UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
Amendment No. 3
(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, 1998
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
---
Approximate aggregate market value of voting stock held by non-
affiliates of Registrant: $90,847,442 (based on closing price as of
May 26, 1999)
Number of shares outstanding of only class of Registrant's common
stock as of May 26, 1999: $1 par value common - 6,489,103
Documents incorporated by reference:
No documents listed on the cover of Form 10-K are incorporated herein.
PART I.
ITEM 1. BUSINESS.
Background.
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 that is primarily engaged in the
business of managing its investment in LabOne, Inc. At December 31,
1998, LabOne was 80.5% owned by the Registrant. LabOne provides
laboratory testing services on a world-wide basis for insurance risk
appraisal, clinical use in the healthcare industry and employee
screening for substance abuse
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). SLH is now known as Syntroleum Corporation. See Item 7
and Notes to Consolidated Financial Statements for additional
information.
Lab Holdings had a majority ownership position in Response. Response
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 1997 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.
In 1997, Lab Holdings entered into an agreement with SLH whereby SLH
provided accounting and administrative services and record storage
space for Lab Holdings. Under this agreement, Lab Holdings paid
$75,000 annually for these services and storage space. On August 7,
1998, SLH merged with Syntroleum Corporation and changed its name to
Syntroleum Corporation. Effective with this merger, Lab Holdings
terminated its 1997 services agreement with SLH and entered into a
facilities sharing agreement with Syntroleum whereby Syntroleum
provides office facilities and record storage space in exchange for
Lab Holdings' personnel providing services related to the historical
information of SLH and its subsidiaries.
Proposed Merger.
On March 8, 1999, Lab Holdings and its subsidiary, LabOne, announced
that the Boards of Directors of both companies had approved an
agreement to merge the two companies.
Under the merger agreement, Lab Holdings name will be changed to
LabOne, Inc., its management will consist of LabOne management and its
board will consist of nine of the current LabOne directors as well as
three new independent non-management directors.
Stockholders of Lab Holdings will have each of their Lab Holdings
shares split immediately before the merger into 1.5 shares.
Stockholders of LabOne, other than Lab Holdings, may elect to have
each of their existing LabOne shares exchanged for one share of the
combined company or $12.75 in cash or a combination of cash and
shares. However, if the cash election shares exceed a cash limit of
$16.6 million (approximately 50% of eligible shares), then the cash
will be allocated on a pro rata basis among the cash election shares.
Lab Holdings now owns 80.5% of LabOne. If none of the LabOne
stockholders elect to receive cash, Lab Holdings stockholders will own
approximately 78.9% of the combined company and stockholders of
LabOne, other than Lab Holdings, will own about 21.1% of the combined
company after the merger.
As reported in the Lab Holdings Report on Form 8-K dated March 7,
1999, the combination of the two companies is designed to position
LabOne so that it may continue its growth both internally and by
acquisition as it implements LabOne's diversification strategy. This
will also allow Lab Holdings stockholders to enjoy the benefits of a
direct investment in LabOne and its excellent management team while
eliminating duplicate holding company management and administrative
costs.
The merger is expected to close in June or July following the
satisfaction of a number of closing conditions. These include
approval by the holders of two-thirds of the outstanding Lab Holdings
shares and a majority of the shares voted by LabOne stockholders other
than Lab Holdings and its affiliates. Financing must also be obtained
sufficient to satisfy cash elections after the use of available cash
of LabOne and Lab Holdings. Stockholder meetings to vote on the
proposed merger will be scheduled as soon as a registration statement
becomes effective with the Securities and Exchange Commission and
proxy materials are finalized. Lab Holdings expects to file the
registration statement in April.
The offering of Lab Holdings common stock in the merger will only be
made by means of the Joint Proxy Statement/Prospectus. That document
will contain detailed information about the proposed merger.
The Lab Holdings Report on Form 8-K, dated March 7, 1999, which is
incorporated herein by reference, includes a copy of the Merger
Agreement and the text of the press release announcing the merger.
Employees.
Lab Holdings had three full time and two part time employees as of
December 31, 1998. None of the employees is represented by a labor
union and Lab Holdings believes its relations with employees are good.
Subsidiaries.
The following list shows the Registrant and each subsidiary
corporation of which Registrant owned a majority interest at December
31, 1998, 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) 80.5%
Lab One Canada Inc. (Canada) 100%
Systematic Business Services, Inc. (Missouri) 100%
Forward Looking Statements.
This Annual Report on Form 10-K may contain "forward-looking
statements," including, but not limited to: projections of revenues,
income or loss, capital expenditures, the payment or non-payment of
dividends and other financial items, statements of plans and
objectives, statements of future economic performance and statements
of assumptions underlying such statements. Forward-looking statements
involve known and unknown risks and uncertainties. Many factors could
cause actual results to differ materially from those that may be
expressed or implied in such forward-looking statements, including,
but not limited to, the volume and pricing of laboratory tests
performed by LabOne, competition, the extent of market acceptance of
LabOne's testing services in the healthcare and substance abuse
testing industries, market acceptance of the Lab Card program, intense
competition, the loss of one or more significant customers, general
economic conditions and other factors detailed from time to time in
Lab Holding's reports and registration statements filed with the
Securities and Exchange Commission, including Lab Holding's Current
Report on Form 8-K dated October 23, 1998, which is incorporated
herein by reference.
INFORMATION CONCERNING LABONE, INC.
Information concerning LabOne, Inc. has been obtained from its Form
10-K for the year ended December 31, 1998.
The Registrant's subsidiary, LabOne, Inc., was 80.5% owned by the
Registrant and 19.5% publicly held at December 31, 1998. LabOne is a
publicly-traded stock (NASDAQ-LABS). LabOne provides laboratory and
investigative services for the insurance industry, clinical testing
services for the healthcare industry and substance abuse testing
services for employers. LabOne, together with its wholly-owned
subsidiaries, Lab One Canada Inc. and Systematic Business Services,
Inc. (SBSI), hereinafter collectively referred to as LabOne, is the
largest provider of life insurance laboratory testing services in the
United States and Canada. See Notes to Consolidated Financial
Statements for financial information regarding foreign operations.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed by 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.
Effective October 30, 1998, LabOne acquired Systematic Business
Services, Inc., a Missouri corporation. SBSI provides telephone
inspections, motor vehicle reports, attending physician statements,
and claims investigation services to life and health insurers
nationwide.
LabOne's clinical testing services are provided to the healthcare
industry 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(r), a Laboratory
Benefits Management (LBM) program.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) to perform substance abuse testing services
for federally regulated employers and is currently marketing these
services throughout the country to both regulated and nonregulated
employers. LabOne's rapid turnaround times and multiple testing
options help clients reduce downtime for affected employees and meet
mandated drug screening guidelines.
Services Provided by LabOne
LabOne - Insurance Services:
Insurance companies require an objective means of evaluating the
insurance risk posed by policy applicants in order to establish the
appropriate level of premium payments or to determine whether to issue
a policy. Because decisions of this type are based on statistical
probabilities of mortality and morbidity, insurance companies
generally require quantitative data reflecting the applicant's general
health. Standardized laboratory testing, tailored to the needs of the
insurance industry and reported in a uniform format, provides
insurance companies with an efficient means of evaluating the
mortality and morbidity risks posed by policy applicants. The use of
standardized blood, urine and oral fluid testing has proven a cost-
effective alternative to individualized physician examinations, which
utilize varying testing procedures and reports.
LabOne's insurance testing services consist of certain specimen
profiles that provide insurance companies with specific information
that may indicate liver or kidney disorders, diabetes, the risk of
cardiovascular disease, bacterial or viral infections and other health
risks. LabOne also offers tests to detect the presence of antibodies
to human immunodeficiency virus (HIV). Insurance companies generally
offer a premium discount for nonsmokers and often rely on testing to
determine whether an applicant is a user of tobacco products.
Standardized laboratory testing can 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. 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.
In association with Lincoln National Risk Management, LabOne provides
electronic data collection services and software to enable insurance
companies to receive data directly into their underwriting systems.
LabOne offers LabOne NET, a combination network/software product that
provides a connection for insurance underwriters for ordering and
delivery of risk assessment information such as laboratory results,
motor vehicle reports and other applicant information. LabOne handles
paramedical examination paperwork and assist with administration of
data for insurance underwriting. Additionally, LabOne can obtain
attending physician statements, telephone inspections, motor vehicle
reports, and perform claims investigation through its subsidiary,
SBSI.
LabOne - Clinical Services:
Clinical laboratory tests are generally requested by physicians and
other healthcare providers to diagnose and monitor diseases and other
medical conditions through the detection of substances in blood and
other specimens. Laboratory testing is generally categorized as
either clinical testing, which is performed on bodily fluids including
blood and urine, or anatomical pathology testing, which is performed
on tissue. Clinical and anatomical pathology tests are frequently
performed as part of regular physical examinations and hospital
admissions in connection with the diagnosis and treatment of
illnesses. The most frequently requested tests include blood
chemistry analyses, blood cholesterol level tests, 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(registered trademark) Program as a
vehicle 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. The Lab Card Program provides laboratory testing at reduced
rates as compared to traditional laboratories. It uses a unique
benefit design that shares the cost savings with the patient, creating
an incentive for the patient to help direct laboratory work to LabOne.
Under the Program, the patient incurs no out-of-pocket expense when
the Lab Card is used, and the insurance company or self-insured group
receives substantial savings on its laboratory charges.
LabOne has several exclusive arrangements with managed care
organizations. The two most significant are Principal Healthcare of Kansas
City and BlueCross BlueShield of Tennessee. With these arrangements,
LabOne contracts with the managed care organizations and they direct all
testing for their members through LabOne.
LabOne - Substance Abuse Testing Services:
LabOne markets substance abuse testing to large companies, third party
administrators and occupational health providers. Certification by
the Substance Abuse and Mental Health Services Administration enables
LabOne to offer substance abuse testing services to federally regulated
industries.
Specimens for substance abuse testing are typically collected by
independent agencies who use LabOne's forms and collection supplies.
Specimens are sealed with bar-coded, tamper-evident seals and shipped
overnight to 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.
LabOne - Segment Information
The following table summarizes LabOne's revenues from services
provided to the insurance, clinical and substance abuse testing
markets:
Year ended December 31,
1998 1997 1996
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(Dollars in thousands)
Insurance $ 69,149 68% $61,998 79% $50,801 85%
Clinical 18,600 18% 7,512 9% 3,942 7%
Substance abuse 14,478 14% 9,416 12% 4,689 8%
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Total $102,227 $78,926 $59,432
======= ====== ======
(See Note 4 of Notes to Consolidated Financial Statements for
operating income and identifiable assets by segment.)
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
The objective of the regulatory affairs department is to ensure that
accurate and reliable test results are released to clients. This is
accomplished by incorporating both internal and external quality
assurance programs in each area of the laboratory. In addition,
quality assurance specialists share the responsibility with all LabOne
employees of an ongoing commitment to quality and safety in all
laboratory operations. Internal quality and education programs are
designed to identify opportunities for improvement in laboratory
services and to meet all required safety training and education
issues. These programs help ensure the reliability and
confidentiality of test results.
Procedure manuals in all areas of the laboratory help maintain
uniformity and accuracy and meet regulatory guidelines. Tests on
control samples with known results are performed frequently to
maintain and verify accuracy in the testing process. Complete
documentation provides record keeping for employee reference and meets
regulatory requirements. All employees are thoroughly trained to meet
standards mandated by OSHA in order to maintain a safe work
environment. Superblind Testing Service(trademark) controls are used
to challenge every aspect of service at LabOne from specimen arrival
through final billing. Approximately 500 sample kits are prepared and
submitted anonymously each month. These samples have at least 15
different indicators each representing over 7,500 challenges to the
testing, handling and reporting procedures. Specimens requiring
special handling are evaluated and verified by control analysis
personnel. A computer edit program is used to review and verify
clinically abnormal results, and all positive HIV antibody and drugs-
of-abuse records. As an external quality assurance program, LabOne
participates in a number of proficiency programs established by the
College of American Pathologists, the American Association of
Bioanalysts and the Centers for Disease Control. LabOne is accredited
by the College of American Pathologists.
Even though only a small portion of LabOne's business encompasses fee-
for-service Medicare/Medicaid, LabOne has appointed a Chief Compliance
Officer and nine Co-Compliance Officers. Additionally, LabOne
has developed the LabOne Compliance Plan, based on the Model
Compliance Plan recommended by the Office of Inspector General (OIG)
of the Department of Health and Human Services to ensure compliance
with anti-fraud and abuse laws and rules governing federally-financed
reimbursement for lab testing services.
LabOne is licensed under the Clinical Laboratory Improvement
Amendments 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 the Substance Abuse and Mental Health
Services Administration to perform testing to detect drugs of abuse in
federal employees and in workers governed by federal regulations.
Congress recently enacted the Health Insurance Portability and
Accountability Act of 1996. As a transmitter of health information in
electronic form, LabOne will be required to maintain administrative,
technical and physical safeguards to protect the integrity and
confidentiality of healthcare information against unauthorized uses or
disclosures. The act will also require LabOne to convert healthcare
information to electronic form that had previously been required under
state law to be maintained in paper form. Compliance with these
regulations may be required as early as the fall of 2001.
LabOne - Sales and Marketing
LabOne's client base 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.
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.
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 LabOne's ability to
offer multiple reporting methods, next flight out options, dedicated
client service representatives and rapid reporting of results.
LabOne - Competition
LabOne believes that the insurance laboratory testing market in the
United States and Canada is approximately a $130 million industry.
