SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant toss.240.14a-12
LabOne, Inc.
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(Name of Registrant as Specified In Its Charter)
Whitney F. Miller
Morrison & Hecker LLP
2600 Grand Avenue
Kansas City, MO 64108
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(I)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
Not Applicable
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Not Applicable
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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PRELIMINARY COPY
11/06/01
LabOne, Inc.
10101 Renner Boulevard
Lenexa, Kansas 66219
(913) 888-1770
--------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held January ___, 2002
--------------------------------------------
A special meeting of the shareholders of LabOne, Inc., a Missouri
corporation ("LabOne"), will be held at the offices of LabOne, 10101 Renner
Boulevard, Lenexa, Kansas, on January __, 2002, at 3:00 p.m., local time, to
consider and vote upon:
1. The termination of the 19.9% limit on the percentage of
outstanding shares of Common Stock which may be issued upon
conversion of shares of Series B-1 Cumulative Convertible
Preferred Stock and exercise of Series B Warrants.
2. The automatic conversion of all outstanding shares of Series B-2
Cumulative Convertible Preferred Stock into Series B-1
Cumulative Convertible Preferred Stock.
3. The amendment of Article X of the Articles of Incorporation of LabOne
governing certain future business combinations.
4. In the event of the approval of Proposal 1 by the shareholders, the
election of three directors to the Board of Directors of
LabOne.
5. Such other business as may properly come before the meeting and any
adjournment thereof.
Shareholders of record at the close of business on __________, 2001, are
entitled to notice of and to vote at the meeting and any adjournment thereof.
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU INTEND TO BE
PRESENT AT THE MEETING.
Sending in your proxy now will not interfere with your rights to attend
the meeting or to vote your shares personally at the meeting if you wish to do
so.
All shareholders are cordially invited to attend the meeting.
By Order of the Board of Directors
JOSEPH C. BENAGE
Secretary
Lenexa, Kansas
Dated: _____________, 2001
TABLE OF CONTENTS
Page Page
Page
INTRODUCTION................................1
VOTING......................................1
General...................................1
Revocation of Proxies.....................2
Quorum; Voting............................2
SUMMARY OF THE TRANSACTIONS.................3
Osborn Acquisition........................3
Welsh Carson Financing....................4
Appointment of Welsh Carson
Representative as Director...............4
BACKGROUND OF THE TRANSACTIONS..............5
REASONS FOR THE TRANSACTIONS................7
OPINION OF ROBINSON HUMPHREY TO
THE BOARD OF DIRECTORS OF LABONE..........11
General..................................11
Material and Information
Considered.............................12
Analysis of LabOne.......................14
Market Analysis of Selected
Public Companies.......................14
Analysis of Selected Merger and
Acquisition Transactions...............15
Discounted Cash Flow Analysis..........16
Analysis of Selected Private
Investment in Public Equity
("PIPE") Transactions..................16
PIPE Transaction Conversion
Premiums (Discounts) to Trading
Prices on Date Prior to
Announcement...........................18
Pro Forma Ownership Analysis...........18
Other Factors..........................19
Information Regarding Robinson
Humphrey.................................19
NASDAQ STOCK MARKET, INC.
MARKETPLACE RULES..........................19
Voting Rights............................20
TERMS OF THE WELSH, CARSON
FINANCING..................................21
TERMS OF SECURITIES PURCHASE AGREEMENT.....22
Purchase and Sale of Securities..........22
Board Composition and Representation.....22
Board Size.............................22
Prior to Shareholder Approval..........22
After Shareholder Approval.............22
Additional Provisions..................23
Election of Company Directors..........23
Board Recommendation of Approval by
Shareholders.............................24
Standstill Agreement.....................24
Right to Purchase Shares of Series C
Preferred Stock..........................25
Issuance of Series B Senior Subordinated
Notes in Connection With Subsequent
Acquisitions.............................25
Certain Veto Rights Applying After
Shareholder Approval.....................26
Certain Covenants Relating to Shares of
Series B-2 Preferred Stock and Series
C-2 Preferred Stock and Series A Senior
Subordinated Notes and Series B Senior
Subordinated Notes.......................27
Reimbursement of Expenses and Payment
of Advisory Fee..........................28
TERMS OF SERIES B-1 CONVERTIBLE PREFERRED
STOCK......................................28
Stated Value.............................29
Rank.....................................29
Dividend Rights..........................29
Liquidation Preference...................29
Conversion Rights........................29
Conversion at the Option of LabOne.......30
Anti-Dilution Protection.................30
Conversion Limitation....................30
Redemption upon Change of Control........30
Put/Call Rights..........................31
Voting Rights............................31
Election of Directors....................31
Veto Rights..............................32
Pre-emptive Rights.......................33
Redemption and Dividends on Common Stock.33
TERMS OF SERIES B-2 PREFERRED STOCK........33
Stated Value.............................33
Rank.....................................33
Dividend Rights..........................33
Liquidation Preference...................34
Conversion Rights........................34
Redemption Rights........................35
Redemption upon Change of Control........35
Voting Rights............................35
Veto Rights..............................36
Restrictive Covenants....................36
Pre-emptive Rights.......................37
Redemption and Dividends on Common Stock.37
i
TERMS OF SERIES B WARRANTS.................37
TERMS OF SERIES A SENIOR
SUBORDINATED NOTES.........................37
TERMS OF REGISTRATION RIGHTS AGREEMENT.....38
TERMS OF SHAREHOLDER RIGHTS
PLAN AMENDMENT.............................39
TERMS OF VOTING AGREEMENT..................39
PROPOSAL 1 - PROPOSAL TO APPROVE REMOVAL
OF THE CONVERSION LIMITATION...............39
PROPOSAL 2 - PROPOSAL TO APPROVE AUTOMATIC
CONVERSION OF SERIES B-2 PREFERRED STOCK
INTO SERIES B-1 CONVERTIBLE PREFERRED
STOCK......................................40
Discussion of Proposals 1 and 2 and
Reasons For Board Recommendation.........40
Vote Required............................44
PROPOSAL 3 - PROPOSAL TO APPROVE
AMENDMENTS TO ARTICLE X OF THE ARTICLES
OF INCORPORATION...........................44
Proposed Amendments......................45
Discussion and Reasons For Board
Recommendation...........................45
Vote Required............................46
PROPOSAL 4 - ELECTION OF DIRECTORS.........46
Nominees for Election as Directors.......47
Directors Continuing in Office After
the Special Meeting......................47
Directors Resigning Effective Upon
Approval of Proposal 1...................49
Meetings of the Board and Committees.....51
Section 16(a) Beneficial Ownership
Reporting Compliance.....................52
Required Vote............................52
EXECUTIVE COMPENSATION.....................52
Summary Compensation Table...............52
Option Grants in 2000....................53
Aggregate Option Exercises and
December 31, 2000 Option Value Table.....54
Compensation of Directors................54
Employment Agreements....................55
Compensation Committee Interlocks
and Insider Participation................56
Board Compensation Committee Report on
Executive Compensation...................56
Compensation Philosophy................56
Base Salary............................57
Annual Incentive Plan..................57
Stock Options..........................57
Chief Executive Officer's Compensation.58
Deductibility Cap on Compensation
Exceeding $1,000,000...................58
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...............................61
2000 Stock Purchase Loan Program.........61
Fees for Legal Services..................62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS.....................................62
SECURITY OWNERSHIP OF
MANAGEMENT.................................63
SHAREHOLDER PROPOSALS......................64
GENERAL....................................65
DOCUMENTS INCORPORATED BY REFERENCE........65
ii
LabOne, Inc.
10101 Renner Boulevard
Lenexa, Kansas 66219
(913) 888-1770
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PROXY STATEMENT
INTRODUCTION
This proxy statement is furnished to the shareholders of LabOne, Inc., a
Missouri corporation ("LabOne"), in connection with the solicitation of proxies
by the board of directors of LabOne ("Board") for use at the special meeting of
shareholders to be held on ____________, January _____, 2002, at 3:00 p.m.,
local time, at the offices of LabOne, 10101 Renner Boulevard, Lenexa, Kansas,
and at any adjournment thereof (the "special meeting"). This proxy statement,
the notice and the accompanying form of proxy were first mailed to the
shareholders on or about [December] ____, 2001.
VOTING
General
Shareholders of record at the close of business on _____________, 2001,
are entitled to notice of and to vote at the meeting. There were _______________
shares of Common Stock and 14,000 shares of Series B-1 Cumulative Convertible
Preferred Stock ("Series B-1 Convertible Preferred Stock") outstanding at the
close of business on that date.
Holders of Common Stock are entitled to one vote per share on all matters
presented to a shareholder vote, other than the election of directors, as to
which cumulative voting applies. Under cumulative voting, each shareholder is
entitled to cast as many votes as shall equal the number of shares held by the
shareholder multiplied by the number of directors to be elected, and such votes
may all be cast for a single director or may be distributed among the directors
to be elected as the shareholder wishes. If a shareholder desires to cumulate
his or her votes, the accompanying proxy should be marked to indicate clearly
that the shareholder desires to exercise the right to cumulate votes and to
specify how the votes are to be allocated among the nominees for directors. For
example, a shareholder may write "cumulate" on the proxy and write below the
name of the nominee or nominees for whom the shareholder desires to cast votes
the number of votes to be cast for such nominee or nominees. Alternatively,
without exercising his or her right to vote cumulatively, a shareholder may
instruct the proxy holders not to vote for one or more of the nominees by lining
through the name(s) of such nominee or nominees on the proxy. If the proxy is
not marked with respect to the election of directors, authority will be granted
to the persons named in the proxy to cumulate votes if they so choose and to
allocate votes among the nominees in such a manner as they determine is
necessary in order to elect all or as many of the nominees as possible.
Holders of shares of Series B-1 Convertible Preferred Stock shall not vote
on Proposals 1, 2, or 4. Holders of shares of Series B-1 Convertible Preferred
Stock shall vote on Proposal 3 together with the holders of Common Stock as a
single class and shall be entitled to [_____]1 votes per share of Series B-1
Convertible Preferred Stock.
When a proxy in the accompanying form is properly executed and returned,
the shares represented by the proxy will be voted at the special meeting in the
manner specified by the shareholder. If no instructions are specified, authority
will be granted to vote such shares FOR (1) the termination of the limit on the
number of shares of Common Stock which may be issued upon conversion of the
Series B-1 Convertible Preferred Stock and exercise of the 350,000 Common Stock
purchase warrants issued by LabOne on August 31, 2001 ("Series B Warrants"), (2)
the automatic conversion of all outstanding shares of Series B-2 Cumulative
Convertible Preferred Stock ("Series B-2 Preferred Stock") into Series B-1
Convertible Preferred Stock, (3) the amendment of Article X of the Articles of
Incorporation of LabOne and (4) the election of the three nominees named herein
as directors. Unless otherwise indicated on the proxy, discretionary authority
will be granted to the persons named in the proxy to vote the shares represented
by the proxy (a) cumulatively for the election of directors and (b) with respect
to procedural matters and other matters that properly come before the meeting
for which LabOne did not receive notice a reasonable time before the date of the
mailing of this proxy statement.
Revocation of Proxies
A shareholder may revoke his or her proxy at any time before it is voted
by giving to the Secretary of LabOne written notice of revocation bearing a
later date than the proxy, by submitting a later-dated proxy, or by revoking the
proxy and voting in person at the special meeting. Attendance at the special
meeting will not in and of itself constitute a revocation of a proxy. Any
written notice revoking a proxy should be sent to Mr. Joseph C. Benage,
Secretary, LabOne, Inc., 10101 Renner Boulevard, Lenexa, Kansas 66219.
