SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 23, 1998
Lab Holdings, Inc.
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(Exact name of registrant as
specified in its charter)
Missouri 0-16946 43-1039532
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
5000 W. 95th St. Suite 260
Shawnee Mission, KS 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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Page 1 of 12
ITEM 5. Other Events
CAUTIONARY STATEMENT UNDER THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Lab Holdings, Inc. is filing this Form 8-K in order to
obtain the benefits of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
Lab Holdings, Inc. is a holding company which owns
approximately 81% of LabOne, Inc. LabOne, Inc. operates a
centralized laboratory and markets insurance, clinical and
substance abuse testing services in the United States and Canada.
In this document, Lab Holdings, Inc. and LabOne, Inc. together
are referred to as the "Company".
Certain written and oral statements which have been made and
which may be made from time to time by the Company, or by its
officers, directors or employees acting on its behalf, that are
not statements of historical fact, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include,
without limitation, any statement specifically identified by the
Company as a forward-looking statement. Examples of forward-
looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, capital expenditures, the payment or non-payment of
dividends, capital structure and other financial items, (ii)
statements of plans and objectives of the Company or its
management or Board of Directors, including plans or objectives
relating to the products or services of the Company, (iii)
statements of future economic performance, and (iv) statements of
assumptions underlying the statements described in (i), (ii) and
(iii). Forward-looking statements can often be identified by the
use in such statements of forward-looking terminology, such as
"believes," "expects," "may," "will," "should," "could,"
"intends," "plans," "estimates" or "anticipates," or the negative
thereof, other variations thereon or comparable terminology.
Forward-looking statements made by or on behalf of the
Company involve risks and uncertainties which may cause actual
results to differ materially from those in such statements. The
Company cautions investors that any forward-looking statement
made by the Company is not a guarantee of future performance or
results.
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Any forward-looking statement made by or on behalf of the
Company speaks only as of the time at which the statement is
made. The Company does not undertake to publicly update or
correct any forward-looking statement made by or on behalf of the
Company.
The list set forth below of factors which could cause actual
results to differ materially from those discussed in forward-
looking statements made by or on behalf of the Company is not
exhaustive. Other factors not identified herein could also have
such an effect.
Important factors which could cause actual results to differ
materially from those discussed in forward-looking statements
made by or on behalf of the Company include the following:
The Insurance Testing Market.
A substantial portion of the Company's revenues and net
earnings are derived from the Company's provision of risk
appraisal laboratory services to the insurance industry. The
tests performed by the Company are specifically designed to
assist an insurance company in objectively evaluating the
mortality and morbidity risks posed by policy applicants. The
majority of the testing is performed on specimens of individual
life insurance policy applicants. The Company also provides
testing services on specimens of individuals applying for
individual and group medical and disability policies. The
Company's results of operations from insurance testing services
are subject to a number of risks and uncertainties, including,
without limitation, the number of life insurance applications
written in the industry, the policy amount thresholds at which
insurance companies order tests, the type and cost of tests
requested by insurance companies (i.e. blood, urine, saliva,
hair, etc.), innovations in the types and cost of tests available
for testing which are approved by the Food and Drug
Administration, the prices which the Company can charge for
performing tests, the nature and extent of competition in the
industry and the extent to which insurance companies maintain in-
house testing facilities. Changes in these factors are generally
beyond the Company's control and are difficult to predict. As a
result of these and other risks and uncertainties, future results
of the Company's insurance testing operations may be materially
better or worse than expected or projected.
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Expansion into New Markets.
The Company's growth strategy entails expanding its
laboratory testing services to include: (a) testing for the
healthcare industry and (b) substance abuse testing. The Company
began offering testing services in these areas in 1994.
With respect to testing services for the healthcare
industry, the Company provides clinical testing services to aid
in the diagnosis and treatment of patients. The Company markets
its clinical testing services to the payers of healthcare -
insurance companies and self-insured groups - through exclusive
arrangements with managed care organizations and through the Lab
Card Program. The Lab Card Program provides laboratory testing
at substantial savings, which savings are shared with the patient
to create an incentive for the patient to direct laboratory work
to the Company. Prior to the Company's adoption of the Program
in 1994, the Program was untested in the marketplace. The
Program will be successful only to the extent that the Company
can continue to convince potential customers of its efficacy and
value, patients direct laboratory work to the Company and
competitors do not adopt equivalent or superior marketing
programs.
With respect to substance abuse testing, the Company is
certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) to perform substance abuse testing for
federally regulated employers. The Company is currently
marketing substance abuse testing services throughout the country
to both regulated and non-regulated employers, including Fortune
1000 companies, third party administrators and occupational
health providers.
