UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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Commission file number 0-16946
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LabOne, Inc.
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10101 Renner Blvd.
Lenexa, Kansas 66219
(913) 888-1770
Incorporated in Missouri
I.R.S. Employer Identification Number: 43-1039532
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
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. / /
Approximate aggregate market value of voting stock held by non-affiliates
of Registrant: $65,912,000 (based on closing price as of March 1, 2000, of
$6.875). The non-inclusion of shares held by directors, officers and
beneficial owners of more than 5% of the outstanding stock shall not be deemed
to constitute an admission that such persons are affiliates of the Registrant
within the meaning of the Securities and Exchange Act of 1934.
Number of shares outstanding of the only class of Registrant's common
stock as of March 1, 2000: $0.01 par value common - 11,533,493 shares net of
1,516,527 shares held as treasury stock.
The exhibit list for this Form 10-K begins on page 20
PAGE 1 of 79
PART I
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ITEM 1. BUSINESS
General
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LabOne, Inc., a Missouri corporation, provides laboratory testing,
investigative services and paramedical examinations for the insurance
industry, clinical laboratory testing services for the healthcare industry and
substance abuse testing services for employers. LabOne, Inc., together with
its wholly-owned subsidiaries Lab One Canada Inc., Systematic Business
Services, Inc. (SBSI) and ExamOne World Wide, Inc., hereinafter collectively
referred to as either LabOne or the Company, is the largest provider of life
insurance laboratory testing services in the United States and Canada.
LabOne provides risk-appraisal laboratory services to the insurance industry.
The laboratory tests performed by the Company are specifically designed to
assist an insurance company in objectively evaluating the mortality and
morbidity risks posed by policy applicants. The majority of the testing is
performed on specimens of individual life insurance policy applicants. The
Company also provides testing services on specimens of individuals applying
for individual and group medical and disability policies. Through its
subsidiary, SBSI acquired in 1998, the Company provides telephone
inspections, motor vehicle reports, attending physician statements, and claims
investigation services.
Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc.
and World Wide Health Services of New Jersey, a provider of specimen
collection and paramedical examination services to life and health insurers.
These subsidiaries are operated under the name ExamOne World Wide and are
included in the insurance services division of LabOne. This addition allows
LabOne to expand the services it offers to its insurance industry clients.
LabOne's clinical testing services are provided to the healthcare industry as
an aid in the diagnosis and treatment of patients. LabOne operates only one
highly automated and centralized laboratory, which the Company believes has
significant economic advantages over other conventional laboratory
competitors. LabOne markets its clinical testing services to the payers of
healthcare (insurance companies and self-insured groups). The Company does
this through exclusive arrangements with managed care organizations and
through Lab Card(R) a Laboratory Benefits Management program.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration to perform substance abuse testing services for federally
regulated employers and is currently marketing these services throughout the
country to both regulated and nonregulated employers. The Company's rapid
turnaround times and multiple testing options help clients reduce downtime for
affected employees and meet mandated drug screening guidelines.
On August 10, 1999, the former LabOne, Inc. was merged into its parent
corporation, Lab Holdings, Inc. upon the approval of the shareholders of both
companies at their respective annual meetings. The combined company's name
was then changed to LabOne, Inc.
PAGE 2
Forward Looking Statements
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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 the
Company, competition, the extent of market acceptance of the Company's testing
services in the healthcare and substance abuse testing industries, intense
competition, the loss of one or more significant customers, 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 Cautionary Statement filed herewith as Exhibit 99.
Services Provided by the Company
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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. The Company 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 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 increasing cocaine 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 contracted paramedical personnel using LabOne's custom-designed
collection kits and containers. These kits and containers are delivered to
PAGE 3
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, the Company 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, telephone inspections, motor vehicle
reports and other applicant information. LabOne handles paramedical
examination paperwork and assists with administration of data for insurance
underwriting. Additionally, the Company can obtain attending physician
statements, telephone inspections, motor vehicle reports, and perform claims
investigation through its subsidiary, SBSI.
In November 1999, LabOne's acquisition of ExamOne World Wide provided its
entry into paramedical examinations for the life insurance industry. This
enables LabOne to offer a wide range of services in the insurance services
industry, complementing the laboratory testing and investigative services with
paramedical examinations. LabOne believes it will be successful in extending
its relationship with life insurance companies by providing these additional
services, which should strengthen its position in laboratory testing and
improve its market share in the paramedical industry.
Healthcare Services:
Healthcare 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, urinalyses, blood cell
counts, PAP smears and AIDS-related tests.
Healthcare specimens are collected at the physician's office or other
specified sites. The Company'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. The Company'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 the Company's computer system along with all other
completed results.
The Company has established the Lab Card (R) Program as a vehicle for
delivering outpatient 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
PAGE 4
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,
including Principal Healthcare of Kansas City, BlueCross BlueShield of
Tennessee, BlueCross BlueShield of Kansas City and Kaiser Permanente of Kansas
City. With these arrangements the Company contracts with the managed care
organizations, and they direct all testing for their members through LabOne.
Substance Abuse Testing Services:
LabOne markets substance abuse testing to large employers, third party
administrators and occupational health providers. Certification by the
Substance Abuse and Mental Health Services Administration enables the Company
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 the Company.
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.
During February 2000, LabOne announced the introduction of the Intercept (TM)
drug testing service, a laboratory-based service that identifies commonly-used
illicit drugs in oral fluid samples. The Intercept (TM) test menu is used to
detect the NIDA-5 drug panel (THC, cocaine, opiates, PCP and amphetamines). It
is the first laboratory-based oral fluid drug testing system to be made
commercially available in North America.
Under terms of the collaborative agreement between LabOne, STC Technologies,
Inc. and Epitope, Inc., all three companies will play pivotal roles in the
marketing of the new lab service. STC, the leader in oral fluid immunoassay
technology, will provide reagents as well as marketing support. Epitope
produces the Intercept (TM) collection device and provides sales support for
the criminal justice market. Laboratory testing, result reporting, worksite
sales and account management support will be provided by LabOne. (See TRENDS
Section for further discussion.)
PAGE 5
Segment Information
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The following table summarizes the Company's revenues from services provided
to the insurance, healthcare and substance abuse testing markets (dollars in
thousands):
Year ended December 31,
1999 1998 1997
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Insurance $ 77,687 65% $ 69,149 68% $ 61,998 79%
Clinical 24,793 21% 18,600 18% 7,512 9%
Substance Abuse 17,187 14% 14,478 14% 9,416 12%
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$ 119,667 $ 102,227 $ 78,926
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(See Note 7 of Notes to Consolidated Financial Statements for operating
income and identifiable assets by segment.)
Operations
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The Company's operations are designed to facilitate the testing of a large
number of specimens and to report the results to clients, generally within 24
hours of receipt of the specimens. The Company 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 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 data base 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 the Company'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, the Company'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.
The Company 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 the Company in
conducting its testing are commercially purchased and are readily available
from multiple sources.
Regulatory Affairs
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The objective of the regulatory affairs department is to oversee quality
programs to ensure that accurate and reliable test results are released to
clients. This is accomplished by incorporating both internal and external
PAGE 6
quality improvement programs in each area of the laboratory. In addition,
quality improvement 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 (TM) controls are used to challenge
every aspect of service at LabOne from account setup to specimen arrival and
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.
Even though only a small portion of LabOne's business encompasses fee-for-
service Medicare/Medicaid, LabOne has appointed a Chief Compliance Officer and
12 Co-Compliance Officers. Additionally, the Company has developed the LabOne
Compliance Plan, based on the Model Compliance Plan recommended by the Office
of Inspector General 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 accredited by the College of American Pathologists and 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, the
Company 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 the Company 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 2002.
Sales and Marketing
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LabOne's client base consists of insurance companies in the United States and
Canada and employers primarily in the United States. The Company believes
that its ability to provide prompt and accurate results on a cost-effective
PAGE 7
basis, and its responsiveness to customer needs have been important factors in
servicing existing business.
All of the Company's 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 the Company'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. The Company's sales representatives and its senior management also
attend and sponsor insurance industry underwriters' and medical directors'
meetings.
The sales representatives for the healthcare 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. The
Company'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.
Competition
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The Company believes that the insurance laboratory testing market in the
United States and Canada is approximately a $110 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 insurance 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 2000. The Company
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 Company has entered the market for paramedical examinations and specimen
collections for insurance companies through its acquired subsidiary, ExamOne
World Wide. This market is estimated to be in excess of a $400 million
industry annually. Approximately 80% of this market is controlled by three
companies, Hooper Holmes, Inc., Examination Management Services, Inc. and
American Para Professional Systems. ExamOne World Wide currently serves
approximately 7% of this market.
The outpatient clinical laboratory testing market is a $20 billion industry
which is highly fragmented and very competitive. The Company faces
PAGE 8
competition from numerous independent clinical laboratories and hospital- or
physician-owned laboratories. Many of the Company's competitors are
significantly larger and have substantially greater financial resources than
LabOne. The Company is working to establish a solid client base through the
use of Lab Card and the establishment of exclusive arrangements with large
groups and managed care entities to provide laboratory services.
LabOne's business plan is to be the premier low-cost provider of high-quality
laboratory services to self-insured employers and insurance companies in the
healthcare market. The Company 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 66 laboratories that are certified by the Substance Abuse and Mental
Health Services Administration. The Company's major competitors are the three
major clinical chains, Laboratory Corporation of America, Quest Diagnostics
and SmithKline Beecham Clinical Laboratories, which collectively constitute
approximately two-thirds of the substance abuse testing market. The Company's
focus is fast turnaround with high-quality, low-cost service, with a strategic
position of offering the new oral fluid product with exclusivity in the pre-
employment market.
Foreign Markets
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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 the Company's domestic
operations and its subsidiary, Lab One Canada Inc.
Year ended December 31, (in millions)
1999 1998 1997
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Sales:
United States $112.5 $95.7 $72.4
Canada 7.2 6.5 6.6
Operating Profit:
United States 7.9 11.1 (5.5)
Canada 0.1 0.3 0.6
Identifiable Assets:
United States 116.3 95.2 71.3
Canada 2.1 2.8 3.2
Technology Development
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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 clients to aid them in
choosing the best tests available to meet their requirements. Total
technology development expenditures are not considered significant to the
Company as a whole.