Quorum; Voting
The presence in person or by proxy of the holders of a majority of the
outstanding shares of Common Stock and Series B-1 Convertible Preferred Stock on
an as-converted basis, voting together as a single class, will constitute a
quorum for the transaction of business at the special meeting. If a quorum is
not obtained at the special meeting, the meeting may be adjourned until such
time as a quorum is obtained. Abstentions and broker non-votes (shares held by
brokers and other nominees or fiduciaries that are present at the meeting but
not voted on a particular matter) will be counted for purposes of determining
the presence or absence of a quorum for the transaction of business. In
tabulating the votes cast on Proposals 1 and 2, abstentions will be counted and
broker non-votes will not be counted for purposes of determining whether either
proposal has been approved by a majority of the shares present and voting on the
proposal. In tabulating the votes cast on Proposal 3 to amend the Articles of
Incorporation, abstentions and broker non-votes will be counted and will thus
have the effect of a vote against the amendment. In tabulating the votes cast on
Proposal 4, abstentions and broker non-votes will not be counted
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1 Insert number equal to the Accrued Value of a B-1 share on the record date
(including dividend accruals through such date) divided by $8.90.
2
for purposes of determining the directors to be have been elected and will thus
not affect the outcome of the election.
INFORMATION APPLICABLE TO ALL
OF THE PROPOSALS PRESENTED TO THE SHAREHOLDERS
SUMMARY OF THE TRANSACTIONS
On August 31, 2001, LabOne acquired all of the outstanding stock of Osborn
Group, Inc. ("Osborn") from ChoicePoint Services, Inc., its parent corporation,
for $49 million in cash and entered into certain related transactions with
ChoicePoint Services, Inc., ChoicePoint Inc. ("ChoicePoint") and certain
affiliated entities (the "Osborn acquisition"). In order to finance the Osborn
acquisition, LabOne issued and sold certain equity and debt securities to Welsh,
Carson, Anderson & Stowe IX, L.P. ("WCAS IX") and related purchasers (together
with WCAS IX, the "Purchasers") for an aggregate purchase price of $50 million
(the "Welsh Carson financing"). WCAS IX is an affiliate of Welsh, Carson,
Anderson & Stowe ("Welsh Carson").
THE OSBORN ACQUISITION AND THE WELSH CARSON FINANCING WERE APPROVED BY THE
BOARD OF LABONE PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS. NO SHAREHOLDER
APPROVAL OF THE TRANSACTIONS WAS OR IS REQUIRED UNDER APPLICABLE LAW OR UNDER
LABONE'S ORGANIZATIONAL DOCUMENTS. THE OSBORN ACQUISITION AND THE WELSH CARSON
FINANCING ARE EFFECTIVE REGARDLESS OF WHETHER THE SHAREHOLDERS APPROVE THE
PROPOSALS PRESENTED IN THIS PROXY STATEMENT. LABONE IS SEEKING SHAREHOLDER
APPROVAL FOR SEVERAL REASONS, INCLUDING IN ORDER TO SATISFY THE SHAREHOLDER
APPROVAL REQUIREMENTS OF THE NASDAQ STOCK MARKET, INC. DESCRIBED BELOW UNDER
"NASDAQ STOCK MARKET, INC. MARKETPLACE RULES".
Osborn Acquisition
On August 31, 2001, LabOne acquired all of the outstanding stock of Osborn
from ChoicePoint Services, Inc. for a cash purchase price of $49 million.
Osborn is a provider of laboratory testing and related insurance risk
assessment services headquartered in Olathe, Kansas. Prior to the Osborn
acquisition, Osborn and its affiliates conducted business in four operating
segments, the largest of which is Osborn Laboratories, a provider of laboratory
testing and related risk assessment services. The companies acquired by LabOne
included three wholly-owned subsidiaries of Osborn - Intellisys, Inc., Applied
BioConcepts, Inc. and Osborn Laboratories (Canada) Inc.
3
Certain assets of Osborn were not included in the acquisition, including
real estate, certain equipment financing arrangements, cash and accounts
receivable and the stock of Osborn's wholly-owned subsidiary, ChoicePoint Health
Systems Inc.
Welsh Carson Financing
In order to finance the Osborn acquisition, LabOne entered into a
securities purchase agreement and certain related agreements with WCAS IX and
the other Purchasers (the "Securities Purchase Agreement").
Welsh Carson, one of the nation's largest private equity firms, focuses on
the healthcare, information services and communications industries. Welsh Carson
has raised and manages $11 billion in 12 private equity partnerships, including
$9.3 billion of capital in nine equity funds and $1.8 billion of capital in
three subordinated debt funds.
Under the Securities Purchase Agreement, LabOne issued and sold to the
Purchasers the following securities of LabOne for an aggregate purchase price of
$50 million:
o 14,000 shares of Series B-1 Convertible Preferred Stock of LabOne
having a stated value of $1,000 per share and an aggregate stated
value of $14 million;
o 21,000 shares of Series B-2 Preferred Stock of LabOne having a stated
value of $1,000 per share and an aggregate stated value of $21
million;
o 350,000 Series B Warrants of LabOne, each warrant having the right to
purchase initially one share of Common Stock at a nominal price; and
o $15 million in aggregate principal amount of Series A Senior
Subordinated Notes of LabOne ("Series A Senior Subordinated Notes").
The terms of these securities are described under "TERMS OF THE WELSH
CARSON FINANCING".
Appointment of Welsh Carson Representative as Director
On August 31, 2001, LabOne appointed Paul B. Queally as a director of
LabOne. Mr. Queally, as a managing member of the general partner of WCAS IX and
holder of 28 shares of Series B-1 Convertible Preferred Stock, 42 shares of
Series B-2 Preferred Stock, 703 Series B Warrants and $30,147 principal amount
of Series A Senior Subordinated Notes, has an interest in the proposals to be
presented to the shareholders at the special meeting.
In addition, two of the nominees standing for election to the Board at the
special meeting also have an interest in the proposals presented in this proxy
statement: D. Scott Mackesy is a managing member of the general partner of WCAS
IX and holds 7 shares of Series B-1 Convertible Preferred Stock, 11 shares of
Series B-2 Preferred Stock, 175 Series B Warrants and $7,500 principal amount of
Series A Senior Subordinated Notes and Sean M. Traynor holds 6 shares of Series
B-1 Convertible Preferred Stock, 8 shares of Series B-2 Preferred Stock, 140
4
Series B Warrants and $6,000 principal amount of Series A Senior
Subordinated Notes. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS".
BACKGROUND OF THE TRANSACTIONS
On June 30, 1999, LabOne merged into its parent corporation, Lab Holdings,
Inc., which became the surviving corporation in the merger with its name changed
to LabOne, Inc. A principal reason for the merger was to facilitate LabOne's
strategy to significantly increase its future growth. This strategy focuses on
the growth of LabOne's business on three fronts: (1) internal growth with
emphasis on increasing efficiency and cost-effectiveness in the delivery of high
quality risk assessment, toxicology and healthcare services at competitive
prices, (2) growth through acquisitions of less efficient client services
operations in order to achieve cost savings by consolidating the acquired
operations into LabOne's facility in Lenexa, Kansas housing its central
laboratory, insurance services, administrative and warehouse operations, and (3)
growth through strategic alliances.
In January, 2001, ChoicePoint, a publicly traded company listed on the New
York Stock Exchange, initiated an auction process conducted by US Bancorp Piper
Jaffray, Inc. for the sale of ChoicePoint's wholly-owned indirect subsidiary,
Osborn. Osborn is a provider of laboratory testing and other risk assessment
services headquartered in Olathe, Kansas, less than five miles from LabOne's
central campus in Lenexa. Prior to the Osborn acquisition, Osborn and its
affiliates conducted business in four operating segments, the largest of which
is Osborn Laboratories, a provider of laboratory testing and other risk
assessment services. The nature of the services performed by Osborn is very
similar to some of the services performed by LabOne. Osborn also operated (1)
Applied BioConcepts, Inc., a registered FDA facility that assembles and
distributes medical specimen collection kits for Osborn, (2) Intellisys, Inc.,
which provides information management and underwriting evidence services for
insurance carriers and brokers, and (3) ChoicePoint Health Systems, which
provides disease management testing solutions to patients with chronic
illnesses. ChoicePoint Health Systems was not included in the sale of Osborn.
On January 25, 2001, U.S. Bancorp Piper Jaffray entered into a
confidentiality agreement on behalf of ChoicePoint with LabOne.
On March 16, 2001, LabOne's management team met with representatives of
Osborn to receive a presentation concerning Osborn's business from Osborn
management and to commence its preliminary due diligence review of Osborn's
business operations.
From January through May 7, 2001, LabOne's management met with
representatives of Credit Suisse First Boston, First Union Bank, Goldman Sachs,
Lehman Brothers, Vestar and Welsh Carson, in order to explore available
financing alternatives for the procurement of the funds necessary to make a
possible bid for Osborn. During this period LabOne received proposals to finance
a possible bid for Osborn from Goldman Sachs, Lehman Brothers and Welsh Carson.
As a result of these efforts, LabOne's management determined that public equity
or debt financing was not available to LabOne given the time constraints on
making a bid for Osborn and that a sale of a combination of equity and
subordinated debt securities to a private equity investment group would offer
the most attractive source of funds to LabOne.
5
On May 14, 2001, the Board met to consider pursuing a possible bid for
Osborn and the alternatives for financing such a bid. At the meeting the Board
concluded that (1) the auction of Osborn by ChoicePoint offered a significant
business opportunity to LabOne, (2) it would be necessary for LabOne to obtain
private equity financing in order to make a bid for Osborn, (3) evidence of a
preliminary commitment for such financing would be required immediately for
LabOne to continue to participate in the Osborn auction process, (4) the
preliminary financing terms offered by Welsh Carson were superior to those
offered by other potential financing sources, and (5) given the time constraints
established by ChoicePoint on making a bid for Osborn, it was in the best
interests of the corporation to enter into an exclusive financing arrangement
with Welsh Carson for Welsh Carson's purchase of up to $35 million of LabOne
cumulative convertible preferred shares and $15 million of subordinated notes,
as well as for Welsh Carson's right to purchase an additional $15 million of
cumulative convertible preferred shares and $15 million of subordinated notes in
the event of certain future acquisitions by LabOne. On May 16 LabOne and Welsh
Carson entered into an exclusive arrangement with respect to LabOne's financing
of a possible bid for Osborn.
From May 16 through the end of August 2001, management teams of both
LabOne and Osborn, representatives of Welsh Carson and legal counsel for the
respective parties conducted due diligence investigations, discussions and
negotiations with respect to the terms of a possible acquisition of Osborn by
LabOne and the financing of the acquisition by Welsh Carson. During this period
no definitive agreements were arrived at among the parties with respect to the
price or the substantive terms of any purchase of Osborn by LabOne, or the
definitive terms of any financing of such purchase by Welsh Carson.
On August 17, 2001, the management of LabOne, following discussions with
several potential investment advisors, engaged SunTrust Robinson Humphrey
("Robinson Humphrey") as financial advisor to the Board to render an opinion to
the Board with respect to the fairness of the consideration to be paid by LabOne
in connection with a possible transaction with Osborn and the terms of the
proposed financing of such a transaction by Welsh Carson.
On August 22, 2001, a telephonic meeting of the Board was held to review
the current status of the negotiations for the Osborn acquisition and for the
associated financing of the acquisition.
On August 24, 2001, the Board met to deliberate on issues relating to the
Osborn acquisition and the proposed financing of the transaction through equity
and subordinated debt investments by Welsh Carson. W. Thomas Grant II, Chairman
of the Board, President and Chief Executive Officer of LabOne reviewed with the
Board the background and status of the negotiations with Osborn and the proposed
equity investment by Welsh Carson. At the meeting the Board ratified the
engagement of Robinson Humphrey, and Robinson Humphrey presented to the Board a
detailed financial review of the consideration and terms of the proposed
transactions with Osborn and Welsh Carson. Robinson Humphrey then delivered its
oral opinion to the Board, which was subsequently confirmed in writing, that the
consideration to be paid by LabOne for the Osborn acquisition and the terms of
the proposed financing for such transaction from Welsh Carson were fair from a
financial point of view to the common shareholders of LabOne. The Board also
sought the advice of its independent legal counsel regarding the legal
6
duties of the Board, regulatory and tax matters, the terms of the proposed
Osborn acquisition agreements and the Welsh Carson financing agreements and
other relevant matters. After full consideration and discussion of the price,
structure and terms of the Osborn acquisition and the proposed financing for
such transaction from Welsh Carson, the Board unanimously determined that the
transactions were in the best interests of LabOne and its shareholders.
