UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-16946
LAB HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Missouri 43-1039532
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 7568
5000 W. 95th Street, Suite 260
Shawnee Mission, KS 66207
-------------------------------- ----------------
(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (913) 648-3600
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- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
November 6, 1998: $1 par value common - 6,489,103
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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(unaudited)
September 30, December 31,
1998 1997
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(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 24,813 22,129
Short-term investments 1,330 2,648
Accounts and notes receivable 17,596 12,608
Current income tax receivable 1,902 1,400
Inventories 1,537 2,203
Real estate available for sale 3,515 3,515
Prepaid expenses and other current assets 2,694 2,459
Deferred income taxes 3,985 3,386
----------------------
Total current assets 57,372 50,348
Property, plant and equipment 24,016 10,441
Intangible assets 11,528 13,058
Deferred income taxes 433 858
Other assets 54 81
----------------------
$ 93,403 74,786
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,385 3,367
Bonds payable 1,850 --
Accrued payroll and benefits 4,144 4,530
Other accrued expenses 666 423
Other current liabilities 240 303
----------------------
Total current liabilities 11,285 8,623
Bonds payable 18,051 --
----------------------
Total liabilities 29,336 8,623
----------------------
Minority interests 9,511 9,476
----------------------
Stockholders' equity:
Preferred stock of $1 par value.
Authorized 3,000,000 shares; none issued -- --
Common stock of $1 par value.
Authorized 24,000,000 shares;
issued 7,500,000 shares 7,500 7,500
Paid-in capital 1,772 1,772
Retained earnings 76,148 78,103
Accumulated other comprehensive income (loss) (720) (544)
----------------------
84,700 86,831
Less cost of 1,010,897 shares of treasury stock 30,144 30,144
----------------------
Total stockholders' equity 54,556 56,687
----------------------
$ 93,403 74,786
======================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------
(in thousands except share amounts)
Sales $ 25,834 19,728 74,930 57,776
Cost of sales 14,529 10,665 41,320 30,751
--------------------- ---------------------
Gross profit 11,305 9,063 33,610 27,025
Selling, general and
administrative 8,605 7,393 24,888 26,575
--------------------- ---------------------
Earnings from operations 2,700 1,670 8,722 450
Investment income - net (95) 364 561 4,564
Other income (expense) (87) 2 (113) 86
--------------------- ---------------------
Earnings before income taxes 2,518 2,036 9,170 5,100
Income taxes 1,129 403 4,040 9,976
--------------------- ---------------------
Earnings (loss) before
minority interests 1,389 1,633 5,130 (4,876)
Minority interests 412 301 1,245 899
--------------------- ---------------------
Earnings (loss) from continuing
operations 977 1,332 3,885 (5,775)
Loss from discontinued
healthcare business -- -- -- (2,342)
--------------------- ---------------------
Net earnings (loss) $ 977 1,332 3,885 (8,117)
===================== =====================
Basic earnings (loss) per share:
Earnings (loss) from
continuing operations $ .15 .21 .60 (.89)
Loss from discontinued
healthcare business -- -- -- (.36)
--------------------- ---------------------
Net earnings (loss) $ .15 .21 .60 (1.25)
===================== =====================
Diluted earnings (loss) per share:
Earnings (loss) from
continuing operations $ .15 .21 .59 (.89)
Loss from discontinued
healthcare business -- -- -- (.36)
--------------------- ---------------------
Net earnings (loss) $ .15 .21 .59 (1.25)
===================== =====================
Dividends $ .30 .30 .90 .90
Book value $ 8.41 9.36 8.41 9.36
Weighted average shares
outstanding 6,489,103 6,489,103 6,489,103 6,488,488
Shares outstanding
end of period 6,489,103 6,489,103 6,489,103 6,489,103
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Nine Months Ended Sept.30, 1998 (unaudited)
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Comprehensive Stockholders'
Income Equity
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(in thousands)
Common stock:
Balance, beginning and end of period $ 7,500
--------
Paid-in capital:
Balance, beginning and end of period 1,772
--------
Retained earnings:
Balance, beginning of year 78,103
Net earnings 3,885 3,885
Cash dividends paid -------- (5,840)
--------
Balance, end of period 76,148
--------
Accumulated other comprehensive income (loss)
Balance, beginning of year (544)
Foreign currency translation (176)
Tax expense -
--------
(176) (176)
-------- --------
Balance, end of period (720)
--------
Less:
Treasury stock:
Balance, beginning and end of period 30,144
--------
Totals $ 3,709 54,556
======== ========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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(unaudited)
Nine Months Ended
Sept. 30,
1998 1997
- ------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Earnings (loss) from continuing operations $ 3,885 (5,775)
Adjustments to reconcile earnings(loss)
from continuing operations to net cash
provided by continuing operations:
Depreciation and amortization 4,177 4,445
Earnings applicable to minority interests 1,245 899
