UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-16946
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 7568
5000 W. 95th Street, Suite 260
Shawnee Mission, KS 66207
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(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (913) 648-3600
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
July 29, 1999: $1 par value common - 6,489,103
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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(unaudited)
June 30, December 31,
1999 1998
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(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 9,148 15,223
Accounts receivable 18,538 18,730
Current income taxes 2,458 400
Inventories 1,160 1,798
Real estate available for sale -- 3,515
Prepaid expenses and other current assets 2,796 2,753
Deferred income taxes 2,096 3,973
---------------------
Total current assets 36,196 46,392
---------------------
Property, plant and equipment 78,346 72,919
Less accumulated depreciation 36,002 35,983
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Net property, plant and equipment 42,344 36,936
---------------------
Other assets:
Intangible assets 12,587 13,770
Deferred income taxes 615 485
Other assets 1,508 425
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Total Assets $ 93,250 98,008
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,520 4,393
Retainage and construction payable 695 3,809
Accrued payroll and benefits 3,746 4,149
Other accrued expenses 412 610
Other current liabilities 372 275
Current portion of long-term debt 1,863 1,860
---------------------
Total current liabilities 12,608 15,096
Long-term debt 18,093 18,097
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Total liabilities 30,701 33,193
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Minority interests 10,042 10,276
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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 2,921
Accumulated other comprehensive income (loss) (615) (683)
Retained earnings 72,845 74,945
---------------------
82,651 84,683
Less cost of 1,010,897 shares
of treasury stock 30,144 30,144
---------------------
Total stockholders' equity 52,507 54,539
---------------------
Total Liabilities and Stockholders' Equity $ 93,250 98,008
=====================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
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(in thousands except share amounts)
Sales $ 28,572 25,763 55,900 49,096
Cost of sales 17,004 13,832 32,655 26,791
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Gross profit 11,568 11,931 23,245 22,305
Selling, general and
administrative 9,361 8,561 18,549 16,558
--------------------- ---------------------
Earnings from operations 2,207 3,370 4,696 5,747
Investment income - net 116 289 263 656
Interest expense (300) -- (590) --
Other income (expense) (1) (25) (7) (26)
--------------------- ---------------------
Earnings before income taxes 2,022 3,634 4,362 6,377
Income taxes 916 1,553 1,895 2,802
--------------------- ---------------------
Earnings before
minority interests 1,106 2,081 2,467 3,575
Minority interests 312 449 674 803
--------------------- ---------------------
Net earnings $ 794 1,632 1,793 2,772
===================== =====================
Basic earnings per share $ .12 .25 .28 .43
Diluted earnings per share $ .12 .25 .28 .42
Dividends per share $ .30 .30 .60 .60
Book value per share $ 8.09 8.52 8.09 8.52
Weighted average shares
outstanding 6,489,103 6,489,103 6,489,103 6,489,103
Shares outstanding
end of period 6,489,103 6,489,103 6,489,103 6,489,103
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Three Months Ended June 30, 1999(unaudited)
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Comprehensive Stockholders'
Income Equity
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(in thousands)
Common stock:
Balance, beginning and end of period $ 7,500
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Paid-in capital:
Balance, beginning and end of period 2,921
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Retained earnings:
Balance, beginning of period 74,945
Net earnings 1,793 1,793
Cash dividends paid (3,893)
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Balance, end of period 72,845
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Accumulated other comprehensive income (loss)
Balance, beginning of period (683)
Foreign currency translation 68 68
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Balance, end of period (615)
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Less:
Treasury stock:
Balance, beginning and end of period 30,144
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Totals $ 1,861 52,507
======== ========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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(unaudited)
Six Months Ended
June 30,
1999 1998
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(In thousands)
OPERATING ACTIVITIES
Net earnings $ 1,793 2,772
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization 3,832 3,103
Provision for loss on accounts receivable 1,281 650
Loss (gain) on disposal of property
and equipment (843) 4
Earnings applicable to minority interests 674 803
Change in trading portfolio, net -- 69
Change in accounts receivable (1,083) (3,726)
Change in accounts payable (2,233) 708
Income taxes and other, net (1,191) (327)
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Net cash provided by operations 2,230 4,056
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INVESTING ACTIVITIES
Purchases of investments held to maturity -- (5,461)
Maturities of investments held to maturity -- 6,202
Additions to property, plant and equipment,net (3,511) (6,319)
Other, net (975) (748)
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Net cash used by investing activities (4,486) (6,326)
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FINANCING ACTIVITIES
Payment of principal on long-term debt (6) --
Regular quarterly dividends paid (3,893) (3,893)
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Net cash used by financing activities (3,899) (3,893)
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Effect of foreign currency translation 80 (56)
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Net decrease in cash and cash equivalents (6,075) (6,219)
Cash and cash equivalents at
beginning of period 15,223 22,129
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Cash and cash equivalents at end of period $ 9,148 15,910
===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 652 --
===================
Income taxes, net $ 2,228 3,059
===================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
LAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(1) The interim financial information furnished herein is unaudited while
the balance sheet at December 31, 1998 is derived from audited financial
statements. In the opinion of management, the financial information
reflects all adjustments which are necessary to fairly state Lab Holdings'
financial position at June 30, 1999 and December 31, 1998 and the results
of its operations and cash flows for the periods ended June 30, 1999 and
1998. All adjustments made in the interim period were of a normal
recurring nature. The financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances, and therefore included in the financial statements are
certain amounts based on management's informed estimates and judgments.