On August 31, 2001, negotiations with respect to the transactions were
completed and a stock purchase agreement, a transition services agreement, an
employee secondment agreement and other related agreements, were executed by
LabOne, ChoicePoint and the other parties thereto. Also on August 31, the
Securities Purchase Agreement, certificates of designation of the Series B-1 and
B-2 Preferred Stock, a subordinated note, a warrant agreement, a registration
rights agreement, a rights plan amendment and other related documents were
executed by LabOne and WCAS IX and the other Purchasers, as applicable, and the
Osborn acquisition and Welsh Carson financing were completed simultaneously by
LabOne on that date.
REASONS FOR THE TRANSACTIONS
The Board believes that the Osborn acquisition will enhance the potential
of LabOne to realize improved long-term operating results and to achieve a
stronger financial position. The Board believes that the Osborn acquisition will
have a number of potential benefits for LabOne, including the following:
o LabOne's central laboratory in Lenexa, Kansas is currently operating
substantially below capacity. LabOne plans to close Osborn's
laboratory in Olathe, Kansas and to transfer the processing of all
future Osborn laboratory tests to LabOne's Lenexa facility. The
consolidation of Osborn's and LabOne's laboratory testing into one
facility will enable LabOne to use its excess capacity to process
future risk assessment, healthcare and toxicology tests at
substantially lower unit operating costs. The cost savings
synergies expected to be realized from the consolidation include
substantial reductions in payroll and benefits, building occupancy
and equipment expenses, and depreciation.
o The increased revenues and operational efficiencies resulting from
the consolidation of LabOne's and Osborn's laboratory facilities
should enable LabOne to achieve a substantially improved critical
mass, enhance LabOne's potential for realizing increased operating
earnings, cash flow and financial leverage for purposes of making
future acquisitions. The Board recognized that these potential
benefits are dependent upon LabOne's ability to retain the business
of Osborn's clients at reasonable pricing levels and to successfully
integrate Osborn's operations with those of LabOne.
o The combination of LabOne and Osborn should enhance LabOne's ability
to position itself in a changing market as an expanding, integrated
insurance risk assessment services provider.
o The additional revenues from the Osborn acquisition should increase
LabOne's visibility in the capital markets.
7
o The combination of LabOne's and Osborn's service offerings should
bolster LabOne's ability to offer an expanded menu of services to its
clients.
o The combination of LabOne's CaseOne and Osborn's Intellisys electronic
information management and underwriting services products should
provide LabOne the opportunity to capitalize on the strengths of both
systems, to improve network efficiencies through increased scale and
to reduce costs associated with such products. The Board recognizes
that the differences between LabOne's and Osborn's information
management products will present challenges in the integration of
these systems.
o The combination of LabOne and Osborn should enhance LabOne's
opportunities to offer paramedical examinations and other services to
additional insurance services clients.
o The Osborn acquisition will eliminate Osborn's costs of assembling
and distributing medical specimen collection kits through its Applied
BioConcepts subsidiary. LabOne plans to close Osborn's kit assembly
plant and to transfer Osborn's kit production operation to LabOne's
outside supplier of collection kits.
o The Osborn acquisition should enhance the quality of LabOne's
workforce by the addition of the skills and experience of Osborn's
laboratory employees and certain members of Osborn's management.
In approving the Welsh Carson financing on August 24, the Board considered
a number of factors, including the following:
o The Board's knowledge of LabOne's management, business operations,
operating results, properties, financial condition, growth strategy
and prospects.
o Various reports from LabOne's senior management and independent legal
advisors.
o The oral and written presentations of Robinson Humphrey and the
opinion of Robinson Humphrey that as of August 24, 2001, the
consideration to be paid by LabOne for the Osborn acquisition and the
terms of the proposed Welsh Carson financing are fair from a
financial point of view to the common shareholders of LabOne.
o The terms of the proposed stock purchase agreement and related
agreements for the Osborn acquisition, and the terms of the
Securities Purchase Agreement and related agreements proposed to be
entered into in connection with the purchase of equity and
subordinated debt by Welsh Carson.
o The substantial decline in the trading price for shares of LabOne
Common Stock over the past five years from a trading range of from
$12.50 to $18.75 from
8
January 1, 1996 through August 23, 1996 to a recent trading range of
from $4.75 per share to $9.39 per share from January 1, 2001 through
August 23, 2001.
o The Board's belief that the Osborn acquisition offered a significant
business opportunity to LabOne at a reasonable price.
o The Board's belief that evidence of a preliminary commitment for the
financing of the Osborn acquisition was needed by May 14, 2001 to
enable it to continue to participate in the auction process for
Osborn.
o The Board's assessment that LabOne's senior management had made
extensive efforts to pursue alternative sources of financing for the
Osborn acquisition and the Board's conclusions that the preliminary
terms of the Welsh Carson transaction as of May 14 and the proposed
terms of the Welsh Carson financing as of August 24, 2001 were
superior to the other financing transactions available to LabOne.
o The $8.32 per share conversion price for the Series B-1 Convertible
Preferred Stock established at the time Welsh Carson provided
preliminary financing terms to LabOne on May 10, 2001, was at a 20%
premium to the average per share closing price for shares of LabOne
Common Stock on the NASDAQ for the 20 business days preceding the
date of the preliminary commitment.
o The Board's belief that the additional capital provided by the Welsh
Carson investments would strengthen LabOne's balance sheet, creating
increased financial capacity to enable LabOne to pursue future
acquisitions and other strategic opportunities in the risk assessment
services, healthcare and substance abuse testing markets.
o The Board's belief that the substantial investments in LabOne by Welsh
Carson should enhance LabOne's credibility in the healthcare industry
and provide LabOne with greater access to the financial marketplace.
Welsh Carson, one of the nation's largest private equity firms,
focuses on the healthcare, information services and communications
industries. Welsh Carson has raised and manages $11 billion in 12
private equity partnerships, including $9.3 billion of capital in nine
equity funds and $1.8 billion of capital in three subordinated debt
funds. The Welsh Carson organization combines internal strategic,
operational and financial experience with extensive relationships and
expertise in the healthcare industry. It has an existing portfolio of
14 healthcare companies and has the financial resources to commit
substantial additional equity and subordinated debt to its portfolio
companies.
o The Board's belief that the Welsh Carson financing should give LabOne
access to Welsh Carson's strategic relationships in the healthcare
industry. Due to Welsh Carson's substantial investments in LabOne,
the Board believes that Welsh Carson has a strong incentive to assist
LabOne in building shareholder value
9
through the introduction to LabOne of companies and individuals who
may be potential business partners.
o Welsh Carson's statements to the Board that Welsh Carson is presently
committed to assisting LabOne in the pursuit of LabOne's growth
strategy of (1) continuing its efforts to acquire and consolidate risk
assessment services businesses, (2) aggressively growing LabOne's
CaseOne service offerings, (3) providing additional complementary
services to its existing customer base, (4) expanding its healthcare
testing business through strategic and regionally focused
acquisitions, (5) improving its profitability in all business segments
through continued cost controls, disciplined pricing and economies of
scale, (6) continuing to build its management team and (7) expanding
its relationships with Wall Street.
o Welsh Carson's reputation of attracting private equity fund investors
consisting of major corporate and government pension funds, university
endowments and select wealthy individuals who typically do not have
short term investment objectives.
o All of the existing shareholders of LabOne would retain their entire
equity interests in LabOne and, although the percentage interests of
shareholders would be diluted by the Welsh Carson financing, all of
the LabOne shareholders would be able to fully participate in any
improvements in LabOne's operating and investment performance which
may occur following the consummation of the Osborn acquisition and the
Welsh Carson financing.
o The Welsh Carson financing did not result in a change of voting
control of LabOne, a substantial majority of the outstanding shares of
LabOne voting securities would continue to be held by shareholders
other than Welsh Carson, and Welsh Carson would be subject to
significant restrictions on its future acquisition of additional
shares as set forth in a standstill agreement and LabOne's shareholder
rights plan.
o The implications of Welsh Carson's ownership of a substantial equity
interest in LabOne comprised initially of 15.9% of the outstanding
voting securities of LabOne on a fully diluted basis and subsequently
up to 41.5% of the outstanding voting securities of LabOne on a fully
diluted basis in the event that LabOne shareholders approve the
proposals contained herein and pay-in-kind ("PIK") dividends are
accrued on the Series B-1 Convertible Preferred Stock for seven years.
o The fact that Welsh Carson would have the right to nominate or to
directly elect a total of three directors to the Board, that Welsh
Carson would have veto powers over certain significant corporate
transactions of LabOne if shareholder approval of Proposal 1 is
obtained, and that the terms of the Series A Senior Subordinated Note
held by Welsh Carson contain negative covenants restricting LabOne
from engaging in certain significant activities without Welsh Carson's
consent, which rights and restrictive covenants may give Welsh Carson
a significant practical
10
degree of influence and control over LabOne's future major corporate
activities and decisions.
o The requirement of the Welsh Carson financing that if LabOne conducts
an equity offering within three years, Welsh Carson will have the
right to purchase from LabOne at a purchase price of $1,000 per share
up to $15 million of Series C-1 or C-2 cumulative convertible
preferred stock upon similar terms to the Series B-1 and B-2 Preferred
Stock, with the Series C-1 Convertible Preferred Stock having a
conversion price equal to the lower of (a) a 10% premium over the
average closing price per share of LabOne Common Stock for the 20
trading days preceding the Series C transaction or (b) the price per
common share equivalent to an enterprise value of LabOne of 7.5 times
LabOne's trailing 12 months EBITDA less debt and the liquidation
preference of certain preferred stock, which conversion price could be
less than the value of the shares being sold in the future LabOne
equity offering.
o The future conflicts of interest which may arise from Welsh Carson's
holdings and the potential discouraging effect on other transactions
that may result from such holdings.
o The benefits to LabOne that should be derived from having Paul B.
Queally, a principal in Welsh Carson with substantial expertise in the
healthcare industry, join the Board and participate in future
decisions concerning LabOne's business operations, strategic direction
and other significant matters.
o The other strategic alternatives to the Osborn and Welsh Carson
transactions, including the alternative of doing nothing
The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of Welsh Carson's proposed
investments in LabOne, the Board did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determinations. In
addition, individual Board members may have given different weights to different
factors.
OPINION OF ROBINSON HUMPHREY TO THE BOARD OF DIRECTORS OF LABONE
General
Pursuant to an engagement letter dated August 17, 2001, SunTrust Capital
Markets, Inc., through its Robinson Humphrey subsidiary, was retained by LabOne
to render a written opinion with respect to the fairness from a financial point
of view to the common shareholders of LabOne of the financial terms of the
proposed Osborn acquisition and of the proposed equity investment by Welsh
Carson. On August 24, 2001, Robinson Humphrey rendered a written opinion to the
Board to the effect that, as of the date of such opinion and based upon and
subject to certain
11
matters stated therein, the terms of both the Osborn acquisition and the Welsh
Carson financing are fair from a financial point of view.
The full text of the opinion of Robinson Humphrey sets forth the
assumptions made, matters considered and limitations on the review undertaken.
The following description of the Robinson Humphrey opinion is qualified in its
entirety by reference to the full text of the opinion attached to this proxy
statement as Appendix B. Shareholders are urged to read the opinion in its
entirety.
The opinion of Robinson Humphrey is directed to the LabOne Board and
relates only to the fairness of the proposed terms of the transactions from a
financial point of view. It does not address any other aspect of the proposed
transactions and does not constitute a recommendation to any shareholder as to
how such shareholder should vote at the shareholders' meeting. The terms of the
proposed Osborn acquisition and Welsh Carson's equity investment were determined
on the basis of negotiations between LabOne and Osborn and Welsh Carson and were
approved by the LabOne Board.