Change in trading portfolio, net 614 34,426
Change in accounts receivable (4,988) (3,608)
Change in accounts payable 1,017 (353)
Income taxes and other, net (390) 6,332
-------------------
Net cash provided by continuing
operations 5,560 36,366
Net cash used by discontinued
healthcare business -- (1,006)
Net cash provided by discontinued
real estate operations -- 581
-------------------
Total cash provided by operations 5,560 35,941
-------------------
INVESTING ACTIVITIES
Sales of investments available for sale -- 1,350
Purchases of investments held to maturity (5,461) (15,894)
Maturities of investments held to maturity 6,202 13,485
Additions to property, plant
and equipment, net (16,100) (3,249)
Acquisition of assets (167) (4,128)
Other, net (1,212) (1,109)
-------------------
Net cash used by investing activities (16,738) (9,545)
-------------------
FINANCING ACTIVITIES
Proceeds from issuance of bonds 19,900 --
Regular quarterly dividends paid (5,840) (5,840)
Cash portion of SLH dividend -- (19,590)
Net issuance of treasury stock pursuant to
stock option plans -- (8)
-------------------
Net cash provided (used) by
financing activities 14,060 (25,438)
-------------------
Effect of foreign currency translation (198) (28)
-------------------
Net increase in cash and cash equivalents 2,684 930
Cash and cash equivalents at
beginning of period 22,129 4,957
-------------------
Cash and cash equivalents at end of period $ 24,813 5,887
===================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 106 --
===================
Income taxes, net $ 4,711 2,550
===================
Supplemental disclosures of non-cash information:
SLH dividend $ -- 28,373
===================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
LAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) The interim financial information furnished herein is unaudited while
the balance sheet at December 31, 1997 is derived from audited financial
statements. In the opinion of management, the financial information
reflects all adjustments which are necessary to fairly state Lab Holdings'
financial position at September 30, 1998 and December 31, 1997 and the
results of its operations and cash flows for the periods ended September
30, 1998 and 1997. All adjustments made in the interim period were of a
normal recurring nature. The financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances, and therefore included in the financial statements are
certain amounts based on management's informed estimates and judgments.
The financial information herein is not necessarily representative of a
full year's operations because levels of sales, interest rates and other
factors fluctuate throughout the fiscal year. These same considerations
apply to all year to year comparisons. Certain 1997 amounts have been
reclassified for comparative purposes with no effect on net earnings
(loss). See Lab Holdings' Annual Report pursuant to Section 13 to the
Securities Exchange Act of 1934 (Form 10-K as amended) for additional
information not required by this Quarterly Report on Form 10-Q.
This Quarterly report on Form 10-Q may contain "forward-looking
statements," including projections, statements of plans and objectives,
statements of future economic performance and statements of assumptions
underlying such statements. Forward-looking statements involve known and
unknown risks and uncertainties. They are usually identified by or are
associated with such words such as "intend," " believe," "estimate,"
"expect," "anticipate," "hopeful," "should," "may" and similar expressions.
Many factors could cause actual results to differ materially from those
that may be expressed or implied in such forward-looking statements,
including, but not limited to, the volume and pricing of laboratory tests
performed by LabOne, competition, the extent of market acceptance of
LabOne's testing services in the healthcare and substance abuse testing
industries, general economic conditions and other factors detailed from
time to time in the Company's reports and registration statements filed
with the Securities and Exchange Commission, including the Company's
Current Report on Form 8-K dated October 23, 1998.
(2) On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation (SLH, now known as Syntroleum Corporation). For each
shareholder of record on February 24, 1997, one share of SLH common stock
was distributed for each four shares of Lab Holdings common stock owned.
In connection with this distribution and pursuant to a Distribution
Agreement between Lab Holdings and SLH, Lab Holdings transferred its real
estate and energy businesses and miscellaneous assets and liabilities,
including two wholly-owned subsidiaries, Scout Development Corporation and
BMA Resources, Inc., to SLH. The net assets distributed to SLH totaled
approximately $48 million. The spinoff was accounted for as a dividend.
The Lab Holdings shareholders paid no consideration for any shares of SLH
stock received in the distribution.
(3) On July 25, 1997, Lab Holdings distributed to its shareholders all of
the 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 for each share of Lab
Holdings common stock outstanding. The distribution of all shares of
Response stock to Lab Holdings' shareholders was effected as a dividend.
The Lab Holdings shareholders paid no consideration for any shares of
Response stock received in the distribution.