PAGE 9
Employees
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As of March 1, 2000, the Company had 1,162 employees, including 63 part-time
employees, representing an increase of 267 employees from the same time in
1999. None of the Company's employees are represented by a labor union. The
Company believes its relations with employees are good.
ITEM 2. PROPERTIES
The Company is located in Lenexa, Kansas, approximately 15 miles from Kansas
City, Missouri. Its new 268,000 square foot, custom-designed facility
consolidates the Company's laboratory, administrative and warehouse functions
into one building. The facility is owned by the Company and 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 PCs 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 three facilities in Independence, Missouri under leases expiring
in 2001 and 2003. ExamOne World Wide has a five year lease expiring in 2004
for a facility used as office space in Voorhees, New Jersey and leases a
regional office location in Tampa, Florida. LabOne leases 10 locations in
Northern California and 9 in the Midwest which serve as LabOne Service
Centers. 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.
ITEM 3. LITIGATION
In the normal course of business, LabOne had certain lawsuits pending at
December 31, 1999.
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 $0.6 million.
The Company 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 Comptroller's administrative law
judge's office. The Company believes its reserves are adequate to cover any
potential resolution in this matter.
In the opinion of management, after consultation with legal counsel and based
upon currently available information, none of these lawsuits are expected to
PAGE 10
have a material impact on the financial condition or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock trades on The Nasdaq Stock Market(R) under the
symbol LABS. As of March 1, 1999, the outstanding shares were held by
approximately 3,750 shareholders of record.
The Company paid quarterly dividends of $0.20 per common share in 1998 and the
first two quarters of 1999. The Company paid quarterly dividends of $0.18 per
common share in the third and fourth quarter of 1999. The Board of Directors
reviews the dividend policy on a periodic basis and has eliminated the
quarterly dividend to retain cash flow to finance the Company's growth plans.
Additionally, the Company's expanded line of credit with Commerce Bank, N.A.
prohibits the payment of dividends under the terms of the line of credit.
The following are the high and low prices of the stock for each quarter of
1999 and 1998 (split adjusted):
1999 1998
---- ----
High Low High Low
---- --- ---- ---
1st Quarter $12.75 10.08 $16.33 14.42
2nd Quarter 11.33 7.88 16.17 13.58
3rd Quarter 11.00 8.25 15.67 10.17
4th Quarter 10.00 5.88 12.42 9.33
On April 1, 1999, LabOne issued a Warrant to Health Plan Services, Inc.
("HPS") to purchase up to 500,000 shares of Common Stock of LabOne, at a
purchase price of $12.375 per share. The Warrant was issued in connection
with an Agreement entered into between LabOne and HPS, which is a third party
administrator.
No cash consideration was received by LabOne for the issuance of the Warrant.
The Warrant was issued for a term of five years and is exercisable by HPS in
respect of the number of shares of Common Stock of LabOne indicated below for
each calendar quarter during the term in which the quarterly revenues received
by LabOne pursuant to the Agreement with HPS are within the ranges specified
below:
LabOne Quarterly Revenues Number of LabOne Shares
Received under HPS Exercisable under the
Agreement Warrant
---------------------------- ------------------------
$0.5 million - $1.5 million 5,000
$1.0 million - $1.5 million 10,000
$1.5 million - $2.5 million 15,000
$2.5 million - $2.5 million 20,000
Over $2.5 million 25,000
PAGE 11
On May 14, 1999, LabOne issued a Warrant to STC Technologies, Inc. ("STC") to
purchase 50,000 shares of Common Stock of LabOne, at a purchase price of $0.01
per share. The Warrant was issued in connection with a Distribution Agreement
entered into between LabOne and STC. Under the Distribution Agreement, STC
Technologies appointed LabOne as its exclusive distributor in the North
American workplace testing market for its new product line that is designed to
identify illicit drug abuse through oral fluids rather than urine or blood
samples.
No cash consideration was received by LabOne for the issuance of the Warrant.
The Warrant was issued for a term of two years and two months and is
exercisable beginning one year after the date of issuance of the Warrant.
On November 5, 1999, LabOne issued a Warrant to Mr. Larry Glenn to purchase up
to 250,000 shares of Common Stock of LabOne, at a purchase price of $9.97 per
share. The Warrant was issued in connection with a Stock Purchase Agreement
entered into between LabOne and Mr. Glenn pursuant to which LabOne acquired
from Mr. Glenn the outstanding stock of World Wide Health Services, Inc.
("WWHS") in consideration of (1) a purchase price of $2 million in cash, as
adjusted by a post-closing audit, (2) the issuance of the Warrant, and (3)
WWHS's purchase from Mr. Glenn of the outstanding stock of World Wide Health
Services of New Jersey, Inc. ("WWNJ") for a purchase price of (a) $250,000 in
cash (provided by a loan from LabOne to WWHS), as adjusted pursuant to a post-
closing audit, (b) $200,000 to be paid to Mr. Glenn in five annual
installments of $40,000 each and (c) 10% of the annual gross revenues of WWNJ
to be paid to Mr. Glenn for each of the next six years. (See Note 2 of Notes
to Consolidated Financial Statements.)
The Warrant was issued for a term of five years and is exercisable by Mr.
Glenn in respect of the number of shares of Common Stock of LabOne indicated
below in the event that LabOne earns "qualified revenues" from WWHS, (as
defined in the Warrant) as indicated below in any calendar quarter within
three years after November 5, 1999:
LabOne Quarterly Qualified Number of LabOne Shares
Revenues Received under WWHS Exercisable Under
Stock Purchase Agreement the Warrant
---------------------------- -----------------------
$3,750,000 or more 83,333
$5,000,000 or more 83,333
$6,250,000 or more 83,334
Alternatively, LabOne agreed to make cash payments to Mr. Glenn on November 5,
2004 of up to $1,000,000, depending upon the trading price of LabOne's Common
Stock.
The above three Warrants and shares of Common Stock of LabOne issuable upon
such exercise of the Warrants were not registered under the Securities Act of
1933 in reliance upon the exemptions from the registration requirements
provided by Section 4(2) of the Act and Rule 506 under Regulation D. HPS, STC
and Mr. Glenn are believed to be "accredited investors" within the meaning of
Regulation D.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial information and
operating data regarding the Company. This information should be read in
PAGE 12
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, 1999, 1998, 1997, 1996 and 1995, and the statement of earnings
data for each of the years in the five-year period ended December 31, 1999,
have been derived from the Company's Consolidated Financial Statements, which
have been audited by KPMG LLP, the Company's independent certified public
accountants.
Years Ended December 31,
(in thousands, except per share amounts)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Sales $119,667 102,227 78,923 59,432 57,029
Earning (loss) from
continuing operations 2,589 4,877 (8,103) (4,226) (1,826)
Loss from
discontinued operations -- -- (2,343) (770) (5,522)
------- ------- ------- ------- -------
Net earnings (loss) $ 2,859 4,877 (10,446) (4,996) (7,348)
======= ======= ======= ======= =======
Diluted earnings (loss)
from continuing
operations per
common share $ 0.27 0.50 (0.83) (0.43) (0.19)
Diluted loss from
discontinued operations
per common share -- -- (0.24) (0.08) (0.57)
-------- ------ ------ ------ -------
Diluted earning (loss)
per common share $ 0.27 0.50 (1.07) (0.51) (0.76)
======== ====== ====== ====== ======
Dividends per common share $ 0.76 0.80 0.80 0.80 0.80
======== ====== ====== ====== ======
Total assets $118,443 98,007 74,482 196,783 198,018
Long term debt 29,615 18 097 -- -- --
Stockholders' equity 71,029 54,539 56,439 174,024 187,084
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
On July 1, 1999, the Company announced a restatement of earnings for the years
ended December 31, 1997 and 1998. As requested by the staff of the Securities
and Exchange Commission, the Company has changed the amortization schedule
from fifteen years to five years on a customer list acquired during the first
quarter 1997. The Company's original amortization period was based on
historical performance; however, the SEC requested the amortization period be
reduced to five years. The amortization expense of this asset was originally
reported at $252,000 and $275,000 in 1997 and 1998, respectively, and has been
restated to $757,000 and $826,000, respectively. This restatement is not the
PAGE 13
result of any changes in customer relationships and has no effect on any
present or future cash flows.
1999 Compared to 1998
Revenue for the year ended December 31, 1999 was $119.7 million as compared to
$102.2 million in 1998. The increase of $17.4 million, or 17%, was due to
increases in insurance services revenue of $8.5 million, healthcare revenue of
$6.2 million and SAT revenue of $2.7 million. The insurance services segment
revenue increased from $69.1 million in 1998 to $77.7 million due to an
increase in non laboratory services, including revenue of $7.4 million from
the October 1998 acquisition of SBSI and revenue of $3.3 million from the
November 1999 acquisition of ExamOne World Wide, partially offset by a 4%
decrease in insurance laboratory revenue. This decrease is due to a 3%
decrease in total applicants tested and a 1% decrease in the average revenue
per applicant. Healthcare laboratory revenue increased from $18.6 million
during 1998 to $24.8 million in 1999 primarily due to a 36% increase in
testing volumes. SAT revenue increased from $14.5 million in 1998 to $17.2
million in 1999 primarily due to a 26% increase in testing volumes, partially
offset by lower revenue per specimen.
Cost of sales increased $14.8 million, or 26%, for the year as compared to the
prior year. This increase is primarily due to increases in payroll,
paramedical collections and the cost of motor vehicle and physician statements
due to the addition of SBSI and ExamOne World Wide. Insurance segment cost of
sales expenses were $41.9 million as compared to $32.3 million during 1998.
Healthcare cost of sales expenses were $17.1 million as compared to $14.5
million during 1998. SAT cost of sales expenses were $12.6 million as
compared to $9.9 million during 1998. These increases in the healthcare and
SAT segments are due primarily to increased testing volumes.