The financial information herein is not necessarily representative of a
full year's operations because levels of sales, interest rates and other
factors fluctuate throughout the fiscal year. These same considerations
apply to all year to year comparisons. Certain 1998 amounts have been
reclassified for comparative purposes with no effect on net earnings. See
Lab Holdings' Annual Report pursuant to Section 13 to the Securities
Exchange Act of 1934 (Form 10-K) for additional information not required by
this Quarter's Report (Form 10-Q).
This Quarterly report on Form 10-Q may contain "forward-looking
statements," including projections, statements of plans and objectives,
statements of future economic performance and statements of assumptions
underlying such statements. Forward-looking statements involve known and
unknown risks and uncertainties. They are usually identified by or are
associated with such words such as "intend," " believe," "estimate,"
"expect," "anticipate," "hopeful," "should," "may" and similar expressions.
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, general economic conditions and other factors detailed from
time to time in the Company's reports and registration statements filed
with the Securities and Exchange Commission, including the risk factors and
cautionary statements discussed on pages 13 through 17 of the Joint Proxy
Statement/Prospectus, dated July 2, 1999, this is a part of the Company's
Registration Statement No. 333-76131 on Form S-4.
(2) Lab Holdings' principal asset consists of its 80.4% ownership of
LabOne, Inc., a publicly-traded company. On March 8, 1999, Lab Holdings
and LabOne jointly announced that the Boards of Directors of both companies
had approved an agreement to merge the two companies. A Registration
Statement covering the proposed transaction was declared effective by the
Securities and Exchange Commission on July 2, 1999. Under the merger
agreement, LabOne is to be merged into Lab Holdings and the combined
company'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 combined company. 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 combined
company 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). The
combined company will use cash from operations and additional borrowings,
if necessary, to cover the purchase of shares from LabOne stockholders that
choose the cash election option. The merger is subject to approval by the
holders of two-thirds of the outstanding Lab Holdings shares and a majority
of the shares voted by LabOne stockholders, other than Lab Holdings and its
affiliates, and other closing conditions.
(3) On July 1, 1999, the Company announced a restatement of earnings for
the year ended December 31, 1998. As requested by the staff of the
Securities and Exchange Commission, LabOne has changed the amortization
schedule from fifteen years to five years on a customer list acquired
during the first quarter of 1997. LabOne's original amortization period
was based on historical performance, however, the SEC requested that the
amortization period be reduced to five years. This restatement is not the
result of any changes in customer relationships and has no effect on any
present or future cash flows. The effect of this restatement is as
follows:
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
------------------------ ------------------------
As Previously As As Previously As
Reported Restated Reported Restated
------------- -------- ------------- --------
(in thousands except per share data)
Earnings before
taxes $ 3,771 3,634 6,652 6,377
Net earnings 1,700 1,632 2,908 2,772
Basic earnings
per share .26 .25 .45 .43
Diluted earnings
per share .26 .25 .44 .42
(4) Cash and cash equivalents include demand deposits in banks, money
market investments and overnight investments that are stated at cost, which
approximates market value.
(5) 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 compute basic
and diluted earnings per share.