Lab Holdings' share of Response's earnings are shown as a discontinued
business in the accompanying financial statements.
As a result of the SLH and Response distributions, Lab Holdings' principal
asset consists of its approximate 81% ownership of LabOne, Inc. (LabOne).
(4) Cash and cash equivalents include demand deposits in banks, money
market investments and overnight investments that are stated at cost, which
approximates market value.
(5) Basic earnings per share is computed using the weighted average number
of common shares and diluted earnings per share is computed using the
weighted average number of common shares and dilutive stock options.
Earnings available to common shareholders was adjusted to reflect the
Company's share of LabOne's earnings based on a diluted ownership after
taking into account LabOne's common stock equivalents. The following table
reconciles net earnings and weighted average shares used to compute basic
and diluted earnings per share.
Sept. 30, 1998
-----------------------------------
Earnings from
Continuing Per Share
Operations Shares Amount
-----------------------------------
Basic earnings per share $ 3,885,000 6,489,103 $ .60
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options (64,000) --
-----------------------------------
Dilutive earnings per share $ 3,821,000 6,489,103 $ .59
===================================
Sept. 30, 1997
-----------------------------------
Loss from
Continuing Per Share
Operations Shares Amount
-----------------------------------
Basic loss per share $(8,117,000) 6,488,488 $ (1.25)
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options -- --
-----------------------------------
Dilutive loss per share $(8,117,000) 6,488,488 $ (1.25)
===================================
Computation of dilutive loss per share at September 30, 1997 did not
include the effect of stock options because to do so would have been
antidilutive.
(6) LabOne operates in three lines of business: insurance risk appraisal
testing, clinical diagnostic testing and substance abuse testing. The
following table presents the Company's selected financial information for
each segment.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
------------------ ------------------
(in thousands)
Sales
Insurance risk
appraisal testing $ 16,677 15,206 51,071 45,532
Clinical diagnostic testing 5,046 1,804 13,423 5,465
Substance abuse testing 4,111 2,718 10,436 6,779
------------------- -------------------
Total sales $ 25,834 19,728 74,930 57,776
=================== ===================
Operating Income (Loss)
Insurance risk
appraisal testing $ 4,841 4,637 15,626 13,683
Clinical diagnostic testing (1,431) (2,162) (4,876) (6,161)
Substance abuse testing 128 (117) (10) (625)
General corporate expense (838) (688) (2,018) (6,447)
------------------- -------------------
Earnings from operations 2,700 1,670 8,722 450
Investment income - net (95) 364 561 4,564
Other income (expense) (87) 2 (113) 86
------------------- -------------------
Earnings before income taxes $ 2,518 2,036 9,170 5,100
=================== ===================
The assets classified as corporate increased significantly due to bond
proceeds and construction of the new LabOne facility. There were no
material changes in assets in the other segments or in the basis of
segmentation or measurement of segment operating income or loss.
(7) The Company adopted the provisions of the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" on January
1, 1998. Comprehensive income is defined as any change in equity from
transactions and other events originating from non-owner sources. For Lab
Holdings, those changes are composed of reported net income and changes in
unrealized foreign currency translation adjustments. The components of
comprehensive income are as follows.
Sept. 30,
1998 1997
------------------
(in thousands)
Net earnings (loss) $ 3,885 (8,117)
------------------
Other comprehensive income
Foreign currency translation (176) (50)
Tax expense -- --
------------------
Total other comprehensive income (176) (50)
------------------
Total Comprehensive Income $ 3,709 (8,167)
==================
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Selected Financial Data
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
1998 1997 1998 1997
---------- ---------- --------- -------
Sales $25,834,000 19,728,000 74,930,000 57,776,000
Earnings from operations $ 2,700,000 1,670,000 8,722,000 450,000
Investment income - net $ (95,000) 364,000 561,000 4,564,000
Earnings (Loss) from
continuing operations $ 977,000 1,332,000 3,885,000 (5,775,000)
Loss from discontinued
healthcare business $ -- -- -- (2,342,000)
Net earnings (loss) $ 977,000 1,332,000 3,885,000 (8,117,000)
Basic earnings per share:
Earnings (loss) from
continuing operations $ .15 .21 .60 (.89)
Loss from discontinued
healthcare business -- -- (.36)
Net earnings (loss) $ .15 .21 .60 (1.25)
Dividends per share $ .30 .30 .90 .90
Book value per share $ 8.41 9.36 8.41 9.36
Introductory remarks about results of operations
Lab Holdings, Inc.'s (Lab Holdings or Registrant) principal asset consists
of a majority ownership of LabOne, Inc. (LabOne), together with $6.7
million of related goodwill. Additionally, Lab Holdings has approximately
$6.3 million of other net assets, consisting primarily of cash, short-term
investments and income tax receivables. Prior to October 20, 1997, Lab
Holdings was named Seafield Capital Corporation (Seafield). Seafield
changed its name to Lab Holdings for better identification with its primary
asset, the approximate 80.5% ownership of LabOne.