As a result of the above factors, gross profit increased $2.6 million, or 6%,
from $45.5 million in 1998 to $48.1 million in 1999. Healthcare gross profit
improved $3.7 million, from $4.1 million in 1998 to $7.7 million in 1999. SAT
gross profit stayed at $4.6 million. Insurance gross profit decreased $1.1
million, or 3%, to $35.8 million in 1999.
Selling, general and administrative expenses increased $6.8 million, or 20%,
in 1999 as compared to 1998 primarily due to increases in depreciation and
amortization expenses, payroll expenses and bad debt accruals. Depreciation
expense increased primarily due to placing the Company's new facility in
service during 1999, and amortization expense increased primarily due to
merger goodwill. Payroll expenses increased 9% for the year due to a 29%
increase in selling, general and administrative employees at year end as
compared to last year. Bad debt expense increased primarily due to the
revenue growth in the healthcare and SAT segments which also have higher bad
debt experience than the insurance segment. Healthcare overhead was $12.2
million as compared to $10.3 million in 1998. SAT overhead increased from
$4.3 million in 1998 to $5.4 million in 1999. These increases are due to the
growth in each segment. The allocation of corporate overhead to the
healthcare and SAT segments increased to $6.4 million for the year, as
compared to $5.3 million in 1998, due to the increased share of total revenue
for those segments. Insurance overhead expenditures increased to $20.3
million as compared to $16.8 million in 1998 primarily due to the addition of
SBSI.
Operating income including overhead allocations decreased from $11.4 million
in 1998 to $8.0 million in 1999. The insurance services segment had operating
PAGE 14
income of $15.5 million as compared to $18.6 million in 1998. The healthcare
segment experienced an operating loss of $4.5 million for 1999 as compared to
an operating loss of $6.2 million in 1998. The SAT segment had an operating
loss of $0.8 million in 1999 as compared to a gain of $0.2 million in 1998.
Unallocated operating expenses for the year were $2.2 million related to
corporate and merger expenses, partially offset by gains on the sale of the
former laboratory and administrative facilities. Unallocated operating
expenses in 1998 were $2.7 million.
Non operating expense increased $1.8 million in 1999 as compared to 1998,
primarily due to interest expense on the industrial revenue bonds and lower
investment income due to less funds available for investment. Average income
tax expense was 48.1% of pretax income in 1999 as compared to 46.2% in 1998.
The increase is due to an increase in amortization expenses incurred from the
Lab Holdings merger which are not deductible for tax purposes.
The combined effect of the above factors resulted in net earnings of $2.9
million, or $0.27 per share, in 1999 as compared to $4.9 million, or $0.50 per
share, in 1998.
1998 Compared to 1997
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 healthcare laboratory revenue of $11.1 million, insurance
services revenue of $7.2 million and SAT revenue of $5.1 million. Healthcare
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 $62.0 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.
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.
Healthcare 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 $7.0 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. Healthcare gross
profit improved $4.9 million from a loss of $0.8 million in 1997 to a gain of
$4.1 million in 1998. SAT gross profit increased by $2.2 million to $4.5
million in 1998.
Selling, general and administrative expenses decreased $1.2 million, or 3%, in
1998 as compared to 1997 primarily due to $4.6 million lower corporate expense
at the Lab Holdings level due to the distribution of SLH Corporation and
Response Oncology ownership to shareholders (see Note 10 to Notes to
Consolidated Financial Statements), partially offset by $3.4 million increase
in LabOne SGA due to increases in payroll expenses and bad debt accruals. Bad
PAGE 15
debt expense increased primarily due to the revenue growth in the healthcare
and SAT segments which also have higher bad debt experience.
Healthcare overhead was $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 were due to the growth in each segment and increased overhead
allocations due to the increased share of total revenue for those segments.
The allocation of corporate overhead to the healthcare and SAT segments
increased to $5.3 million for the year, as compared to $3.3 million in 1997.
Insurance overhead expenditures decreased to $16.8 million as compared to
$17.3 million in 1997 (see Note 7 to Notes to Consolidated Financial
Statements).
In 1997, the Company 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 Note 1 of Notes to Consolidated Financial Statements.)
Operating income increased from a loss of $4.9 million in 1997 to a gain of
$11.4 million in 1998. The insurance services segment operating income
increased $2.1 million to $18.6 million in 1998. The healthcare 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 $0.9
million in 1997 to a gain of $0.2 million in 1998.
Other income decreased $4.0 million in 1998 as compared to 1997, primarily due
to a Lab Holdings gain in 1997 of $3 million on the sale of marketable common
stock and lower investment income in 1998 due to less funds available to
invest. Average income tax expense was 46% of pretax income in 1998,
primarily reflecting nondeductibility of goodwill amortization. Tax expense
in 1997 was based on the write-off of approximately $5 million of 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.
The combined effect of the above factors resulted in earnings from continuing
operations of $4.9 million in 1998 as compared to a $8.1 million loss from
continuing operations in 1997.
TRENDS
- ------
The following is management's analysis of certain existing trends that have
been identified as potentially affecting the future financial results of the
Company. Due to the potential for a rapid rate of change in any number of
factors associated with the insurance, SAT and healthcare laboratory testing
industries, it is difficult to quantify with any degree of certainty LabOne's
future volumes, sales or net earnings.
Amortization of goodwill during 1999, including amortization from the Lab
Holdings merger starting in August and amortization from the acquisition of
ExamOne World Wide starting in November, was $3.2 million. Amortization of
goodwill in the future, excluding any adjustments or future goodwill from
additional acquisitions, is scheduled to be $4.1 million in 2000 and 2001,
$3.4 million in 2002, $2.1 million in 2003 and $1.6 million in 2004. The
majority of the amortization expense is not deductible for tax purposes and
has the effect of increasing the average income tax rate.
The insurance laboratory testing industry continues to be highly competitive.
PAGE 16
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. Management expects that prices may continue to decline
during 2000 due to competitive pressures. This trend may have a material
impact on earnings from operations.
Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc.
and World Wide Health Services of New Jersey, a provider of specimen
collection and paramedical examination services to life and health insurers.
These subsidiaries are operated under the name ExamOne World Wide and included
in the insurance services division of LabOne. This addition allows LabOne to
expand the services it offers to its insurance industry clients. Prior to its
acquisition by LabOne, ExamOne World Wide had annual revenues of approximately
$9 million. In the first two months of 2000, ExamOne World Wide has billed
revenue of approximately $4 million. The paramedical industry is a low gross
margin industry. A substantial percentage of the revenue from a specimen
collection is paid back to the contracted phlebotomist or physician. As the
revenue from ExamOne World Wide grows as a percentage of total LabOne revenue,
its lower gross margins will add to the total profitability of LabOne but will
reduce the average gross profit margin percentage.
In the healthcare division, the Company continued its trend of growth led by
its Lab Card Program. The Lab Card Program now has more than 1.7 million
members. In 1999, the program continued to expand through new members as well
as increased participation from existing members.
The healthcare division also signed exclusive outpatient laboratory service
contracts with Blue Cross and Blue Shield of Kansas City and Kaiser Permanente
of Kansas City in early 2000. With the addition of these managed care
organizations, LabOne has over 750,000 lives in its managed care programs.
Managed care organizations and the physicians who are under their contracts
continue to choose LabOne for its high-quality testing, disease management
data capabilities, and responsive customer service and support.
In addition to its urine drug testing, the SAT division of LabOne has
introduced the Intercept (TM) drug testing service, a laboratory-based service
that identifies commonly used illicit drugs in oral fluid samples. The oral
fluid collection avoids the process of collecting and handling of urine
samples which has been criticized for being invasive, demeaning and expensive.
The collection with the Intercept device is directly observable and efficient.
LabOne will market this new service to employers nationwide starting in 2000.
The Company'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 is expected to lower LabOne's average income
tax rate for the duration of the credit.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
LabOne's working capital position declined from $31.3 million at December 31,
1998, to $19.4 million at December 31, 1999. This decrease is primarily due
to cash used in the merger with Lab Holdings, dividends paid, capital
additions and debt payments exceeding cash provided by operations and line of
credit borrowings. Net cash provided by operations increased from $10.3
PAGE 17
million in 1998 to $12.0 million in 1999. Accounts receivable grew from $18.7
million as of December 31, 1998 to $26.3 million as of December 31, 1999, due
primarily to an increase in revenue growth from all three segments. Total
cash and investments at December 31, 1999, were $3.0 million, as compared to
$15.2 million at December 31, 1998. Management expects to be able to fund
operations from a combination of cash flow from operations, cash reserves and
short-term borrowings.
During 1999, LabOne paid dividends of $0.20 per common share (split adjusted)
in the first and second quarter. The Company paid dividends of $0.18 per
common share in the third and fourth quarter. The total amount of dividends
paid during 1999 was $0.76 per share, or $9.0 million. During the first
quarter 2000, the Board of Directors decided to eliminate the quarterly
dividend to retain cash flow to finance the Company's growth plans and for
other corporate purposes.
During 1999, the Company spent $12.8 million for capital investments, as
compared to $28.5 million in 1998 and $11.5 million in 1997. Of the amount
spent in 1999, $5.2 million was spent on completion of the Company's new
facility and $2.1 million was spent on the purchase of ExamOne World Wide. Of
the amount spent in 1998, approximately $21.6 million was for construction the
Company's new facility, and $3.0 million net cash was used in the purchase of
SBSI. The 1997 amount included land purchased related to the new facility and
the GIB Laboratories acquisition. As of April 1999, the new facility was
completely operational. Future capital asset expenditures, excluding strategic
expansions, are expected to be approximately $5 million annually.
On August 10, 1999, the former LabOne, Inc. was merged into its parent
corporation, Lab Holdings, Inc. upon the approval of the shareholders of both
companies at their respective annual meetings. The combined company's name
was then changed to LabOne, Inc. The merger provisions included a 3 for 2
stock split for all Lab Holdings common shares, the par value of the common
shares was changed from $1.00 per share to $0.01 per share, and the authorized
number of common shares was increased to 40 million. The Company paid $12.6
million, including transaction costs, to complete the merger and purchase 0.8
million shares of LabOne stock. The minority 2.6 million shares of former
LabOne stock were exchanged on a one for one basis for the combined company
stock. The transaction was recorded under purchase accounting and resulted in
$24.1 million in goodwill which is being amortized over 20 years.