June 30, 1999
-----------------------------------
Per Share
Net Earnings Shares Amount
-----------------------------------
Basic earnings per share $ 1,793,000 6,489,103 $ .28
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options (5,000) --
-----------------------------------
Diluted earnings per share $ 1,788,000 6,489,103 $ .28
===================================
June 30, 1998
-----------------------------------
Per Share
Net Earnings Shares Amount
-----------------------------------
Basic earnings per share $ 2,772,000 6,489,103 $ .43
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options (50,000) --
-----------------------------------
Diluted earnings per share $ 2,722,000 6,489,103 $ .42
===================================
(6) The Company, through its subsidiary, LabOne, operates in three lines
of business: insurance risk appraisal testing, clinical diagnostic testing
and substance abuse testing. The following table presents the Company's
selected financial information for each segment.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------- ------------------
(in thousands)
Sales
Insurance $ 18,474 17,572 36,058 34,394
Clinical 5,736 4,723 11,693 8,377
Substance abuse testing 4,362 3,468 8,149 6,325
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Total sales $ 28,572 25,763 55,900 49,096
================== ==================
Operating Income
Insurance $ 3,795 5,436 7,810 10,511
Clinical (1,309) (1,509) (2,268) (3,444)
Substance abuse testing (172) 40 (291) (139)
General corporate expense (107) (597) (555) (1,181)
------------------ ------------------
Earnings from operations 2,207 3,370 4,696 5,747
Investment income - net 116 289 263 656
Interest expense (300) -- (590) --
Other income (expense) (1) (25) (7) (26)
------------------ ------------------
Earnings before
income taxes $ 2,022 3,634 4,362 6,377
================== ==================
LabOne's new facility was completed in early 1999 and the portions of the
building identifiable to each segment have been allocated to those
segments. Effective the second quarter, the associated depreciation
expenses have been charged to the segments and are included in the
operating income or loss information stated above. There were no other
material changes in assets or in the basis of segmentation or measurement
of segment operating income or loss.
(7) Effective October 30, 1998, LabOne acquired SBSI, a Missouri
corporation. SBSI provides telephone inspections, motor vehicle reports,
attending physician statements and claims investigation services to life
and health insurers nationwide.
(8) Comprehensive income is defined as any change in equity from
transactions and other events originating from non-owner sources. For Lab
Holdings, those changes are composed of reported net income and changes in
unrealized foreign currency translation adjustments. The components of
comprehensive income are as follows.
June 30,
1999 1998
------------------
(in thousands)
Net earnings $ 1,793 2,772
Other comprehensive income
Foreign currency translation 68 (51)
------------------
Total Comprehensive Income $ 1,861 2,721
==================
(9) Contingencies
The Comptroller of the State of Texas has conducted an audit of LabOne for
sales and use tax compliance for the years 1991 through 1997 and contends
that LabOne's insurance laboratory services are taxable under the Texas tax
code. The Texas Comptroller has issued a tax audit assessment, including
interest and penalties, of approximately $1.9 million. The Texas State
Hearing Attorney has issued a position letter agreeing to amend the audit
based on the exclusion of non-Texas applicants. At this time, LabOne is
unable to estimate the possible liability, if any, that may be incurred as
a result of this assessment, but believes the amount will be less than
$500,000. LabOne continues to appeal this assessment arguing that its
services do not fit within the definition of insurance services under the
Texas code.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Selected Financial Data
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------
1999 1998 1999 1998
---------- ---------- --------- -------
Sales $28,572,000 25,763,000 55,900,000 49,096,000
Earnings from operations $ 2,207,000 3,370,000 4,696,000 5,747,000
Investment income - net $ 116,000 289,000 263,000 656,000
Interest expense $ 300,000 -- 590,000 --
Net earnings $ 794,000 1,632,000 1,793,000 2,772,000
Basic earnings per share: $ .12 .25 .28 .43
Diluted earnings per share:$ .12 .25 .28 .42
Dividends per share $ .30 .30 .60 .60
Book value per share $ 8.09 8.52 8.09 8.52
Introductory remarks about results of operations
Lab Holdings, Inc.'s (Lab Holdings or Registrant) principal asset consists
of a majority ownership of LabOne, Inc. (LabOne), together with $5.6
million of related goodwill. Additionally, Lab Holdings has approximately
$6 million of other net assets, consisting primarily of cash and cash
equivalents, income tax receivables and capitalized costs associated with
the proposed merger with LabOne. Prior to October 20, 1997, Lab Holdings
was named Seafield Capital Corporation (Seafield). Seafield changed its
name to Lab Holdings for better identification with its primary asset, the
approximate 80.4% 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. The offering of Lab Holdings common stock in the merger
is being made only by means of the Joint Proxy Statement/Prospectus, dated
July 2, 1999, that has been mailed to stockholders. The Registration
Statement on Form S-4 was declared effective by the Securities and Exchange
Commission on July 2, 1999 (File No. 333-76131).