Lab Holdings had a majority ownership position in Response Oncology, Inc.
(Response). On July 25, 1997, Lab Holdings distributed to its shareholders
all the shares of common stock of Response owned by Lab Holdings. The
distribution of Response stock was effected as a taxable dividend by Lab
Holdings. Response's 1997 operations are presented as a discontinued
healthcare business in Lab Holdings' financial statements.
Additionally, Lab Holdings had investments in real estate, energy
businesses and miscellaneous assets. On March 3, 1997, Lab Holdings
distributed to its shareholders all of the outstanding shares of common
stock of its wholly-owned subsidiary, SLH Corporation (SLH). In connection
with this distribution and pursuant to a Distribution Agreement between Lab
Holdings and SLH, Lab Holdings transferred its real estate and energy
businesses and miscellaneous assets and liabilities to SLH. The SLH spin-
off was accounted for as a dividend. On August 7, 1998, Syntroleum
Corporation merged into SLH and SLH changed its name to Syntroleum
Corporation.
LabOne provides high-quality laboratory testing services to insurance
companies, physicians and employers.
LabOne provides risk-appraisal laboratory testing services to the insurance
industry. The tests performed are specifically designed to assist an
insurance company in objectively evaluating the mortality and morbidity
risks posed by policy applicants. The majority of the testing is performed
on specimens of individual life insurance policy applicants. LabOne also
provides testing services on specimens of individuals applying for
individual and group medical and disability policies.
LabOne's clinical testing services are provided to the healthcare industry
to aid in the diagnosis and treatment of patients. LabOne operates only
one highly automated and centralized laboratory, which LabOne believes has
significant economic advantages over other conventional laboratory
competitors. LabOne markets its clinical testing services to the payers of
healthcare--insurance companies and self-insured groups. LabOne does this
through Lab Card(trademark), a Laboratory Benefits Management (LBM)
program.
The Lab Card Program provides laboratory testing at reduced rates as
compared to traditional laboratories. It uses a unique benefit design that
shares the cost savings with the patient, creating an incentive for the
patient to help direct laboratory work to LabOne. Under the Program, the
patient incurs no out-of-pocket expense when the Lab Card is used, and the
insurance company or self-insured group receives substantial savings on its
laboratory charges.
Additionally, BlueCross BlueShield of Tennessee selected LabOne to provide
routine outpatient laboratory testing services for BlueCare members
throughout Tennessee effective February 1, 1998. BlueCare is BlueCross
BlueShield of Tennessee's plan for Tenncare participants and covers
approximately 350,000 members. LabOne's LBM programs, including BlueCare
and the Lab Card program, have approximately 2.1 million lives enrolled.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) to perform substance abuse testing services for
federally regulated employers and is currently marketing these services
throughout the country to both regulated and nonregulated employers.
LabOne's rapid turnaround times and multiple testing options help clients
reduce downtime for affected employees and meet mandated drug screening
guidelines.
THIRD QUARTER ANALYSIS
Revenues increased 31% to $25.8 million in the third quarter 1998 from
$19.7 million in the third quarter 1997 due to increases in all of LabOne's
business segments. Insurance segment revenue increased to $16.7 million
during the third quarter 1998 as compared to $15.2 million in the same
quarter last year. The increase was due to an increase in market share and
an increase in oral fluid testing on applicants applying for smaller face-
amount policies. The total number of insurance applicants tested in the
third quarter 1998 increased by 10% as compared to the same quarter last
year. Average revenue per applicant decreased 3% during the same periods
due to competitive pricing pressures. Insurance kit and container revenue
increased, due primarily to an increase in the number of blood and oral
fluid kits sold.
Clinical (diagnostic) laboratory revenue increased 180% from $1.8 million
in the third quarter 1997 to $5 million in 1998 due to a 117% increase in
testing volumes and a 29% increase in the average revenue per patient.
Substance abuse testing (SAT) revenue increased 51% from $2.7 million in
the third quarter 1997 to $4.1 million in 1998 primarily due to increased
testing volumes.
Cost of sales increased $3.9 million in the third quarter 1998 as compared
to the prior year, due primarily to increases in supplies, inbound freight
and outside laboratory testing and collection services. Laboratory
supplies increased due to the increased specimen volumes tested in each
segment. Insurance kit supplies increased due to the higher volume of kits
sold. Inbound freight and outside laboratory testing and collection
services increased primarily due to the increased specimen volumes in the
clinical and SAT segments. Clinical cost of sales expenses were $3.7
million as compared to $2.2 million in the third quarter 1997. SAT cost of
sales expenses were $2.5 million as compared to $2 million in the third
quarter 1997.