Material and Information Considered
In arriving at its opinion, Robinson Humphrey among other things:
o Reviewed the stock purchase agreement with Osborn.
o Reviewed and analyzed various publicly available financial statements
and other business and financial information of LabOne and Osborn.
o Reviewed and discussed the past and current operations, financial
condition and prospects of LabOne and Osborn with their senior
executives, including LabOne pro forma combined results accounting for
the Osborn acquisition.
o Compared the historical and financial performance of LabOne and
Osborn, and the prices and trading activity of the LabOne Common
Stock, with that of certain publicly traded companies which Robinson
Humphrey deemed relevant.
o Compared terms of the issuance of the Preferred Stock to Welsh Carson
to the terms of the securities issued in selected transactions
involving private investments in publicly traded companies which
Robinson Humphrey deemed relevant.
o Reviewed the drafts dated August 6, 2001 of the stock purchase
agreement with Osborn and the Securities Purchase Agreement and the
warrant agreement with Welsh Carson.
o Reviewed the financial forecasts, including information relating to
anticipated cash flows and credit availability, prepared by LabOne
management assuming no placement of Preferred Stock or other equity
securities, both before and after consideration of the Osborn
acquisition.
12
o Reviewed LabOne's forecasted capital structure and operating earnings
prepared by its management, assuming the placement of the Preferred
Stock.
o Reviewed the terms of indications of interest received by LabOne from
other potential financing sources in the process of seeking financing
for the Osborn acquisition.
o Performed such other analyses and considered such other factors as
Robinson Humphrey deemed appropriate.
In arriving at its opinion, Robinson Humphrey assumed and relied upon the
accuracy and completeness of the financial and other information provided to it
by LabOne without independent verification. With respect to the financial
forecasts of LabOne and Osborn, Robinson Humphrey assumed that they were
reasonably prepared and reflected the best currently available estimates and
judgments of LabOne's and Osborn's respective management as to the future
financial performance of LabOne and Osborn. In arriving at its opinion, Robinson
Humphrey conducted only a limited physical inspection of the properties and
facilities of LabOne. Robinson Humphrey did not make or obtain any evaluations
or appraisals of the assets or liabilities of LabOne or Osborn.
The Robinson Humphrey opinion is necessarily based upon the information
made available to it and market, economic and other conditions as they existed
and could be evaluated as of the date of its opinion. The financial markets in
general and the market for the Common Stock of LabOne are subject to volatility
and Robinson Humphrey's opinion did not address potential developments in the
financial markets or the market for the LabOne Common Stock after the date of
its opinion. Robinson Humphrey assumed that the Osborn acquisition and the Welsh
Carson financing would be consummated on the terms described in the acquisition
and financing documents. Subsequent developments may affect Robinson Humphrey's
opinion and Robinson Humphrey does not have any obligation to update or reaffirm
its opinion.
In preparing its opinion, Robinson Humphrey performed a variety of
financial and comparative analyses, a summary of which is provided below. This
summary does not purport to be a complete description of the analyses underlying
Robinson Humphrey's opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analysis, and the application of those methods to
the particular circumstances is not readily susceptible to summary description.
Robinson Humphrey believes that its analyses must be considered as an integrated
whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses. In its analyses, Robinson
Humphrey made numerous assumptions with respect to LabOne and Osborn, industry
performance, general business, economic, market and financial conditions, and
other matters. The estimates contained in these analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses.
Analyses relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, these analyses and estimates are inherently subject to
substantial uncertainty. LabOne's Board made an
13
independent evaluation of the terms of the Osborn acquisition and the Welsh
Carson financing in making their recommendation to shareholders.
Analysis of LabOne
Market Analysis of Selected Public Companies
Robinson Humphrey reviewed and compared selected publicly available
financial data for LabOne with other selected publicly-traded companies in
the laboratory industry which Robinson Humphrey deemed comparable to LabOne.
This group included the following nine emerging growth companies in the
laboratory industry: AmeriPath, Inc. (Nasdaq: PATH), Dianon Systems, Inc.
(Nasdaq: DIAN), Dynacare, Inc. (Nasdaq: DNCR), Hooper Holmes, Inc. (AMEX:
HH), Impath, Inc. (Nasdaq: IMPH), Laboratory Corporation of America (NYSE:
LH), Quest Diagnostics, inc. (NYSE: DGX), Specialty Laboratories (NYSE: SP)
and Unilab Corporation (Nasdaq: ULAB).
For the selected public companies, Robinson Humphrey compared, among other
things, Total Firm Value (defined as market capitalization plus debt less cash
and cash equivalents) as a multiple of: 1) estimated calendar 2001 revenues, 2)
estimated calendar 2001 EBIT, and 3) estimated calendar 2001 EBITDA. All
multiples were based on closing stock prices as of August 22, 2001. Revenue,
EBIT and EBITDA results for the comparable companies were based on historical
financial information available in public filings and press releases of the
comparable companies, as well as estimates from research reports, including
those of Robinson Humphrey and First Call consensus estimates. First Call is an
information provider that publishes a compilation of estimates of projected
financial performance for public companies produced by equity research analysts
at leading investment banking firms. Emerging growth companies are commonly
valued based upon estimated future performance. The following table sets forth
the mean, low and high multiples and range of implied equity values for LabOne
indicated by this analysis:
-------------------------------------------------------------------
Valuation Parameters Implied Multiples for Range of
Selected Companies Implied
Equity Values
for LabOne
-------------------------------------------------------------------
Mean Low High (dollars in
thousands)
Firm Value to:
Estimated 2001 Revenues 2.5x 1.1x 4.9x $548,666-$553,053
Estimated 2001 EBITDA 12.7x 6.7x 21.4x $282,769-$419,694
Estimated 2001 EBIT 16.4x 8.2x 29.1 $147,673-$371,095
It should be noted that none of the companies used in the market analysis
of selected public companies was identical to LabOne and that, accordingly, the
analysis of comparable public companies necessarily involves complex
considerations and judgments concerning
14
differences in financial and operating characteristics of the companies reviewed
and other factors that would affect the market values of comparable companies.
Analysis of Selected Merger and Acquisition Transactions
Robinson Humphrey reviewed and analyzed the consideration paid and implied
transaction multiples in selected completed and pending mergers and acquisitions
involving emerging growth companies in the laboratory [and medical device
industries]. The selected transactions are shown below.
---------------------------------------------------------------------
Effective Acquirer Target
Date
---------------------------------------------------------------------
Pending JWCH Merger Corp. InSight Health Services
Holding Corp.
Pending Dianon Systems, Inc.
UroCor Inc
Pending Quest Diagnostics Inc.
MedPlus Inc.
11/1/99 Hooper Holmes, Inc.
Pediatric Services of America
5/10/99 Unilab Corporation
Physicians Clinical
3/16/99 Applied Analytical Laboratory
Industries, Inc.
Medical & Technical Research
8/16/99 Associates, Inc.
Quest Diagnostics Inc.
SmithKline Beecham Clinical
11/1/99 Laboratories Inc.
Unilab Corporation
2/13/98 Meris Laboratories, Inc.
AmeriPath, Inc.
Anatomic Pathology Associates
---------------------------------------------------------------------
For the selected comparable transactions, Robinson Humphrey compared the
Total Firm Value in the selected transactions as multiples of estimated 2001
revenues, EBITDA and EBIT. The following table sets forth the mean, low and high
multiples and range of implied equity values for LabOne indicated by this
analysis:
15
---------------------------------------------------------------------
Valuation Parameters Implied Multiples for Range of
Selected Companies Implied
Equity Values
for LabOne
---------------------------------------------------------------------
Mean Low High (dollars in
thousands)
Firm Value to:
Estimated 2001 Revenues 1.60x 0.76x 2.90x $332,119-$548,666
Estimated 2001 EBITDA 9.1x 4.6x 16.9x $188,603-$287,191
Estimated 2001 EBIT 12.6x 4.7x 24.9x $100,874-$272,336
---------------------------------------------------------------------
It should be noted that no company utilized in the analysis of selected
transactions is identical to LabOne. All multiples for the selected transactions
were based on public information available at the time of announcement of such
transaction, without taking into account differing market and other conditions
during the period during which the selected transactions occurred.
Discounted Cash Flow Analysis
Robinson Humphrey performed a discounted cash flow analysis of LabOne
based upon LabOne's management's projected results for fiscal 2001 through 2005
and projections for fiscal 2006 developed by Robinson Humphrey (calculated using
similar growth rates and margins). Robinson Humphrey calculated a range of net
present firm values for LabOne based on its projected Free Cash Flow (defined as
earnings before interest and after taxes plus depreciation and amortization
expense minus capital expenditures and increases in working capital) for the
years ending December 31, 2002 through December 31, 2006. Robinson Humphrey
calculated the weighted average cost of capital for LabOne and used discount
rates ranging from 16% to 20% and terminal value multiples based on estimated
fiscal 2006 EBITDA ranging from 7.0x to 9.0x. Robinson Humphrey observed that
the valuation based on this methodology produced a range of implied firm values
for LabOne of between $363.7 million and $426.0 million.
Analysis of Selected Private Investment in Public Equity ("PIPE")
Transactions
Robinson Humphrey analyzed publicly available information related to
selected PIPE transactions in the healthcare industry announced since August,
2000. While Robinson Humphrey believes that there are no transactions that are
exactly comparable to the Welsh Carson Financing, it analyzed the following
selected public transactions:
16
-----------------------------------------------
Issuer Announcement
Date
-----------------------------------------------
Alliance Pharmaceutical
Corporation 8/22/2000
Pharmos Corporation 9/1/2000
Cubist Pharmaceuticals, Inc. 9/8/2000
Access Pharmaceuticals, Inc. 9/13/2000
Quantech, Ltd. 9/13/2000
AXYS Pharmaceuticals, Inc. 9/20/2000
Abaxis, Inc. 10/3/2000
Valentis, Inc. 11/20/2000
BriteSmile, Inc. 12/6/2000
Advanced Biotherapy, Inc. 12/19/2000
Novavax, Inc. 12/19/2000
BEI Medical Systems Company,
Inc. 2/14/2001
Triangle Pharmaceuticals, Inc. 3/9/2001
VaxGen, Inc. 5/23/2001
Inkine Pharmaceutical Company,
Inc. 6/15/2001
ViroLogic, Inc. 6/29/2001
LaserSight, Inc. 7/6/2001
Akorn, Inc. 7/12/2001
Microcide Pharmaceuticals, Inc. 7/27/2001
Synaptic Pharmaceutical
Corporation 8/2/2001
17
Robinson Humphrey analyzed the PIPE transactions based upon numerous
parameters, including the conversion premium (discount) based upon the selected
companies' share price one day prior to the announcement of the transactions, in
order to determine the median, average, high and low conversion premiums
(discounts) in such transactions set forth below:
PIPE Transaction Conversion Premiums (Discounts) to
Trading Prices on Date Prior to Announcement
----------------------------------------
High 21.9%
----------------------------------------
Average 1.4%
----------------------------------------
Median 5.6%
----------------------------------------
Low (33.7)%
----------------------------------------
Robinson Humphrey evaluated the above ranges of conversion premiums and
discounts in PIPE transactions in conjunction with various other parameters and
factors, including coupons, size of transactions, market capitalization and
warrant coverage. Robinson Humphrey also took into account the fact that the
$8.32 per share conversion price for the Series B-1 Convertible Preferred Stock
was at a 20% premium to the average per share closing price for shares of LabOne
Common Stock on the NASDAQ for the 20 business days preceding Welsh Carson's
preliminary commitment to provide financing to LabOne on May 11, 2001. Based
upon this analysis, Robinson Humphrey determined that a range of plus or minus
15% was an appropriate range of conversion premiums or discounts based upon the
trading price of shares of LabOne Common Stock one day prior to the date of the
announcement of the sale of the Preferred Stock to Welsh Carson. Robinson
Humphrey applied this range of conversion premiums (discounts) to shares of
LabOne Common Stock to compute the range of implied prices per share for LabOne
Common Stock set forth below:
- ---------------------------------------------------------------
Range of Conversion Implied Price Per
Premiums (Discounts) Share for LabOne
Common Stock (1)
- ---------------------------------------------------------------
High 15.0% $10.24
- ---------------------------------------------------------------
Low (15.0)% $7.57
- ---------------------------------------------------------------
(1) Based on the $8.90 per share closing price for LabOne Common Stock
on the NASDAQ on August 30, 2001.