LabOne provides high-quality laboratory testing services to insurance
companies, physicians and employers.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed 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. Through its
subsidiary, SBSI, LabOne 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 Lab Card(trademark), a Laboratory Benefits Management program.
The Lab Card program provides laboratory testing at reduced rates as
compared to traditional laboratories. It uses a unique benefit design that
shares the cost savings with the patient, creating an incentive for the
patient to help direct laboratory work to LabOne. Under the Program, the
patient incurs no out-of-pocket expense when the Lab Card is used, and the
insurance company or self-insured group receives substantial savings on its
laboratory charges. LabOne's Laboratory Benefits Management programs,
including BlueCross BlueShield of Tennessee and the Lab Card program, have
more than 2.3 million lives enrolled.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration to perform substance abuse testing services for federally
regulated employers and is currently marketing these services throughout
the country to both regulated and nonregulated employers. LabOne's rapid
turnaround times and multiple testing options help clients reduce downtime
for affected employees and meet mandated drug screening guidelines.
SECOND QUARTER ANALYSIS
Net sales increased 11% in the second quarter 1999 to $28.6 million from
$25.8 million in the second quarter 1998. The increase of $2.8 million is
due to increases in clinical laboratory revenue of $1 million, substance
abuse testing (SAT) revenue of $894,000 and insurance services revenue of
$902,000.
Clinical diagnostic testing revenue increased from $4.7 million to $5.7
million for the quarter due to a 34% increase in testing volumes partially
offset by a 9% decrease in average revenue per patient related to lower
capitated billing rates. SAT revenue increased from $3.5 million in 1998
to $4.4 million in 1999 due to a 30% increase in testing volumes as
compared to last year.
The insurance services division revenue increased $902,000 due to the
addition of SBSI revenue and growth in non laboratory services revenue,
reduced by lower laboratory and kit revenue. SBSI was acquired in October
1998 and contributed $2.1 million, and non laboratory services revenue
increased $400,000. Insurance laboratory testing revenue decreased $1.1
million as a result of reductions in volume and price and a retroactive
pricing credit. The total number of insurance applicants tested in the
second quarter 1999 decreased by 6% as compared to the same quarter last
year due to competitive pressures. Average revenue per applicant decreased
1% primarily due to price reductions and a shift in product mix to lower
price products partially offset by increased ancillary test volumes. Kit
and container revenue declined due to a decrease in the number of kits
sold.
Cost of sales increased $3.2 million or 23% in the second quarter 1999 as
compared to the prior year, due to increases in payroll, information
services such as state motor vehicle report fees, and postage expense. A
significant portion of these increases are related to the addition of SBSI
and the growth of the SAT and clinical segments. These increases were
partially offset by a decrease in insurance kit expenses due to lower sales
volumes. Clinical cost of sales expenses were $4.1 million as compared to
$3.6 million in the second quarter 1998. SAT cost of sales expenses were
$3.2 million as compared to $2.3 million in the second quarter 1998.
Insurance cost of sales expenses increased from $7.9 million to $9.7
million primarily due to the addition of SBSI.
As a result of the above factors, gross profit for the quarter decreased
$363,000 million or 3% from $11.9 million in 1998 to $11.6 million in 1999.
Clinical gross profit increased $500,000 on an increase in revenue of $1
million. SAT gross profit was flat as compared to the second quarter last
year. Insurance gross profit decreased $900,000 for the quarter.
LabOne's selling, general and administrative expenses increased $700,000 or
9% in the second quarter 1999 as compared to the prior year, due primarily
to the inclusion of SBSI, increases in bad debt and depreciation expenses,
and moving expenses. Closure on the sale of the former administrative
facility resulted in a gain of $600,000, partially offsetting the
increases. The sales gain resulted from the sales price of $2.5 million
being greater than originally anticipated. Bad debt expense increased
primarily due to the revenue growth in clinical and SAT segments which have
inherently higher bad debt experience than the insurance testing segment.