LabOne currently services more than half the market. LabOne has
maintained its market leadership through the development of long term
client relationships, its reputation for providing quality products
and services at competitive prices, and its battery of tests which are
tailored specifically to an insurance company's needs. LabOne has two
other main laboratory competitors, Osborn Laboratories, Inc. and
Clinical Reference Laboratory.
The insurance testing industry continues to be highly competitive.
The primary focus of the competition has been on pricing. This
continued competition has resulted in a decrease in LabOne's average
price per test. It is anticipated that prices may continue to decline
in 1999. LabOne continues to develop innovative data management
services that differentiate its products from competitors. These
services enable LabOne's clients to expedite the underwriting process,
saving time and reducing underwriting costs.
The outpatient clinical laboratory testing market is a $20 billion
industry which is highly fragmented and very competitive. 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 through the use of Lab Card and the establishment of
exclusive arrangements to provide laboratory services with large
groups and managed care entities.
LabOne's business plan is to be the premier low-cost provider of high-
quality laboratory services to self-insured employers and insurance
companies in the healthcare market. LabOne feels that its superior
quality and centralized, low-cost operating structure enable it to
compete effectively in this market.
LabOne competes in the substance abuse testing market nationwide.
There are presently 71 laboratories that are certified by the Substance
Abuse and Mental Health Services Administration. LabOne's major
competitors are the three major clinical chains, Laboratory Corporation of
America, Quest Diagnostics and SmithKline Beecham Clinical Laboratories,
who collectively constitute approximately two-thirds of the substance abuse
testing market. LabOne's focus is fast turnaround with high quality, low
cost service.
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,
1998 1997* 1996
---- ---- ----
(In millions)
Sales:
United States $95.7 72.4 53.1
Canada 6.5 6.6 6.4
Operating Profit:
United States 13.6 1.5 2.4
Canada 0.3 0.6 0.7
Identifiable Assets:
United States 83.5 56.5 62.1
Canada 2.8 3.2 2.7
*1997 United States operating profit includes a one-time write-off of
$6.6 million. See Notes to Consolidated Financial Statements for
additional information.
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 1, 1999, LabOne had 895 employees, including 23 part-time
employees, representing an increase of 230 employees from the same
time in 1998. The addition of SBSI accounts for approximately 65% of
the increase. None of LabOne's employees are represented by a labor
union. LabOne believes its relations with employees are good.
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
its 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. On August 7, 1998, SLH
merged with its subsidiary, Syntroleum Corporation, and changed its
name to Syntroleum Corporation. Effective with this merger,
Registrant terminated its previous services agreement with SLH and
entered into a facilities sharing agreement with Syntroleum whereby
Syntroleum provides approximately 3,400 square feet of office
facilities and record storage space in exchange for Registrant's
personnel providing services related to the historical information of
SLH and its subsidiaries. The office is located at 5000 W. 95th
Street, Suite 260, Shawnee Mission, Kansas. The term of the lease
expires on April 30, 2000. See Items 1 and 7 and Notes to
Consolidated Financial Statements for additional information regarding
the SLH distribution.
On December 26, 1998, LabOne started moving into its new 268,000
square foot, custom-designed facility located in Lenexa, Kansas,
approximately 15 miles from Kansas City, Missouri. This facility
consolidates LabOne's laboratory, administrative and warehouse
functions into one building. The facility is owned by LabOne and is
financed through $20 million in industrial revenue bonds issued by the
City of Lenexa, Kansas in September 1998. The testing laboratory has
certain enhancements that improve the efficiency of operations.
Conveyor systems transport inbound test kits from the receiving area
to the laboratory and remove waste after the opening process. All
automated testing equipment requiring purified water is linked
directly to a centralized water-purification system. Over 50,000
square feet of raised flooring allows laboratory instruments and PC's
to be arranged or moved quickly and easily. The security system
includes proximity card readers to control access and a ceiling
detector system to prevent foreign substances from being thrown into
the laboratory. In addition, three diesel generators and a UPS
battery system are on-line in the event of electrical power shortage.
These back-up power sources allow specimen testing and data processing
to continue until full power is restored, thus assuring LabOne's
clients of continuous laboratory operation.
SBSI utilizes two facilities in Independence, Missouri under five year
leases expiring in 2003. LabOne leases ten locations in Northern
California and nine in the Midwest which serve as LabOne Service
Centers (LSC's). These facilities provide specimen collection
services for patients and are typically located in medical office
buildings. Lab One Canada Inc. leases office space in Ontario Canada,
which is used for sales and client services. This lease expires in
2000. Additionally, Lab One Canada Inc. leases space in Quebec Canada
for assembly and distribution of specimen collection kits for Canadian
insurance testing. This lease expires in 2000.
LabOne also owns two buildings which are currently under contract to
be sold in the first and second quarters of 1999. Prior to moving to
the new facility, these buildings were used for laboratory operations,
administrative offices and data processing. LabOne's lease on its
former warehouse facility expired in February 1999.
ITEM 3. LEGAL PROCEEDINGS.
During 1998, the Registrant was not a party to any material overtly
threatened or pending litigation, claims or assessments.
In the normal course of business, LabOne had certain lawsuits pending
at December 31, 1998.
The Comptroller of the State of Texas has conducted an audit of LabOne
for sales tax compliance and contends that LabOne's insurance
laboratory testing services are taxable under the Texas tax code and
has issued an audit assessment, including interest and penalties, of
approximately $1.9 million. LabOne has appealed this assessment
arguing that its services do not fit within the definition of
insurance services under the Texas code. The assessment is under
review by the Texas State Hearing Attorney.
LabOne's management reports, that in its opinion, after consultation
with LabOne legal counsel and based upon currently available
information, none of these lawsuits are expected to have a material
impact on the financial condition or results of operations of LabOne.
No provisions for loss related to litigation are included in the
accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of stockholders during the
fourth quarter of the fiscal year covered by this report.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Registrant's common stock trades on the Nasdaq Stock Market under the
symbol "LABH". As of May 26, 1999, the outstanding shares were held
by 1,688 stockholders of record. High and low sales prices for each
quarter of 1998 and 1997 are included in the table of quarterly
financial data in Note 15 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
The following table summarizes certain selected financial information
and operating data regarding Lab Holdings. This information should be
read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Item 14 (a)(1)
and (2) "Consolidated Financial Statements and Schedule." The balance
sheet data as of December 31, 1998, 1997, 1996, 1995 and 1994, and the
statement of operations data for each of the years in the five-year
period ended December 31, 1998, have been derived from Lab Holdings'
consolidated financial statements, which have been audited by KPMG
LLP, Lab Holdings' independent certified public accountants.
December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------
(In thousands except share and per share amounts)
REVENUES $ 102,227 78,926 61,878 75,246 86,027
===============================================
OPERATING EARNINGS (LOSS)
Earnings (loss) from
continuing
operations $ 4,877 (8,103) (4,226) (1,826) (276)
Earnings (loss) from
discontinued
healthcare business -- (2,342) 682 1,078 (1,596)
Loss from discontinued
real estate
operations -- -- (1,452) (6,600) (2,904)
-----------------------------------------------
Net earnings (loss)$ 4,877 (10,445) (4,996) (7,348) (4,776)
===============================================
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings (loss) from
continuing
operations $ .75 (1.25) (.65) (.28) (.03)
Earnings (loss) from
discontinued
healthcare business -- (.36) .10 .17 (.25)
Loss from discontinued
real estate
operations -- -- (.22) (1.03) (.46)
-----------------------------------------------
Net earnings (loss)$ .75 (1.61) (.77) (1.14) (.74)
===============================================
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings (loss) from
continuing
operations $ .74 (1.25) (.65) (.28) (.03)
Earnings (loss) from
discontinued
healthcare business -- (.36) .10 .17 (.25)
Loss from discontinued
real estate
operations -- -- (.22) (1.03) (.46)
-----------------------------------------------
Net earnings (loss)$ .74 (1.61) (.77) (1.14) (.74)
===============================================
Cash dividends $ 1.20 1.20 1.20 1.20 1.20
Book value $ 8.40 8.70 26.84 28.96 31.50
Average shares
outstanding
during the year 6,489,103 6,488,643 6,477,878 6,433,989 6,374,837
Shares outstanding
end of year 6,489,103 6,489,103 6,483,934 6,461,061 6,378,261
Total assets $ 98,007 74,482 196,783 198,018 234,196
Long-term debt $ 18,097 -- -- -- 8
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 an 80.5% ownership of LabOne, Inc. (LabOne) and
approximately $5 million in cash and short term investments.
On July 1, 1999, Lab Holdings announced a restatement of earnings for the
years ended December 31, 1998 and 1997. As requested by the staff of the
Securities and Exchange Commission, Lab Holdings' subsidiary, LabOne, Inc.,
has changed the amortization schedule from fifteen years to five years on a
customer list acquired during the first quarter 1997. LabOne's original
amortization period was based on historical performance, however, the SEC
has requested the amortization period be reduced to five years. As a
result of LabOne's earnings restatements, Lab Holdings was required to
restate its earnings. This increased Lab Holdings 1997 net loss by
$248,000 and reduced the 1998 net income by $271,000. This restatement is
not the result of any changes in customer relationships and has no effect
on any present or future cash flows.
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 and reduced Lab Holdings'
retained earnings by $47.9 million.
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. The distribution
of the Response stock as a dividend reduced Lab Holdings' retained
earnings by $51.3 million.
Prior to October 20, 1997, Lab Holdings was named Seafield Capital
Corporation (Seafield). Seafield changed its name on that date to Lab
Holdings for better identification with its primary asset, the
approximate 80.5% ownership of LabOne.
On March 8, 1999, Lab Holdings and its subsidiary, LabOne, announced
that the boards of directors of both companies had approved a
definitive agreement to merge the two companies. Under the merger
agreement, LabOne is to be merged into Lab Holdings, but the
survivor's name will be changed to "LabOne, Inc." Stockholders of Lab
Holdings will have each of their Lab Holdings shares split immediately
before the merger into 1.5 shares of the survivor. Stockholders of
LabOne, other than Lab Holdings, will be entitled to elect to have
each of their existing LabOne shares exchanged for one share of the
survivor or $12.75 in cash or a combination of cash and shares. If
the cash election shares exceed a cash limit of $16.6 million, then
the cash will be allocated on a pro rata basis among the cash election
shares. See Item 1 for additional information and the Company's
Report on Form 8-K dated March 7, 1999, which is incorporated herein
by reference. The offering of Lab Holdings common stock in the merger
will only be made by means of the Joint Proxy Statement/Prospectus.
1998 Compared to 1997
Insurance, Clinical and Substance Abuse Testing Segments:
LabOne's revenue for the year ended December 31, 1998 was $102.2
million as compared to $78.9 million in 1997. The increase of $23.3
million, or 30%, was due to increases in clinical laboratory revenue
of $11.1 million, insurance services revenue of $7.2 million and SAT
revenue of $5.1 million. Clinical laboratory revenue increased from
$7.5 million during 1997 to $18.6 million in 1998 primarily due to
increased testing volumes. The insurance services segment revenue
increased from $62 million in 1997 to $69.1 million due to an increase
in the total number of insurance applicants tested and an increase in
non-laboratory services, including SBSI revenue of $1.3 million,
partially offset by a 3% decrease in the average revenue per
applicant. SAT revenue increased from $9.4 million in 1997 to $14.5
million in 1998 primarily due to a 48% increase in testing volumes.
LabOne's cost of sales increased $14.7 million, or 35%, for the year
as compared to the prior year. This growth is primarily due to
increases in inbound freight, laboratory and kit supplies and payroll
expenses due to the larger specimen volume for all three business
segments. Insurance segment cost of sales expenses were $32.3 million
as compared to $26.7 million during 1997. Clinical cost of sales
expenses were $14.5 million as compared to $8.3 million during 1997.
SAT cost of sales expenses were $9.9 million as compared to $7 million
during 1997. These increases are due to increased testing volumes.
As a result of the above factors, gross profit increased $8.6 million,
or 23%, from $36.9 million in 1997 to $45.5 million in 1998.
Insurance gross profit increased $1.5 million, or 4%, to $36.9 million
in 1998. Clinical gross profit improved $4.9 million from a loss of
$800,000 in 1997 to a gain of $4.1 million in 1998. SAT gross profit
increased $2.2 million to $4.5 million in 1998.
LabOne's selling, general and administrative expenses increased $3.4
million, or 12%, in 1998 as compared to 1997 primarily due to
increases in payroll expenses and bad debt accruals. Bad debt expense
increased primarily due to the revenue growth in clinical and SAT segments
which have inherently higher bad debt experience than the insurance testing
segment. Clinical overhead expenditures were $10.3 million as compared to
$7.5 million in 1997. SAT overhead increased from $3.3 million in 1997 to
$4.3 million in 1998. These increases are due to the growth in each
segment. The allocation of corporate overhead to the clinical and SAT
segments increased to $5.3 million for the year, as compared to $3.3
million in 1997, due to the increased share of total revenue for those
segments. Insurance overhead expenditures decreased to $16.8 million
as compared to $17.3 million in 1997.
Consolidated selling, general and administrative expenses also were
impacted at the Lab Holdings level during 1998. On August 7, 1998, an
agreement that provided Lab Holdings with management and
administrative services was cancelled and Lab Holdings was required to
employ its entire present staff and to increase expenses for related
management, employee and administrative costs and expenses that had
been born by SLH Corporation. The total annual cash general and
administrative expenses at the Lab Holdings level are approximately $1
million. General and administrative expenses also include $1.5
million of annual amortization of goodwill incurred in connection with
prior purchases of LabOne shares. That goodwill will have been fully
amortized by April 2003.