Although the Company has met with initial success in
marketing its testing services in the healthcare and substance
abuse testing industries, there can be no assurance that the
Company will be able to continue increasing its market share in
these industries or that the Company's provision of testing
services in these industries will become profitable. The
Company's continued expansion in, and results of operations from,
these industries is subject to a number of risks and
uncertainties, including, without limitation, the nature and
extent of competition, the Company's ability to comply with
additional regulatory and certification requirements applicable
to testing in these industries, the extent of future efforts in
the healthcare industry to control or reduce costs, and the
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Company's ability to successfully market its services to new
customers in new markets.
Cost Reduction Efforts in the Healthcare Industry.
The clinical testing industry has been affected by the
growth of managed care organizations and the efforts of third
party payers to control the utilization and costs of health care
services. Managed care organizations have become a significant
force in the health care industry. Managed care providers
typically contract with a limited number of clinical laboratories
and negotiate discounts to the fees charged by such laboratories
in an effort to control costs. Many managed care providers have
used capitated payment contracts, pursuant to which the managed
care provider and the laboratory agree to a per member, per month
payment to cover an agreed upon schedule of laboratory tests
during the month, regardless of the number or cost of those tests
actually performed. The effect of capitated payment contracts is
to shift the risks of additional testing beyond that covered by
the capitated payment to the clinical laboratory. As a result of
the expansion of managed care, many clinical laboratories have
experienced declines in test utilization and per-test revenue.
In addition, Medicare, Medicaid and insurance companies have
increased efforts to control the cost and delivery of health care
services, including testing services. These efforts have also
reduced prices, added costs and decreased test utilization in the
clinical laboratory industry. There is a substantial risk that
further reductions in reimbursement rates of third-party payers
will occur. The Company believes that it can effectively compete
with existing clinical laboratories in providing low cost testing
services to managed care companies and third party payers. Even
if the Company is successful in marketing its services to managed
care companies and insurance companies, continued cost-cutting
efforts may further erode the volume of testing and profit
margins in the industry and adversely affect the Company's
clinical laboratory operations.
Competition.
The Company currently services over half of the insurance
laboratory testing market. The Company has two other main
competitors, Osborn Laboratories, Inc. and Clinical Reference
Laboratory. The insurance testing industry is highly
competitive. The primary focus of the competition is pricing.
This continued competition has resulted in a decrease in the
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average price per test charged by the Company. The clinical
laboratory testing market is highly fragmented and very
competitive. The Company faces competition from numerous
independent clinical laboratories and hospital-owned or
physician-owned laboratories. Many of the Company's competitors
are significantly larger and have substantially greater financial
resources than the Company. The Company competes in the
substance abuse testing market nationwide. The Company's major
competitors are the three major clinical chains, Laboratory
Corporation of America, Quest Diagnostics and SmithKline Beecham
Laboratories, who collectively service approximately two-thirds
of the substance abuse testing market. The principal methods of
competition in the clinical laboratory and substance abuse
testing markets are price and timeliness of service. The
Company's competitors may take actions to meet the Company's
marketing programs and other initiatives, and may be willing to
accept lower margins and to reduce prices in order to more
effectively compete in the Company's industries. As a result of
such actions, the Company could fail to achieve sales and
revenues increases or otherwise fail to meet its anticipated
results. There can be no assurance that increased competition in
the Company's industries will not have a material adverse effect
on the Company's business, financial condition and results of
operations.
Certification.
The Company's laboratory is currently certified to conduct
laboratory testing under the Clinical Laboratory Improvement
Amendments of 1988 (collectively, as amended, CLIA `88), by the
Substance Abuse and Mental Health Services Administration
(SAMHSA) and by all other states that require separate licensure.
The Company is also accredited by the College of American
Pathologists (CAP). Certification and accreditation is essential
to the Company's business because some of its customers are
required to use certified laboratories, and many of its customers
look to certification and accreditation as an indication of
accuracy and reliability of results. In order to remain
certified and accredited, the Company is subject to frequent
inspections and proficiency testing challenges. Failure to meet
any of the numerous certification requirements to which the
Company is subject could result in suspension or loss of
certification. Such suspension or loss of certification could
have a material adverse effect on the Company.
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General Economic Conditions.