Insurance expenditures increased to $5 million for the quarter as compared
to $4.2 million in 1998 primarily due to the addition of SBSI. Total
clinical costs increased $300,000 to $3 million in 1999 primarily due to an
increase in bad debt expense and an increase in corporate overhead
allocations to $900,000 from $800,000 in 1998. SAT expenditures were $1.3
million as compared to $1.1 million last year.
Lab Holding's selling, general and administrative expenses increased to
$251,000 in the second quarter 1999 from $191,000 in the second quarter of
1998. Prior to August 7, 1998, Lab Holdings received administrative
services which were provided by SLH Corporation. As a result of SLH's
merger with Syntroleum Corporation on August 7, 1998, the previous services
agreement with SLH was terminated. As a consequence, Lab Holdings'
personnel have since been employed directly by Lab Holdings, resulting in
increased administration expenses during 1999's second quarter. Goodwill
amortization of $368,000 associated with Lab Holdings' investment in LabOne
was included in the second quarter operating results of both 1999 and 1998.
Consolidated earnings from operations decreased to $2.2 million in 1999's
second quarter from $3.4 million in the second quarter of 1998. LabOne's
clinical segment improved $200,000 to an operating loss of $1.3 million.
The SAT segment declined $200,000 to a loss of $200,000 in the second
quarter of 1999. The insurance segment, including SBSI, declined $1.6
million to an operating profit of $3.8 million.
Other investments include liquidity investments. The return on short-term
investments is included in the investment income line in the consolidated
statements of operations. Investment income decreased to $116,000 in
1999's second quarter from $289,000 in 1998's second quarter primarily
reflecting a reduction in capital available for investments.
Interest expense of $300,000 was recorded in 1999's second quarter as a
result of LabOne's new facility being placed in service. Previously, the
interest had been capitalized during construction in 1998. Miscellaneous
items produced a $1,000 loss in 1999's second quarter as compared to a loss
of $25,000 in 1998's second quarter.
Tax expense decreased to $916,000 in 1999's second quarter from $1.6
million in 1998's second quarter. The effective tax rate increased to 45%
from 43% primarily due to the non deductibility of goodwill.
The combined effect of the above factors resulted in net earnings of
$794,000 or $0.12 diluted earnings per share in the second quarter of 1999,
compared to net earnings of $1.6 million or $0.25 diluted earnings per
share in the same period last year.
YEAR-TO-DATE ANALYSIS
Revenue in the six month period ended June 30, 1999 was $55.9 million as
compared to $49.1 million in the same period last year. The increase of
$6.8 million is due to increases in clinical revenue of $3.3 million, SAT
revenue of $1.8 million and insurance revenue of $1.7 million
Clinical laboratory revenue increased from $8.4 million during the first
six months of 1998 to $11.7 million for the same period in 1999 due to
increased testing volumes. SAT revenue increased from $6.3 million in 1998
to $8.1 million in 1999 due to a 33% increase in testing volumes.
During the first six months of 1999, the insurance services division
revenue increased $1.7 million to $36.1 million as compared with $34.4
million in the same period of 1998. The total number of insurance
applicants tested in the six month period decreased by 5% as compared to
last year, while average revenue per applicant declined 2%. Kit and
container revenue decreased $1.1 million due primarily to a decrease in the
number of kits sold.
Cost of sales increased $5.9 million year to date as compared to the prior
year. This increase is due primarily to increases in payroll expenses,
insurance information services and inbound freight. A significant portion
of these increases are related to the addition of SBSI and the growth of
the SAT and clinical segments. These increases were partially offset by a
decrease in insurance kit expenses due to lower sales volumes. Clinical
cost of sales expenses were $8 million as compared to $7 million during the
first six months of 1998. SAT cost of sales expenses were $6 million as
compared to $4.4 million during 1998.
As a result of the above factors, gross profit for the first six months
increased from $22.3 million in 1998 to $23.2 million in 1999. Clinical
gross profit improved from $1.4 million in 1998 to $3.7 million in 1999.
SAT gross profit increased to $2.2 million in the first six months of 1999
from $1.9 million last year.