During 1997, Lab Holdings significantly reduced its corporate
structure and overhead costs as the SLH and Response distributions
were finalized. The decrease in consolidated selling, general and
administrative expenses to $34.1 million in 1998 from $35.3 million in
1997 reflects both LabOne's $3.4 million increased expenses discussed
above and Lab Holdings' $4.6 million decrease in general corporate
expenses including position eliminations and related severance
benefits.
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 increased from $2.1 million in 1997 to $13.9
million in 1998. The insurance services segment operating income
increased $2 million to $20.1 million in 1998. The clinical segment
had an operating loss of $6.2 million for 1998 as compared to an
operating loss of $8.3 million in 1997. The SAT segment improved from
an operating loss of $934,000 in 1997 to a gain of $204,000 in 1998.
Investment Income - Net:
Other investments include short-term and cash equivalent investments.
The returns on these investments are included in the investment income
line in the consolidated statements of operations. Investment income
decreased to $861,000 in 1998 from $4.7 million in 1997 primarily
reflecting a $3 million gain by Lab Holdings on the sale of marketable
common stock in 1997 and a decrease in investable funds during 1998 as
LabOne's cash was utilized in construction of the new facilities prior
to IRB funding. Additionally, a net loss of $143,000 in 1998 on
short-term investments was incurred resulting from the decline in the
stock market during the third and fourth quarters.
Miscellaneous Items:
Other Income/(Expense), primarily reflecting miscellaneous items at
LabOne, was a $42,000 expense during 1998 as compared to income of
$77,000 in 1997.
Taxes:
The income tax rate of approximately 46% in 1998 reflects non-
deductibility of goodwill amortization. Tax expenses in 1997
reflecting the 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 1998 earnings
from continuing operations of $4.9 million, as compared with a $8.1
million loss from continuing operations in 1997.
1997 Compared to 1996
Insurance, Clinical and Substance Abuse Testing Segments:
LabOne's revenue for the year ended December 31, 1997 was $78.9
million as compared to $59.4 million in 1996. The increase of $19.5
million, or 33%, is due to increases in insurance segment revenue of
$11.2 million, SAT revenue of $4.7 million and clinical laboratory
revenue of $3.6 million. The insurance segment increased 22% due to
an increase in the total number of insurance applicants tested and an
increase in kit revenue, partially offset by a 1% decrease in the
average revenue per applicant. The increase in insurance segment
revenue is primarily due to an increase in market share and changes to
testing thresholds. Effective January 30, 1997, LabOne acquired
certain assets, including customer lists, of GIB Laboratories, Inc., a
subsidiary of Prudential Insurance Company of America. Concurrently,
Prudential's individual insurance group agreed to use LabOne as its
exclusive provider of risk assessment testing services for a three
year period. At the time of the purchase, GIB served approximately 5%
of the insurance laboratory testing market. Revenue in 1997 from
former GIB customers, including Prudential, was approximately $3.8
million. SAT revenue increased from $4.7 million in 1996 to $9.4
million in 1997 due to a doubling in testing volumes. Clinical
laboratory revenue increased from $3.9 million in 1996 to $7.5 million
in 1997 due to increased testing volumes and higher revenue per
patient.
LabOne's cost of sales increased $9.3 million, or 28%, for the year as
compared to the prior year. This increase is due primarily to
increases in payroll, laboratory supplies and kit expenses due to the
larger specimen volume for all three business segments. Direct and
allocated clinical cost of sales expenses were $8.3 million as
compared to $6.5 million during 1996. Direct and allocated SAT cost
of sales expenses were $7 million as compared to $3.7 million during
1996. These increases are due to increased testing volumes.
As a result of the above factors, gross profit increased $10.2
million, or 38%, from $26.7 million in 1996 to $36.9 million in 1997.
Insurance gross profit increased $7 million, or 25%, in 1997 as
compared to 1996. Clinical gross profit improved $1.8 million from a
loss of $2.6 million in 1996 to a loss of $800,000 in 1997. SAT gross
profit increased from $1 million in 1996 to $2.4 million in 1997.
LabOne's selling, general and administrative expenses increased $4.6
million, or 19%, in 1997 as compared to 1996 due primarily to
increases in payroll expenses, travel and amortization expenses.
Clinical overhead expenditures were $7.5 million as compared to $5.4
million in 1996. SAT overhead increased from $2.2 million in 1996 to
$3.3 million in 1997. These increases are due to the 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 $2.1
million in 1997, primarily due to the $6.6 million write down
partially offset by an increase in the insurance segment operating
income of $5.4 million. The 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.
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. The net gain on investments in the
trading portfolio, securities available for sale and venture capital
investments during 1997 totaled $2.9 million as compared to $1.3
million in 1996. The 1997 results include a $3 million gain on the
sale of marketable common stock. Lab Holdings' earnings on liquidity
investments decreased to $518,000 in 1997 from $1.9 million in 1996
primarily as result of $19.6 million of cash distributed in the SLH
spin-off in March 1997. LabOne's investment income decreased to $1.2
million in 1997 from $1.8 million in 1996 reflecting LabOne's $10.4
million net decrease in cash and cash equivalents during 1997. During
1997, LabOne used $2.8 million for land and initial development cost
for its new facility and $4.8 million for the GIB Laboratories, Inc.
acquisition.
Interest Expense:
Interest expense decreased to $11,000 in 1997 from $1 million in 1996.
During 1996, Lab Holdings incurred $1 million of interest expense
associated with a preliminary state tax audit.
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.
During 1997, Lab Holdings reduced its corporate structure and overhead
costs as the SLH and Response distributions were finalized. The
increase in general and administrative expenses to $35.3 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. During 1997, SLH
provided administrative and accounting functions to Lab Holdings under
a services agreement for an annual fee of $75,000.
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 $8.1 million, as compared with a $4.2 million
loss in 1996.
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. The
distribution of the Response stock as a dividend reduced Lab Holdings'
retained earnings by $51.3 million.
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. Assets
distributed to SLH on March 3, 1997 included $23 million of net real
estate assets , $19.6 million of cash and $5.3 million of other
assets. The SLH spin-off was accounted for as a dividend and reduced
Lab Holdings' retained earnings by $47.9 million.
Real estate revenues were $3.6 million in 1997's first two months
prior to distribution and were $16.3 million in 1996. 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).
Cost of the real estate sales in 1997 prior to distribution totaled
$3.5 million and were $15.3 million in 1996, 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, a $500,000 reduction from the previous year associated with the
substantial completion of residential projects.
In 1992, Lab Holdings' board of directors approved a plan to
discontinue real estate operations. Real estate after-tax losses were
$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
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.
TRENDS
The following is LabOne's analysis of certain existing trends that
have been identified as potentially affecting the future financial
results of LabOne. 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 1999 due
to competitive pressures. This trend may have a material impact on
earnings from operations.
The total number of insurance applicants tested by LabOne increased
11% in 1998 from the prior year. Approximately 80% of the increase
represented oral fluid HIV tested applicants. The number of oral
fluid tested applicants are expected to further increase in 1999.
Effective October 30, 1998 LabOne acquired Systematic Business
Services, Inc. (SBSI) which is operated as a wholly owned subsidiary
of the insurance services division of LabOne. SBSI is a provider of
information services to life and health insurers nationwide, and has
annual revenues of approximately $7 million. With 148 employees in
Kansas City area, SBSI provides telephone inspections, motor vehicle
reports, attending physician statements, and claims investigation
services to life insurance companies. This addition allows LabOne to
expand the services it offers to its insurance industry clients.
In the clinical division, BlueCross BlueShield of Tennessee selected
LabOne to provide routine outpatient laboratory testing services for
BlueCare members throughout Tennessee effective February 1, 1998.
BlueCare is BlueCross BlueShield of Tennessee's plan for Tenncare
participants. Approximately 400,000 BlueCare members are currently
covered by the program. To date, LabOne's Laboratory Benefit
Management programs, including BlueCare and the Lab Card
Program, have more than 2.3 million lives enrolled. Revenue from
Laboratory Benefit Management programs during the fourth quarter 1998 was
$3.2 million or approximately 62% of total clinical revenue.
LabOne's new facility was financed through the City of Lenexa, Kansas,
with industrial revenue bonds. In conjunction with the bonds, LabOne
expects to receive income tax credits through the State of Kansas High
Performance Incentive Plan to be applied against state income taxes
for up to 10 years, or until the credit is completely used. The
amount of the credit is expected to be approximately $4 million, and
will lower LabOne's average income tax rate for the duration of the
credit.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1998, at the holding company level, Lab Holdings had
available for operations approximately $5 million in cash and cash
equivalents. Operating results during 1998 decreased Lab Holdings'
working capital by $934,000 to $5.4 million at December 31, 1998.
On a consolidated basis, Lab Holdings had $15.2 million in cash and
cash equivalents at December 31, 1998. Current assets totaled
approximately $46.4 million while current liabilities totaled $15.1
million.
Net cash provided by continuing operations totaled $10.3 million in
1998 compared with $8.5 million in 1997. During 1998, cash from
continuing operations included a $6.8 million increase in accounts
receivable at LabOne and a non-cash item of $6.2 million for
depreciation and amortization. The 1998 net cash provided
additionally included a decrease in trading portfolios of $1.4
million, a net change in income taxes and other of $500,000.
During 1997, the earnings from continuing operations included a non-
cash items of $6.8 million for depreciation and amortization and a
$6.6 million provision by LabOne for loss on anticipated disposal of
assets. The 1997 cash provided additionally included a decrease in
trading portfolios of $2.6 million, a $3.6 million increase in accounts
receivable, a net change in income taxes and other of $3.3 million and
$425,000 of net cash used by discontinued healthcare and real estate
operations.
Net cash used by investing activities totaled $28.9 million in 1998
primarily representing construction of LabOne's new facility and the
acquisition of SBSI during 1998. LabOne's future capital asset
purchases are expected to be approximately $3 million to $4 million
annually. Net cash used by investing activities in 1997 totaled $11.8
million primarily representing LabOne's land purchases related to its
new facility and GIB Laboratories acquisition.
Net cash provided by financing activities in 1998 totaled $11.9
million primarily due to $19.9 million proceeds from industrial
revenue bond financing construction of LabOne's new facilities and Lab
Holdings' regular cash dividends of $7.8 million. Net cash used by
financing activities in 1997 totaled $27.4 million primarily due to
net of the $19.6 million cash portion of the SLH dividend to Lab
Holdings shareholders and regular cash dividends of $7.8 million.
Lab Holdings is currently a holding company. Sources of cash for Lab
Holdings are investments and subsidiary dividends. The primary uses
of cash for Lab Holdings are investments, operating expenses and
dividends to shareholders. The Lab Holdings dividends to shareholders
are limited to its investments and any dividends received from LabOne.
Although, there are currently no restrictions that would limit
LabOne's ability to make future dividend payments, Lab Holdings does
not directly control dividends issued by LabOne. LabOne's board of
directors independently reviews its dividend policy on a periodic
basis.
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. 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. 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 1998, 1997 and 1996. As an
approximate 80.5% owner, Lab Holdings has received $7.7 million of
cash as dividends from LabOne in 1998. LabOne's working capital
position declined from $35.4 million at December 31, 1997, to $25.9
million at December 31, 1998. This decrease is primarily due to
dividends paid and capital additions, including building payments, in
excess of bond proceeds and cash provided by operations. Accounts
receivable grew from $12.6 million as of December 31, 1997 to $18.7
million as of December 31, 1998, due primarily to an increase in
revenue growth from all three segments. Bad debt expense and reserves
increased due to the increase in total revenue and a shift in revenue
toward clinical and SAT sources.
During 1998, LabOne invested $28.5 million in additional property,
plant and equipment, as compared to $11.5 million in 1997 and $3.2
million in 1996. Of the amount spent in 1998, approximately $21.6
million was for construction of LabOne's new facility and $3 million
net cash was used in the purchase of SBSI. The 1997 amount included
land purchased related to LabOne's new facility and the GIB
Laboratories acquisition. As of April 1999, the new facility was
completely operational. LabOne's future capital asset purchases are
expected to be approximately $5 million annually.
LabOne had no short-term borrowings during 1998 and expects to be able
to fund operations and future dividend payments from a combination of
cash flow from operations, cash reserves, building sales and short-
term borrowings. Interest on the industrial revenue bonds issued to
finance the construction of LabOne's new facility is based on a
taxable seven day variable rate which, including letter of credit and
remarketing fees, is approximately 5.8% as of March 1, 1999. The
bonds mature over 11 years in increments of $1.85 million per year
plus interest. LabOne's total cash and investments at December 31,
1998, were $10.2 million, as compared to $19.5 million at December 31,
1997.
On February 26, 1997, Response converted a $23.5 million loan from Lab
Holdings and accrued interest of $664,000 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.
The SLH Corporation/Syntroleum Corporation merger was completed on
August 7, 1998. Per the Facilities Sharing and Interim Services
Agreement between Lab Holdings, SLH and Syntroleum, the former
employees of SLH are now employees of Lab Holdings. Concurrently,
SLH/Syntroleum is providing facilities to Lab Holdings in exchange for
certain limited accounting, bookkeeping, tax and administrative
services by Lab Holdings personnel.