Pro Forma Ownership Analysis
Robinson Humphrey performed a pro forma ownership analysis to determine
the impact that the proposed Welsh Carson financing would have on LabOne
shareholders. Robinson Humphrey compared the range of implied equity values for
LabOne on a standalone basis to the range of implied values of equity for LabOne
after giving effect to the Osborn acquisition and the Welsh Carson financing.
Robinson Humphrey calculated ranges of implied equity values for LabOne on a
standalone basis between $97.7 million and $177.7 million. After accounting for
both the Osborn acquisition and the Welsh Carson financing, Robinson Humphrey
calculated ranges of implied equity value of LabOne of from $224.3 million to
$318 million.
18
Other Factors
Robinson Humphrey took into consideration various other factors including
historical market prices and trading volumes for shares of LabOne Common Stock
and the relationship between movements in LabOne's Common Stock, movements in
the Common Stock of selected comparable companies and movements in the S&P 500
Index, the Nasdaq Index, the Russell 2000 Index and a composite comprised of
comparable companies.
Information Regarding Robinson Humphrey
The Board selected Robinson Humphrey to render a fairness opinion because
Robinson Humphrey is a nationally recognized investment banking firm with
substantial experience in transactions similar to those involved in the Osborn
acquisition and the Welsh Carson financing. Robinson Humphrey is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary
distributions of listed and unlisted securities and private placements.
NASDAQ STOCK MARKET, INC. MARKETPLACE RULES
LabOne's Common Stock is traded on the Nasdaq National Market System.
Consequently, LabOne is subject to the Marketplace Rules of The Nasdaq Stock
Market, Inc. (the "Marketplace Rules"). Although the Welsh Carson financing did
not require shareholder approval prior to its consummation under the Marketplace
Rules, there are certain terms of the financing which, according to these rules,
cannot become effective until shareholder approval has been obtained. The
Marketplace Rules that require shareholder approval in this circumstance are
summarized below:
o Marketplace Rule 4350(i)(1)(B) states that shareholder approval is
required prior to the issuance of securities "when the issuance or
potential issuance will result in a change of control of the issuer".
LabOne does not believe that the Welsh Carson financing has resulted
in a change of control of LabOne nor does it believe that the approval
of the proposals set forth in this proxy statement will result in such
a change of control. If, however, the Welsh Carson financing were
deemed to constitute a change of control of LabOne by the NASD under
this rule, LabOne believes that shareholder approval of Proposal 1
would satisfy the shareholder approval requirements of the rule.
o Marketplace Rule 4350(i)(1)(C) requires shareholder approval prior to
the issuance of securities "in connection with the acquisition of the
stock or assets of another company if . . . due to the present or
potential issuance of common stock, or securities convertible into or
exercisable for common stock: (a) the common stock has or will have
upon issuance voting power equal to or in excess of 20% of the voting
power outstanding before the issuance of stock or securities
convertible into or exercisable for common stock or (b) the number of
shares of common stock to be issued is or will be equal to or in
excess of 20% of the number of shares of common stock outstanding
before the issuance of the stock or securities". Although the Welsh
Carson financing
19
was consummated in order to finance the Osborn acquisition, the
securities purchased by Welsh Carson are not convertible into more
than 19.9% of the outstanding shares of LabOne, nor can they represent
more than 19.9% of the voting power of LabOne, until such time as the
shareholders of LabOne have approved the removal of these limitations.
As a result, although the Welsh Carson financing did not require
shareholder approval, the proposed modification of the terms of Welsh
Carson's securities set forth in this proxy statement does require
shareholder approval.
o Marketplace Rule 4350(i)(1)(D) requires shareholder approval prior to
the issuance of securities "in connection with a transaction other
than a public offering involving . . . the sale, issuance or potential
issuance by the company of...common stock (or securities convertible
into or exercisable for common stock) equal to 20% or more of the
common stock or 20% or more of the voting power outstanding before the
issuance for less than the greater of book or market value of the
stock". Because the conversion price of $8.32 was less than the $8.90
closing price per share of the LabOne Common Stock on the Nasdaq Stock
Market, Inc. on the date the definitive financing documents were
signed, this rule requires shareholder approval to remove the 19.9%
conversion limitation.
Voting Rights
Nasdaq Stock Market, Inc. Marketplace Rule 4351 limits the extent to which
the voting rights of existing shareholders may be reduced by action of LabOne.
Rule 4351 provides in part that "voting rights of existing shareholders of
publicly traded Common Stock . . . cannot be disparately reduced or restricted
through any corporate action or issuance".
This rule requires that the issuance of a class of securities not
disenfranchise existing shareholders, i.e. that the voting power of the new
class be commensurate with the economic interest represented by the class. Thus,
the rights of a newly issued class of securities to vote on an as-converted
basis or its right to elect directors may not exceed the relative contribution
of the holders of such class to the issuer based on the higher of the book value
or market value of the Common Stock on the date of issuance of such new
securities.
With respect to the Welsh Carson financing, this rule imposes two
limitations on the holders of Series B-1 Convertible Preferred Stock, which
limitations apply whether or not shareholder approval of the proposals presented
in this proxy statement is obtained:
o Although the Series B-1 Convertible Preferred Stock is convertible
into Common Stock at a conversion price of $8.32, the Series B-1
Convertible Preferred Stock votes on an as-converted basis with the
Common Stock at the higher assumed conversion price of $8.90, which
was the market price at the time of the closing of the Welsh Carson
financing ("As-Converted Voting Limitation"). Thus, although the
Series B-1 Convertible Preferred Stock was initially convertible into
1,682,692 shares of Common Stock, the Series B-1 Convertible Preferred
Stock had only 1,573,033 votes at the time of issuance on an
as-converted basis.
20
o The power of the Series B-1 Convertible Preferred Stock to directly
elect directors is limited to that percentage of the Board that equals
its economic interest in voting securities of LabOne, based upon the
higher of the market value or book value of the Common Stock on August
31, 2001, the date a binding agreement was entered into between LabOne
and WCAS IX ("Director Election Limitation"). The market price of the
Common Stock at the close of business on August 30, 2001 was $8.90 per
share. Based upon the $14 million purchase price paid for the Series
B-1 Convertible Preferred Stock by the Purchasers, the economic
percentage interest represented by such investment is 12.7% of the
Common Stock on a fully diluted basis. As described below under "TERMS
OF SECURITIES PURCHASE AGREEMENT - Board Composition and
Representation", the Board consists of seven directors. Based upon its
present economic percentage interest in LabOne, the Series B-1
Convertible Preferred Stock will not be entitled to directly elect any
directors. Under the Director Election Limitation, in order to
directly elect one director, the economic percentage interest must be
at least 1/7, or 14.3%, of the Common Stock on a fully-diluted basis.
If Proposals 1 and 2 are approved by the shareholders, and
consequently the Series B-2 Preferred Stock is automatically converted
into Series B-1 Convertible Preferred Stock, the economic percentage
interest of the Purchasers in voting securities of LabOne will be
26.7% of the Common Stock on a fully diluted basis. In this event, the
Series B-1 Convertible Preferred Stock will be entitled to directly
elect one director. Under the Director Election Limitation, the Series
B-1 Convertible Preferred Stock cannot directly vote with the Common
Stock with respect to the election of directors if any director
directly elected by the Series B-1 Convertible Preferred Stock is then
serving.
TERMS OF THE WELSH CARSON FINANCING
LabOne and the Purchasers entered into the Securities Purchase Agreement,
a warrant agreement and a registration rights agreement in connection with the
Welsh Carson financing. WCAS IX and certain members of the family of William D.
Grant, including certain related trusts (the "Grant Family"), also entered into
a voting agreement. In addition, LabOne and American Stock Transfer & Trust Co.
entered into an amendment to the rights agreement dated February 11, 2000
governing LabOne's shareholder rights plan. LabOne also filed with the Missouri
Secretary of State a certificate of designation of the Series B-1 Convertible
Preferred Stock, which sets forth the terms of the Series B-1 Convertible
Preferred Stock, and a certificate of designation of the Series B-2 Preferred
stock, which sets forth the terms of the Series B-2 Preferred Stock. In the
Welsh Carson financing, LabOne issued to the Purchasers shares of Series B-1
Convertible Preferred Stock, shares of Series B-2 Preferred Stock, Series B
Warrants and Series A Senior Subordinated Notes.
The terms of the Welsh Carson financing and the agreements and instruments
related thereto are complex and are summarized only briefly in this proxy
statement. The summaries of such terms are qualified in their entirety by
reference to the relevant transaction documents, which are filed as exhibits to
LabOne's Current Report on Form 8-K/A ("Form 8-K") filed with the Securities and
Exchange Commission on October 9, 2001, as follows:. Exhibit 4.1 - Stock
Purchase Agreement (with attached thereto Exhibit D - Certificate of Designation
for Series C-1
21
Convertible Preferred Stock and Exhibit E - Certificate of Designation for
Series C-2 Preferred Stock), Exhibit 4.2 - Certificate of Designation for Series
B-1 Convertible Preferred Stock, Exhibit 4.3 - Warrant Agreement and Form of
Series B Warrant, Exhibit 4.4 - Certificate of Designation for Series B-2
Preferred Stock, Exhibit 4.5 - Form of Series A Senior Subordinated Note,
Exhibit 4.6 - Amendment No. 1 to Rights Agreement and Exhibit 4.7 - Registration
Rights Agreement. The Form 8-K, together with all exhibits, is available at the
web site of the Securities and Exchange Commission at www.sec.gov. These
documents can also be obtained without charge by contacting Joseph C. Benage,
Secretary, LabOne, Inc., 10101 Renner Boulevard, Lenexa, Kansas 66219 ((913)
888-1770). The documents requested will be sent by first class mail within one
business day of receipt of such request.
TERMS OF SECURITIES PURCHASE AGREEMENT
Purchase And Sale Of Securities
The Securities Purchase Agreement provides for the sale of the equity and
debt securities described above to the Purchasers for an aggregate purchase
price of $50 million. The purchase and sale was consummated on August 31, 2001.
Board Composition And Representation
Board Size
The Securities Purchase Agreement provides that the Board of LabOne shall
consist of seven directors so long as the Purchasers are entitled to nominate
directors for election, as described below.
Prior to Shareholder Approval
Until shareholder approval of Proposal 1, so long as the Purchasers and
certain related parties beneficially own shares of Series B-1 Convertible
Preferred Stock, Series B-2 Preferred Stock or Common Stock issued upon
conversion thereof which represent 5% or more of the shares of Common Stock
(determined on an as-converted basis) purchased by the Purchasers on August 31,
2001, WCAS IX has the right to nominate one director for election to the LabOne
Board by the holders of Common Stock.
After Shareholder Approval
After shareholder approval of Proposal 1 is obtained, WCAS IX is entitled
to nominate three directors for election to LabOne's Board so long as the
Purchasers and certain related parties beneficially own shares of Series B-1
Convertible Preferred Stock, Series B-2 Preferred Stock and Common Stock issued
upon conversion thereof which represent 50% or more of the shares of Common
Stock (determined on an as-converted basis) purchased by the Purchasers on
August 31, 2001;
WCAS IX is entitled to nominate two directors for election to LabOne's
Board so long as the Purchasers and certain related parties beneficially own
shares of Series B-1 Convertible
22
Preferred Stock, Series B-2 Preferred Stock and Common Stock issued upon
conversion thereof which represent 25% or more (but less than 50%) of the shares
of Common Stock (determined on an as-converted basis) purchased by the
Purchasers on August 31, 2001;
WCAS IX is entitled to nominate one director for election to LabOne's
Board so long as the Purchasers and certain related parties beneficially own
shares of Series B-1 Convertible Preferred Stock, Series B-2 Preferred Stock and
Common Stock issued upon conversion thereof which represent 5% or more (but less
than 25%) of the shares of Common Stock (determined on an as-converted basis)
purchased by the Purchasers on August 31, 2001; and
So long as the Purchasers and certain related parties beneficially own
shares of Series B-1 Convertible Preferred Stock, Series B-2 Preferred Stock and
Common Stock issued upon conversion thereof which represent 5% or more of the
shares of Common Stock (determined on an as-converted basis) purchased by the
Purchasers on August 31, 2001, one of the members of the Board (the "Jointly
Selected Director") shall be a person mutually nominated by (A) the directors
designated or nominated by WCAS IX or elected by the holders of Series B-1
Convertible Preferred Stock ("Welsh Carson Directors") and (B) the members of
the Board other than the Jointly Selected Director and the Welsh Carson
Directors ("Company Directors").