LabOne's selling, general and administrative expenses increased $2.7
million (18%) in the six month period ended June 30, 1999 as compared to
the prior year due to the addition of SBSI and increases in depreciation
expenses, bad debt accruals, and moving expenses. Clinical expenditures
were $6 million as compared to $4.9 million in 1998. SAT expenses
increased from $2.1 million in 1998 to $2.5 million in 1999. The overhead
allocation to the clinical and SAT segments for the period was $3.1 million
as compared to an allocation of $2.4 million in 1998.
Lab Holding's selling, general and administrative expenses increased to
$507,000 in the first six months of 1999 from $372,000 in the first six
months of 1998. Prior to August 7, 1998, Lab Holdings received
administrative services which were provided by SLH Corporation. As a
result of SLH's merger with Syntroleum Corporation on August 7, 1998, the
previous services agreement with SLH was terminated. As a consequence, Lab
Holdings' personnel have since been employed directly by Lab Holdings,
resulting in increased administration expenses during 1999's first six
months. Goodwill amortization of $736,000 associated with Lab Holdings'
investment in LabOne was included in the first six months operating results
of both 1999 and 1998.
Consolidated operating income decreased from $5.7 million in the first six
months of 1998 to $4.7 million in 1999. The insurance segment had
operating income of $7.8 million as compared to 10.5 million in the first
six months of last year. The clinical segment had an operating loss of
$2.3 million for the six month period ended June 30, 1999 as compared to an
operating loss of $3.4 million in 1998. The SAT segment had an operating
loss of $291,000 in 1999 as compared to an operating loss of $139,000 in
1998. The general corporate segment has an operating loss of $555,000 in
the first six months of 1999 as compared to a loss of $1.2 million in the
first six months of 1998. This decrease is primarily due to gains on sales
of LabOne's former laboratory and administrative facilities.
Other investments include liquidity investments. The return on short-term
investments is included in the investment income line in the consolidated
statements of operations. Investment income decreased to $263,000 in
1999's first six months from $656,000 in 1998's first six months primarily
reflecting a reduction in capital available for investments.
Interest expense of $590,000 was recorded in 1999's first six months as a
result of LabOne's new facility being placed in service. Previously, the
interest had been capitalized during construction in 1998. Miscellaneous
items produced a $7,000 loss in 1999's first six months as compared to a
loss of $26,000 in 1998's first six months.
The effective income tax rate was approximately 43% in both the six month
periods of 1999 and 1998.
The combined effect of the above factors resulted in net earnings of $1.8
million or $0.28 diluted earnings per share in the six month period ended
June 30, 1999 as compared to $2.8 million or $0.42 diluted earnigs per
share in the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1999, at the holding company level, Lab Holdings had available
for operations approximately $3.9 million in cash and cash equivalents.
Lab Holdings' working capital at June 30, 1999 decreased to $3.8 million
from $5.4 million at December 31, 1998, reflecting costs associated with
the proposed merger with LabOne.
On a consolidated basis, Lab Holdings' cash and cash equivalents decreased
to $9.1 million at June 30, 1999 from $15.2 million at December 31, 1998.
The decrease primarily reflects LabOne's dividends and capital additions
exceeding its cash provided by operations as well as Lab Holdings'
corporate overhead. Current assets totaled approximately $36.2 million
while current liabilities totaled $12.6 million.
Net cash provided by operations decreased by $1.8 million to $2.2 million
in 1999's first six months compared with $4 million in 1998's first six
months, primarily attributable to LabOne's slower increase in accounts
receivable and decreases in accounts payable.
Net cash used by investing activities in 1999's first six months totaled
$4.5 million, as compared with $6.3 million in 1998's first six months.
The net cash used in 1999 primarily reflects LabOne's $3.5 million net
additions to property plant and equipment related to construction and
fixtures for the new facility. Net cash used by investing activities in
1998's first six months included a net decrease in long-term investments of
$741,000 and $6.3 million of net additions to property, plant and
equipment. LabOne's capital additions are expected to be approximately $5
million annually.
Net cash used by financing activities totaled $3.9 million in both 1999 and
1998's first six months, primarily consisting of regular cash dividends.
Lab Holdings is currently a holding company. Sources of cash are
investments and subsidiary dividends. The primary uses of cash for Lab
Holdings are investments, operating expenses and dividends to shareholders.