As contemplated in the March 8, 1999 merger announcement between Lab
Holdings and LabOne, stockholders of Lab Holdings will have each of
their Lab Holdings shares split immediately before the merger into 1.5
shares. Stockholders of LabOne, other than Lab Holdings, will be
entitled to elect to have each of their existing LabOne shares
exchanged for one share of the merged entity or $12.75 in cash or a
combination of cash and shares up to a cash limit of $16.6 million
(approximately 50% of eligible shares). If cash elections reach the
$16.6 million cash limit, it is expected that the combined company
might need to borrow up to $15 million to satisfy cash elections and
merger expenses after the use of available cash. Additional cash
could be needed to the extent that any Lab Holdings' stockholders
perfect dissenters' rights.
YEAR 2000
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's laboratory operating systems and its business
processing systems were completely rewritten as of 1991 and were
brought into compliance with Year 2000 date standards at that time.
Non-IT systems, which include security systems, time clocks and
heating and cooling systems, have been replaced with certified
compliant systems as part of construction of the new facility.
Ongoing remediation efforts include regularly scheduled software
upgrades and replacement of personal computers and associated
equipment. LabOne expects to complete all remaining internal Year
2000 objectives by the end of the second quarter, 1999.
LabOne is assessing the Year 2000 preparation and contingency plans of
the its clients and vendors. LabOne has material relationships and
dependencies with its primary telecommunications provider, Sprint
Corp., its inbound shipping provider, Airborne Express and municipal
services providers. In the event of a service interruption, LabOne
has the ability to switch telecommunications services to AT&T at any
time, and maintains backup electrical generators capable of meeting
its electrical needs. LabOne currently tracks and controls routing of
its inbound specimens and can use USPS, airlines and other common
carriers or express delivery services in the event of delivery
problems with Airborne Express. LabOne currently maintains
approximately an eight week supply of most laboratory supplies, and
does not expect significant problems in obtaining supplies. LabOne
continues to review the Year 2000 plans of these providers, and does
not currently expect significant problems in these areas, however,
there can be no assurance that the systems of clients and vendors will
be converted to address Year 2000 problems in a timely and effective
manner or that such conversions will be compatible with LabOne's
computer systems.
Resources dedicated to the remaining effort are expected to cost less
than $300,000 and are not considered a material expense to LabOne.
These efforts have not caused delay to LabOne's other ongoing
information systems projects. LabOne has not hired any outside
consultants or other independent validation provider at this time, and
does not expect to do so.
There can be no assurance that LabOne's adjustments to its computer
systems will completely eliminate all Year 2000 problems. Failure to
properly address the Year 2000 problem could have a material adverse
effect on LabOne'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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components. SFAS No. 130
became effective for the year ended December 31, 1998. The
presentation of previous periods has been changed to reflect the
provisions of this statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which established
standards for reporting operating segments. SFAS No. 131 became
effective for the year ended December 31, 1998. This statement did
not effect the presentation of segment information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for the quarter ending
September 30, 1999. Retroactive application will not be required.
The Company does not expect this statement to have a significant
impact on the Company's financial position or results of operations.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A foreign currency risk exposure exists for LabOne due to billing
Canadian subsidiary revenue in Canadian dollars and the direct
laboratory expenses associated with this revenue being incurred in US
dollars. This exposure is not considered material. Any future
material Canadian currency fluctuations against the US dollar could
result in a decision to hedge future foreign currency cash flows or to
increase Canadian prices.
An interest rate risk exposure exists due to LabOne's liability of $20
million in industrial revenue bonds. The interest expense incurred on
these bonds is based on a taxable seven day variable rate, which
including letter of credit and remarketing fees, is approximately 5.8%
as of March 1, 1999. This exposure is not considered material. Any
future increase in interest rates would result in additional interest
expense and could result in a decision to enter into a long-term
interest rate swap transaction.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Report of Independent Auditors with Respect to Lab Holdings, Inc.
Lab Holdings, Inc. Consolidated Balance Sheets as of
December 31, 1998 and 1997
Lab Holdings, Inc. Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Consolidated Statements of Comprehensive Income for
the years ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Notes to Consolidated Financial Statements
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, 1998 and 1997,
and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 2, the accompanying consolidated financial statements
as of December 31, 1998 and 1997 and for the years then ended have been
restated.
KPMG LLP
Kansas City, Missouri
June 30, 1999
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
- ---------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 15,223 22,129
Short-term investments -- 2,648
Accounts receivable 18,730 12,608
Current income taxes 400 1,400
Inventories 1,798 2,203
Real estate available for sale 3,515 3,515
Prepaid expenses and other current assets 2,753 2,459
Deferred income taxes 3,973 3,386
---------------------
Total current assets 46,392 50,348
---------------------
Property, plant and equipment:
Land 2,379 2,379
Laboratory equipment 18,101 19,044
Data processing equipment and software 18,883 17,130
Office and transportation equipment 5,788 4,910
Leasehold improvements 701 493
Construction in progress 27,067 --
---------------------
72,919 43,956
Less accumulated depreciation 35,983 33,515
---------------------
Net property, plant and equipment 36,936 10,441
---------------------
Other assets:
Intangible assets 13,770 12,554
Bond issue costs 186 --
Deferred income taxes 485 1,058
Other assets 239 81
---------------------
Total Assets $ 98,008 74,482
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,393 3,367
Retainage and construction payable 3,809 --
Accrued payroll and benefits 4,149 4,530
Other accrued expenses 610 423
Other current liabilities 275 303
Current portion of long-term debt 1,860 --
---------------------
Total current liabilities 15,096 8,623
Long-term debt 18,097 --
---------------------
Total liabilities 33,193 8,623
---------------------
Minority interests 10,276 9,420
---------------------
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 2,921 1,772
Accumulated other comprehensive income (loss) (683) (544)
Retained earnings 74,945 77,855
---------------------
84,683 86,583
Less cost of 1,010,897 shares
of treasury stock 30,144 30,144
---------------------
Total stockholders' equity 54,539 56,439
---------------------
Commitments and contingencies
---------------------
Total Liabilities and Stockholders' Equity $ 98,008 74,482
=====================
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
- ---------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
(In thousands except
per share amounts)
Sales $ 102,227 78,926 61,878
Cost of sales 56,720 42,017 35,488
----------------------------------
Gross profit 45,507 36,909 26,390
Selling, general and administrative 34,101 35,270 29,767
Provision for loss on disposal
of assets -- 6,553 --
----------------------------------
Earnings (loss) from operations 11,406 (4,914) (3,377)
Investment income - net 861 4,671 5,004
Interest expense (70) (11) (1,044)
Other income (expense) (42) 77 (456)
----------------------------------
Earnings before income taxes 12,155 (177) 127
----------------------------------
Taxes on income (benefits):
Current 5,823 (429) 3,131
Deferred (203) 8,006 670
----------------------------------
Total 5,620 7,577 3,801
----------------------------------
Earnings (loss) before
minority interests 6,535 (7,754) (3,674)
Minority interests 1,658 349 552
----------------------------------
Earnings (loss) from
continuing operations 4,877 (8,103) (4,226)
Earnings (loss) from
discontinued healthcare
business -- (2,342) 682
Loss from discontinued real
estate operations -- -- (1,452)
----------------------------------
NET EARNINGS (LOSS) $ 4,877 (10,445) (4,996)
==================================
Basic earnings (loss)
per share of common stock:
Earnings (loss) from
continuing operations $ .75 (1.25) (.65)
Earnings (loss) from
discontinued healthcare
business -- (.36) .10
Loss from discontinued real
estate operations -- -- (.22)
----------------------------------
NET EARNINGS (LOSS) PER SHARE $ .75 (1.61) (.77)
==================================
Diluted earnings (loss)
per share of common stock:
Earnings (loss) from
continuing operations $ .74 (1.25) (.65)
Earnings (loss) from
discontinued healthcare
business -- (.36) .10
Loss from discontinued real
estate operations -- -- (.22)
----------------------------------
NET EARNINGS (LOSS) PER SHARE $ .74 (1.61) (.77)
==================================
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
(In thousands)
Common stock:
Balance, beginning and
end of year $ 7,500 7,500 7,500
----------------------------------
Paid-in capital:
Balance, beginning of year 1,772 1,748 1,747
Issuance of common stock by
LabOne in connection with
an acquisition 1,149 -- --
Exercise of stock options -- 24 1
----------------------------------
Balance, end of year 2,921 1,772 1,748
----------------------------------
Accumulated other comprehensive
income (loss):
Balance, beginning of year (544) (439) (447)
Net change during year (139) (105) 8
----------------------------------
Balance, end of year (683) (544) (439)
----------------------------------
Retained earnings:
Balance, beginning of year 77,855 195,329 208,098
Net earnings (loss) 4,877 (10,445) (4,996)
Dividends* and distributions (7,787) (107,029) (7,773)
----------------------------------
Balance, end of year 74,945 77,855 195,329
----------------------------------
Less treasury stock:
Balance, beginning of year 30,144 30,114 29,814
Net issuance pursuant to stock
option plans (1997-5,169;
1996-22,873) -- 30 300
----------------------------------
Balance, end of year 30,144 30,144 30,114
----------------------------------
STOCKHOLDERS' EQUITY $ 54,539 56,439 174,024
==================================
*Cash dividends per share amounted to $1.20 in 1998, 1997 and 1996.
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
- ---------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
(In thousands)
Net earnings (loss) $ 4,877 (10,445) (4,996)
Other comprehensive income (loss):
Foreign currency translation (139) (105) 8
--------------------------------
Total comprehensive income (loss) $ 4,738 (10,550) (4,988)
================================
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Earnings (loss) from continuing
operations $ 4,877 (8,103) (4,226)
Adjustments to reconcile earnings
(loss) from continuing operations
to net cash provided by continuing
operations:
Depreciation and intangibles
amortization 6,192 6,782 8,760
Earnings applicable to minority
interests 1,658 349 552
Provision for loss on accounts
receivable 1,503 571 494
Provision for loss on disposal
of assets -- 6,553 --
Change in trading portfolio, net 1,443 2,645 19,318
Change in accounts receivable (6,775) (3,551) 964
Change in accounts payable 892 (18) 134
Income taxes and other, net 478 3,290 9,558
-----------------------------
Net cash provided by continuing
operations 10,268 8,518 35,554
Net cash used by discontinued
healthcare business -- (1,006) (32,140)
Net cash provided by discontinued
real estate operations -- 581 9,107
-----------------------------
Total cash provided by operations 10,268 8,093 12,521
-----------------------------
INVESTING ACTIVITIES
Sales of investments available for sale -- 1,350 4
Purchases of investments held
to maturity (5,461) (15,894) (15,753)
Maturities of investments held
to maturity 6,702 18,155 23,395
Additions to property, plant
and equipment, net (25,489) (6,683) (3,252)
Acquisition of businesses (2,968) (4,816) --
Other, net (1,711) (3,948) (470)
-----------------------------
Net cash provided (used) by
investing activities (28,927) (11,836) 3,924
-----------------------------
FINANCING ACTIVITIES
Proceeds from issuance of bonds 19,900 -- --
Bond issue costs (192) -- --
Payment of capital lease (2) -- --
Regular quarterly dividends paid (7,787) (7,787) (7,773)
Cash portion of SLH dividend -- (19,590) --
Net issuance of treasury stock
pursuant to stock option plans -- (7) (299)
-----------------------------
Net cash provided (used) by
financing activities 11,919 (27,384) (8,072)
-----------------------------
Effect of foreign currency translation (166) (72) 12
-----------------------------
Net increase (decrease) in cash and
cash equivalents (6,906) (31,199) 8,385
Cash and cash equivalents at
beginning of year 22,129 53,328 44,943
-----------------------------
Cash and cash equivalents at
end of year $ 15,223 22,129 53,328
=============================
Supplemental disclosures of cash flow information:
Cash paid (received)
during the year for:
Interest $ 552 934 25
=============================
Income taxes, net $ 5,451 2,676 (3,487)
=============================
Supplemental schedule of 1998 noncash investing and financing
activities:
Details of acquisition:
Fair value of assets acquired $ 6,223
Liabilities assumed (645)
LabOne stock issued (2,000)
--------
Cash paid 3,578
Less cash acquired 610
--------
Net cash paid for acquisition $ 2,968
========
Supplemental schedule of 1997 noncash investing and financing
activities:
Dividend of SLH Corporation $ 28,373
Dividend of Response Oncology, Inc. 51,277
--------
$ 79,650
========
See accompanying notes to consolidated financial statements.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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. (Lab Holdings or the Company) and its
majority-owned subsidiary, LabOne, Inc. All significant intercompany
transactions have been eliminated in consolidation. Certain 1997 and
1996 amounts have been reclassified for comparative purposes with no
effect on net earnings.
At December 31, 1998, Lab Holdings' principal asset consists of its
80.5% 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 resulting in a reduction of
$51.3 million in stockholders' equity. The amount of the dividend was
based on the book value of the shares at the time of the distribution.
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 Note 13 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 resulting in a reduction of $47.9 million in
stockholders' equity. The amount of the dividend was based on the
book value of the shares at the time of the distribution. The Lab
Holdings shareholders paid no consideration for any shares of SLH
stock received in the distribution. The net assets distributed to SLH
consisted of $19.6 million in cash, $23 million in real estate assets
and $5.3 million in miscellaneous assets and liabilities. On August
7, 1998, SLH merged with its subsidiary, Syntroleum Corporation, and
changed its name to Syntroleum Corporation.
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. These matters were resolved in
1998 and early 1999 and did 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 13 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, marketable
securities with original maturities of three months or less, money
market investments and overnight investments that are stated at cost,
which approximates market value.
INVESTMENT SECURITIES
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, 1998 and 1997.
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.
INVENTORIES
Inventories consist of completed specimen collection kits and various
materials used in the assembly of specimen collection kits for sale to
clients. Inventory is valued at the lower of cost (first-in, first-
out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment additions are recorded at cost which
includes interest capitalized during construction, when material.