As a result of the above factors, gross profit for the quarter increased
$2.2 million (25%) from $9.1 million in the third quarter 1997 to $11.3
million in the third quarter 1998. Clinical gross profit increased to $1.3
million in the third quarter 1998 from a loss of $400,000 in the third
quarter 1997. SAT gross profit increased to $1.3 million in the third
quarter 1998 from $800,000 in the third quarter 1997.
LabOne's selling, general and administrative expenses increased $1 million
(16%) in the third quarter 1998 as compared to the prior year, due
primarily to increases in payroll expenses and bad debt accruals. These
were partially offset by a decrease in depreciation expense. Clinical
expenses, including allocated overhead, were $2.8 million as compared to
$1.8 million in 1997. SAT expenditures, including allocations, were $1.2
million as compared to $900,000 last year. The overhead allocation to the
clinical and SAT testing segments for the third quarter 1998 was $1.5
million as compared to an allocation of $900,000 in 1997.
Lab Holding's selling, general and administrative expenses increased to
$431,000 in the third quarter 1998 from $283,000 in the third quarter of
1997. Prior to August 7, 1998, Lab Holdings received administrative
services which were provided by SLH. As a result of SLH's merger on August
7, 1998, the previous services agreement with SLH was terminated and Lab
Holdings' personnel are employed directly by Lab Holdings resulting in
increased administration expenses during 1998's third quarter.
Additionally, the spin-off distributions of SLH and Response during 1997
increased the tax return preparation costs during 1998's third quarter.
Goodwill amortization of $368,000 associated with Lab Holdings' investment
in LabOne was included in the third quarter operating results of both 1998
and 1997.
Consolidated earnings from operations increased to $2.7 million in 1998's
third quarter from $1.7 million in the third quarter of 1997 primarily
reflecting improvements in LabOne's operating results. LabOne's insurance
segment operating income increased $204,000 to $4.8 million. The clinical
segment improved $731,000 to an operating loss of $1.4 million. The SAT
segment improved $245,000 from an operating loss of $117,000 in the third
quarter 1997 to an operating gain of $128,000 in 1998.
Other investments include liquidity investments. The return on short-term
investments is included in the investment income line in the consolidated
statements of operations. Investment income decreased to a loss of $95,000
in 1998's third quarter from income of $364,000 in 1997's third quarter.
The decrease was primarily attributable to unrealized losses of $445,000 on
a short-term investment portfolio reflecting the decrease in the stock
market during the third quarter. Trading portfolios are carried at market
value for reporting purposes. Miscellaneous items produced a $87,000 loss
in 1998's third quarter as compared to a gain of $2,000 in 1997's third
quarter.
Tax expense increased to $1.1 million in 1998's third quarter from $403,000
in 1997's third quarter. The effective tax rate increased to 45% from 20%
due primarily to the reversal of valuation allowances on deferred tax
assets in the third quarter of 1997.
The combined effect of the above factors resulted in the third quarter 1998
earnings from continuing operations of $977,000, compared with $1.3 million
from continuing operations in the third quarter 1997.
YEAR-TO-DATE ANALYSIS
Revenues in the nine month period ended September 30, 1998 were $74.9
million as compared to $57.8 million in the same period last year. The
increase of approximately $17.2 million is due to increases in clinical
laboratory revenue of $8 million, insurance laboratory revenue of $3.6
million, SAT revenue of $3.7 million and kit revenue of $2 million.
The total number of insurance applicants tested in the nine month period
increased by 13% as compared to last year, while average revenue per
applicant declined 3%. Kit and container revenue increased $2 million due
primarily to an increase in the number of oral fluid and full blood kits
sold.
Clinical laboratory revenue increased from $5.5 million during the first
nine months of 1997 to $13.4 million for the same period in 1998 due to
increased testing volumes and higher revenue per patient. SAT revenue
increased from $6.8 million in 1997 to $10.4 million in 1998 due to a 51%
increase in testing volumes.
Cost of sales increased $10.6 million year to date as compared to the prior
year. This increase is due primarily to increases in laboratory and kit
supplies, payroll expenses, inbound freight and outside laboratory
services. Lab supplies increased 26% due to the larger volume of all
specimen types processed, and insurance kit expense increased due to the
higher volume of kits sold. Payroll increased 19%. Freight and outside
testing increased primarily due to the substantial growth in clinical and
SAT specimen volumes. Clinical cost of sales expenses were $10.7 million
as compared to $6.1 million during the first nine months of 1997. SAT cost
of sales expenses were $7.2 million as compared to $5.1 million during
1997.