LabOne paid regular quarterly dividends in 1999 and 1998. As an
approximate 80.4% owner, Lab Holdings received $3.9 million of cash
dividends from LabOne in the first six months of 1999. LabOne's working
capital position decreased by $6.1 million to $19.8 million at June 30,
1999 from $25.9 million at December 31, 1998. This decrease is primarily
due to dividends paid and capital additions exceeding cash provided by
operations.
LabOne had no short-term borrowings in the second quarter of 1999. LabOne
expects to fund operations and future dividend payments from a combination
of cash flows from operations, cash reserves and short term borrowings.
Proceeds from the industrial revenue bond have been used to finance the
construction of LabOne's new facility project. Interest on the bond is
based on a taxable seven day variable rate and is currently approximately
6.0%. LabOne expects to repay the bond over 11 years at $1.85 million per
year plus interest. The first principle payment of $1.85 million is due
September 1, 1999.
During 1999's second quarter, Lab Holdings procured a $15 million bank line
of credit for the purpose of financing Lab Holdings' obligations for cash
elections, if any, by LabOne stockholder under the proposed merger. At Lab
Holdings' option, each borrowing will be at the bank's prime rate or three
quarters of one percent in excess of the LIBOR rate.
YEAR 2000
LabOne is actively addressing Year 2000 computer concerns. LabOne has
established an oversight committee which includes management from all parts
of the Company and meets periodically to review progress. LabOne's
laboratory operating systems and its business processing systems were
completely rewritten in the past ten years and were brought into compliance
with Year 2000 date standards at that time. As part of construction of the
new facility, certified compliant security systems, time clocks and heating
and cooling systems (non-IT systems) were installed. As of 4/1/99, all
mission critical systems meet LabOne's compliance criteria. LabOne is
currently engaged in a comprehensive system validation, running production
systems in a year 2000 simulation. This effort will continue through the
balance of 1999 as updates are made to our systems.
LabOne is assessing the Year 2000 preparation and contingency plans of
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
United States Postal Service, airlines and other common carriers or express
delivery services in the event of delivery problems with Airborne Express.
LabOne currently maintains approximately 8 weeks 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 the LabOne's computer
systems.
Resources dedicated to the remaining effort are expected to cost less than
$200,000 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
No recently issued accounting standards presently exist which will require
adoption in future periods.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A foreign currency risk exposure exists due to billing Canadian subsidiary
revenue in Canadian dollars and the direct laboratory expenses associated
with this revenue being incurred in US dollars. This exposure is not
considered to be material. Any future material Canadian currency
fluctuations against the US 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 6% as of July 30,
1999. This exposure is not considered material. Any future increase in
interest rates would result in additional interest expense and could result
in a decision to enter into a long-term interest rate swap transaction.
Lab Holdings will have an interest rate risk exposure on its $15 million
bank line of credit. The bank line of credit is to be used to fund cash
elections, if any, under the proposed merger with LabOne. At the Company's
option, each borrowing will be at the bank's prime rate or three quarters
of one percent in excess of the LIBOR rate. This exposure is not
considered material. Any future increase in interest rates would result in
additional interest expense.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) Under the Missouri General Corporation Law, no dividends to
stockholders may be declared or paid at a time when the net assets of the
corporation are less than its stated capital or when the payment thereof
would reduce the net assets of the corporation below its stated capital.
At June 30, 1999, the net assets of Lab Holdings, Inc. exceeded its stated
capital by $45,007,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.l Line of Credit Loan Agreement and related Note
[incorporated by reference to Exhibit 4.6 to
Pre-Effective Amendment No. 1 to the Company's
Registration Statement No. 333-76131].
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lab Holdings, Inc.
Date July 30, 1999 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Executive Vice President, Chief
Operating and Financial Officer
Date July 30, 1999 By /s/ Linda K. McCoy
----------------------------
Linda K. McCoy
Vice President and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period ending June 30, 1999 and is qualified in its
entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,148
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 1,160
<CURRENT-ASSETS> 36,196
<PP&E> 78,346
<DEPRECIATION> 36,002
<TOTAL-ASSETS> 93,250
<CURRENT-LIABILITIES> 12,608
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 45,007
<TOTAL-LIABILITY-AND-EQUITY> 93,250
<SALES> 0
<TOTAL-REVENUES> 55,900
<CGS> 0
<TOTAL-COSTS> 51,204
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 590
<INCOME-PRETAX> 4,362
<INCOME-TAX> 1,895
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<F1>Disclosure not required on interim financial statements.
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