Facilities leased pursuant to revenue bond financing transactions are
accounted for as purchases with the cost of the leased property
included in property, plant and equipment and the related obligation
included in long-term debt.
Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets as follows:
Buildings 30 years
Laboratory equipment 3-5 years
Data processing equipment 3-5 years
Office equipment 5 years
Depreciation on LabOne's former facilities was suspended after the
recognition of the impairment loss was recorded in December 1997.
Depreciation expense for the years ended December 31 was recorded as
follows:
1998 1997 1996
--------------------------
(in thousands)
Cost of sales $ 2,081 1,769 1,241
Selling, general and administrative 1,329 2,004 2,028
--------------------------
$ 3,410 3,773 3,269
==========================
On December 26, 1998, the substance abuse testing laboratory started
to move to the new LabOne facility. Construction in progress was
transferred and depreciation expense was recorded as portions of the
new facility were completed and put into use in 1999.
COST OF BORROWINGS
Expenses directly related to the issuance of debt are deferred and
amortized over the period the debt is expected to be outstanding using
the interest method.
INTANGIBLE ASSETS
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. Lab Holdings recorded
goodwill on the acquisition of LabOne stock. LabOne has recorded goodwill
as described in Note 2 to the consolidated financial statements.
Customer lists acquired are being amortized over fifteen years. The patent
process utilized in coating the plates on which blood and urine testing is
performed was amortized on a straight-line basis over the estimated life of
the patent (184 months at date of acquisition).
IMPAIRMENT OF LONG-LIVED ASSETS
When facts and circumstances indicate potential impairment, Lab
Holdings evaluates the recoverability of carrying values of long-lived
assets, including intangibles, using estimates of undiscounted future cash
flows at the lowest level for which there are identifiable cash flows over
remaining asset lives. When impairment is indicated, any impairment
loss is measured by the excess of carrying values over fair values. The
fair value is the amount at which the asset could be bought or sold in a
current transaction between willing parties. During December 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. LabOne plans to dispose of these
facilities after moving to its new facility in early 1999. An impairment
loss of approximately $6.6 million related to the anticipated sale was
recorded in 1997 which reduced the carrying value to $3.5 million. No
depreciation expense was recorded after the write-down of the facilities.
At December 31, 1998, LabOne had entered into real estate sales contracts
to sell all real estate available for sale for $4.5 million.
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.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares and diluted earnings per share is computed using the
weighted average number of common shares and dilutive stock options.
SALE OF STOCK BY A SUBSIDIARY
Lab Holdings records the sale of stock by a subsidiary as an
adjustment to Lab Holdings' stockholders' equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components. SFAS No. 130
became effective for the year ended December 31, 1998. The
presentation of previous periods has been changed to reflect the
provisions of this statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which established
standards for reporting operating segments. SFAS No. 131 became
effective for the year ended December 31, 1998. This statement did
not effect the presentation of segment information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for the quarter ending
September 30, 1999. Retroactive application will not be required.
The Company does not expect this statement to have a significant
impact on the Company's financial position or results of operations.
NOTE 2 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As requested by the staff of the Securities and Exchange Commission in the
second quarter of 1999, LabOne conducted a review of the useful lives of
certain intangible assets which arose in 1997 in connection with the
acquisition described in the last paragraph of Note 3. LabOne concluded
that the useful lives of such assets be changed from fifteen to five years.
The accompanying 1998 and 1997 consolidated financial statements have been
retroactively restated for the change. The effect of this restatement is
as follows (see Note 15 for restated quarterly data):
Year ended December 31, 1998 1997
---------------------- -----------------------
As Previously As As Previously As
Reported Restated Reported Restated
------------ -------- ------------- --------
(in thousand except per share data)
Earnings before taxes $ 12,706 12,155 328 (177)
Earnings (loss) from
continuing operations 5,148 4,877 (7,855) (8,103)
Net earnings 5,148 4,877 (10,197) (10,445)
Basic earnings per share:
Earnings (loss) from
continuing operations .79 .75 (1.21) (1.25)
Net earnings .79 .75 (1.57) (1.61)
Diluted earnings per share:
Earnings (loss) from
continuing operations .78 .74 (1.21) (1.25)
Net earnings .78 .74 (1.57) (1.61)
NOTE 3 - ACQUISITIONS AND INTANGIBLE ASSETS
The cost and accumulated amortization of intangible assets are as
follows:
December 31, 1998 1997
- ----------------------------------------------------------------------
(In thousands)
Goodwill - excess of cost over fair value
of net assets acquired $ 26,931 22,942
Less accumulated amortization 15,707 13,977
--------------------
11,224 8,965
--------------------
Customer lists 4,128 4,128
Less accumulated amortization 1,582 756
--------------------
2,546 3,372
--------------------
Patent 8,000 8,000
Less accumulated amortization 8,000 7,783
--------------------
-- 217
--------------------
Intangible assets, net of accumulated
amortization $ 13,770 12,554
====================
Effective October 30, 1998, LabOne acquired Systematic Business
Services, Inc. (SBSI) for approximately $5.7 million. SBSI is a
provider of information support services to insurance underwriters.
The purchase was comprised of $3.7 million of cash and the issuance of
168,885 shares of LabOne stock having a fair market value of $2
million. The acquisition was accounted for using the purchase method
of accounting. The excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $4 million
is being amortized over twenty years.
LabOne is obligated to pay to the prior owner of SBSI, 20% of SBSI's
income before taxes (as defined) greater than a target amount
approximately equal to 1998 pretax income for each of SBSI's fiscal
years ending in 1999 and 2000. Any amounts paid under this obligation
will result in additional excess purchase price for reporting
purposes.
The operating results of SBSI have been included in the consolidated
statements of operations from the date of acquisition. The following
unaudited pro forma consolidated results of operations of the Company
for the years ended December 31, 1998 and 1997 assume the acquisition
occurred as of January 1, 1997:
1998 1997
-------------------------
(in thousands)
Sales $ 108,239 85,032
Net earnings (loss) from
continuing operations 5,407 (7,914)
Earnings per share:
Basic .83 (1.22)
Diluted .82 (1.22)
Pro forma data does not purport to be indicative of the results that
would have been obtained had these events actually occurred at the
beginning of the periods presented and is not intended to be a
projection of future results.
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 for a period of
three years. Of the total amount paid to Prudential, $4.1 million was
classified as customer lists and is being amortized over five years.
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1998
(in thousands):
Taxable industrial revenue bonds, Series 1998A,
principal payable annually through
September 1, 2009, interest payable monthly
at a rate adjusted weekly based on short-term
United States treasury obligations (5.14% at
December 31, 1998), secured by LabOne's facility
and an irrevocable bank letter of credit $ 20,000
Various capital leases, principal and interest
payable monthly through May 2003, interest
ranging from 7% to 12%, collateralized by
office equipment 54
-------
Total long-term debt 20,054
Less:
Current portion 1,860
Unamortized discount 97
-------
Long-term debt, net $ 18,097
=======
Aggregate maturities of long-term debt as of December 31, 1998 are as
follows (in thousands):
Bonds Capital
Payable Leases Total
-------------------------------------
1999 $ 1,850 10 1,860
2000 1,850 13 1,863
2001 1,850 15 1,865
2002 1,850 11 1,861
2003 1,800 5 1,805
Thereafter 10,800 -- 10,800
-------------------------------------
$ 20,000 54 20,054
=====================================
Interest expense in 1998 amounted to approximately $70,000, net of
interest capitalized as a component of property, plant and equipment
of $315,000.
NOTE 5 - SEGMENT DATA
The Company, through its subsidiary, LabOne, operates principally in
three lines of business: insurance, clinical testing and substance
abuse testing. The insurance line of business involves risk-appraisal
laboratory testing and information services to the insurance industry.
The tests performed and information provided by LabOne are
specifically designed to assist an insurance company in objectively
evaluating the risks posed by policy applicants. Clinical testing
services are provided to the healthcare industry to aid in the
diagnosis and treatment of patients. Substance abuse testing services
are provided to both regulated and nonregulated employers who employ
drug screening guidelines.
Operating income (loss) of each line of business is computed as sales
less identifiable and allocated expenses. All expenses that can be
identified as specific to a certain segment of business are charged to
that segment. All shared resources and expenses are totaled and
allocated to each segment based on the relative revenue of each
segment each month. Allocated expenses include administrative
salaries, information systmes support, accounting, human resources and
facilities. In computing operating income (loss) of lines of
business, none of the following items have been added or deducted:
general corporate expenses, investment income or other income
(expense). Identifiable assets by line of business are those assets
that are used in the Company's operations in each line of business.
General corporate assets at December 31, 1997 and 1996 were primarily
cash and investments, income taxes receivable, deferred income taxes and
real estate available for sale. At December 31, 1998, general corporate
assets were primarily construction in progress, cash, income taxes
receivable, deferred income taxes and real estate available for sale.
The following is a summary of line of business information as of and
for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
- ---------------------------------------------------------------------
(In thousands)
SALES:
Insurance services $ 69,149 61,998 50,801
Clinical services 18,600 7,512 3,942
Substance abuse testing 14,478 9,416 4,689
Other -- -- 2,446
----------------------------------
Total revenues $ 102,227 78,926 61,878
==================================
OPERATING EARNINGS (LOSS):
Insurance services $ 18,607 16,530 11,138
Clinical services (6,188) (8,304) (7,967)
Substance abuse testing 204 (934) (1,236)
Other -- -- (431)
General corporate expenses (1,217) (5,774) (4,725)
Investment income 861 4,671 5,004
Interest expense (70) (11) (1,044)
Other expense (42) (6,355) (612)
----------------------------------
Earnings (loss) before income
taxes and minority interests 12,155 (177) 127
Income taxes (5,620) (7,577) (3,801)
Minority interests (1,658) (349) (552)
----------------------------------
Earnings (loss) from
continuing operations $ 4,877 (8,103) (4,226)
==================================
IDENTIFIABLE ASSETS:
Insurance services $ 34,597 32,343 34,543
Clinical services 5,493 3,513 4,022
Substance abuse testing 6,449 4,994 3,323
Net assets of discontinued
healthcare business -- -- 48,432
Net assets of discontinued
real estate operations -- -- 30,466
General corporate 51,469 33,632 75,997
----------------------------------
Total identifiable assets $ 98,008 74,482 196,783
==================================
CAPITAL EXPENDITURES:
Insurance services $ 2,090 3,308 2,558
Clinical services 501 469 163
Substance abuse testing 424 946 505
General corporate 22,474 2,553 --
DEPRECIATION AND AMORTIZATION:
Insurance services $ 4,585 5,163 3,977
Clinical services 797 940 1,141
Substance abuse testing 810 645 369
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. Although the plans had authorized non-
qualified options to be awarded at 75% to 110% of the market value,
all options were awarded at market value on the date of grant. 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 was not recorded because the market price of the
underlying stock equaled the exercise price on the date of grant.
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. Compensation
expense was recorded on the stock appreciation rights and restricted
stock awards as required under APB 25.
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.
Effective December 31, 1995, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," (SFAS 123) which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternately, SFAS 123 allows entities to
continue to apply the provisions of APB 25 and provide pro forma net
earnings and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and 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 SFAS 123.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996 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, 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 --
Granted --
Exercised --
--------
Outstanding
December 31, 1998 60,000 26.500 20,000
========
The following table summarizes information about stock options at
December 31, 1998.
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 9.00 $26.50 20,000 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 net earnings
(loss) and earnings (loss) per share would have been reduced by
approximately the following: $604,000, or $.09 per share, in 1998;
$402,000, or $.06 per share, in 1997; and $161,000, or $.02 per share,
in 1996. Lab Holdings share of the reductions to LabOne's net
earnings would have been $419,000 in 1998, $339,000 in 1997 and
$161,000 in 1996, representing Lab Holdings' weighted average
ownership percent of LabOne's reductions during each period. Lab
Holdings' actual ownership percentage was reduced to 80.5% at December
31, 1998.Pro forma net earnings reflect only options granted in 1998,
1997 and 1996. Therefore, the full impact of calculating compensation
cost for stock options under SFAS 123 is not reflected in the pro
forma net earnings amounts presented above because compensation costs
are reflected over the options' vesting period of five years for the
1998, 1997 and 1996 options. Compensation cost for options granted
prior to January 1, 1995 is not considered.
NOTE 7 - INVESTMENT SECURITIES
The Company held no investment securities at December 31, 1998. A
summary of investment securities information relating to quoted market
values and holding gains and losses at December 31, 1997 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
investments, all with
maturities less than
one year:
Obligations of states
and political
subdivisions $ 502 501 502 -- 1
Canadian
government
notes 703 703 703 -- --
------------------------------------------------
$ 1,205 1,204 1,205 -- 1
================================================
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, 1998 1997 1996
- ----------------------------------------------------------------------
(In thousands)
Proceeds $ -- 4,365 3
==================================
Gross realized gains $ -- 3,015 --
==================================
Gross realized losses $ -- -- (1)
==================================
Trading securities primarily included United States treasury
securities and common stock and totaled approximately $1.4 million at
December 31, 1997. The changes in net unrealized holding gains and
losses on trading securities that have been included in operations are
losses of $213,000 and $7,000 for the years ended December 31, 1997
and 1996, respectively.
At December 31, 1996, the Company had 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.
At December 31, 1998, based on the market price of publicly traded
shares of LabOne, the Company's 80.5% owned subsidiary, pretax
unrealized gains of approximately $90 million ($13.00 per share) on
this investment were not reflected in either Lab Holdings' book value
or stockholders' equity.
