunder.
8. EXERCISE OF RIGHTS UNDER OPTIONS
8.1 A person entitled to exercise an Option may do so
by delivery of a written notice to that effect
specifying the number of Shares with respect to
which the Option is being exercised and any other
information the Company may prescribe.
8.2 The notice of exercise shall be accompanied by
payment in full of the purchase price for any
Shares to be purchased, with such payment being
made in cash or cash equivalents or in Pre-Owned
Shares having a Fair Market Value at that time
equivalent to the purchase price of the Shares or
Units to be purchased, or a combination thereof.
8.3 In lieu of delivery of a stock certificate or
certificates evidencing Shares tendered by the
Grantee in payment of the purchase price in
exercising an Option, the Grantee may furnish a
notarized statement executed by the Grantee, in
such form as prescribed by the Company, as payment
for all or a portion of the purchase price for
Shares or Units to be purchased. The statement
shall recite the number of Shares or Units being
purchased by the Grantee pursuant to the Option
and the number of Pre-Owned Shares owned by the
Grantee which otherwise could be freely delivered
as payment of the purchase price by the Grantee
based on their Fair Market Value at that time.
The Grantee will then be issued a certificate(s)
for (a) new Shares equal to the number of Shares
acquired by the Grantee hereunder upon exercise of
the Option, less the number of Pre-Owned Shares
owned by the Grantee and described in the
notarized statement, and (b) if applicable, other
securities comprising the Units as to which the
exercise relates.
8.4 No Shares or other securities shall be issued upon
exercise of an Option until full payment has been
made therefor.
8.5 Upon exercise of an Option but before a
distribution of Shares or other securities in
satisfaction thereof, the Grantee may request in
writing that the Shares or other securities to be
issued in satisfaction of the Option exercise be
issued in the name of the Grantee and another
person as joint tenants with right of survivorship
or as tenants in common.
8.6 All notices or requests to the Company provided
for herein shall be delivered to the Secretary of
the Company.
9. EFFECTIVE DATE OF THE PLAN AND DURATION
9.1 The Plan shall become effective on the date upon
which the Company files a definitive Proxy
Statement with the Securities and Exchange
Commission respecting a Special Meeting of Company
shareholders, called for the purpose of
considering and voting upon a proposal to amend
the Company's Articles of Incorporation to change
the Company's name to Lab Holdings, Inc.
9.2 The Plan shall remain in effect until all Options
have been exercised in accordance herewith, but no
Options may be granted under the Plan after
September 15, 2007. The provisions of any Option
may be amended at any time prior to the end of its
Term in accordance with the Plan.
10. SHAREHOLDER STATUS
No person shall have any rights as a shareholder by
virtue of the grant of an Option under the Plan, except
with respect to Shares or other securities actually
issued to that person.
11. POSTPONEMENT OR NON-EXERCISE
The Company shall not be required to issue any
certificate or certificates for Shares or other
securities upon the exercise of an Option granted under
the Plan prior to (i) the obtaining of any approval
from any governmental agency which the Company shall,
in its sole discretion, determine to be necessary or
advisable, (ii) the taking of any action in order to
comply with restrictions or regulations incident to the
maintenance of a public market for its Shares or other
securities, if any; and (iii) the completion of any
registration or other qualification of such Shares or
other securities, if any, under any state or Federal
law or rulings or regulations of any governmental body
which the Company shall, in its sole discretion,
determine to be necessary or advisable. The Company
shall not be obligated by virtue of the terms and
conditions of any Option or any provisions of the Plan
to recognize the exercise of an Option or to sell or
issue Shares or other securities in violation of the
Securities Act or the law of any government having
jurisdiction thereof. Any postponement or delay by the
Company in recognizing the exercise of any Option or in
issuing any Shares or other securities hereunder shall
not extend the Term of an Option and neither the
Company nor its directors or officers shall have any
obligation or liability to the Grantee of an Option, to
a Successor or to any other person with respect to any
Shares or other securities, including those as to which
an Option shall lapse because of such postponement.
12. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN
The Board may terminate, suspend or modify the Plan at
any time and in any manner, provided, however, that to
the extent shareholder approval is required by
regulations issued under the Securities Act or the
Exchange Act, in order to create or preserve Company
or Grantee benefits or rights under or with respect to
Options, the Board shall not, without authorization of
the shareholders, effect any change (other than through
adjustment for changes in capitalization or as
otherwise herein provided) which:
(i) increases the aggregate number of Shares for
which Options may be granted under the Plan
or increases the maximum number of Shares for
which Options may be granted to any one
Grantee;
(ii) lowers the minimum Option exercise price;
(iii) lengthens the maximum period during
which an Option may be exercised;
(iv) materially modifies the requirements as to
eligibility to participate in the Plan;
(v) extends the period of time during which
Options may be granted; or
(vi) materially increases the benefit accruing to
Grantees.
Notwithstanding the foregoing, (i) the Board may amend the
Plan, without shareholder authorization, to comply with
Section 16(b) of the Exchange Act or regulations issued
thereunder, to effect registration of the Plan or securities
issuable thereunder under the Securities Act or the
securities laws of any state, or to obtain any required
regulatory approval and (ii) if amendments to the Code or to
the Securities Act or Exchange Act, or regulations issued
thereunder, are adopted after the Effective Date of the Plan
under Section 9 hereof, which amendments permit termination,
suspension or modification of the Plan, including but not
limited to the changes referred to above, without
shareholder approval, no authorization by the Company's
shareholders of any Board action hereunder shall be
required.
No termination, suspension or modification of the Plan shall
adversely affect any right acquired by any Grantee or any
Successor under an Option granted before the date of such
termination, suspension or modification unless such Grantee
or Successor shall consent, but it shall be conclusively
presumed that any adjustment for changes in capitalization
as provided for herein does not adversely affect any such
right.
13. TAXES
13.1 The Company may pay, withhold or require a Grantee
to remit to it amounts sufficient to satisfy the
Company's federal, state, local or other tax
withholding obligations attributable to any Option
exercise, after giving notice to the Grantee, and
the Company may defer issuance of Shares or other
securities in connection with an Option exercise
if any such tax, charge or assessment may be
pending, until indemnified to its satisfaction.
13.2 In connection with the exercise of an Option, a
Grantee may make an irrevocable election to have
Shares or Units otherwise issuable withheld, or
tender back to the Company Shares received, or
deliver to the Company previously-acquired Shares,
having a Fair Market Value at the time sufficient
to satisfy all or part of the Company's total
federal, state, local and other tax withholding
obligations associated with the transaction.
14. APPLICATION OF PROCEEDS
The proceeds received by the Company from the issuance
of Shares or Units under the Plan shall be used for
general corporate purposes of the Company and its
Subsidiaries.
15. OTHER ACTIONS
Nothing in the Plan shall be construed to limit the
authority of the Company to exercise its corporate
rights and powers, including, by way of illustration
and not by way of limitation, the right to grant
options for proper corporate purposes otherwise than
under the Plan to any employee or any other person,
firm, corporation, association or other entity, or to
grant options to, or assume options of, any person in
connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of all or any part
of the business and assets of any person, firm,
corporation, association or other entity.
16. GENDER AND NUMBER
Except when otherwise indicated by the context, words
in the masculine gender when used in the Plan shall
include the feminine gender, the singular shall include
the plural, and the plural shall include the singular.
17. REQUIREMENTS OF LAW, GOVERNING LAW
The granting of Options and the issuance of Shares or
Units shall be subject to all applicable laws, rules
and regulations, and to such approvals by any
governmental agencies or national securities exchanges
and self-regulating entities as may be required. The
Plan, and all agreements hereunder, shall be construed
in accordance with and governed by the laws of the
State of Missouri.