Demand for the Company's services is dependent on general
economic conditions. The Company generally conducts fewer tests
for the insurance industry during periods of recession. In
addition, recessions and economic slow-downs generally result in
fewer new hires, and therefore may lead to fewer pre-employment
drug tests for public and private employer customers. Because
expenses associated with maintaining the Company's testing work
force are relatively fixed over the short term, the Company's
profit margins tend to increase in periods of higher testing
volume and decrease in periods of lower testing volume.
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results will be influenced
by a host of factors, which include those discussed herein and
the following: regulatory matters; the extent to which the
Company's services gain market acceptance in new markets;
competition; changes in the mix of testing services provided in a
given quarter; changes in pricing policies by the Company and by
its competitors; acquisition costs and restructuring and other
charges associated with acquisitions; the Company's success in
implementing its growth strategy; personnel changes; and general
economic conditions. As a result of the influence of these
factors, the Company's results of operations may fluctuate from
quarter to quarter, and the Company's results of operations in
any particular quarter may be materially better or worse than
expected or projected.
Legal Proceedings.
In the ordinary course of its business, claims are made
against the Company by individuals alleging false positive or
false negative reports. To date, the Company has not experienced
any material liability related to these claims, although there
can be no assurance that the Company will not at some time in the
future experience significant liability in connection with such
claims. The Company believes that its liability insurance
coverage is adequate for its business. However, there can be no
assurance that the Company's existing insurance coverage limits
will be adequate to protect the Company from any liabilities it
might incur in connection with its operations. Any liabilities
in excess of coverage could have a material adverse affect on the
Company's business, results of operations and financial
condition.
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Dependence on Key Personnel.
The Company is dependent upon a number of key management and
technical, sales and marketing personnel. The loss of a number
of key employees could have a material adverse effect on the
Company. The Company believes that its future success will
depend in part upon its continued ability to attract, retain and
motivate highly skilled personnel.
Governmental Regulation.
Operation of Clinical Laboratory. The clinical laboratory
industry is subject to significant governmental regulation at the
Federal, state and local levels. Virtually all clinical
laboratories, including the laboratory owned by the Company, are
required to be certified or licensed under CLIA, the Medicare and
Medicaid programs and various state and local laws, and may be
subject to periodic inspections by regulatory agencies. In 1992,
the Department of Health and Human Services issued regulations
implementing CLIA `88 which establish quality standards for the
conduct of different categories of laboratory tests. The
potential penalties for failure to comply with these regulations
include denial of the right to conduct business, significant
fines and criminal penalties. The Company is also subject to
state regulations which may impose more stringent requirements
than federal law. Although the Company has instituted programs
to ensure that its operations meet all applicable regulatory
requirements, there can be no assurance that the Company will
always be able to comply with all of such requirements. The loss
of a license, imposition of a fine or future changes in such
Federal, state and local laws and regulations could have a
material adverse effect on the Company.
Medicare/Medicaid Regulations. A small portion of the
Company's revenues from clinical laboratory services are received
from Medicare or Medicaid programs. Although the Company does
not expect the percentage of its revenues derived from Medicare
and Medicaid reimbursements to increase substantially in the
future, to the extent that such revenues do increase, the
Company's results of operations may be affected by Medicare and
Medicaid reimbursement policies. In 1984, Congress established a
Medicare fee schedule for clinical laboratory services performed
for patients under Part B of the Medicare program. Subsequently,
Congress imposed a national ceiling on the amount that can be
paid under the fee schedule.
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Since 1984, Congress has periodically reduced the ceilings on
Medicare reimbursement to clinical laboratories from previously
authorized levels. In addition, state Medicaid programs are
prohibited from paying more than the Medicare fee schedule for
clinical laboratory services provided to Medicaid recipients. It
is impossible to predict if additional Medicare reductions will
be implemented.
The Federal government has adopted policies for
administration of Medicare payments to clinical laboratories for
the most frequently performed automated blood chemistry profiles.
The policies establish a consistent nationwide standard for the
content of automated blood chemistry profiles and require
laboratories performing certain profiles to obtain and provide
documentation of the medical necessity of tests included in the
profiles for each Medicare beneficiary. The Company incurs
additional costs in complying with these regulations.
Future changes in Federal, state and local regulations
affecting government reimbursement of clinical laboratory testing
could have an adverse effect on the Company. The materiality of
any such adverse effect will depend in part upon the extent to
which the Company receives its revenues from Medicare and
Medicaid programs.
Fraud and Abuse Regulations. A wide array of fraud and
abuse provisions apply to clinical laboratories participating in
Medicare and Medicaid programs. Penalties for violations of
these laws include exclusion from participation in
Medicare/Medicaid programs and civil and criminal penalties. The
Office of Inspector General of the Department of Health and Human
Services has developed a sample Model Compliance Plan.