NOTE 8 - 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. Lab Holdings has recorded
valuation allowances against previous years' net operating losses.
LabOne has recorded a deferred tax asset related to the proposed sales
of its previous facilities. The loss will be offset by LabOne's
taxable income.
The components of the provision (benefit) for income taxes on income
from continuing operations are as follows:
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
(In thousands)
Current:
Federal $ 4,602 (1,372) 1,722
State 1,104 637 1,150
Foreign 117 306 259
----------------------------------
5,823 (429) 3,131
----------------------------------
Deferred:
Federal (165) 7,554 104
State 25 449 434
Foreign (63) 3 132
----------------------------------
(203) 8,006 670
----------------------------------
$ 5,620 7,577 3,801
==================================
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, 1998 1997 1996
- ---------------------------------------------------------------------
(In thousands)
Computed expected tax expense $ 4,132 (60) 43
State income taxes, net of federal
benefit and state valuation
allowance changes 645 730 1,045
Goodwill amortization 577 664 604
Tax exempt interest and dividends (6) (19) (45)
Tax benefits not available for
subsidiary losses -- -- 276
Foreign taxes on repatriation of
foreign source income -- -- 219
Other, net 202 (343) (171)
Increase in federal valuation
allowance, and write-off of
deferred tax assets 62 6,533 1,716
Foreign tax in excess of U.S. rate 8 72 114
----------------------------------
Actual income tax expense $ 5,620 7,577 3,801
==================================
The significant components of deferred income tax assets and
liabilities are as follows:
December 31, 1998 1997
- ---------------------------------------------------------------------
(In thousands)
Current deferred income tax assets (liabilities):
Valuation allowances on
investments and real estate $ 2,607 2,654
Allowance on accounts receivable 926 380
Excess book expense accruals 460 341
Other (20) 11
State net operating loss
carryforwards -- --
---------------------
Gross current deferred income
tax assets 3,973 3,386
Current valuation allowance -- --
---------------------
Net current deferred income
tax assets 3,973 3,386
---------------------
Non-current deferred income tax assets (liabilities):
Excess book (tax) depreciation and
amortization 392 598
Alternative minimum tax credit 489 577
Other (418) (93)
Federal capital loss carryforwards 699 431
Federal net operating loss
carryforwards 542 524
State net operating loss
carryforwards and capital losses 1,050 1,399
---------------------
Gross non-current deferred
income tax assets 2,754 3,436
Valuation allowance for non-current
deferred income tax assets (2,269) (2,378)
---------------------
Net non-current deferred
income tax assets 485 1,058
---------------------
Net deferred income tax
assets $ 4,458 4,444
=====================
The valuation allowance as of January 1, 1997 was approximately
$3,425,000. The valuation allowance decreased by approximately
$1,047,000 and $109,000 during 1997 and 1998, respectively.
NOTE 9 - FOREIGN OPERATIONS
The following summarizes financial information for LabOne's wholly-
owned Canadian subsidiary, Lab One Canada Inc.:
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
(in thousands)
Revenues $ 6,463 6,565 6,380
Operating earnings 314 645 719
Total assets 2,842 3,193 2,668
NOTE 10- EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares and diluted earnings per share is computed using the
weighted average number of common shares and dilutive stock options.
Earnings available to common shareholders was adjusted to reflect the
Company's share of LabOne's earnings based on a diluted ownership
after taking into account LabOne's common stock equivalents. The
following table reconciles net earnings and weighted average shares
used to computed basic and diluted earnings per share.
December 31, 1998
----------------------------------
Earnings from
Continuing Per Share
Operations Shares Amount
----------------------------------
Basic earnings per share $ 4,877,000 6,489,103 .75
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options (73,000) --
----------------------------------
Dilutive earnings per share $ 4,804,000 6,489,103 .74
==================================
The weighted average common shares outstanding were used to calculate
both the basic and diluted loss per share for the years ending
December 31, 1997 and 1996 because of the Company's losses from
continuing operations. 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 and 10,939 for 1997 and 1996,
respectively.
NOTE 11- RELATED PARTY TRANSACTIONS
In 1997, the Company entered into an agreement with SLH whereby SLH
provided accounting and administrative services and record storage
space for Lab Holdings. Under this agreement, Lab Holdings paid
$75,000 annually for these services and storage space.
On August 7, 1998, SLH merged with its subsidiary, Syntroleum
Corporation, and changed its name to Syntroleum Corporation.
Effective with this merger, the Company terminated its 1997 services
agreement with SLH and entered into a facilities sharing agreement
with Syntroleum whereby Syntroleum provides office facilities and
record storage space in exchange for Lab Holdings' personnel providing
services related to the historical information of SLH and its
subsidiaries. The level of services and office facilities provided
under this agreement are reviewed periodically and the parties
reimburse the other to the extent that the exchange of office
facilities for services is not of reasonably equivalent market value.
The total expense under this agreement in 1998 was $6,000.
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 12 - 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. Matching contributions to the money
purchase pension plan by Lab Holdings and participating subsidiaries
were $100,000 for 1996.
In 1997, Lab Holdings terminated its stock purchase plan. Matching
contributions for this plan amounted to $32,000 and $44,000 for the
years ended December 31, 1997 and 1996, 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 $2,466,000, $1,980,000 and $1,696,000 to the
plans for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Tax Assessment
The Comptroller of the State of Texas has conducted an audit of LabOne
for sales and use tax compliance for the years 1991 through 1997 and
contends that LabOne's insurance laboratory services are taxable under
the Texas tax code. The Texas Comptroller has issued a tax audit
assessment, including interest and penalties, of approximately $1.9
million. LabOne has appealed this assessment arguing that its
services do not fit within the definition of insurance services under
the Texas code. The assessment is under review by the Texas State
Hearing Attorney. At this time, LabOne is unable to estimate the
possible liability, if any, that may be incurred as a result of this
assessment.
Leases
LabOne has several noncancelable operating leases, primarily for land
and buildings, and other commitments that expire through 2003,
including a lease for office space from an entity owned by an
employee. Included with the assets and liabilities transferred to SLH
in the Distribution were several operating leases for office space and
equipment. Rental expense for these operating leases during 1998,
1997 and 1996 amounted to $539,000, $529,000 and $1,175,000,
respectively.
Future minimum lease payments and other commitments under the LabOne
agreements as of December 31, 1998 are as follows:
Year Amount
-------------------------
(In thousands)
1999 $ 520
2000 347
2001 229
2002 196
2003 163
Construction and Equipment Costs
At December 31, 1998, management estimates additional cost to complete
construction of the new facility and to acquire related equipment
approximates $3.5 million, substantially all of which will be paid in
the first half of 1999. The move to the new facility was completed in
April 1999.
NOTE 14- 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
July 31, 1997 December 31, 1996
- ----------------------------------------------------------------------
(In thousands)
Revenues $ 50,007 67,353
=============================
Earnings before income tax $ 1,579 931
Income tax 3,921 249
-----------------------------
Net earnings (loss) $ (2,342) 682
=============================
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
- ----------------------------------------------------------------------
(In thousands)
Revenues $ 16,365
=======
Loss (2,200)
Income tax benefits (748)
-------
Net loss $ (1,452)
=======
NOTE 15- QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized 1998 quarterly financial data is as follows:
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
Quarter Ended 1998 1998 1998 1998
- ----------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $ 23,333 25,763 25,834 27,297
========================================
Net earnings (loss) $ 1,140 1,632 909 1,196
========================================
Basic earnings per share $ .18 .25 .14 .18
========================================
Diluted earnings per share $ .17 .25 .14 .18
========================================
Cash dividends paid
per share $ .30 .30 .30 .30
========================================
Stock prices:
High $ 24 1/2 24 1/4 23 1/2 18 5/8
Low $ 21 5/8 20 3/8 15 1/4 14
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 $ (2,865) (4,351) 1,265 (2,152)
Earnings (loss) from
discontinued healthcare
business 604 (2,946) -- --
----------------------------------------
Net earnings (loss) $ (2,261) (7,297) 1,265 (2,152)
========================================
Basic and diluted earnings (loss) per share:
Earnings (loss) from
continuing operations $ (.44) (.67) .19 (.33)
Earnings (loss) from
discontinued healthcare
business .09 (.45) -- --
----------------------------------------
Net earnings (loss) $ (.35) (1.12) .19 (.33)
========================================
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
Stock prices shown above have not been adjusted to reflect effects of
the SLH and Response distributions. See Note 13 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).
NOTE 16 - SUBSEQUENT EVENT - MERGER AGREEMENT
On March 8, 1999, Lab Holdings and LabOne jointly announced that the
Board of Directors of both companies have approved an agreement to
merge the two companies. Under the merger agreement, LabOne is to be
merged into Lab Holdings and the merged entity's name will be changed
to LabOne, Inc. Stockholders of Lab Holdings will have each of their
Lab Holdings shares split immediately before the merger into 1.5
shares of the merged entity. Stockholders of LabOne, other than Lab
Holdings, will be entitled to elect to have each of their existing
LabOne shares exchanged for one share of the merged entity or $12.75
in cash or a combination of cash and shares up to a limit of $16.6
million in cash (approximately 50% of eligible shares). LabOne will
use cash from operations and additional borrowings, if necessary, to
cover the purchase of shares from stockholders that choose the cash
election option. The merger is subject to approval by the holders of
two-thirds of the outstanding Lab Holdings shares and a majority of
the shares voted by LabOne stockholders, other that Lab Holdings and
its affiliates, and other closing conditions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of Lab Holdings are as follows:
Name Age Position
- ---------------------- --- ---------------------------------
P. Anthony Jacobs, CFA 57 President, Chief Executive Officer
and Class C Director
Steven K. Fitzwater 52 Executive Vice President, Chief
Operating and Financial Officer,
Treasurer, Secretary and Class A
Director
Linda K. McCoy 48 Vice President and Chief Accounting
Officer
John H. Robinson, Jr. 48 Chairman of the Board and Class B
Director
Lan C. Bentsen 52 Class B Director
W. T. Grant II 49 Chairman of the Board, President and
Chief Executive Officer of LabOne
Mr. Jacobs has been a director of Lab Holdings since 1987,
President of Lab Holdings since May 1993 and Chief Executive Officer
since September 1997. Mr. Jacobs was Chief Operating Officer from
1990 to September 1997 and Executive Vice President prior to May 1993.
Mr. Jacobs also is a director of Trenwick Group, Inc., Syntroleum
Corporation and Response Oncology, Inc.
Mr. Fitzwater has been a director of Lab Holdings since September
1997, and Executive Vice President, Chief Operating and Financial
Officer, Treasurer and Secretary since May 1998. He was Vice
President, Chief Financial and Accounting Officer, Treasurer and
Secretary from September 1997 to May 1998 and was Vice President,
Chief Accounting Officer and Secretary of Lab Holdings from 1990 to
September 1997.
Ms. McCoy has been Vice President and Chief Accounting Officer
since May 1998.
Mr. Robinson has been a director of Lab Holdings since 1990 and
Chairman of the Board since September 1997. Mr. Robinson is Managing
Partner of Black & Veatch (design and construction). Mr. Robinson
also is a director of Commerce Bancshares, Inc.
Mr. Bentsen has been a director of Lab Holdings since 1986. He
has been the Executive Vice President of Frontera Resources since 1996
(oil and gas). From 1994 to 1996 he was Managing Partner of Remington
Partners (investments) and was previously Chairman and Chief Executive
Officer of Sovereign National Management, Inc. (property management).
Mr. Grant has been Chairman, President and Chief Executive
Officer of LabOne since November 1995. He was a director of Lab
Holdings from 1980 to September 1997, Chairman and Chief Executive
Officer of Lab Holdings from May 1993 to September 1997, and President
of Lab Holdings prior to May 1993. Mr. Grant also is a director of
AMC Entertainment Inc., Commerce Bancshares, Inc., Kansas City Power &
Light Company, and Response Oncology, Inc.
Committees of the Lab Holdings' Board of Directors
The Lab Holdings Board has established an Audit Committee
consisting of Messrs. Bentsen (Chairman) and Robinson and a
Compensation Committee consisting of Messrs. Robinson (Chairman) and
Bentsen.
During the year ended December 31, 1998, the Board met seven
times and the Compensation Committee met four times. The Audit
Committee held a normally scheduled December meeting in January 1999.
The attendance at Committee and Board meetings by all Directors in the
aggregate was 97% and each Director attended at least 90% of the
meetings of the Board and the Committees of which the Director was a
member.
The Audit Committee recommends to the Board of Directors an
independent auditor to audit the books and records of Lab Holdings and
its subsidiaries for the year. It also reviews, to the extent it
deems appropriate, the scope, plan and findings of the independent
auditors' annual audit, recommendations of the auditor, the adequacy
of internal accounting controls and audit procedures, Lab Holdings'
audited financial statements, non-audit services performed by the
independent auditor, and fees paid to the independent auditor for
audit and non-audit services.
The Compensation Committee recommends to the Board of Directors
the compensation of all officers and administers Lab Holdings' 1997
Directors' Stock Option Plan . It also recommends to the Board of
Directors the qualifications for new Director nominees, candidates for
nomination, and policies concerning director compensation and length
of service.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Non-employee directors of Lab Holdings receive compensation
consisting of annual cash retainers and meeting fees. Each director
also receives a one-time option to purchase 15,000 shares of Lab
Holdings' common stock.