The number of directors which WCAS IX is entitled to nominate under the
above provisions is reduced by the number of directors that may be directly
elected by the holders of Series B-1 Convertible Preferred Stock. See "TERMS OF
SERIES B-1 CONVERTIBLE PREFERRED STOCK" below.
Additional Provisions
LabOne agrees in the Securities Purchase Agreement to nominate the
nominees of WCAS IX described above and to use its best efforts to cause their
election to the Board by the holders of Common Stock. The directors nominated by
WCAS IX and/or elected by the Series B-1 Convertible Preferred Stock are
entitled to proportionate representation on each committee and subcommittee of
the Board, other than the audit committee to the extent prohibited by law.
Election of Company Directors
In the Securities Purchase Agreement, the Purchasers agree that until
August 31, 2008 the Purchasers shall (i) use their best efforts to cause the
election or appointment to the Board of LabOne and any of its subsidiaries of
the persons nominated by the Company Directors to fill the positions on such
boards of directors allocated to the Company Directors, (ii) use their best
efforts to cause the Company Directors to have proportionate representation on
all committees of such boards of directors and (iii) not directly or indirectly
take any action to seek or cause the removal of any Company Director as such a
director or committee member without the written consent of a majority of the
members of the Board other than the Welsh Carson Directors.
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Board Recommendation of Approval by Shareholders
In the Securities Purchase Agreement, the Board agrees to recommend that
the shareholders approve the proposals presented in this proxy statement and
further agrees to use commercially reasonable efforts to solicit from
shareholders proxies in favor of such proposals.
Standstill Agreement
As a condition to engaging in the Welsh Carson financing, LabOne required
that the Securities Purchase Agreement include a standstill agreement which
imposes restrictions on the ability of the Purchasers and entities they control
to acquire additional securities outside of the Welsh Carson financing or to
take certain other actions.
The standstill provisions contained in the Securities Purchase Agreement
restricts the activities of the Purchasers and entities they control until the
earlier of August 31, 2008 or until the Purchasers and certain related parties
own securities representing less than 5% of the securities originally acquired
by the Purchasers, on an as-converted basis.
During the standstill period, neither the Purchasers nor entities they
control may, without the consent of a majority of the members of the Board other
than the Welsh Carson Directors:
o acquire any voting securities, assets or business of LabOne or any
subsidiary (except for transfers among the Purchasers or pursuant to
the terms of the Welsh Carson financing documents);
o solicit proxies or consents with respect to any securities of LabOne
or any subsidiary or become a participant in any election contest;
o execute any written shareholder consent solicited by or on behalf of
any shareholder;
o solicit shareholders for the approval of any shareholder proposal;
o make any public announcement with respect to, or submit any public
proposal for or approach any third party regarding any extraordinary
transaction involving the acquisition of the securities or assets of
LabOne;
o form, join or in any way participate in or assist in the formation of
a "group" in connection with any of the foregoing;
o otherwise act, alone or in concert with others, in a manner designed
or having the deliberate effect of circumventing the above
restrictions;
o disclose or publicly announce any intention, plan or arrangement
inconsistent with the foregoing; or
o finance any other persons or entities in connection with any of the
activities prohibited by the foregoing.
24
In addition, the Purchasers are subject to the provisions of the
shareholder rights plan of LabOne. See "AMENDMENT TO SHAREHOLDER RIGHTS PLAN"
below.
Right to Purchase Shares of Series C Preferred Stock
In the Securities Purchase Agreement, LabOne agrees that, from August 31,
2001 until August 31, 2004, LabOne will not conduct any equity offering, with
certain exceptions, unless and until it first grants to WCAS IX and certain
related parties the right to purchase Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock") of LabOne for a purchase price of $1,000 per
share. The Series C Preferred Stock to be purchased would be Series C-1
Cumulative Convertible Preferred Stock ("Series C-1 Convertible Preferred
Stock") to the extent permitted under the Marketplace Rules prior to shareholder
approval relating to the issuance, and would otherwise be Series C-2 Cumulative
Convertible Preferred Stock ("Series C-2 Preferred Stock"). With respect to each
such proposed equity offering, WCAS IX and the related parties would have the
right to purchase Series C-1 Convertible Preferred Stock or Series C-2 Preferred
Stock with a stated value up to the amount proposed to be raised by LabOne;
provided that WCAS IX and the related parties would have the right to purchase
no more than $15 million in the aggregate of Series C-1 Convertible Preferred
Stock and Series C-2 Preferred Stock.
The initial conversion price of any Series C-1 Convertible Preferred Stock
issued pursuant to this provision would equal the lower of: (a) 1.1 times the
average closing price per share of Common Stock for the 20 trading days
immediately preceding the closing date of the transaction and (b) 7.5 x EBITDA
of LabOne and its subsidiaries for the 12 months prior to the transaction less
certain indebtedness (as reduced by cash and cash equivalents and the aggregate
exercise price of in-the-money stock options) and less the liquidation
preference of certain shares of preferred stock, determined on a per share basis
giving effect to the exercise of all outstanding in-the-money stock options and
conversion of all in-the-money preferred stock.
Except as described above, the terms of the Series C-1 Convertible
Preferred Stock would be substantially the same as the Series B-1 Convertible
Preferred Stock and the terms of the Series C-2 Preferred Stock would be
substantially the same as the Series B-2 Preferred Stock. See "TERMS OF SERIES
B-1 CONVERTIBLE PREFERRED STOCK" and "TERMS OF SERIES B-2 PREFERRED STOCK"
below.
Issuance of Series B Senior Subordinated Notes in Connection With Subsequent
Acquisitions
Under the Securities Purchase Agreement, LabOne agrees that until at least
August 31, 2004, if LabOne shall identify an acquisition opportunity for LabOne,
the consummation of which would require LabOne to obtain third-party
subordinated debt financing, LabOne shall give WCAS IX and certain related
parties the opportunity to participate in such financing through the acquisition
of Series B Senior Subordinated Notes of LabOne ("Series B Senior Subordinated
Notes"). With respect to each such proposed equity offering, WCAS IX and the
related parties would have the right to purchase an aggregate principal amount
of Series B Senior Subordinated Notes up to the principal amount of subordinated
debt proposed to be issued by LabOne; provided that WCAS IX and the related
parties would have the right to purchase no more than $15 million in the
aggregate of principal amount of Series B Senior Subordinated Notes pursuant
25
to this provision. The terms of the Series B Senior Subordinated Notes would be
substantially similar to the terms of the Series A Senior Subordinated Notes
described below.
In connection with the issuance of Series B Senior Subordinated Notes, the
purchasers of such notes would be receive up to an aggregate of 300,000
nominally priced Common Stock purchase warrants. The number of warrants issued
would be based upon the principal amount of Series B Senior Subordinated Notes
issued and the market price of the Common Stock on the date(s) such Series B
Senior Subordinated Notes are issued.
Certain Veto Rights Applying After Shareholder Approval
If shareholder approval is obtained with respect to Proposal 1, for so
long as WCAS IX and certain related parties beneficially own shares of Series
B-1 Convertible Preferred Stock, Series B-2 Preferred Stock and Common Stock
issued upon conversion thereof which represent 35% or more of the shares of
Common Stock (determined on an as-converted basis) purchased by the Purchasers
on August 31, 2001, WCAS IX shall have the right to approve the following
transactions:
o any merger or consolidation involving LabOne or any sale of all or
substantially all of the assets of LabOne and its subsidiaries taken
as a whole;
o any acquisition or series of related acquisitions of stock or assets
or any entity or business by LabOne or any subsidiary for
consideration greater than $10 million;
o any sale, lease, transfer or other divestiture of material assets
outside the ordinary course of business by LabOne or any subsidiary;
o any capital project or series of related capital projects costing in
excess of $3 million;
o any material change in the business strategy or operations of LabOne
and its subsidiaries;
o certain transactions with affiliates or other related parties of
LabOne;
o certain dividends, distributions, redemptions, or optional payments
with respect to indebtedness;
o any material change to any equity incentive plan of LabOne or any of
its subsidiaries;
o any material increase in the compensation or benefits payable under
any management incentive plan of LabOne or any of its subsidiaries;
and
o any restructuring of senior management of LabOne and its subsidiaries.
26
Certain Covenants Relating to Shares of Series B-2 Preferred Stock and Series
C-2 Preferred Stock and Series A Senior Subordinated Notes and Series B Senior
Subordinated Notes.
For so long as any shares of Series B-2 Preferred Stock or Series C-2
Preferred Stock or any Series A Senior Subordinated Notes or Series B Senior
Subordinated Notes remain outstanding, unless compliance is waived by (a) the
holders of a majority of the outstanding shares of Series B-2 Preferred Stock
and Series C-2 Preferred Stock and (b) the holders of a majority in principal
amount of Series A Senior Subordinated Notes and Series B Senior Subordinated
Notes, LabOne and its subsidiaries may not, subject to exceptions in each case:
o incur any indebtedness in excess of three times EBITDA of LabOne and
its subsidiaries for the 12 months prior to the date of incurrence, as
adjusted for then pending or completed acquisitions as determined by
the parties (other than renewal or replacement of certain existing
indebtedness);
o issue any redeemable capital stock until the later of December 31,
2008 and the date that Proposal 1 is approved by the shareholders;
o make certain restricted payments, including among other things
payments of distributions on or redemptions of certain capital stock
and prepayments of certain indebtedness;
o incur any liens other than certain permitted liens;
o wind up, liquidate or dissolve;
o enter into any merger or consolidation or sale or all or any part of
its property or assets (including capital stock) unless certain
conditions are satisfied;
o sell any capital stock of a wholly-owned subsidiary unless the sale is
of all of the stock of such subsidiary;
o after shareholder approval of Proposal 1 is obtained, acquire in a
single transaction or series of related transactions any stock or
assets or any entity or business for consideration greater than $10
million;
o after shareholder approval of Proposal 1 is obtained, engage in any
capital project or series of related capital projects costing in
excess of $3 million;
o restrict a material subsidiary's ability to pay dividends or debt,
make loans or transfer assets to LabOne or any other material
subsidiary, or restrict the ability of LabOne to redeem shares of
Series B-2 Preferred Stock or Series C-2 Preferred Stock;
o enter into certain transactions with affiliates and other related
parties of LabOne;
27
o make any material change to any equity incentive plan of LabOne or any
of its subsidiaries,
o effect any material increase in the compensation or benefits payable
under any management incentive plan of LabOne or any of its
subsidiaries; or
o engage in any restructuring of senior management of LabOne and its
subsidiaries.
Reimbursement of Expenses and Payment of Advisory Fee
In the Securities Purchase Agreement, LabOne agrees to pay up to $500,000
of the reasonable out-of-pocket costs and expenses of the Purchasers, including
fees and disbursements of counsel, advisors, accountants and consultants,
incurred by the Purchasers in connection with the Welsh Carson financing and the
Osborn acquisition. In addition, LabOne agrees to directly pay 50% of the fees
and expenses of Ernst & Young LLP, accountants for the Purchasers, and Reboul,
MacMurray, Hewitt, Maynard & Kristol, legal counsel to the Purchasers, relating
to the Osborn acquisition. LabOne also agrees to pay (a) all of the reasonable
out-of-pocket costs and expenses of the Purchasers incurred in connection with
(i) any and all purchases of Series C Preferred Stock and Series B Senior
Subordinated Notes and (ii) the preparation and review of this proxy statement
and (b) any fees and expenses associated with any filing required to be made
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection
with any conversion of any Series B-1 Convertible Preferred Stock, Series B-2
Preferred Stock, Series C-1 Convertible Preferred Stock or Series C-2 Preferred
Stock or any exercise of any Series B Warrants or additional warrants issued to
the Purchasers. As of the date of this proxy statement, LabOne has paid to the
Purchasers a total of $___________ pursuant to these obligations.