Exhibit 10.2
EXHIBIT A
DIRECTOR STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement"), made this ____ day
of _______, ____, by and between Lab Holdings, Inc. ("LHI") and
____________ ______________________ (the "Grantee") evidences the
grant, by LHI, of a Stock Option (the "Option") to the Grantee
effective on __________, ____, (the "Date of Grant") and the Grantee's
acceptance of the Option in accordance with the provisions of the Lab
Holdings, Inc. 1997 Directors' Stock Option Plan (the "Plan"). LHI
and the Grantee agree as follows:
1. Shares Optioned and Option Price. The Grantee shall have an
option to purchase ________ shares of LHI common stock, par value
$1.00 per share, for $_________ per share, subject to the terms and
conditions of this Agreement and of the Plan, the provisions of which
are hereby incorporated herein by reference. The shares subject to
the Option are not, nor are they intended to be, Incentive Stock
Option (ISO) shares as described in section 422 of the Internal
Revenue Code of 1986, as amended.
2. Vesting. Except as otherwise provided in section 3 below or
in the Plan, this Option shall be deemed vested with respect to the
number of shares described in section 1 as follows: (a) the right to
purchase one-third of the number of shares described in section 1
shall first be vested on the first anniversary of the Date of Grant,
(b) the right to purchase one-half of the remaining number of unvested
shares shall first be vested on the second anniversary of the Date of
Grant, and (c) the right to purchase the balance of the unvested
shares shall first be vested on the third anniversary of the Date of
Grant. Notwithstanding the foregoing provisions of this section 2, if
the Grantee's term as a Director of LHI terminates on account of his
death, the Option shall be deemed vested as to all shares described in
section 1 hereof as of the date of death.
3. Exercise Period. Except as otherwise provided in the Plan,
the Option may be exercised from time to time with respect to all or
any number of the then vested but unexercised shares on any regular
business day of LHI at its then executive offices, until the earliest
to occur of the following dates:
(a) the tenth anniversary of the Date of Grant;
(b) subject to subsection (c) next below, the date which is
ninety (90) days after the date the Grantee's term as a Director
of LHI terminates, except that such date shall be the date which
is twelve (12) months after the Grantee's death, if death occurs
while the Grantee is a Director of LHI or within ninety (90) days
thereafter;
provided, however, that if the Option is exercised after the
Grantee's term as a Director has terminated for any reason,
it may be exercised only to the extent vested on the date
such term as a Director terminated.
4. Exercise.
(a) During the period that the Option is
exercisable, it may be exercised in full or in part by
the Grantee or his guardian, assignee or legal
representative, and, in the event of the Grantee's
death, by the person or persons to whom the Option was
transferred by assignment, will or the laws of descent
and distribution, by delivering or mailing written
notice of the exercise to the Secretary of LHI. The
written notice shall be signed by the person entitled
to exercise the Option and shall specify the address
and Social Security number of such person. If any
person other than the Grantee purports to be entitled
to exercise all or any portion of the Option, the
written notice shall be accompanied by proof,
satisfactory to the Secretary of LHI, of that
entitlement.
(b) Subject to the provisions of subsection (c)
hereof, the written notice shall be accompanied by full
payment of the exercise price for the shares as to
which the Option is exercised either (i) in cash or
cash equivalents, (ii) in shares of LHI common stock
evidenced by certificates either endorsed or with stock
powers attached transferring ownership to LHI, with an
aggregate Fair Market Value (as defined in the Plan)
equal to said exercise price on the date the written
notice is received by the Secretary, or (iii) in any
combination of cash or cash equivalents and such
shares; provided that any shares of LHI common stock
tendered in payment of all or any part of the exercise
price must, if they are shares acquired by the Grantee
through an exercise of the Option, have been owned for
more than six (6) months prior to the subject Option
exercise.