Interest on the industrial revenue bonds issued to finance the construction of
the Company's new facility is based on a taxable seven day variable rate
which, including letter of credit and remarketing fees, is approximately 6.6%
as of March 1, 2000. The bonds mature over 11 years in increments of $1.85
million per year plus interest. The first principal payment of $1.85 million
was paid in September 1999. The Company spent $10.3 million in the third
quarter 1999 to fund cash elections from the merger. Interest on the line of
credit is currently based on the 30 day LIBOR rate plus 75 basis points and is
currently approximately 6.6%.
During the first quarter 2000, the Board of Directors approved a stock
repurchase program pursuant to which LabOne is authorized to repurchase up to
$10 million of its common stock. The Company has arranged for an increase in
its available line of credit from $15 million to $25 million to accommodate
stock repurchases. The timing of purchases and the actual number of shares
purchased will depend upon market conditions.
PAGE 18
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A foreign currency risk exposure exists due to billing Canadian subsidiary
revenue in Canadian dollars and the direct laboratory expenses associated with
this revenue being incurred in US dollars. This exposure is not considered to
be material. Any future material Canadian currency fluctuations against the
US$ could result in a decision to hedge future foreign currency cash flows, or
to increase Canadian prices.
An interest rate risk exposure exists due to LabOne's liability of $18 million
in industrial revenue bonds and $12 million borrowing on its line of credit.
The interest expense incurred on the bonds is based on a taxable seven day
variable rate, which including letter of credit and remarketing fees, is
approximately 6.6% as of March 1, 2000. The interest expense on the line of
credit is based on the 30 day LIBOR rate plus three quarters of one percent
and is currently approximately 6.6%. 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
See ITEM 14.(a).
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
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the captions entitled "Information Concerning
Nominees for Election as Directors," "Security Ownership of Management,"
"Security Ownership of Certain Beneficial Owners," and "Executive
Compensation" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A with respect to its annual meeting of
stockholders to be held May 11, 2000, is incorporated into Items 10, 11, 12
and 13 above by reference.
PAGE 19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) and (2) -- The following consolidated financial statements and
schedule are attached as a separate section of this report entitled
"Consolidated Financial Statements and Schedule":
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Operations, Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
SCHEDULE:
Schedule II - Valuation and qualifying accounts
All other schedules are omitted because they are not applicable, not
required, or the information is included in the Consolidated Financial
Statements or the notes thereto.
(b) Reports on Form 8-K
A Form 8-K current report dated January 6, 2000 was filed with the
Commission reporting under Other Events that Robert D. Thompson, executive
vice president, chief operating officer and chief financial officer had
resigned from the company.
A Form 8-K current report dated February 11, 2000 was filed with the
Commission reporting under Other Events the Company's adoption of a
shareholder rights plan and a dividend distribution of one Right for each
outstanding share of Common Stock of the Company. The rights plan replaces
and modernizes a shareholder rights plan which was adopted by the Company in
1988 and expired in 1998.
A Form 8-K current report dated March 2, 2000 was filed with the
Commission reporting under Other Events that John McCarty had been hired as
executive vice president and chief financial officer effective April 1, 2000.
(c) Exhibits required by Item 601 of Regulation S-K
(Exhibits follow the Schedule):
Page
2.1* Distribution Agreement, dated December 20, 1996, between
the Registrant and SLH Corporation - attached as Exhibit
2(a) to SLH Corporation's Form 10/A (Amendment No. 1) dated
February 4, 1997 (File No. 0-21911).
2.2* Blanket Assignment, Bill of Sale, Deed and Assumption
Agreement, dated as of February 28, 1997, between the
Registrant and SLH Corporation - attached as Exhibit 2(b)
to SLH Corporation's Form 10/A (Amendment No. 1) dated
February 4, 1997 (File No. 0-21911).
PAGE 20
Page
2.3* Agreement and Plan of Merger by and between Lab Holdings,
Inc. and LabOne, Inc., dated March 7, 1999 - attached as
Appendix A to the Joint Proxy Statement/Prospectus filed as
a part of the Registrant's Registration Statement on Form
S-4, filed July 2, 1999 (File No. 333-76131).
3.1* Amended Articles of Incorporation - attached as Exhibit B
to Appendix A to the Joint Proxy Statement/Prospectus filed
as a part of the Registrant's Registration Statement on
Form S-4, filed July 2, 1999 (File No. 333-76131).
3.2 Certificate of Designations, Preferences, Qualifications 50
and Rights of Series A Preferred Stock, dated
February 11, 2000
3.3* Amended and Restated Bylaws - attached as Exhibit C to
Appendix A to the Joint Proxy Statement/Prospectus filed as
a part of the Registrant's Registration Statement on Form
S-4, filed July 2, 1999 (File No. 333-76131)
4.1* 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 - attached as Exhibit 4.1 to
the Quarterly Report on Form 10-Q of LabOne, Inc., a
Delaware corporation, for the quarter ended September 30,
1998 (File No. 0-15975).
4.2* Lease Agreement dated as of September 1, 1998, between the
City of Lenexa, Kansas and LabOne, Inc. related to the
Trust Indenture - attached as Exhibit 4.2 to the Quarterly
Report on Form 10-Q of LabOne, Inc., a Delaware
corporation, for the quarter ended September 30, 1998
(File No. 0-15975).
4.3* Reimbursement Agreement dated as of September 1, 1998,
between LabOne, Inc. and Commerce Bank, N.A. - attached as
Exhibit 4.3 to the Quarterly Report on Form 10-Q of LabOne,
Inc., a Delaware corporation, for the quarter ended
September 30, 1998 (File No. 0-15975).
4.4* Letter agreement dated September 4, 1998, between the
Registrant and Commerce Bank, N.A. relating to the
Registrant's obligations with respect to the Reimbursement
Agreement and letters of credit to be issued thereunder -
attached as Exhibit 4.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998.
4.5* Warrant to Purchase Shares of Common Stock of LabOne, Inc.,
issued to USA Managed Care Organization - attached as
Exhibit 4.5 to the Annual Report on Form 10-K of LabOne,
Inc., a Delaware corporation, for the year ended December
31, 1998 (File No. 0-15975).
PAGE 21
Page
4.6* Warrant to Purchase Shares of Common Stock of LabOne, Inc.,
issued to Health Plan Services, Inc., dated April 1, 1999 -
attached as Exhibit 10.19 to the Registrant's Registration
Statement on Form S-4, filed July 2, 1999 (File No. 333-
76131).
4.7* Warrant to Purchase Shares of Common Stock of LabOne, Inc.,
issued to STC Technologies, Inc., dated April 27, 1999 -
attached as Exhibit 10.18 to the Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form S-
4, filed July 2, 1999 (File No. 333-76131).
4.8 Warrant to Purchase Shares of Common Stock of LabOne, Inc., 55
issued to Larry Glenn, dated November 5, 1999.55
4.9* Rights Agreement and attached exhibits A, B and C, dated as
of February 11, 2000, between the Registrant and American
Stock Transfer & Trust Company, - attached as Exhibit 4.1
to the Registrant's Form 8-K Current Report, filed
February 14, 2000.
10.1* Registrant's 1997 Directors' Stock Option Plan, as amended
- attached as Exhibit 10.4 to the Registrant's Form 10-Q
for the quarter ended September 30, 1998. **
10.2* Form of Option Agreement with Directors under the
Directors' Stock Option Plan, as amended - attached as
Exhibit 10.5 to the Registrant's Form 10-Q for the quarter
ended September 30, 1998. **
10.3* 1987 Long-Term Incentive Plan of LabOne, Inc., approved May
16, 1991, with amendments adopted May 21, 1993 and November
9, 1993 - attached as Exhibit 10.21 to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1993.**
10.4* Amendment to 1987 Long-Term Incentive Plan of LabOne, Inc.,
effective February 10, 1995 - attached as Exhibit 10.31 to
the Registrant's Annual Report on Form 10-K for year ended
December 31, 1995. **
10.5* Amendment to 1987 Long-Term Incentive Plan of LabOne, Inc.,
effective May 9, 1997 - attached as Exhibit 10.5 to the
Annual Report on Form 10-K of LabOne, Inc., a Delaware
corporation, for the year ended December 31, 1997 (File No.
0-15975). **
10.6* 1997 Long Term Incentive Plan of LabOne, Inc. - attached as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of
LabOne, Inc., a Delaware corporation, for the quarter ended
June 30, 1998 (File No. 0-15975). **
10.7* Form of Stock Option Agreement pursuant to the LabOne 1997
Long-Term Incentive Plan - attached as Exhibit 10.2 to the
Quarterly Report on Form 10-Q of LabOne, Inc., a Delaware
corporation, for the quarter ended June 30, 1998 (File No.
0-15975). **
PAGE 22
Page
10.8* Stock Plan for nonemployee directors of LabOne, Inc.-
attached as Exhibit 10.23 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994. ***
10.9 Registrant's Annual Incentive Plan. ** 63
10.10 Form of Amended and Restated Indemnification Agreement
between the Registrant and its directors. 64
10.11* Form of Employment Agreement between LabOne, Inc. and its
executive officers and certain key employees - attached as
Exhibit 10 to the Annual Report on Form 10-K of LabOne,
Inc., a Delaware corporation, for the year ended December
31, 1987 (File No. 0-15975). **
10.12* Amended Employment Agreement between LabOne, Inc. and
Robert D. Thompson- attached as Exhibit 10.11 to the Annual
Report on Form 10-K of LabOne, Inc., a Delaware
corporation, for the year ended December 31, 1995 (File No.
0-15975). **
10.13* Employment Agreement between LabOne, Inc. and Gregg R.