As a result of the above factors, gross profit for the first nine months
increased from $27 million in 1997 to $33.6 million in 1998. Clinical
gross profit improved from a loss of $700,000 in 1997 to a gain of $2.8
million in 1998. SAT gross profit increased to $3.2 million in the first
nine months of 1998 from $1.7 million last year.
LabOne's selling, general and administrative expenses increased $2.8
million (14%) in the nine month period ended September 30, 1998 as compared
to the prior year due primarily to increases in payroll expenses and bad
debt accruals. Payroll expense increased primarily due to a 18% increase
in headcount and increased benefit expenses. These were partially offset
by a decrease in depreciation expense. Clinical expenditures were $7.6
million as compared to $5.5 million in 1997. SAT expenses increased from
$2.3 million in 1997 to $3.2 million in 1998. The overhead allocation to
the clinical and SAT segments for the period was $3.9 million as compared
to an allocation of $2.4 million in 1997.
Lab Holding's selling, general and administrative expenses decreased to
$803,000 in the first nine months of 1998 from $5.4 million in the first
nine months of 1997 as Lab Holding's significantly reduced its corporate
structure after the SLH and Response distributions. Goodwill amortization
of $1.1 million associated with Lab Holdings' investment in LabOne was
included in the first nine months operating results of both 1998 and 1997.
Consolidated earnings from operations increased to $8.7 million in 1998's
first nine months from $450,000 in the first nine months of 1997 reflecting
both Lab Holdings reduction in corporate structure expenses and
improvements in LabOne's operating results. LabOne's operating income
increased from $6.9 million in the first nine months of 1997 to $10.6
million in 1998, primarily due to an increase in the insurance segment
operating income of $1.9 million. The clinical segment had an operating
loss of $4.9 million for the nine month period ended September 30, 1998 as
compared to an operating loss of $6.2 million in 1997. The SAT segment
improved from an operating loss of $625,000 in 1997 to a loss of $10,000 in
1998.
Other investments contributing earnings include liquidity investments. The
return on short-term investments is included in the investment income line
in the consolidated statements of operations. Investment income decreased
to $561,000 in 1998's first nine months from $4.6 million in 1997's first
nine months, which primarily reflected a $3 million gain by Lab Holdings on
the sale of marketable common stock.
Tax expense decreased to $4 million in 1998's first nine months from
approximately $10 million in 1997's first nine months. During 1997's first
nine months, tax expense included the write off of approximately $5 million
of the deferred income tax assets related to assets spun off in the SLH
distribution and the write off of approximately $3.2 million 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 $3.9 million for the first nine months of 1998 ,
compared with a loss from continuing operations of $5.8 million in the
first nine months of 1997.
Discontinued Healthcare Business:
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a $2.3 million loss from discontinued
healthcare business in Lab Holdings' financial statements. The second
quarter of 1997 was the last period in which Response significantly
impacted Lab Holdings' financial results. During the first six months of
1997, Response's revenues were $50 million and net earnings totaled $2.1
million. The distribution of Response stock was effected as a taxable
dividend by Lab Holdings in which Lab Holdings utilized tax loss
carryforwards to offset a resulting tax liability in the financial
statements.
The combined effect of the above factors resulted in net earnings of $3.9
million or $0.60 basic earnings per share in the nine month period ended
September 30, 1998 as compared to a net loss of $8.1 million or $1.25 basic
loss per share in the same period last year.
Publicly-Traded Subsidiary
Lab Holdings' majority-owned subsidiary, LabOne, is publicly-traded. At
September 30, 1998, based on the market prices of publicly-traded shares of
this subsidiary, pretax unrealized gains of approximately $96.3 million on
this investment were not reflected in either Lab Holdings' book value or
stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1998, at the holding company level, Lab Holdings had
available for operations approximately $4.5 million in cash and short-term
investments. Lab Holdings' working capital at September 30, 1998 decreased
slightly to $5.8 million from $6.3 million at December 31, 1997.
On a consolidated basis, Lab Holdings had $26.1 million in cash and short-
term investments at September 30, 1998. Current assets totaled
approximately $57.4 million while current liabilities totaled $11.3
million. Accounts receivable increased $5 million or 40% from December 31,
1997 due to LabOne's increase in revenues for the nine month period.
Net cash provided by continuing operations totaled $5.6 million in 1998's
first nine months compared with $36.4 million in 1997's first nine months,
primarily reflecting net earnings in 1998, a net loss in 1997 and a $34
million net change in the trading portfolio in 1997. Additionally in 1997,
the discontinued healthcare business used $1 million and discontinued real
estate operations provided $581,000.