Cash Compensation. Directors who are not employees of Lab
Holdings are paid an annual retainer for Board service of $15,000 and
a fee of $2,000 for each meeting of the Board or a Board committee
attended. Directors who are employees of Lab Holdings, which
presently consist of Messrs Jacobs and Fitzwater, are not paid any fee
or additional remuneration for services as members of the Lab Holdings
Board or any committee thereof.
Directors' Stock Options. Pursuant to Lab Holdings' 1997
Directors' Stock Option Plan, each director of Lab Holdings received
on adoption of the plan in September 1997, a one-time grant of an
option to purchase 15,000 shares of Lab Holdings' common stock for a
purchase price equal to the $26.50 fair market value of the stock on
the date of grant. The options expire ten years from the date of grant
and become exercisable at the rate of 5,000 per year, commencing with
the first anniversary of the date of grant. Unvested options become
exercisable immediately in the case of a liquidation or dissolution, a
merger or consolidation which contemplates that a director will not
continue in office following the transaction or in the case of certain
change-in-control events. Upon termination of the director's term of
office, options expire (i) on the earlier of twelve months following
death or the end of the option term in the case of termination in
connection with a merger, consolidation, liquidation, dissolution or
certain change-in-control events, (ii) after one year in the case of
termination due to or followed within 90 days by death, and (iii)
after 90 days in all other cases.
Compensation of Executive Officers
The following table sets forth compensation received by Lab
Holdings' Chief Executive Officer and the only other executive
officers holding office at December 31, 1998 whose salary and bonus
for 1998 aggregated $100,000 or more, for services rendered in all
capacities to Lab Holdings and its subsidiaries for the last three
years.
Summary Compensation Table
Long-Term
Compensation
Awards All
Securities Other
Annual Compensation(1) Underlying Compen-
Name and ---------------------- Options/ sation-
Principal Position Year Salary($) Bonus($) SARs(#) ($)(2)
- ------------------ ---- ----------------------- ----------- --------
P. Anthony Jacobs 1998 $ 39,583 -- -- $ --
President and 1997 112,423 -- 18,000(3) 797,259
Chief Executive 1996 249,590 -- 4,000(4) 44,110
Officer of Lab
Holdings
W. T. Grant II 1998 164,769(5) 107,261(6) -- 21,670
Chairman of the 1997 232,363(5) 131,173(6) 78,000(7) 900,255
Board, President 1996 331,000 -- 4,000(4) 25,227
and Chief
Executive Officer
of LabOne
(1) Compensation deferred at the election of an executive officer,
pursuant to Lab Holdings' or its subsidiaries' 401(k) Plans, is
included in the year earned.
(2) Includes the following contributions paid or accrued to the named
executive's accounts in Lab Holdings', or one of its
subsidiaries', as the case may be, 401(k) Plan ("401(k)") and
Money Purchase Pension Plan ("MPP"), pursuant to a Supplemental
Retirement Agreement ("SERP") with said executive and for term
life insurance for said executive:
401(k) MPP
------------------------ ------------------------
Executive 1998 1997 1996 1998 1997 1996
--------- ------ ------ ------ ------ ------ ------
Mr. Jacobs $ -- -- 4,750 -- -- 15,476
Mr. Grant 4,526 9,922 4,750 16,421 -- 15,476
Term Life
SERP Insurance Premiums
------------------------ ------------------------
Executive 1998 1997 1996 1998 1997 1996
--------- ------- ------- ------- ------- ------- -------
Mr. Jacobs $ -- 143,197 22,309 -- 656 1,575
Mr. Grant -- 38,201 2,914 723 870 2,087
Lab Holdings' 401(k) Plan and Money Purchase Pension Plan were
terminated effective as of December 31, 1996. Mr. Grant received
$9,922 pursuant to LabOne's 401(k) Plan in 1997 and $4,526 in
1998. Also includes (i) severance payments to Messrs. Grant and
Jacobs of $809,851 and $610,802, respectively and (ii) payment of
accrued vacation amounts upon termination of employment to Messrs.
Grant and Jacobs of $39,851 and $37,360, respectively.
(3) Consists of options to purchase (i) 15,000 shares of Lab Holdings
common stock and (ii) 3,000 shares of common stock of LabOne.
(4) Consists entirely of options to purchase shares of common stock
of Response Oncology, Inc. Numbers have been adjusted to reflect
a 1 for 5 reverse stock split effective November 1995.
(5) Since November 1995, Mr. Grant has served as President, Chairman
of the Board and Chief Executive officer of LabOne, an 80.5%
owned subsidiary of Lab Holdings; however, Mr. Grant had received
cash compensation only from Lab Holdings until June 1, 1997. At
such time his employment with Lab Holdings was terminated. Lab
Holdings paid Mr. Grant a base salary of $146,344 from January 1,
1997 to May 31, 1997. LabOne paid Mr. Grant a base salary of
$86,019 from June 1, 1997 to December 31, 1997.
(6) Reflects cash bonuses paid to Mr. Grant by LabOne for services
rendered to LabOne.
(7) Consists of options to purchase (i) 75,000 shares of common stock
of LabOne and (ii) 3,000 shares of Response Oncology, Inc.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
The table below provides information on option exercises in 1998
by the named executive officers and the values of such officers'
unexercised options at December 31, 1998. No options were
granted to any of those executive officers during 1998.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired Value at Year End(#) at Year End($)
on Realized ------------------ ------------------
Exercise ($) Exer- Unexer- Exer- Unexer-
Name (#) cisable cisable cisable cisable
- ----------------------------------------------------------------------
P. A. Jacobs -- -- 5,000(1) 10,000 -- --
W. T. Grant II -- -- 42,431(2) 60,000(2) 84,007 --
(1) Consists entirely of shares of Lab Holdings' common stock.
(2) Consists entirely of options to purchase shares of common stock
of LabOne, Inc. and the value (i.e. market value of
underlying securities minus option exercise price) at
December 31, 1998 of such options.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Set forth below is the report of the compensation committee of the
Board of Directors of Lab Holdings. The report covers all officers of
Lab Holdings other than Mr. Grant, who is the Chairman, President and
Chief Executive Officer of LabOne. The compensation committee did not,
and Lab Holdings' Board of Directors also does not, have
responsibility for and in fact does not establish compensation policy
for officers and employees of LabOne. The Board of Directors of
LabOne has its own compensation committee, which establishes
compensation policies for the executive officers of LabOne.
Report of the Compensation Committee
Compensation Committee Interlocks and Insider Participation. The
compensation committee of the Board of Directors of Lab Holdings
consists of John H. Robinson, Jr. (Chairman) and Lan C. Bentsen. Mr.
Robinson and Mr. Bentsen, who are non-employee directors of Lab
Holdings, have not been employees or officers of Lab Holdings or any
of its subsidiaries and have had no relationship or transaction with
Lab Holdings requiring disclosure under Item 404 of Regulation S-K.
This report is provided by the committee to assist stockholders in
understanding the committee's philosophy in establishing the
compensation of the Chief Executive Officer and all other executive
officers of Lab Holdings for the year ended December 31, 1998.
Overview and Compensation Philosophy. During 1996, Lab Holdings
initiated a restructuring process that contemplated the distribution
of most of its assets other than LabOne and Response Oncology to Lab
Holdings' shareholders through the SLH Distribution. That
distribution was effected on March 3, 1997. In connection with SLH's
move to new facilities and the termination of a lease between SLH and
Lab Holdings on June 1, 1997, Lab Holdings and SLH entered into an
agreement whereby SLH hired all of Lab Holdings' existing employees
and agreed to provide to Lab Holdings management and administrative
services and certain office space for an annual fee of $75,000. This
arrangement was entered into at the time that Lab Holdings was
effecting a second distribution to Lab Holdings' stockholders of all
of the common stock of Response Oncology owned by Lab Holdings. That
distribution occurred on July 25, 1997. As a consequence of the SLH
and Response Distributions and the Services Agreement, Lab Holdings
had no employees between June 1, 1997, and August 7, 1998. On August
7, 1998, the Services Agreement was terminated due to the merger of
SLH and Syntroleum Corporation, thereby necessitating a restaffing of
Lab Holdings. In anticipation of the need to restaff, the
compensation committee engaged McDaniel & Associates, Inc., a
compensation consultant, in the spring of 1998 to assist the committee
in developing a compensation structure for Lab Holdings' executive
officers, who would become Lab Holdings employees.
In developing a new compensation structure, the committee focused
on tying Lab Holdings' business strategy to three basic elements of
compensation: (a) base compensation, (b) severance pay and (c)
existing stock option arrangements. The principal business of Lab
Holdings is to manage its investment in LabOne. Although negotiations
for the merger of the two companies had been terminated in 1997, the
committee recognized that the long-term interests of both companies
and stockholder groups was to engage in a combination or some other
strategic transaction. Accordingly, the committee believed that
compensation should be structured to ensure the continuity of
management necessary to effectively pursue this strategy or to pursue
other strategies that might develop under the circumstances.
Consistent with these goals, Mr. Jacobs, the President and Chief
Executive Officer, Mr. Fitzwater, the Executive Vice President, Chief
Operating and Financial Officer, Treasurer and Secretary and Ms.
McCoy, the Vice President and Chief Accounting Officer, were offered
employment agreements that provide base compensation of $100,000,
$100,000 and $70,000, respectively, and severance pay of two years'
base salary for Messrs. Jacobs and Fitzwater and one year's base pay
for Ms. McCoy.
The committee also concluded that an amendment to the stock option
plan was necessary to render it effective. Under the plan, options
would expire 90 days following the termination of director status.
Since the $26.50 exercise price of all options granted under the plan
was significantly above the market price of Lab Holdings' stock, it
was concluded that benefits under the plan would have no value should
Lab Holdings be successful in implementing its strategy. Accordingly,
the committee recommended an amendment, which was subsequently adopted
by the Board, that would permit an optionee who was terminated in
connection with a strategic transaction to exercise the option through
the end of the option term, all of which expire on September 17, 2007.
Compensation of the Chief Executive Officers for 1998. The
components of the 1998 compensation of P. Anthony Jacobs, the
President and Chief Executive Officer of Lab Holdings, ere also
determined in accordance with the above discussion. Mr. Jacobs base
compensation was set at $100,000 under the terms of an employment
agreement as described above. Mr. Jacobs, as a director of Lab
Holdings, is also the holder of options to purchase 15,000 shares of
Lab Holdings' common stock at a price of $26.50 per share. As
described above, that option was amended in August 1998, to extend the
option exercise period upon termination of his status as a director in
connection with a merger, consolidation, liquidation or certain change
in control transactions.
This report is being made over the names of John H. Robinson, Jr.
and Lan C. Bentsen, who are the present members of the committee.
Performance of Lab Holdings' Common Stock
The following performance graph compares the performance of Lab
Holdings' common stock during the period beginning on January 1. 1994
and ending December 31, 1998, to the NASDAQ Stock Market index (the
"NASDAQ COMPOSITE"), and a peer group referred to as the "LabOne Peer
Group." The LabOne Peer Group is a group of seven testing
laboratories selected by LabOne (Bio-References Labs, Laboratory Corp.
Of America, Oncormed, Pharmchem, Psychemedics, Unilab and Universal
Standard Medical). The performance graph published by Lab Holdings
last year also included the Russell 2000 Index. This is an index of
companies, the mean of whose market capitalizations approximated that
of Lab Holdings before its 1997 distributions of SLH Corporation and
Response Oncology, Inc. The Russell 2000 Index was deleted from this
year's graph due to the decline in Lab Holdings' market capitalization
as a result of the SLH and Response distributions. Lab Holdings'
total return for 1998 decreased compared to the return reflected by
the Russell 2000 Index.
The graph assumes a $100 investment in Lab Holdings' common stock and
in each of the indexes at the beginning of the period and a
reinvestment of dividends paid on those investments throughout the
period. Since dividends are included, the graph reflects the 1997 SLH
and Response distributions, the equivalent cash value of which were
$4.78 and $7.31 per share, respectively.
VALUE OF $100 INVESTMENTS
AT DECEMBER 31, 1993 AND AT EACH SUBSEQUENT DECEMBER 31, THROUGH
DECEMBER 31, 1998, ASSUMING REINVESTMENT OF DIVIDENDS
[Performance graph reflecting information
shown in the table below]
Year End Data 1993 1994 1995 1996 1997 1998
- ------------- ------ ------ ------ ------ ------ ------
Lab Holdings, Inc. 100.00 99.67 102.3 120.53 108.45 86.74
Nasdaq US CRSP Index 100.00 97.75 138.26 170.01 208.58 293.21
LabOne Peer Group 100.00 89.51 67.97 26.49 22.13 20.38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Lab Holdings Management.
The following table and notes thereto indicate the shares of common
stock of Lab Holdings and of LabOne, known to Lab Holdings to be
beneficially owned as of December 31, 1998, respectively, by each
director (including the nominee for election as a director) of Lab
Holdings, each of the executive officers named in the Summary
Compensation Table, and by all directors and executive officers of Lab
Holdings as a group.
Shares of
Shares of Lab Common Stock
Holdings Common of LabOne
Stock Percentage Beneficially
Beneficially of Class Owned
Name Owned (1)(3) (2) (1) (4) (5)
- --------------------- --------------- --------- ---------
Lan C. Bentsen 6,000 -- --
Steven K. Fitzwater 6,932 -- 5
W. T. Grant II (6) 138,089 2.1% 81,596(7)
P. Anthony Jacobs 6,780 -- --
John H. Robinson, Jr. 6,652 -- --
All directors, nominees
and executive officers
as a group of six 164,453 2.2% 81,601(7)
(1) A beneficial owner of a security includes a person who, directly
or indirectly, has or shares voting or investment power with
respect to such security. Voting power is the power to vote or
direct the voting of the security and investment power is the
power to dispose or direct the disposition of the security. Each
person listed has stated that he, either alone or with his
spouse, has sole voting power and sole investment power with
respect to the shares shown as beneficially owned, except as
otherwise indicated.