Sadler - attached as Exhibit 10.14 to the Annual Report on
Form 10-K of LabOne, Inc., a Delaware corporation, for the
year ended December 31, 1993 (File No. 0-15975). **
10.14* Amendment to Employment Agreement between LabOne, Inc. and
Gregg R. Sadler- attached as Exhibit 10.13 to the Annual
Report on Form 10-K of LabOne, Inc., a Delaware
corporation, for the year ended December 31, 1995 (File No.
0-15975). **
10.15* Employment Agreement between LabOne, Inc. and Thomas J.
Hespe- attached as Exhibit 10.14 to the Annual Report on
Form 10-K of LabOne, Inc., a Delaware corporation, for the
year ended December 31, 1995 (File No. 0-15975). **
10.16* Tax Sharing Agreement, dated as of February 28, 1997,
between the Registrant and SLH Corporation - attached 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).
11. Statement regarding computation of per share earnings - see
Note 1 of Notes to Consolidated Financial Statements,
"Earnings Per Share."
21. Subsidiaries of Registrant - see Note 1 of Notes to
Consolidated Financial Statements, "Principles of
Consolidation and Basis of Presentation."
24. Powers of Attorney. 75
27. Financial Data Schedule - as submitted electronically by
the Registrant in conjunction with this 1999 Form 10-K.
PAGE 23
Page
99. Cautionary Statement under the Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995. 76
* Incorporated by reference pursuant to Rule 12b-23
** Management Compensatory Plan
*** Non-Management Director Compensatory Plan
These exhibits may be obtained by stockholders of Registrant upon written
request to LabOne, Inc., 10101 Renner Blvd., Lenexa, KS 66219.
(d) Not applicable
PAGE 24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Registrant has duly caused this report, as amended to be signed on its
behalf by the undersigned, thereunto duly authorized.
LabOne, Inc.
By: /s/ W. Thomas Grant II By: /s/ Kurt E. Gruenbacher
---------------------- -----------------------
W. Thomas Grant II Kurt E. Gruenbacher
Title: Chairman, President Title: V.P. Finance,
Chief Executive Officer CAO and Treasurer
Date: March 23, 2000 Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report, as amended has been signed below by the following persons on behalf of
the Registrant on March 23, 2000 in the capacities indicated.
By: /s/ W. Thomas Grant II By: /s/ Kurt E. Gruenbacher
---------------------- -----------------------
W. Thomas Grant II Kurt E. Gruenbacher
Title: Chairman of the Board, President Title: V.P. Finance, CAO
And Chief Executive Officer and Treasurer
By: */s/ Joseph H. Brewer By */s/ Peter C. Brown
--------------------- -------------------
Joseph H. Brewer Peter C. Brown
Title: Director Title: Director
By: */s/ William D. Grant By:. */s/ Richard A. Rifkind
--------------------- ----------------------
William D. Grant Richard A. Rifkind
Title: Director Title: Director
By: */s/ Richard S. Schweiker By: */s/ James R. Seward
------------------------- --------------------
Richard S. Schweiker James R. Seward
Title: Director Title: Director
By: */s/ Janet M. Stallmeyer By: */s/ Chester B. Vanatta
------------------------ -----------------------
Janet M. Stallmeyer Chester B. Vanatta
Title: Director Title: Director
By: */s/ John E. Walker By: */s/ R. Dennis Wright
------------------- ---------------------
John E. Walker R. Dennis Wright
Title: Director Title: Director
By: /s/ Gregg R. Sadler
---------------------
Gregg R. Sadler
Title: Attorney-in-fact
PAGE 25
LABONE, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Schedule
December 31, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
LABONE, INC. AND SUBSIDIARIES
PAGE 26
Table of Contents
Independent Auditors' Report 28
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1999
and 1998 29
Consolidated Statements of Operations, Years ended
December 31, 1999, 1998 and 1997 31
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows, Years
ended December 31, 1999, 1998 and 1997 33
Notes to Consolidated Financial Statements 35
Schedule:
Schedule II - Valuation and Qualifying Accounts 49
PAGE 27
Independent Auditors' Report
The Board of Directors
LabOne, Inc.:
We have audited the accompanying consolidated balance sheets of LabOne, Inc.
and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. In connection with our audits of the consolidated financial statements,
we have also audited the financial statement schedule. 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 LabOne,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, 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.
KPMG LLP
Kansas City, Missouri
February 4, 2000 except as to
Note 3, which is as of
March 9, 2000
PAGE 28
LABONE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 2,983,644 15,223,336
Accounts receivable, net of allowance
for doubtful accounts of $1,981,285 in
1999 and $2,326,716 in 1998 26,331,960 18,729,939
Income taxes receivable 1,643,520 399,776
Inventories 3,186,853 1,798,481
Real estate available-for-sale (note 1) -- 3,515,000
Prepaid expenses and other current assets 1,772,884 2,752,732
Deferred income taxes (note 4) 1,328,027 3,972,575
----------- -----------
Total current assets 37,246,888 46,391,839
----------- -----------
Property, plant, and equipment:
Land 2,380,654 2,379,334
Building 28,441,638 --
Laboratory equipment 20,387,176 18,101,286
Data processing equipment and software 19,932,302 18,882,559
Office and transportation equipment 8,224,223 5,787,762
Leasehold improvements 240,244 700,842
Construction in progress 1,304,649 27,067,631
----------- -----------
80,910,886 72,919,414
Less accumulated depreciation 38,106,948 35,983,169
----------- -----------
Net property, plant, and equipment 42,803,938 36,936,245
----------- -----------
Other assets:
Intangible assets, net of
accumulated amortization (note 2) 37,868,921 13,770,280
Bond issue costs, net 168,856 186,324
Deferred income taxes - noncurrent (note 4) 93,326 484,621
Deposits and miscellaneous 260,795 237,864
----------- -----------
Total assets $ 118,442,724 98,007,173
=========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
PAGE 29
LABONE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1999 and 1998
Liabilities and Stockholders' Equity 1999 1998
------------ ------------
Current liabilities:
Accounts payable $11,852,403 4,392,689
Retainage and construction accounts payable -- 3,809,193
Accrued payroll and benefits 2,793,721 4,148,593
Other accrued expenses 727,241 610,315
Other current liabilities 551,146 274,198
Current portion of long-term debt (note 3) 1,873,577 1,860,168
----------- -----------
Total current liabilities 17,798,088 15,095,156
Long-term payable (note 2) 1,360,000 --
Long-term debt (note 3) 28,255,139 18,097,308
----------- -----------
Total liabilities 47,413,227 33,192,464
----------- -----------
Minority interest (note 2) -- 10,275,611
----------- -----------
Stockholders' equity (note 2):
Preferred stock, $0.01 par value per
share; 3,000,000 shares authorized,
none issued -- --
Common stock, $0.67 par value per
share; 36,000,000 shares authorized,
11,250,000 shares issued -- 7,500,000
Common stock, $0.01 par value per
share; 40,000,000 shares authorized,
13,050,020 shares issued 130,500 --
Additional paid-in capital 32,035,445 2,920,357
Accumulated other comprehensive income (750,115) (683,270)
Retained earnings 69,758,872 74,945,615
----------- -----------
101,174,702 84,682,702
Less treasury stock of 1,516,527 shares
in 1999 and 1,516,345 shares in 1998,
at cost 30,145,205 30,143,604
----------- -----------
Total stockholders' equity 71,029,497 54,539,098
----------- -----------
Total liabilities and
stockholders' equity $ 118,442,724 98,007,173
=========== ===========
See accompanying notes to consolidated financial statements.
PAGE 30
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ---------- ----------
Sales $ 119,666,534 102,227,216 78,926,119
Cost of sales 71,543,532 56,719,603 42,017,179
----------- ---------- ----------
Gross profit 48,123,002 45,507,613 36,908,940
Selling, general, and
administrative expenses 40,942,628 34,100,884 35,269,668
Provision for loss on disposal
(gain on sale) of assets (864,340) -- 6,553,279
----------- ---------- ----------
Earnings (loss) from
operations 8,044,714 11,406,729 (4,914,007)
----------- ---------- ----------
Other income (expenses):
Investment income 370,262 861,359 4,670,529
Interest expense (1,410,009) (70,335) --
Other, net (24,118) (42,118) 66,769
----------- ---------- ----------
Total other income
(expenses), net (1,063,865) 748,906 4,737,298
----------- ---------- ----------
Earnings (loss)
before income taxes 6,980,849 12,155,635 (176,709)
----------- ---------- ----------
Income taxes (benefit) (note 4):
Current 849,758 5,823,543 (428,828)
Deferred 2,505,940 (203,496) 8,006,107
----------- ---------- ----------
Total income taxes 3,355,698 5,620,047 7,577,279
----------- ---------- ----------
Earning(loss) before
minority interest 3,625,151 6,535,588 (7,753,988)
Minority interest 766,375 1,658,308 349,466
----------- ---------- ----------
Earnings (loss) before
discontinued operations 2,858,776 4,877,280 (8,103,454)
Loss from discontinued
health care operations -- -- (2,342,286)
----------- ---------- ----------
Net earning (loss) $ 2,858,776 4,877,280 (10,445,740)
=========== ========== ==========
Basic and diluted earning (loss)
per share:
Earning (loss) from
continuing operations 0.27 0.50 (0.83)
Loss from discontinued health
care operations -- -- (0.24)
=========== ========== ==========
Net earnings (loss) per share $ 0.27 0.50 (1.07)
=========== ========== ==========
See accompanying notes to consolidated financial statements.