Net cash used by investing activities in 1998's first nine months totaled
$16.7 million, as compared with $9.5 million in 1997's first nine months.
The net cash used in 1998 primarily reflects LabOne's net additions to
property plant and equipment related to construction of a new facility.
Net cash used by investing activities in 1997's first nine months included
a net increase in long-term investments of $2.4 million, $3.2 million of
net additions to property, plant and equipment supporting expanded
laboratory capacity and $4.1 million of intangible assets purchases by
LabOne associated with its purchase of the assets and customer list of GIB
Laboratories, Inc.
Net cash provided by financing activities of $14.1 million in 1998's first
nine months reflects LabOne's proceeds form issuance of bonds on its new
facility less Lab Holdings regular cash dividends to its shareholders
totaling $5.8 million Net cash used by financing activities in 1997's
first nine months totaled $25.4 million primarily due to the $19.6 million
cash transferred to SLH and regular cash dividends of $5.8 million.
Lab Holdings is currently a holding company. Sources of cash are
investment income and subsidiary dividends. The primary uses of cash for
Lab Holdings are investments, operating expenses and dividends to
shareholders.
LabOne paid regular quarterly dividends in 1998 and 1997. As an
approximate 80.5% owner, Lab Holdings received $5.8 million of cash
dividends from LabOne in 1998. LabOne's working capital position increased
$4.9 million to $40.3 million at September 30, 1998 from $35.4 million at
December 31, 1997. This increase is primarily due to bond proceeds and
LabOne's cash provided by operations before changes in working capital
exceeding capital additions and dividends paid.
LabOne's new facility project is expected to cost approximately $33 million
and is being financed with an industrial revenue bond (IRB) approved by the
City of Lenexa (Kansas), and signed during the third quarter of 1998. The
$33 million IRB is split into three series. Series A consists of $20
million which has been sold publicly. Series B and C consists of $13
million which has been purchased by LabOne. LabOne expects to repay Series
A over 11 years at approximately $1.85 million per year plus interest.
Interest expense is based on a taxable seven day variable rate and is
currently less than 6.5%, including all financing costs. Debt restrictions
include, but are not limited to, a net worth covenant and an operating cash
flow covenant. As of September 30, 1998, total capital expenditures for
this project were $17.1 million.
LabOne had no short-term borrowings in the first nine months of 1998.
LabOne expects to fund operations and future dividend payments from a
combination of cash flows from operations and cash reserves.
LabOne is actively addressing Year 2000 computer concerns. LabOne has
established an oversight committee which includes management from all parts
of LabOne and meets periodically to review progress. LabOne's laboratory
operating systems and its business processing systems were completely
rewritten in the past ten years and were brought into compliance with Year
2000 date standards at that time. Non-IT systems, which include security
systems, time clocks and heating and cooling systems, are being replaced
with certified compliant systems as part of construction of the new
facility. LabOne expects to complete all remaining internal Year 2000
objectives by the end of the first quarter, 1999.
Ongoing remediation efforts include regularly scheduled software upgrades
and replacement of personal computers and associated equipment, and are not
unique to the Year 2000 efforts. LabOne is assessing the Year 2000
preparation and contingency plans of its clients and vendors. LabOne has
material relationships and dependencies with its primary telecommunications
provider, Sprint Corp., its inbound shipping provider, Airborne Express,
and municipal services providers. In the event of a service interruption,
LabOne has the ability to switch telecommunications services to AT&T at any
time, and maintains backup electrical generators capable of meeting its
electrical needs. LabOne currently tracks and controls routing of its
inbound specimens and can use USPS, airlines and other common carriers or
express delivery services in the event of delivery problems with Airborne
Express. LabOne currently maintains approximately 8 weeks supply of most
laboratory supplies, and does not expect significant problems in obtaining
supplies. LabOne continues to review the Year 2000 plans of these
providers, and does not currently expect significant problems in these
areas, however, there can be no assurance that the systems of clients and
vendors will be converted to address Year 2000 problems in a timely and
effective manner or that such conversions will be compatible with LabOne's
computer systems.
Resources dedicated to the remaining effort are expected to cost less than
$300,000 over the next 18 months and are not considered a material expense
to LabOne. These efforts have not caused delay to LabOne's other ongoing
information systems projects. LabOne has not hired any outside consultants
or other independent validation providers at this time, and does not expect
to do so.
There can be no assurance that LabOne's adjustments to its computer systems
will completely eliminate all Year 2000 problems. In addition, a failure
to properly address the Year 2000 problem could have a material adverse
effect on LabOne's business, financial condition and results of operations.
Lab Holdings has completed its Year 2000 internal compliance program and
believes that its limited computer systems are now Year 2000 compliant.