Laboratories are being advised to ensure compliance with anti-
fraud and abuse laws and rules governing federally-financed
reimbursement for laboratory testing services. Even though only
a small portion of the Company's business encompasses fee-for-
service Medicare/Medicaid, a Chief Compliance Officer and nine
Co-Compliance Officers have been appointed. The Company is in
the process of developing its own Compliance Plan.
Drug Testing. Drug testing for certain public sector
employees is regulated by SAMHSA, which has established detailed
quality standards for drug testing on employees of federal
government contractors and certain other entities. Certification
by SAMHSA is essential to the Company's substance abuse testing
business. See "Certification."
Page 9
Environmental and Occupational Safety. The Company is
subject to various federal, state and local laws and regulations
concerning the environment and occupational safety and health,
including laws and regulations relating to the handling,
transportation and disposal of specimens, infectious and
hazardous waste and radioactive materials. The Company is
subject to extensive regulation relating to workplace safety for
healthcare employers whose workers may be exposed to blood-borne
pathogens such as HIV. Although the Company is not aware of any
material non-compliance with such laws and regulations, any
failure to comply could subject the Company to denial of the
right to conduct business, fines, criminal and civil penalties
and civil liability. The Company cannot predict what
environmental or health and safety legislation or regulations
will be enacted in the future or how existing or future laws or
regulations will be administered or interpreted, nor can it
predict the amount of future expenditures which may be required
in order to comply with any environmental or health and safety
laws or regulations.
Dividends.
The Company has paid quarterly dividends with respect to
shares of Common Stock over the past several years. Declaration
and payment of dividends are subject to the discretion of the
Company's Board of Directors and may be made only from funds
legally available therefor. The Board of Directors reviews the
Company's dividend policy on a periodic basis. The Company's
ability to pay dividends depends upon LabOne's financial
condition, results of operations and dividend payments. The
Company has paid dividends per share in excess of earnings per
share in recent years. There can be no assurance that the
Company will be able to, or will continue to, declare and pay
dividends with respect to shares of Common Stock.
Single Facility; New Facility.
The Company's testing operations are contained in a single
facility located in Overland Park, Kansas. Although the Company
has a full-time alternative power source in the event of an
electrical power shortage and has taken steps to limit the
possibility of a fire, the facility is subject to risk of fire,
earthquake, tornado, telecommunications failure and similar
events. Even though the Company does carry business interruption
insurance to compensate for losses which might occur, the
Page 10
occurrence of such an event with respect to the Company's testing
facility could materially adversely affect the Company's
business, results of operations and financial condition.
The Company is arranging for the construction of a new
testing facility to replace the existing laboratory, warehouse
and administration facilities. The facility is expected to be
completed during the first quarter of 1999. Completion of the
new facility in a timely manner is subject to a number of risks
and uncertainties, including weather and construction delays.
Year 2000 Computer Concerns.
Year 2000 computer concerns are the result of computer
programs using two digits instead of four digits to identify the
applicable year. Such computer programs may recognize a date
using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations, resulting in
a disruption of operations. The Company is actively addressing
Year 2000 computer concerns. LabOne 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 the
first quarter, 1999 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 to the
Company. However, there can be no assurance that the Company's
adjustments to its computer systems will completely eliminate all
Year 2000 problems. In addition, there can be no assurance that
the systems of clients and vendors will be converted to address
Year 2000 problems in a timely and effective manner or that such
conversions will be compatible with the Company's computer
systems. A failure to properly address the Year 2000 problem
could have a material adverse effect on the Company's business,
financial condition and results of operations.
Lab Holdings has completed its Year 2000 internal compliance
program and believes that its limited computer systems are now
Year 2000 compliant.
Supplies.
The Company's operations require the supply of insurance
testing kits, testing agents and other laboratory supplies. The
Company has several suppliers for most of these materials. There
can be no assurance, however, that the Company will not
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experience shortages of such materials or be forced to seek
alternative sources of supply. In addition, there can be no
assurance that prices for such materials will remain stable. Any
shortages of such materials may result in service delays and
increased costs which could have a material adverse effect on the
Company's business, financial condition and results of
operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
Lab Holdings, Inc.
Date: October 23, 1998 By: /s/ Steven K. Fitzwater
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Steven K. Fitzwater
Exec. V.P., Chief Operating
and Financial Officer and
Secretary
Date: October 23, 1998 By: /s/ Linda K. McCoy
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Linda K. McCoy
V.P., Chief Accounting Officer
and Assistant Secretary
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