PAGE 31
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
Accumulated
other
comprehensive
income -
Additional foreign Compre- Total
Common paid-in currency Retained Treasury hensive stockholders'
stock capital translation earnings stock income equity
--------- ----------- ----------- ---------- ---------- -------- ------------
Balance at December 31, 1996 $7,500,000 1,748,501 (439,240) 195,328,610 (30,113,649) 174,024,222
Comprehensive income:
Net loss -- -- -- (10,445,740) -- (10,445,740) (10,445,740)
Adjustment from foreign
currency translation -- -- (104,972) -- -- (104,972) (104,972)
----------
Comprehensive loss (10,550,712)
==========
Cash dividends ($.80 per share) -- -- -- (7,786,923) -- (7,786,923)
SLH Corporation spin-off -- -- -- (47,963,199) -- (47,963,199)
Response Oncology, Inc.
distribution -- -- -- (51,277,489) -- (51,277,489)
Exercise of stock options -- 23,123 -- (29,955) (6,832)
--------- ---------- --------- ---------- ----------- ------------
Balance at December 31, 1997 7,500,000 1,771,624 (544,212) 77,855,259 (30,143,604) 56,439,067
Comprehensive income:
Net earnings -- -- -- 4,877,280 -- 4,877,280 4,877,280
Adjustment from foreign
currency translation -- -- (139,058) -- -- (139,058) (139,058)
-----------
Comprehensive income 4,738,222
===========
Cash dividends ($.80 per share) -- -- -- (7,786,924) -- (7,786,924)
Issuance of 168,885 shares of
treasury stock related
to acquisition -- 1,148,733 -- -- -- 1,148,733
--------- --------- --------- ---------- ----------- -----------
Balance at December 31, 1998 7,500,000 2,920,357 (683,270) 74,945,615 (30,143,604) 54,539,098
Comprehensive income:
Net earnings -- -- -- 2,858,776 -- 2,858,776 2,858,776
Adjustment from foreign
currency translation -- -- (66,845) -- -- (66,845) (66,845)
-----------
Comprehensive income 2,791,931
===========
Cash dividends ($.76 per share) -- -- -- (8,045,519) -- (8,045,519)
Stock split and change
in par value (7,369,500) 7,369,500 -- -- -- --
Merger transaction -- 21,745,588 -- -- -- 21,745,588
Purchase of 182 shares of
Common stock for treasury -- -- -- -- (1,601) (1,601)
--------- ---------- --------- ---------- ----------- ------------
Balance at December 31, 1999 $ 130,500 32,035,445 (750,115) 69,758,872 (30,145,205) 71,029,497
========= ========== ========= ========== =========== ============
See accompanying notes to consolidated financial statements.
PAGE 32
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---------- --------- ---------
Cash provided by (used for) operations:
Net earnings (loss) $ 2,858,776 4,877,280 (8,103,454)
Adjustments to reconcile net earnings(loss)to
net cash provided by (used in) operations, net
of acquisitions and divestitures:
Depreciation and intangibles amortization 8,518,958 6,191,577 6,781,800
Amortization of investment premiums -- (36,767) (251,233)
Deferred income taxes 3,040,662 (315,215) 4,173,744
Gain on disposal of property,
plant, and equipment (874,305) (18,606) (120,087)
Provision for loss on disposal of assets -- -- 6,553,279
Provision for loss on accounts receivable 2,877,949 1,502,571 571,192
Earnings applicable to minority interest 766,375 1,658,308 349,466
Directors' stock compensation (20,317) 62,620 66,834
Changes in:
Short-term investments -- 1,443,254 2,645,080
Accounts receivable (8,160,453) (6,774,958) (3,551,006)
Income tax receivable (1,243,744) 1,111,284 617,904
Inventories (1,363,041) 404,990 (755,422)
Prepaid expenses and other current assets 979,848 (269,709) (421,839)
Accounts payable 5,499,704 892,401 (18,024)
Income taxes payable (45,249) -- --
Accrued payroll and benefits (1,354,872) (619,281) 1,727,669
Other accrued expenses 69,998 186,919 (214,624)
Other current liabilities 196,948 (28,793) (1,533,334)
---------- --------- ---------
Net cash provided by continuing
operations 11,747,237 10,267,875 8,517,945
Net cash used by discontinued operations -- -- (424,835)
---------- --------- ---------
Net cash provided by operations 11,747,237 10,267,875 8,093,110
---------- --------- ---------
Cash provided by (used for) investment activities:
Sales of investments available-for-sale -- -- 1,350,000
Purchase of investments held-to-maturity -- (5,461,090) (15,893,902)
Proceeds from maturities of investments
held-to-maturity -- 6,701,893 18,155,062
Property, plant, and equipment additions, net (10,521,118) (25,489,014) (6,683,292)
Acquisition of businesses (note 2) (2,058,460) (2,967,883) (4,815,889)
Acquisition of minority interest (note 2) (12,640,443) -- --
Deposits and miscellaneous 6,280 (1,710,496) (3,948,558)
---------- --------- ---------
Net cash used for
investment activities (25,213,741) (28,926,590) (11,836,579)
---------- ---------- ----------
Cash provided by (used for) financing activities:
Issuance of treasury stock, net of
proceeds from exercise of stock options -- -- (6,832)
Purchase of treasury stock (1,601) -- --
Proceeds from bond issue/line of credit 12,000,000 19,900,000 --
Bond issue costs -- (192,147) --
Cash dividends to minority interest (935,730) -- --
Payments on long-term debt (1,864,006) (1,937) --
Cash portion of SLH Corporation dividend -- -- (19,590,476)
Cash dividends (8,045,519) (7,786,924) (7,786,923)
---------- --------- ---------
Net cash provided by (used for)
financing activities 1,153,144 11,918,992 (27,384,231)
---------- --------- ---------
(Continued)
PAGE 33
LABONE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---------- --------- ---------
Effect of foreign currency translation on cash 73,668 (165,965) (71,544)
---------- --------- ---------
Net decrease in cash and
cash equivalents (12,239,692) (6,905,688) (31,199,244)
Cash and cash equivalents at beginning of year 15,223,336 22,129,024 53,328,268
---------- --------- ---------
Cash and cash equivalents at end of year $ 2,983,644 15,223,336 22,129,024
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 2,279,366 5,450,841 2,675,182
========== ========== ==========
Interest $ 1,377,621 240,586 934,000
========== ========== ==========
Supplemental schedule of noncash investing and
financing activities for the years ended
December 31, 1999 and 1998:
Fair value of assets acquired-acquisition $ 5,796,621 6,223,162
Fair value of assets acquired-merger 34,259,789 --
Liabilities assumed-acquisition (2,078,342) (645,198)
Note payable issued-acquisition (1,440,000) --
Common stock issued-merger (19,278,214) --
Common stock issued-acquisition -- (2,000,000)
Fair value of stock options
and warrants-merger (2,341,132) --
---------- ---------
Cash paid 14,918,722 3,577,964
Less cash acquired 219,819 610,081
---------- ---------
Net cash paid for acquisition
of businesses $ 14,698,903 2,967,883
========== =========
See accompanying notes to consolidated financial statements.
PAGE 34
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
- -----------------------------------------------
Principles of Consolidation and Basis of Presentation
On August 10, 1999, LabOne, Inc. was merged into Lab Holdings, Inc. (Lab
Holdings), its parent. The combined company's name was then changed to
LabOne, Inc. (see note 2). The accompanying consolidated financial statements
include the accounts of LabOne, Inc. (LabOne or the Company) and its wholly
owned subsidiaries: LabOne Canada Inc.; Systematic Business Services, Inc.;
and ExamOne World Wide (and its wholly owned subsidiary, ExamOne World Wide
of New Jersey, Inc.). All significant intercompany transactions have been
eliminated in consolidation.
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
LabOne determines the appropriate classification of debt and equity securities
at the time of purchase. Debt securities are classified as held-to-maturity
when LabOne has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost and investment income
is included in earnings.
Inventories
Inventories consist of completed specimen collection kits, laboratory
supplies, 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
Cost of Borrowings
PAGE 35
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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
Intangible assets are recorded at their acquisition cost, net of amortization.
The excess of cost over fair value of net assets acquired is being amortized
on a straight-line basis over periods of fifteen to twenty years.
In July of 1999, the Company changed its amortization of acquired customer
lists from fifteen years to five years based upon an SEC request. The effect
of this change was an increase in amortization expense from $252,000 and
$275,000 to $757,000 and $826,000 in 1997 and 1998, respectively.
Impairment of Long-lived Assets
When facts and circumstances indicate potential impairment, LabOne evaluates
the recoverability of carrying values of long-lived assets, including
intangibles, using estimates of undiscounted future cash flows over remaining
asset lives. When impairment is indicated, any impairment loss is measured by
the excess of carrying values over fair values. During the fourth quarter of
1997, LabOne decided to dispose of its office and headquarters building and
lab facility, which, net of accumulated depreciation, was classified as
real estate available-for-sale at December 31, 1998. An impairment loss of
$6,553,279 related to the anticipated sale was recorded in 1997 which reduced
the carrying value to $3,515,000. In 1999, the Company sold all real estate
available-for-sale for $4,379,340 and recognized a gain of $864,340.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated 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
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
Estimates of fair values are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could affect the estimates. The fair
market value of LabOne's financial instruments at December 31, 1999 and 1998
approximates their carrying values.
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
PAGE 36
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 are computed using the weighted average number of
common shares and diluted earnings per share are computed using the weighted
average number of common shares and dilutive stock options.
The following table reconciles the weighted average common shares used in the
basic earnings per share calculation and the weighted average common shares
and common share equivalents used in the diluted per share calculation:
1999 1998 1997
---------- ---------- ----------
Weighted average common
shares (basic) 10,443,728 9,733,655 9,732,965
Employee stock options 7,704 -- --
---------- ---------- ----------
Weighted average common shares and
common shares equivalents (diluted) 10,451,432 9,733,655 9,732,965
========== ========== ==========
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for LabOne's quarter ending
September 30, 1999. Retroactive application will not be required. This
statement will not have a significant impact on the Company's financial
position or results of operations.
(2) Merger, Acquisitions, and Intangible Assets
- ------------------------------------------------
The cost and accumulated amortization of intangible assets at December 31,
1999 and 1998 are as follows:
1999 1998
---------- ----------
Excess of cost over fair
value of net assets acquired 58,383,300 31,059,008
Accumulated amortization 20,514,409 17,288,729
---------- ----------
Intangible assets, net of
accumulated amortization $ 37,868,921 13,770,280
========== ==========
On August 10, 1999, LabOne, Inc. was merged into Lab Holdings, its parent,
upon the approval of the required number of shareholders of both companies at
their respective annual meetings. The combined company's name was then
PAGE 37
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
changed to LabOne, Inc. The merger provisions included a 3-for-2 stock split
for all Lab Holdings shares. LabOne shares which did not elect the cash
option were exchanged for combined company shares on a 1-for-1 basis. The
Company paid $10,264,000 in cash for 805,000 shares of LabOne common stock
which were exchanged for cash of $12.75 per share. Also, the Company paid
$2,318,000 in related transaction costs. The transaction was accounted for as
the acquisition of minority interest under the purchase method. The result of
the merger was approximately $24,124,000 of goodwill which is being amortized
over a twenty-year period and the elimination of minority interest.