(2) The percentages represent the total number of shares of common
stock shown in the adjacent column divided by the number of
issued and outstanding shares of common stock as of December 31,
1998 (6,489,103 shares). Percentages of less than one percent
are omitted.
(3) Shares of Lab Holdings common stock shown as beneficially owned
include shares issuable upon the exercise of stock options
granted under the Lab Holdings, Inc. 1997 Directors' Stock Option
Plan that were exercisable on December 31,1 998 or that become
exercisable within 60 days thereafter, as follows: 5,000 shares
for each of Messrs. Bentsen, Fitzwater, Jacobs and Robinson and
20,000 shares for all Directors and executive officers as a
group.
(4) Shares of LabOne stock shown as beneficially owned include shares
issuable upon the exercise of stock options granted under the
LabOne Long-Term Incentive Plan that were exercisable on December
31, 1998 or that become exercisable within 60 days thereafter, as
follows: W. T. Grant II, 57,431 shares; and all directors and
executive officers as a group, 57,431 shares.
(5) Percentages of shares beneficially owned are less than 1% for all
directors and executive officers, individually and as a group;
the shares shown as beneficially owned do not include 10,712,200
shares of LabOne owned by Lab Holdings as to which each director
of Lab Holdings has shared voting and investment power as a
member of Lab Holdings' Board of Directors. Each Board member
disclaims beneficial ownership of the LabOne shares owned by Lab
Holdings.
(6) Includes 22,442 shares held by W. T. Grant II as custodian for
his children; includes 45,000 shares held in a family trust for
which W. T. Grant II serves as a co-trustee and in that capacity
shares voting and investment powers; also includes 12,480 shares
owned by the wife of W. T. Grant II, as to which he disclaims
beneficial ownership.
(7) Includes the 22,365 shares of LabOne common stock held in an
individually directed account of Mr. Grant under LabOne's 401(k)
profit-sharing plan, as to which Mr. Grant has sole investment
power only.
Security Ownership of Certain Other Beneficial Owners of Lab Holdings
Common Stock
The following table indicates the shares of Lab Holdings common
stock beneficially owned by the only persons (other than persons set
forth in the preceding table) known to Lab Holdings or its management
as beneficially owning more than five percent of Lab Holdings' common
stock as of December 31, 1998.
Amount and Nature Percent
Name and Address of of Beneficial of Class
Beneficial Owner Ownership (1)
- --------------------- ------------------------------------- -------
American Century
Companies, Inc. Total 682,100(2) 10.5%
4500 Main Street sole voting power 682,100
P. O. Box 418210 shared voting power --
Kansas City, MO 64141 sole disposition power 682,100
shared disposition power --
Wallace R. Weitz Total 881,454(2) 13.58%
& Company sole voting power 881,454
9290 W. Dodge Rd. shared voting power --
Suite 405 sole disposition power 881,454
Omaha, NE 68114 shared disposition power --
The Southern Total 467,192(2) 7.2%
Fiduciary Group, Inc. sole voting power 76,000
2325 Crestmoor Rd. shared voting power --
Suite 202 sole disposition power 391,192
Nashville, TN shared disposition power --
William D. Grant Total 1,086,647(2) 16.7%
One Ward Parkway, sole voting power 500,441
Suite 130 shared voting power 586,206
Kansas City, MO 64112 sole disposition power 500,441
shared disposition power 586,206
(1) The percentage represents the total number of shares of common
stock shown in the adjacent column divided by the number of
issued and outstanding shares of common stock as of December 31,
1998.
(2) As reported in Schedule 13G filings as of December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment Agreements and Termination of Interim Services
Agreement. Effective August 7, 1998, Lab Holdings entered into
employment agreements with Mr. Jacobs, Mr. Fitzwater and Ms. McCoy,
all of whom are executive officers of Lab Holdings. Each employment
agreement provides for employment of the executive officer for a term
commencing on August 7, 1998, and continuing until the third
anniversary of that date (the second anniversary in the case of Ms.
McCoy's agreement). The term is extended for successive one year
periods on each anniversary of the agreement unless notice of non-
extension is given by either party to the other prior to that
anniversary.
The initial base compensation payable under the employment
agreements is $100,000 for each of Mr. Jacobs and Fitzwater and
$70,000 for Ms. McCoy. It is subject to adjustment annually by the
Board of Directors, provided that base salary may not be decreased by
more than five percent year to year.
If the officer is terminated for cause or voluntarily terminates
his employment with Lab Holdings, then, Lab Holdings will not be
obligated to pay the officer any amounts of compensation or benefits
following the date of termination. A voluntary termination does not
include a resignation tendered at the request of the Board or
following or in connection with a merger, consolidation, liquidation,
dissolution or certain change in control events. If the officer is
terminated without cause, Lab Holdings will continue to pay the
officer amounts equal to his base compensation, as in effect at the
time of the termination without cause, for the remaining term of this
employment agreement, but in no event may the payments continue for a
period of more than two years following the termination in the case of
Mr. Jacobs and Mr. Fitzwater and for more than one year in the case of
Ms. McCoy. In that case, Lab Holdings will also reimburse the officer
for the cost of the officer's health insurance as in effect at the
date of termination. The merger agreement described elsewhere in this
report contemplates that each of the officers will tender their
resignations at the closing of the merger. Under the employment
agreements, those resignations will effect terminations of the
employment agreements without cause so that each will be entitled to
receive payments of their base compensation and health insurance
benefits as described above. Copies of the employment agreements are
appended to this report as Exhibits 10.13, 10.14 and 10.15.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors with Respect to Lab
Holdings, Inc.
Lab Holdings, Inc. Consolidated Balance Sheets as of
December 31, 1998 and 1997
Lab Holdings, Inc. Consolidated Statements of Operations for
the Years ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Consolidated Statements of Stockholders'
Equity for the Years ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Consolidated Statements of Comprehensive
Income for the Years ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Consolidated Statements of Cash Flows for
the Years ended December 31, 1998, 1997 and 1996
Lab Holdings, Inc. Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
II. Valuation and Qualifying Accounts and Reserves -
Years ended December 31, 1998, 1997 and 1996
All other schedules are omitted because they are not
applicable or the information is given in the financial
statements or notes thereto.
(b) Reports on Form 8-K.
A Form 8-K current report dated October 16, 1998 was filed with
the Commission reporting under Other Events that LabOne had entered
into an agreement to acquire Systematic Business Services, Inc.
A Form 8-K current report dated October 23, 1998 was filed with
the Commission providing under Other Events a cautionary statement in
order to obtain the benefits of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
(c) Index to Exhibits (Exhibits follow the Schedule);
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).
2.3 Agreement and Plan of Merger by and between Lab Holdings,
Inc. and LabOne, Inc., dated March 7, 1999 (filed as
Exhibit 2 to the Registrant's Report on Form 8-K dated
March 7, 1999 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 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).
4.2 Trust Indenture dated as of September 1, 1998, between the
City of Lenexa, Kansas and Intrust Bank, N.A. related to
the issuance of Taxable Industrial Revenue Bonds for the
LabOne, Inc., Facility Project (filed as Exhibit 4.1 of the
LabOne, Inc. Form 10-Q for the quarter ended September 30,
1998 and incorporated herein by reference).
4.3 Lease Agreement dated as of September 1, 1998 between the
City of Lenexa, Kansas and LabOne, Inc. related to the
Trust Indenture filed as Exhibit 4.1 to the Company's
Report on Form 10-Q for the quarter ended September 30,
1998 (filed as Exhibit 4.2 of the LabOne, Inc. Form 10-Q
for the quarter ended September 30, 1998 and incorporated
herein by reference).
4.4 Reimbursement Agreement dated as of September 1, 1998
between LabOne, Inc. and Commerce Bank, N.A. related to
Exhibits 4.1 and 4.2 to the Company's Report on Form 10-Q
for the quarter ended September 30, 1998 (filed as Exhibit
4.3 of the LabOne, Inc. Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference).
4.5 Letter agreement dated September 4, 1998, between the
Company and Commerce Bank, N.A. relating to the Company's
obligations with respect to the Reimbursement Agreement and
letters of credit to be issued thereunder that is filed as
Exhibit 4.3 to the Company's Report on Form 10-Q for the
quarter ending September 30, 1998 (filed as Exhibit 4.4 of
the Registrant's form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference).
10.1 Registrant's 1997 Directors' Stock Option Plan, as amended
(filed as Exhibit 10.4 of the Registrant's Form 10-Q for
the quarter ended September 30, 1998 and incorporated
herein by reference).***
10.2 Form of Option Agreement with directors under the
Directors' Stock Option Plan, as amended (filed as Exhibit
10.5 of the Registrant's Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by
reference).***
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 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).**
10.5 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).**
10.6 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).**
10.7 1997 Long-Term Incentive Plan of LabOne, Inc. (filed as
Exhibit 10.1 to the LabOne, Inc. Form 10-Q for the quarter
ended June 30, 1998 (File No. 0-15975) and incorporated
herein by reference).**
10.8 Form of Stock Option Agreement pursuant to the LabOne 1997
Long-Term Incentive Plan (filed as Exhibit 10.2 to the
LabOne, Inc. Form 10-Q for the quarter ended June 30, 1998
(File No. 0-15975) and incorporated herein by reference).**
10.9 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).**/***
10.10 LabOne's Annual Incentive Plan (filed as Exhibit 10.3 to
LabOne, Inc. Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 0-15975) and incorporated
herein by reference).**
10.11 Lab Holdings, Inc. Facilities Sharing and Interim Services
Agreement, dated as of June 1, 1998 (filed as Exhibit 10.29
to the SLH Corporation Registration Statement on Form S-4
(Registration No. 333-50253) and incorporated herein by
reference).
10.12 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).
10.13 Employment agreement between the Registrant and P. Anthony
Jacobs, the President and Chief Executive Officer of the
Registrant (filed as Exhibit 10.1 to the Registrant's Form
10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference).**
10.14 Employment agreement between the Registrant and Steven K.
Fitzwater, the Executive Vice President and Chief Operating
and Financial Officer of the Registrant (filed as Exhibit
10.2 to the Registrant's Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference).**
10.15 Employment agreement between the Registrant and Linda K.
McCoy, the Vice President and Chief Accounting Officer of
the Registrant (filed as Exhibit 10.3 to the Registrant's
Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference).**
10.16 Warrant to Purchase Shares of Common Stock of LabOne, Inc.
issued to National Support Services, Inc. (filed as Exhibit
4 to the LabOne, Inc. Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference).
10.17 Warrant to Purchase Shares of Common Stock of LabOne, Inc.
issued to USA Managed Care Organization (filed as Exhibit
4.5 to the LabOne, Inc. Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by
reference).
11 Statement regarding computation of per share earnings - see
Note l of Notes to Consolidated Financial Statements,
"Earnings Per Share."
21 Subsidiaries of Registrant (reference is made to Item 1
hereof).
23 Consent of Independent Auditors
24 Powers of Attorney (filed as Exhibit 24 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-16946) and incorporated herein by
reference).
27 Financial Data Schedule - as filed electronically by the
Registrant in conjunction with this 1998 Form 10-K.
99.1 Cautionary Statement under the Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995
(incorporated by reference to the Registrant's Report on
Form 8-K, dated October 23, 1998).
** 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: June 30, 1999
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.
Name Title Date
- ----------------------------------------------------------------------
/s/ Lan C. Bentsen Director June 30, 1999
- -------------------------
Lan C. Bentsen
/s/ Steven K. Fitzwater Executive Vice President, June 30, 1999
- ------------------------- Chief Operating and
Steven K. Fitzwater Financial Officer,
Secretary and Director
/s/ Linda K. McCoy Vice President, Chief June 30, 1999
- ------------------------- Accounting Officer and
Linda K. McCoy Assistant Secretary
LAB HOLDINGS, INC. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts and Reserves
- -------------------------------------------------------------------
Additions-
Charged to
selling,
Balance at general and Deductions- Balance
beginning administrative uncollectible at end
Description of year expenses accounts of year
- ----------------------------------------------------------------------
(In thousands)
Year ended December 31, 1998
Accounts and notes receivable -
allowance for
doubtful
accounts $ 968 1,503 144 2,327
Year ended December 31, 1997
Accounts and notes receivable -
allowance for
doubtful
accounts $ 1,022 521 575 968
Year ended December 31, 1996
Accounts and notes receivable -
allowance for
doubtful
accounts $ 1,234 717 929 1,022
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors Lab Holdings, Inc.
We consent to incorporation by reference in the Registration Statement
(No. 333-78593) on Form S-8 of Lab Holdings, Inc. of our report dated
March 8, 1999 relating to the consolidated balance sheets of Lab
Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, comprehensive
income, stockholders' equity and cash flows and related schedule for
each of the years in the three-year period ended December 31, 1998,
which report appears in the December 31, 1998 annual report on Form
10-K of Lab Holdings, Inc.
KPMG LLP
Kansas City, Missouri
June 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10K for the period ending December 31, 1998 and is qualified in its
entirety by reference to such 10K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<PP&E> 72,919
<DEPRECIATION> 35,983
<TOTAL-ASSETS> 98,008
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0
0
<COMMON> 7,500
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<TOTAL-LIABILITY-AND-EQUITY> 98,008
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<INTEREST-EXPENSE> 70
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<INCOME-TAX> 5,620
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