(c) In lieu of payment of the exercise price by
way of delivery of certificate(s) evidencing shares of
LHI common stock, the Grantee may furnish a notarized
statement reciting the number of shares being purchased
under the Option and the number of LHI shares owned by
the Grantee which could be freely delivered as payment;
provided that if the certificate refers to any shares
acquired through an exercise of the Option, then such
shares must have been owned for more than six (6)
months prior to the subject Option exercise in order to
be considered eligible to be freely delivered as
payment. If the Grantee furnishes such a statement in
payment of the exercise price, he will be issued a
certificate for new shares representing the number of
shares as to which the Option is exercised, less the
number of shares described in the notarized statement
as constituting payment under the Option.
(d) In the event the Grantee pays the Option
exercise price by delivery of a notarized statement of
ownership, as described in subsection (c) next above,
the number of shares remaining subject to the Option
shall be reduced not only by the number of new shares
issued upon exercise of the Option but also by the
number of previously owned shares listed on the
notarized statement of ownership and deemed to be
surrendered as payment of the exercise price.
(e) The written notice of exercise will be
effective and the Option shall be deemed exercised to
the extent specified in the notice on the date that the
written notice (together with required accompaniments
respecting payment of the exercise price) is received
by the Secretary of LHI at its then executive offices
during regular business hours.
5. Transfer of Shares; Tax Withholding. As soon as
practicable after receipt of an effective written notice of
exercise and full payment of the exercise price as provided
in section 4 above, the Secretary of LHI shall cause
ownership of the appropriate number of shares of LHI common
stock to be transferred to the person or persons exercising
the Option by having a certificate or certificates for such
number of shares registered in the name of such person or
persons and shall have each certificate delivered to the
appropriate person. Each such certificate shall bear a
legend describing the restrictions imposed by securities
laws, as described in section 7 below, to the extent
applicable. Notwithstanding the foregoing, if LHI or a
Subsidiary requires reimbursement of any tax required by law
to be withheld with respect to shares of LHI common stock,
the Secretary shall not transfer ownership of shares until
the required payment is made; provided that in lieu of
payment in cash of the taxes required by law to be withheld,
the Grantee may pay such taxes by surrendering his right to
exercise a portion of the Option equal in value to the
amount of said taxes; the Grantee would then receive a
certificate for the number of shares otherwise issuable
pursuant to the Grantee's exercise of the Option, reduced by
a number of shares with an aggregate Fair Market Value equal
to the amount of said taxes, which latter number of shares
would be deemed purchased pursuant to the exercise of the
Option and, thus, no longer available under the Plan.
6. Binding Effect. The terms of this Option shall be
binding upon the executors, administrators, heirs,
successors, and assigns of the Grantee.
7. Requirements of Law. This Option may not be
exercised if the issuance of shares of LHI common stock upon
such exercise would constitute a violation of any applicable
federal or state securities or other law or valid
regulation. The Grantee, as a condition to his exercise of
this Option, shall represent to LHI that the shares of LHI
common stock to be acquired by exercise of this Option are
being acquired for investment and not with a present view to
distribution or resale, unless counsel for LHI is then of
the opinion that such a representation is not required under
the Securities Act of 1933 or any other applicable law,
regulation, or rule of any governmental agency.
IN WITNESS WHEREOF, LHI, by its duly authorized
officer, and the Grantee have signed this Agreement as of
the date first above written.
LAB HOLDINGS, INC.
By:___________________________
______________________________
Grantee
The Grantee acknowledges receipt of copies of the Plan
and the Prospectus, dated ________________________,
respecting the Plan. The Grantee represents that (s)he is
familiar with the terms and provisions of the Plan and such
Prospectus. The Grantee hereby accepts this Option subject
to all the terms and provisions of the Plan, including but
not limited to Section 6 ("Terms and Conditions") and
Section 7 ("Adjustments in Event of Changes in
Capitalization") thereof. The Grantee hereby agrees to
accept as binding, conclusive, and final all decisions and
interpretations of the Board of Directors respecting any
questions arising under the Plan.