On November 5, 1999, LabOne acquired a paramed services company and a paramed
billing service provider. The paramed services company was acquired for
$279,000 and cash installments of $40,000 each year beginning in 2000 for five
years and 10% of gross revenue for the next six years. The minimum payments
under the gross revenue agreement provision are estimated to be $240,000. The
current portion of the cash installments and the gross revenue percentage
payments is recorded in other current liabilities with the remainder of the
minimum purchase price recorded as a long-term payable. The excess of the
aggregate minimum purchase price over the fair market value of net assets
acquired of approximately $469,000 is being amortized over fifteen years.
The paramed billing service provider was acquired for $1,912,000 in cash and a
stock warrant purchase agreement. In the agreement, the former owner of the
paramed billing service provider may receive up to 250,000 common shares if
specified revenue targets are achieved. Alternatively, the Company may be
obligated to make cash payments of up to $1,000,000 depending on the Company's
stock price. The Company believes it is likely the cash payment will be
required and has, therefore, reported the $1,000,000 cash payment as a
component of the purchase price. The excess of the aggregate purchase price
over the fair market value of net assets acquired of approximately $2,731,000
is being amortized over fifteen years.
Effective October 30, 1998, LabOne acquired a provider of information support
services to insurance underwriters for approximately $5.7 million. The
purchase was comprised of $3.7 million of cash and the issuance of 168,885
shares of LabOne common stock having a fair market value of $2 million. The
acquisition was accounted for using the purchase method of accounting. The
purchase price could increase if the acquired company achieves certain levels
of earnings in 2000. The excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $3,989,000 is being
amortized over twenty years.
The above acquisitions have been accounted for under the purchase method and,
accordingly, the operating results of the acquired companies have been
included in the consolidated statements of operations from the dates of
acquisition. Contingent consideration will be recorded when earned and will
increase goodwill. The following unaudited pro forma consolidated results of
operations of the Company for the years ended December 31, 1999 and 1998
assumes the acquisitions occurred as of January 1, 1998:
PAGE 38
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1999 1998
----------- -----------
Sales $ 128,581,000 118,278,000
Net earning 2,598,000 4,198,000
Earnings per share-
basic and diluted 0.25 0.43
=========== ===========
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 (Prudential), for $4,815,889. Concurrently, Prudential's
Individual Insurance Group agreed to use LabOne as its exclusive provider of
risk assessment testing services. The excess costs over fair value of GIB
Laboratories, Inc. assets acquired was $4,128,000 and is being amortized over
five years.
(3) Long-term Debt
- -------------------
Long-term debt consists of the following as of December 31, 1999 and 1998:
1999 1998
---------- ----------
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 (6.40% at December 31, 1999),
secured by the Company's facility and an
irrevocable bank letter of credit $ 18,150,000 20,000,000
Line of credit, variable interest
rate (6.40% at December 31, 1999),
principal due October 31, 2000 12,000,000 --
Various capital leases, principal and
interest payable monthly through
May 2003, interest ranging from 7% to
12%, collateralized by office equipment 66,595 54,446
---------- ----------
Total long-term debt 30,216,595 20,054,446
Less:
Current portion 1,873,577 1,860,168
Unamortized discount 87,879 96,970
---------- ----------
Long-term debt, net $ 28,255,139 18,097,308
========== ==========
PAGE 39
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Aggregate maturities of long-term debt as of December 31, 1999 are as follows:
Bonds Line of Capital
payable credit leases Total
---------- ---------- ---------- ----------
2000 1,850,000 12,000,000 23,577 13,873,577
2001 1,850,000 -- 26,077 1,876,077
2002 1,850,000 -- 14,468 1,864,468
2003 1,800,000 -- 2,473 1,852,473
2004 1,800,000 -- -- 1,800,000
Thereafter 8,950,000 -- -- 8,950,000
---------- ---------- ---------- ----------
$ 18,150,000 12,000,000 66,595 30,216,595
========== ========== ========== ==========
On March 9, 2000, the Company increased its line from $15 million to $25
million. The proceeds of the additional $10 million are to be used to finance
the repurchase of the Company's common stock and to finance daily operations.
The line of credit bears variable interest, which at March 9 was approximately
6.6%. The principal of the line of credit is due on February 10, 2002. Under
the terms of the agreement, the Company agrees not to merge or consolidate
with another entity, not to pay dividends or make any other payments to
shareholders, and to maintain a certain tangible net worth and certain other
financial ratios.
(4) Income Taxes
- -----------------
The components of income taxes and deferred taxes (benefit) are as follows for
the years ended December 31:
1999 1998 1997
---------- --------- ---------
Current:
Federal $ 652,087 4,602,389 (1,371,830)
State 82,612 1,104,033 637,078
Foreign 115,059 117,121 305,924
---------- ---------- ----------
Total current 849,758 5,823,543 (428,828)
---------- ---------- ----------
Deferred:
Federal 2,490,548 (164,999) 7,554,482)
State (12,669) 25,177 448,753
Foreign 28,061 (63,674) 2,872
---------- ---------- ----------
Total deferred 2,505,940 (203,496) 8,006,107
---------- ---------- ----------
$ 3,355,698 5,620,047 7,577,279
========= ========= ==========
The tax benefit associated with 1997 discontinued operations was $6,263,231.
Total income taxes differ from the amounts computed by applying the federal
statutory income tax rate of 34% to earnings before income taxes for the
following reasons (for the years ended December 31):
PAGE 40
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1999 1998 1997
--------- --------- ---------
Application of statutory
income tax rate $ 2,373,488 4,132,916 (60,081)
Goodwill amortization 803,920 576,618 663,575
Increase in valuation
allowance and write-
offs of deferred tax
assets -- -- 6,532,673
Foreign taxes, net 61,379 7,598 72,062
State income taxes, net 46,162 631,076 716,649
Tax-exempt interest -- (5,788) (18,730)
Other, net 70,749 277,627 (328,869)
--------- --------- ---------
$ 3,355,698 5,620,047 7,577,279
========= ========= =========
The tax effects of temporary differences that create significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below:
1999 1998
---------- ----------
Deferred current income tax assets (liabilities):
Unrealized loss on real estate
available-for-sale $ -- 2,606,731
Accrued vacation 361,914 302,483
Accrued medical claims 109,648 63,644
Bad debts 763,403 925,620
Inventory adjustment 33,391 40,830
Other items 59,671 33,267
---------- ----------
Total deferred current
income tax assets, net $ 1,328,027 3,972,575
========== ==========
Deferred noncurrent tax assets (liabilities):
Capital loss and net operating loss carryforward $ 934,658 2,291,148
Depreciation and amortization (168,796) 391,645
Acquired subsidiary cash to accrual adjustment (92,767) (192,027)
Other items 16,143 371,746
Kansas High Performance Incentive Program
credit carryforward, net 3,363,000 --
---------- ----------
4,052,238 2,862,512
Valuation allowance (3,958,912) (2,377,891)
---------- ---------
Total deferred noncurrent tax
assets (liabilities), net $ 93,326 484,621
========== ==========
PAGE 41
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
In conjunction with building its new facility, LabOne has received the Kansas
High Performance Incentive Program (HPIP) tax credit. LabOne was certified by
the State of Kansas and received a credit to offset all of its 1999 and 2000
Kansas income tax liability related to operations of the new facility. Any
unused portion of the credit can be carried forward for a period of ten years,
provided LabOne continues to meet requirements of the program. HPIP credits
qualified in 1999 were for potential use in 1999 and subsequent years
approximately $4,060,000. In 1999, LabOne used HPIP credits of approximately
$170,000. A valuation allowance has been provided because the Company must
prove it has the requisite employee wage scale and other specified items
before it may use the credits already qualified.
LabOne has certain capital loss carryovers that were attributes of the former
Lab Holdings. These loss deductions give rise to deferred tax assets, however,
a valuation allowance has been provided because full realization of the
deferred tax assets is not expected.
(5) Benefit Plans
- ------------------
LabOne maintains a money purchase pension plan for all employees who have
completed one-half year of service and have attained age twenty and one-half
years. The plan is a defined contribution plan under which LabOne contributes
a percentage of a participant's annual compensation. LabOne's contributions to
the plan were $2,056,000, $1,803,000, and $1,422,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
LabOne has a profit sharing (401(k)) plan for all employees who have completed
six months of service and a minimum of five hundred hours of service and have
attained the age of twenty and one-half years. LabOne contributes on behalf of
each participant an amount equal to 50% of the participant's annual
contributions, but not in excess of 5% of the participant's annual
compensation. LabOne's contributions are invested in LabOne common stock.
LabOne's contributions to the plan for the years ended December 31, 1999,
1998, and 1997 were $830,000, $663,000, and $558,000, respectively.
(6) Stock Options and Warrants
- -------------------------------
LabOne has a long-term incentive plan which provides for granting awards,
including stock options, for not more than 2,215,252 shares of LabOne common
stock. LabOne has granted certain stock options which entitle the grantee to
purchase shares for a price equal to the fair market value at date of grant
with option periods up to ten years.