In the Securities Purchase Agreement, LabOne also agrees to pay to WCAS
Management Corporation, an affiliate of the Purchasers, a $500,000 advisory fee
for services rendered in connection with the Osborn acquisition. This amount has
been paid.
TERMS OF SERIES B-1 CONVERTIBLE PREFERRED STOCK
As of the date of this proxy statement, there were 14,000 shares of Series
B-1 Convertible Preferred Stock outstanding.
Stated Value
The Series B-1 Convertible Preferred Stock has an initial stated value of
$1,000 per share.
Rank
The Series B-1 Convertible Preferred Stock ranks prior to the Common Stock
and ranks equally with the Series B-2 Preferred Stock and, upon issuance, the
Series C-1 Convertible Preferred Stock and the Series C-2 Preferred Stock.
28
Dividend Rights
Each holder of Series B-1 Convertible Preferred Stock is entitled to
receive cumulative dividends at an annual rate of 8.0% of the stated value,
which accrue as if paid in-kind and are added to the stated value on a
semi-annual basis, whether or not declared and whether or not there are any
funds of LabOne legally available for the payment of dividends. From and after
August 31, 2008, accrued dividends shall be payable in the form of cash, out of
funds legally available for the payment of dividends. Each holder of Series B-1
Convertible Preferred Stock is also entitled to participate on an as-converted
basis (ignoring the Conversion Limitation discussed below) with the Common Stock
with respect to dividends paid on the Common Stock, other than dividends payable
in Common Stock.
Liquidation Preference
Each share of Series B-1 Convertible Preferred Stock has a liquidation
preference equal to the greater of (a) its stated value, treating the date of
determination as a dividend accrual date for purposes of calculating the stated
value on such date, and (b) the amount that would have been payable with respect
to the number of shares of Common Stock into which a share of Series B-1
Convertible Preferred Stock was convertible immediately before such liquidation
(without regard to the Conversion Limitation discussed below). Upon receipt of
such liquidation preference, holders of Series B-1 Convertible Preferred Stock
shall not be entitled to any further payment.
Conversion Rights
Subject to the Conversion Limitation, each holder of Series B-1
Convertible Preferred Stock has the right at any time at such holder's option to
convert any or all of the holder's shares of Series B-1 Convertible Preferred
Stock into shares of Common Stock. Subject to the Conversion Limitation
discussed below, the number of shares of Common Stock into which each share of
Series B-1 Convertible Preferred Stock is convertible equals (a) the stated
value of such share on the date of conversion, treating such date as a dividend
accrual date for purposes of calculating the stated value on such date, divided
by (b) the conversion price on such date. The initial conversion price of the
Series B-1 Convertible Preferred Stock is $8.32 per share. The conversion rate
is subject to adjustment as described below.
Conversion at the Option of LabOne
Subject to the Conversion Limitation discussed below, if on any date after
August 31, 2004 but before August 31, 2008, the closing price of the Common
Stock has been at least $16.64 (as adjusted for any stock splits, stock
dividends, reverse stock splits, share consolidations or other similar
transactions) during any 30 trading days out of any consecutive 45 trading day
period, LabOne may elect, no later than five business days after such date, to
cause all outstanding shares of Series B-1 Convertible Preferred Stock to be
converted into shares of Common Stock at the conversion rate described above.
Anti-Dilution Protection
The Series B-1 Convertible Preferred Stock has standard weighted average
anti-dilution protection, which reduces the conversion price on a weighted
average basis for issuances and
29
deemed issuances of Common Stock below the then effective conversion price,
subject to certain exceptions.
Conversion Limitation
Unless shareholder approval of the elimination of the Conversion
Limitation is obtained, the number of shares of Common Stock that may be issued
upon conversion of Series B-1 Convertible Preferred Stock, together with the
number of shares of Common Stock then issued or issuable upon exercise of the
Series B Warrants and any warrants issued with the Series B Senior Subordinated
Notes, may not exceed in the aggregate 19.9% of the shares of Common Stock
outstanding immediately prior to the issuance of the Series B-1 Convertible
Preferred Stock on August 31, 2001, or 2,144,883 shares, subject to proportional
adjustment for any stock split, stock dividend, recapitalization, reverse stock
split or other similar event with respect to the Common Stock (the "Conversion
Limitation"). Any portion of the stated value that at any time may not be
converted into or exchanged for Common Stock as a result of the Conversion
Limitation shall, at the option of the holder of Series B-1 Convertible
Preferred Stock, be immediately paid in cash by LabOne or immediately converted
into shares of Series B-2 Preferred Stock. If shareholder approval of the
termination of the Conversion Limitation is obtained, the Conversion Limitation
shall be of no further force or effect.
Redemption upon Change of Control
Upon a change of control of LabOne, each holder of Series B-1 Convertible
Preferred Stock may require LabOne to redeem all or any portion of such holder's
shares of Series B-1 Convertible Preferred Stock for cash. The redemption price
per share shall equal 101% of the stated value on the redemption date, treating
such date as a dividend accrual date for purposes of calculating the stated
value on such date; provided, that if the change of control occurs prior to
August 31, 2004, the redemption price shall be calculated assuming the change of
control had occurred on August 31, 2004 and that no dividends had been paid in
cash or converted into Series B-2 Preferred Stock with respect to such share
from the actual date of the change of control through August 31, 2004. LabOne
may elect to pay the redemption price with Common Stock or stock of an acquiring
entity under certain circumstances (subject to adjustment if the market price of
such stock is below the conversion price), provided that the number of shares
issued to pay the redemption price may not exceed the Conversion Limitation to
the extent that shareholder approval of the termination of the Conversion
Limitation has not been obtained.
Put/Call Rights
At any time on or after August 31, 2008, the holders of a majority of the
shares of Series B-1 Convertible Preferred Stock then outstanding may require
LabOne to purchase all of the outstanding shares of Series B-1 Convertible
Preferred Stock and LabOne may elect to purchase all of the outstanding shares
of Series B-1 Convertible Preferred Stock. The purchase price per share shall
equal the stated value on the redemption date, treating such date as a dividend
accrual date for purposes of calculating the stated value on such date, and
shall be payable in cash. LabOne may elect to pay the purchase price with Common
Stock (subject to adjustment if the market price of such stock is below the
conversion price), provided that the number of shares
30
issued to pay the purchase price may not exceed the Conversion Limitation to the
extent that shareholder approval of the termination of the Conversion Limitation
has not been obtained.
Voting Rights
The holders of Series B-1 Convertible Preferred Stock are otherwise
entitled to vote with the holders of Common Stock on an as-converted basis,
subject to the As-Converted Voting Limitation, on matters other than the
election of directors. See "NASDAQ STOCK MARKET, INC. MARKETPLACE RULES - Voting
Rights".
Election of Directors
The holders of the Series B-1 Convertible Preferred Stock, voting or
consenting separately as a single class to the exclusion of all other classes of
LabOne's capital stock and with each share of Series B-1 Convertible Preferred
Stock entitled to one vote, shall by majority vote be entitled to elect
directors to LabOne's Board as follows:
(a) Until shareholder approval of Proposal 1 is obtained, the holders of
Series B-1 Convertible Preferred Stock shall be entitled to elect up to
one director to serve on LabOne's Board as long as the voting power of the
Series B-1 Convertible Preferred Stock (taking in account the As-Converted
Voting Limitation described above under "NASDAQ STOCK MARKET, INC.
MARKETPLACE RULES - Voting Rights") equals or exceeds one-seventh (1/7) of
the combined voting power of (i) the outstanding Common Stock on August
31, 2001 and (ii) the outstanding Series B-1 Convertible Preferred Stock
on the date of the determination,
(b) If shareholder approval of Proposal 1 is obtained,
(i) the holders of Series B-1 Convertible Preferred Stock shall be
entitled to elect two directors to serve on LabOne's Board if the
voting power of the Series B-1 Convertible Preferred Stock (taking in
account the As-Converted Voting Limitation described above under
"NASDAQ STOCK MARKET, INC. MARKETPLACE RULES - Voting Rights") equals
or exceeds two-sevenths (2/7) of the combined voting power of (A) the
outstanding Common Stock on August 31, 2001 and (B) the outstanding
Series B-1 Convertible Preferred Stock on the date of the
determination, and
(ii) the holders of Series B-1 Convertible Preferred Stock shall be
entitled to elect one director to serve on LabOne's Board if the
voting power of the Series B-1 Convertible Preferred Stock (taking in
account the As-Converted Voting Limitation referred to above) equals
or exceeds one-seventh (1/7) (but is less than two-sevenths) of the
combined voting power of (A) the outstanding Common Stock on August
31, 2001 and (B) the outstanding Series B-1 Convertible Preferred
Stock on the date of the determination.
The holders of the Series B-1 Convertible Preferred Stock will not be
entitled to vote on an as-converted basis with the Common Stock in connection
with the election or removal of
31
directors to the extent that any director directly elected by the Series B-1
Convertible Preferred Stock is then serving.
Veto Rights
In addition, so long as any of the Series B-1 Convertible Preferred Stock
is outstanding, the affirmative vote of the holders of (a) 66 2/3% of the
outstanding shares of Series B-1 Convertible Preferred Stock, voting together as
a single class, shall be necessary to alter or change the preferences, rights or
powers of the Series B-1 Convertible Preferred Stock, and (b) a majority of the
outstanding shares of Series B-1 Convertible Preferred Stock, voting together as
a single class, shall be necessary to:
o increase or decrease the authorized number of shares of Series B-1
Convertible Preferred Stock;
o amend, alter, repeal or waive any provision of LabOne's articles of
incorporation (including any certificate of designation or articles of
amendment and whether by amendment, merger or otherwise) or by-laws so
as to adversely affect the preferences, rights or powers of the Series
B-1 Convertible Preferred Stock, including without limitation the
voting powers, dividend rights and liquidation preferences of the
Series B-1 Convertible Preferred Stock;
o change the Series B-1 Convertible Preferred Stock into any other
securities (other than pursuant to the provisions of the Series B-1
Preferred Stock certificate of designation), cash or other property;
or
o issue any additional Series B-1 Convertible Preferred Stock (other
than upon conversion of Series B-2 Preferred Stock) or create,
authorize or issue any capital stock that ranks prior to or pari passu
with, whether with respect to dividends or upon liquidation,
dissolution, winding up or otherwise, the Series B-1 Convertible
Preferred Stock (other than Series B-2 Preferred Stock, Series C-1
Convertible Preferred Stock and Series C-2 Preferred Stock).
Pre-emptive Rights
The holders of Series B-1 Convertible Preferred Stock do not have
pre-emptive rights to acquire additional securities of LabOne. Under the
Securities Purchase Agreement, the Purchasers have certain rights to acquire
additional securities upon the proposed issuance of equity or subordinated debt
securities by LabOne. See the sections under "TERMS OF SECURITIES PURCHASE
AGREEMENT" entitled "Right To Purchase Shares Of Series C Preferred Stock" and
"Issuance of Series B Senior Subordinated Notes in Connection With Subsequent
Acquisitions".
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Redemption and Dividends on Common Stock
So long as any shares of Series B-1 Convertible Preferred Stock are
outstanding, no Common Stock may be redeemed by LabOne (except by conversion
into or exchange for junior securities) or any cash dividend made on Common
Stock other than (a) a dividend on the Common Stock in which the holders of the
Series B-1 Convertible Preferred Stock participate or (b) repurchases of shares
from employees of LabOne and its subsidiaries upon termination of the holders'
employment.
TERMS OF SERIES B-2 PREFERRED STOCK
As of the date of this proxy statement, there were 21,000 shares of Series
B-2 Preferred Stock outstanding.
Stated Value
The Series B-2 Preferred Stock has an initial stated value of $1,000 per
share.
Rank
The Series B-2 Preferred Stock ranks prior to the Common Stock and ranks
equally with the Series B-1 Convertible Preferred Stock and, upon issuance, the
Series C-1 Convertible Preferred Stock and the Series C-2 Preferred Stock.