Date: ________________
Grantee
Exhibit 10.12
SUBLEASE AND SERVICES AGREEMENT
This Sublease and Services Agreement (the "Agreement") is made as
of the 1st day of June, 1997, between Seafield Capital Corporation, a
Missouri corporation ("Seafield") and SLH Corporation, a Kansas
corporation ("SLH").
WHEREAS, the parties hereto determined that it is desirable to
terminate that certain Facilities Sharing and Interim Services
Agreement dated as of February 28, 1997, by and between Seafield and
SLH (the "Interim Services Agreement"), effective as of May 31, 1997;
WHEREAS, in connection with the termination of the Interim
Services Agreement, Seafield no longer has any employees; and
WHEREAS, certain accounting and administrative requirements of
Seafield can more cost effectively be performed by personnel of SLH
than by outside third parties; and
WHEREAS, employees of SLH have adequate time available to perform
the required accounting and administrative functions for Seafield; and
WHEREAS, Seafield desires to sublease a small space from SLH for
the storage of Seafield records; and
WHEREAS, SLH has available the amount of space desired by
Seafield, which space SLH does not require for its own purposes;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein made, the parties hereto agree as follows:
1. Termination of Interim Services Agreement. SLH and Seafield
hereby agree that the Interim Services Agreement shall be
terminated and shall have no further force or effect, effective
as of May 31, 1997.
2. Sublease. SLH does hereby sublease to Seafield a space
approximately 12 feet by 12 feet in size within the premises
being leased by SLH, constituting Suite 260 in the office
building at 5000 West 95th Street, Shawnee Mission, Kansas 66207.
The subject space shall be separate from the space utilized by,
and shall not itself by utilized by, SLH during the term of this
sublease, but the parties understand that the space being sublet
to Seafield is not secured and can be accessed by personnel from
SLH. The term of the sublease respecting said space shall be
identical to the term of SLH's lease of Suite 260, including any
extensions or renewals thereof.
3. Services. SLH hereby agrees to perform all of
those accounting and administrative services requested
by Seafield which are of a nature that would have been
performed by Seafield employees if Seafield were to
have those employees it had prior to the effective date
of this Agreement. Seafield recognizes that SLH
employees must also perform accounting and
administrative functions for SLH and SLH shall be
entitled to use reasonable discretion in determining
the allocation of time by SLH employees when services
are requested by Seafield and at the same time required
by SLH.
4. Consideration. In consideration of the space
sublet to Seafield hereunder and in consideration of
the services to be provided by SLH hereunder, Seafield
shall pay to SLH the sum of Seventy-Five Thousand
Dollars ($75,000.00) annually.
5. Term. The effective date of this Agreement shall
be June 1, 1997. The term of the sublease arrangement
shall be as set forth in Section 1 hereof. The term of
the remainder of this Agreement shall be one year;
provided that the term shall automatically renew for
additional one year periods unless either party shall
notify the other not less than sixty (60) days prior to
the end of the then-current term.
6. Miscellaneous. This Agreement shall be governed
by the internal laws of the State of Kansas. The
Agreement may not be amended except by writing signed
by both parties.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the date first above written.
SEAFIELD CAPITAL CORPORATION
By:
Name:
Title:
SLH CORPORATION
By:
Name:
Title:
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
form 10-K for the period ended December 31, 1997 and is qualified in its
entirety by reference to such 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,129
<SECURITIES> 2,648
<RECEIVABLES> 13,626
<ALLOWANCES> 1,018
<INVENTORY> 2,203
<CURRENT-ASSETS> 50,348
<PP&E> 43,956
<DEPRECIATION> 33,515
<TOTAL-ASSETS> 74,786
<CURRENT-LIABILITIES> 8,623
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 49,187
<TOTAL-LIABILITY-AND-EQUITY> 74,786
<SALES> 0
<TOTAL-REVENUES> 78,926
<CGS> 0
<TOTAL-COSTS> 83,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 571
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 328
<INCOME-TAX> 7,778
<INCOME-CONTINUING> (7,855)
<DISCONTINUED> (2,342)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,197)
<EPS-PRIMARY> (1.57)
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