The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. As such, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On December 31, 1995, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
allows entities to continue to apply the provisions of APB No. 25 and provide
pro forma net earnings and pro forma earnings per share disclosures for
employee stock option grants as if the fair value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
PAGE 42
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
In connection with the merger transaction, stock options held by pre-merger
LabOne employees were converted on a one for one basis to options on the
Company's common shares. All eligible Company employees are now covered by
this plan. A summary of the status of this stock option plan as of December
31, 1999, 1998, and 1997 and changes during the years then ended is presented
below:
1999 1998 1997
------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
Fixed options shares price shares price shares price
- --------------------- --------- --------- --------- --------- --------- ---------
Outstanding at begin-
ing of year 1,837,927 $ 14.30 1,614,068 $ 14.30 1,459,559 $ 13.63
Granted 315,060 11.48 330,859 15.02 253,316 17.36
Exercised (27,000) 10.31 (40,300) 10.64 (71,907) 10.84
Forfeited (172,688) 15.71 (66,700) 17.87 (26,900) 15.95
--------- --------- ---------
Outstanding at
end of year 1,953,299 13.85 1,837,927 14.38 1,614,068 14.30
========= ========= ========= ========= ========= =========
Options exercisable
at year-end 1,138,489 $ 13.87 968,683 $ 13.44 820,609 $ 12.94
========= ========= ========= ========= ========= =========
The following table summarizes information about stock options at
December 31, 1999.
Options outstanding Options exercisable
------------------------------------- -----------------------
Weighted-
average Weighted- Weighted-
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life (years) price exercisable price
---------------- ----------- ----------- ---------- ----------- -----------
$ 9.38 - 9.97 323,185 7.76 $ 9.78 169,685 $ 9.88
11.13 - 11.63 390,411 4.08 11.44 341,911 11.41
12.17 - 14.13 279,897 7.19 13.10 113,777 13.94
14.38 - 15.00 332,171 7.21 14.68 166,171 14.61
15.22 - 16.63 286,885 7.37 16.09 140,854 16.25
16.69 - 20.88 302,942 6.89 17.73 168,283 17.88
23.88 - 23.88 37,808 4.36 23.88 37,808 23.88
---------- ----------
9.38 - 23.88 1,953,299 6.10 13.85 1,138,489 13.87
================ ========== ========== ========== ========== ==========
PAGE 43
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The weighted average per share fair value of stock options granted during
1999, 1998, and 1997 was $2.46, $3.54, and $5.08, respectively, on the date of
grant using the Black Scholes option-pricing model with the following weighted
average assumptions:
1999 1998 1997
---- ---- ----
Expected dividend yield 7.0 % 4.8 4.2
Risk-free interest rate 5.8 % 5.0 6.3
Expected volatility factor 43.0 % 33.9 35.4
Expected life (years) 6 6 6
==== ==== ====
Since the Company applies APB No. 25 in accounting for its plans, no
compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company recorded compensation cost
based on the fair value of options at the grant date, the Company's net
earnings and earnings per share would have been reduced by approximately the
following: $633,000, or $0.05 per share, in 1999; $515,000, or $.04 per
share, in 1998; and $416,000, or $.03 per share, in 1997.
Pro forma net earnings reflect only options granted in 1999, 1998, and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net earnings amounts
presented above because compensation costs are reflected over the options'
vesting periods. Compensation cost for prior option grants is not considered.
At December 31, 1998, the directors of Lab Holdings had 60,000 stock options
at a weighted average price of $26.50 per share, of which 20,000 were
exercisable. As a result of the merger, the exercisable options were adjusted
to reflect the 3-for-2 stock split. The resulting 30,000 LabOne stock options
have an exercise price of $17.66 per share.
LabOne entered marketing agreements with two companies during 1998. In
conjunction with these agreements, LabOne granted warrants for the purchase of
1,000,000 shares of common stock at an exercise price equal to the fair value
of the stock at the grant date (500,000 shares at $17.00 and 500,000 shares at
$15.44). During the first quarter of 1999, the marketing agreement with
shares valued at $17.00 was terminated. The remaining warrants become
exercisable each quarter for five years provided certain conditions are met,
including achievement of certain levels of revenues. During 1999 and 1998,
warrants to purchase 125,000 shares were forfeited.
(7) Business Segment Information
- ---------------------------------
The Company operates principally in three lines of business: insurance,
healthcare, and substance abuse testing. The insurance line of business
involves risk-appraisal laboratory testing, paramed physical evaluations, and
information and billing services to the insurance industry. The tests and
evaluations performed and information provided by the Company are specifically
designed to assist an insurance company in objectively evaluating the risks
PAGE 44
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
posed by policy applicants. The billing services provide insurance companies
with a centralized billing structure for services performed by parameds.
Healthcare services are provided to the health care 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
directly identifiable and allocated expenses. In computing operating income
(loss) of lines of business, none of the following items have been allocated:
general corporate expenses, investment income, goodwill or other income
(expenses). 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 are principally cash, investment securities and merger goodwill.
PAGE 45
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Following is a summary of line of business information as of and for the years
ended December 31, 1999, 1998, and 1997 (in thousands):
1999 1998 1997
------------ ----------- -----------
Sales:
Insurance services $ 77,687 69,149 61,998
Healthcare services 24,793 18,600 7,512
Substance abuse testing 17,187 14,478 9,416
------------ ----------- -----------
Total sales $ 119,667 102,227 78,926
============ =========== ===========
Operating income (loss):
Insurance services $ 15,465 18,607 16,530
Healtcare services (4,472) (6,188) (8,304)
Substance abuse testing (771) 204 (934)
General corporate expenses (2,178) (1,217) (5,774)
Investment income 370 861 4,671
Other expense, net (1,433) (112) (6,366)
------------ ----------- -----------
Earnings (Loss)before
income taxes 6,981 12,155 (177)
Income tax expense (3,356) (5,620) (7,577)
Minority Interests (766) (1,658) (349)
Discontinued operations -- -- (2,343)
------------ ----------- -----------
Net earnings $ 2,859 4,877 (10,446)
============ =========== ===========
Identifiable assets:
Insurance services $ 57,434 34,597 32,343
Healthcare services 12,001 5,493 3,513
Substance abuse testing 11,588 6,449 4,994
General corporate assets 37,420 51,468 33,632
------------ ----------- -----------
Total assets $ 118,443 98,007 74,482
============ =========== ===========
Capital expenditures:
Insurance services $ 7,334 2,090 3,308
Healthcare services 927 501 469
Substance abuse testing 1,389 424 946
General corporate 5,016 22,474 2,553
============ =========== ===========
Depreciation and amortization:
Insurance services $ 3,948 3,112 3,690
Healthcare services 1,019 797 940
Substance abuse testing 1,146 810 645
General corporate 2,406 1,473 1,507
============ =========== ===========
PAGE 46
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(8) Quarterly Financial Data (Unaudited)
A summary of unaudited quarterly results of operations for 1999 and 1998 is as
follows (in thousands except per share data):
Three months ended
---------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1999:
Sales $ 27,328 28,572 28,814 34,952
Gross profit 11,677 11,568 11,712 13,166
Earnings before income
Taxes 2,340 2,022 1,345 1,273
Net earnings 999 794 523 543
Basic and diluted earnings
per share 0.10 0.08 0.05 0.05
Dividends per share 0.20 0.20 0.18 0.18
============ ============ ============ ============
1998:
Sales $ 23,333 25,763 25,834 27,297
Gross profit 10,374 11,981 11,305 11,897
Earnings before
income taxes 2,743 3,634 2,379 3,399
Net earnings 1,140 1,632 909 1,196
Basic and diluted
earnings per share 0.12 0.16 0.10 0.12
Dividends per share 0.20 0.20 0.20 0.20
============ ============ ============= ===========
Share and per share data have been adjusted for the 3-for-2 stock split in
connection with the merger transaction (see note 2). Quarterly earnings per
share amounts do not add to annual earnings per share for 1999 because of
rounding of quarterly computations.
(9) 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 $622,000. The Company 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 Comptroller's administrative law judge's office. At this time, the
Company is unable to predict the ultimate outcome of this appeal.
Leases
LabOne has several noncancelable operating leases, primarily for land and
buildings, and other commitments that expire through 2004, including a lease
PAGE 47
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
for office space from an entity owned by an employee. Rental expense for
these operating leases during 1999, 1998, and 1997 amounted to $513,000,
$539,000, and $529,000, respectively.
Future minimum lease payments and other commitments under these agreements as
of December 31, 1999 are:
Year Amount
------ --------
2000 $ 621,000
2001 478,000
2002 370,000
2003 317,000
2004 254,000
(10) Dispositions
- ------------------
On March 3, 1997, Lab Holdings distributed to its shareholders all of the
outstanding shares of common stock of its wholly owned subsidiary, SLH
Corporation, on the basis of one share of common stock of SLH Corporation for
each four shares of Lab Holdings common stock held. In connection with this
distribution and pursuant to a Distribution Agreement between Lab Holdings and
SLH Corporation, Lab Holdings transferred its real estate and energy
businesses and miscellaneous assets and liabilities, including two wholly
owned subsidiaries, Scout Development Corporation and BMA Resources, Inc., to
SLH Corporation. The net assets distributed to SLH Corporation totaled
approximately $47,963,199 on the date of distribution. The spin-off was
accounted for as a 1997 dividend.
In July 1997, Lab Holdings' Board of Directors declared a dividend to Lab
Holdings' shareholders of all shares of common stock of Response Oncology,
Inc. (Response) owned by Lab Holdings. For each shareholder of record on July
11, 1997, 1.2447625 shares of Response common stock were distributed on July
25, 1997 for each share of Lab Holdings common stock outstanding. The
distribution of all shares of Response stock to Lab Holdings' shareholders was
effected as a dividend. The Lab Holdings shareholders paid no consideration
for any shares of Response or SLH Corporation stock received in the
distributions.
PAGE 48
LABONE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Schedule II
-----------
Additions-
charged to
Balance Selling,
At general, and Deductions- Balance
Beginning administrative uncollectible at
Description of year expenses accounts of year
- ------------------------------ --------- -------------- ------------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 2,326,716 2,877,949 3,223,380 1,981,285
========= ========= ========= =========
Year ended December 31, 1998 $ 968,295 1,502,572 144,151 2,326,716
========= ========= ========= =========
Year ended December 31, 1997 $ 657,558 521,193 210,456 968,295
========= ========= ========= =========
See accompanying independent auditors' report
PAGE 49