The SLH Corporation/Syntroleum Corporation merger was completed on August
7, 1998. Per the Facilities Sharing and Interim Services Agreement between
Lab Holdings, SLH and Syntroleum, the former employees of SLH are now
employees of Lab Holdings. Concurrently, SLH/Syntroleum is providing
facilities to Lab Holdings in exchange for certain limited accounting,
bookkeeping, tax and administrative services by Lab Holdings personnel.
RECENTLY ISSUED ACCOUNTING STANDARDS
No recently issued accounting standards presently exist which will require
adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) The City of Lenexa, Kansas, has issued its Taxable Industrial
Revenue Bonds in the amount of $20 million to provide financing for
LabOne's acquisition, construction and equipping of its new 270,000 square
foot office, lab and warehouse facility in Lenexa, Kansas pursuant to a
Lease Agreement between LabOne and the City of Lenexa. Commerce Bank, N.A.
has provided a direct pay letter of credit to insure payment of the Bonds
pursuant to the Lease Agreement and a Reimbursement Agreement between
Commerce Bank and LabOne. The Company has also entered into a letter
agreement with Commerce Bank pursuant to which the Company has agreed to
use its best efforts to cause LabOne to satisfy its obligations to Commerce
Bank under the Reimbursement Agreement. LabOne is required under the
Reimbursement Agreement to maintain a net worth of $40 million, a tangible
net worth of $20 million and a quarterly debt service coverage of not less
than 3 to 1. At September 30, 1998, LabOne's net worth was $51 million and
its book tangible net worth was $46 million. The above referenced
agreements are appended hereto as Exhibits 4.1 to 4.4.
Under the Missouri General Corporation Law, no dividends to
stockholders may be declared or paid at a time when the net assets of the
corporation are less than its stated capital or when the payment thereof
would reduce the net assets of the corporation below its stated capital.
At September 30, 1998, the net assets of Lab Holdings exceeded its stated
capital by $47,056,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
The Board of Directors is considering the adoption of a rights
agreement to replace the Rights Agreement dated April 5, 1988, as amended,
which is filed as Exhibits 4.1, 4.3, 4.4 and 4.5 to the Company's Form 10-K
for the year ended December 31, 1997, and which expired earlier this year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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
(incorporated by reference to Exhibit 4.1 of the LabOne, Inc. Form 10-Q
for the quarter ended September 30, 1998).
4.2 Lease Agreement dated as of September 1, 1998 between the
City of Lenexa, Kansas and LabOne, Inc. related to the Trust Indenture
filed as Exhibit 4.1 to the Company's Report on Form 10-Q for the quarter
ended September 30, 1998 (incorporated by reference to Exhibit 4.2 of the
LabOne, Inc. Form 10-Q for the quarter ended September 30, 1998).
4.3 Reimbursement Agreement dated as of September 1, 1998 between
LabOne, Inc. and Commerce Bank, N.A. related to Exhibits 4.1 and 4.2 to the
Company's Report on Form 10-Q for the quarter ended September 30, 1998
(incorporated by reference to Exhibit 4.3 of the LabOne, Inc. Form 10-Q for
the quarter ended September 30, 1998).
4.4 Letter agreement dated September 4, 1998, between the Company
and Commerce Bank, N.A. relating to the Company's obligations with respect
to the Reimbursement Agreement and letters of credit to be issued
thereunder that is filed as Exhibit 4.3 to the Company's Report on Form 10-
Q for the quarter ending September 30, 1998.
10.1 Copy of employment agreement between the Company and P.
Anthony Jacobs, the President and Chief Executive Officer of the Company.
10.2 Copy of employment agreement between the Company and Steven
K. Fitzwater, the Executive Vice President and Chief Operating and
Financial Officer of the Company.
10.3 Copy of employment agreement between the Company and Linda K.
McCoy, the Vice President and Chief Accounting Officer of the Company.
10.4 1997 Directors' Stock Option Plan, as amended.
10.5 Form of Option Agreement for options granted under the 1997
Director's Stock Option Plan, as amended.
27 Financial Data Schedule - as filed electronically by the
Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
A Form 8-K current report dated October 16, 1998 was filed
with the Commission reporting under Other Events that the Registrant's 81%
owned subsidiary, LabOne, Inc., had entered into an agreement to acquire
Systematic Business Services, Inc.
A Form 8-K current report dated October 23, 1998 was filed
with the Commission providing under Other Events a cautionary statement in
order to obtain the benefits of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lab Holdings, Inc.
Date November 11, 1998 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Executive Vice President, Chief
Operating and Financial Officer
Date November 11, 1998 By /s/ Linda K. McCoy
----------------------------
Linda K. McCoy
Vice President and
Chief Accounting Officer