Dividend Rights
Each holder of Series B-2 Preferred Stock is entitled to receive
cumulative dividends at an annual rate of 18.0% of the stated value, which
accrue as if paid in-kind and are added to the stated value on a semi-annual
basis, whether or not declared and whether or not there are any funds of LabOne
legally available for the payment of dividends.
Each holder of Series B-2 Preferred Stock is also entitled to participate
on an as-converted basis, assuming conversion of Series B-2 Preferred Stock into
Series B-1 Convertible Preferred Stock, with the Series B-1 Convertible
Preferred Stock on dividends paid on the Series B-1 Convertible Preferred Stock
(other than dividends or distributions paid on the Common Stock described below,
dividends or distributions payable solely in Series B-1 Convertible Preferred
Stock, or regular accrued dividends on the Series B-1 Convertible Preferred
Stock).
Each holder of Series B-2 Preferred Stock is also entitled to participate
on an as-converted basis, assuming conversion of Series B-2 Preferred Stock into
Series B-1 Convertible Preferred Stock and then into Common Stock and ignoring
the Conversion Limitation discussed under "TERMS OF SERIES B-1 CONVERTIBLE
PREFERRED STOCK - Conversion Limitation" above, with the Common Stock with
respect to dividends paid on the Common Stock, other than dividends payable in
Common Stock.
Liquidation Preference
Each share of Series B-2 Preferred Stock has a liquidation preference
equal to the greater of (a) its stated value, treating the date of determination
as a dividend accrual date for purposes
33
of calculating the stated value on such date, and (b) the amount that would have
been payable with respect to the number of shares of Common Stock into which the
number of shares of Series B-1 Convertible Preferred Stock resulting from the
conversion of the Series B-2 Preferred Stock (assuming shareholder approval of
such conversion) was convertible immediately before such liquidation (without
regard to any Conversion Limitation then in effect). Upon receipt of such
liquidation preference, holders of Series B-2 Preferred Stock shall not be
entitled to any further payment.
Conversion Rights
The Series B-2 Preferred Stock is not convertible into any security unless
and until shareholders approve the automatic conversion of Series B-2 Preferred
Stock into Series B-1 Convertible Preferred Stock. In the event of shareholder
approval of such conversion, each share of Series B-2 Preferred Stock shall be
automatically converted into one share of Series B-1 Convertible Preferred Stock
on the date of shareholder approval without any further action required by
LabOne or any holder of Series B-2 Preferred Stock. If shareholder approval is
obtained prior to February 28, 2002, the stated value of each share of Series
B-1 Convertible Preferred Stock issued upon conversion of Series B-2 Preferred
Stock shall be the stated value which a share of Series B-1 Convertible
Preferred Stock issued on August 31, 2001 would have had on the date of
shareholder approval at the 8% per year dividend rate. If shareholder approval
is obtained on or after February 28, 2002, the stated value of each share of
Series B-1 Convertible Preferred Stock into which a share of Series B-2
Preferred Stock shall convert shall be the stated value of such share of Series
B-2 Preferred Stock on the date of shareholder approval at the 18% per year
dividend rate, treating such date as a dividend accrual date for purposes of
calculating the stated value. The conversion price of the share of Series B-1
Convertible Preferred Stock into which such share of Series B-2 Preferred Stock
shall convert on the date of shareholder approval shall be the conversion price
which a share of Series B-1 Convertible Preferred Stock issued on August 31,
2001 would have had on the date of shareholder approval.
Redemption Rights
If the Series B-2 Preferred Stock has not been automatically converted
into Series B-1 Convertible Preferred Stock by August 31, 2004, the holders of a
majority of the shares of Series B-2 Preferred Stock then outstanding may
require LabOne to redeem all of the outstanding shares of Series B-2 Preferred
Stock for cash, payable in two annual installments. The redemption price of each
share would equal the stated value of such share on the date of payment of the
redemption price, treating such date as a dividend accrual date for purposes of
calculating the stated value. If LabOne is of the opinion that any such
redemption would be in violation of the terms of any of its senior credit
arrangements that were outstanding on August 31, 2001 that at such time remain
outstanding, the holder requesting redemption may require LabOne to use its best
efforts to issue and sell subordinated debt securities and to use the proceeds
from such sale and issuance to redeem all of the shares of Series B-2 Preferred
Stock.
At any time following August 31, 2004 and prior to August 31, 2006, LabOne
may redeem all, but not less than all, of the outstanding shares of Series B-2
Preferred Stock at a redemption price per share, payable in cash, equal to 105%
of the stated value of such shares on
34
the date of payment therefor, treating such date as a dividend accrual date for
purposes of calculating the stated value.
At any time following August 31, 2006 and prior to August 31, 2008, LabOne
may redeem all, but not less than all, of the outstanding shares of Series B-2
Preferred Stock at a redemption price per share, payable in cash, equal to the
stated value of such shares on the date of payment therefor, treating such date
as a dividend accrual date for purposes of calculating the stated value.
On August 31, 2008, LabOne will be required to redeem, and the holders of
the Series B-2 Preferred Stock will be required to deliver for redemption, all
of the outstanding shares of Series B-2 Preferred Stock at a redemption price
per share, payable in cash, equal to the stated value of such shares on the date
of payment therefor, treating such date as a dividend accrual date for purposes
of calculating the stated value.
Redemption upon Change of Control
Holders of Series B-2 Preferred Stock have the same rights upon a change
of control of LabOne as the holders of Series B-1 Convertible Preferred Stock,
except that any change of control redemption must be paid in cash. See "TERMS OF
SERIES B-1 CONVERTIBLE PREFERRED STOCK - Redemption upon Change of Control".
Voting Rights
Except as otherwise required by law and except for the veto rights
described below, the Series B-2 Preferred Stock is non-voting.
Veto Rights
So long as any of the Series B-2 Preferred Stock is outstanding, the
affirmative vote of the holders of (a) 66 2/3% of the outstanding shares of
Series B-2 Preferred Stock, voting together as a single class, shall be
necessary to alter or change the preferences, rights or powers of the Series B-1
Convertible Preferred Stock or the Series B-2 Preferred Stock, and (b) a
majority of the outstanding shares of Series B-2 Preferred Stock, voting
together as a single class, shall be necessary to:
o increase or decrease the authorized number of shares of the Series B-1
Convertible Preferred Stock or the Series B-2 Preferred Stock,
o amend, alter, repeal or waive any provision of LabOne's articles of
incorporation or by-laws so as to adversely affect the preferences,
rights or powers of the Series B-1 Convertible Preferred Stock or the
Series B-2 Preferred Stock, including, without limitation the voting
powers, dividend rights and liquidation preference of the Series B-1
Convertible Preferred Stock or the Series B-2 Preferred Stock,
o change the Series B-1 Convertible Preferred Stock (other than pursuant
to the provisions of the Series B-1 Preferred Stock certificate of
designation) or the Series B-2 Preferred
35
Stock (other than upon the conversion of Series B-2 Preferred Stock
into Series B-1 Convertible Preferred Stock upon shareholder approval
of such conversion) into any other securities, cash or other property,
o issue any additional Series B-2 Preferred Stock (other than in lieu of
accrued dividends on the Series B-1 Convertible Preferred Stock prior
to shareholder approval of Proposal 1), or
o create, authorize or issue any capital stock that ranks prior to or
pari passu with, whether with respect to dividends or upon
liquidation, dissolution, winding up or otherwise, the Series B-1
Convertible Preferred Stock or the Series B-2 Preferred Stock (other
than Series C-1 Convertible Preferred Stock or Series C-2 Preferred
Stock).
Restrictive Covenants
So long as any shares of Series B-2 Preferred Stock or Series C-2
Preferred Stock are outstanding, LabOne will comply with all of the provisions
of the Securities Purchase Agreement described above under "SECURITIES PURCHASE
AGREEMENT - Certain Negative Convenants Relating to Shares of Series B-2
Preferred Stock and Series C-2 Preferred Stock and Series A Senior Subordinated
Notes and Series B Senior Subordinated Notes", unless such compliance is waived
in writing by the affirmative vote of the holders of a majority of the
outstanding shares of Series B-2 Preferred Stock and Series C-2 Preferred Stock,
voting together as a single class. These provisions may not be amended with
respect to the Series B-2 Preferred Stock without the consent of the holders of
66 2/3% of the outstanding shares of Series B-2 Preferred Stock.
Pre-emptive Rights
The holders of Series B-2 Preferred Stock do not have pre-emptive rights
to acquire additional securities of LabOne. Under the Securities Purchase
Agreement, however, the Purchasers have certain rights to acquire additional
securities upon the proposed issuance of equity or subordinated debt securities
by LabOne. See the sections under "TERMS OF SECURITIES PURCHASE AGREEMENT"
entitled "Right to Purchase Shares of Series C Preferred Stock" and "Issuance of
Series B Senior Subordinated Notes in Connection With Subsequent Acquisitions".
Redemption and Dividends on Common Stock
So long as any shares of Series B-2 Preferred Stock are outstanding, no
Common Stock may be redeemed by LabOne (except by conversion into or exchange
for junior securities) or any cash dividend made on Common Stock other than (a)
a dividend on the Common Stock in which the holders of the Series B-2 Preferred
Stock participate or (b) repurchases of shares from employees of LabOne and its
subsidiaries upon termination of the holder's employment.
36
TERMS OF SERIES B WARRANTS
In connection with the issuance of the Series B-1 Convertible Preferred
Stock, LabOne issued 350,000 Series B Warrants to the Purchasers.
Each Series B Warrant entitles the holder thereof to acquire one share of
Common Stock at a purchase price of one cent ($.01) per share. The Series B
Warrants have weighted average anti-dilution protection, which adjusts the
exercise price and the number of shares issued upon exercise of each Series B
Warrant on a weighted average basis for issuances and deemed issuances of Common
Stock below the then market price, subject to certain exceptions. The holders of
Common Stock issued upon exercise of Series B Warrants may not vote or give
written consent with respect to such shares on any matters submitted to the
shareholders of LabOne at any time that shares of Series B-1 Convertible
Preferred Stock are outstanding. The Series B Warrants expire on August 31,
2008.
TERMS OF SERIES A SENIOR SUBORDINATED NOTES
In the Welsh Carson financing, LabOne issued Series A Senior Subordinated
Notes in an aggregate principal amount of $15,000,000 to the Purchasers. The
unpaid principal amount bears interest at 11% per annum. Interest is payable
semi-annually. LabOne may elect to pay interest in-kind by issuing a deferred
interest senior subordinated note with similar terms for the first ten months,
provided that the deferred interest shall accrue at the rate of 14% per annum.
25% of the principal amount of each Note is due August 31, 2006, an additional
25% of the principal amount of each Note is due August 31, 2007 and the
remaining 50% of the principal amount of each Note is due August 31, 2008.
LabOne may prepay the Notes at any time from and after August 31, 2003
without premium or penalty. Upon a change of control of LabOne, LabOne is
required to pay the entire principal amount of the Notes and all interest
accrued thereon, plus a 1% premium on the principal amount of the Notes;
provided that the holders of a majority of the principal amount of the Notes
then outstanding may waive such mandatory prepayment.
The Notes are subject to acceleration at the option of the holders of a
majority of the principal amount of the Notes then outstanding upon an event of
default under the Notes. Events of default include without limitation: (a)
default in the payment when due of all or any portion of the principal or
interest under any Note, (b) breach of any covenant contained in any Note, (c)
the commencement of certain actions involving LabOne or any subsidiary as a
debtor under bankruptcy or similar laws and (d) the breach of any covenant in
the Securities Purchase Agreement described above under "SECURITIES PURCHASE
AGREEMENT - Certain Negative Convenants Relating to Shares of Series B-2
Preferred Stock and Series C-2 Preferred Stock and Series A Senior Subordinated
Notes and Series B Senior Subordinated Notes".
The indebtedness evidenced by the Notes is junior and subordinate to
certain existing and future senior indebtedness of LabOne.
TERMS OF REGISTRATION RIGHTS AGREEMENT
In connection with the Welsh Carson financing, LabOne entered into a
registration rights agreement with the Purchasers. The agreement grants the
Purchasers the right to require LabOne
37
to register the public resale of the securities purchased in the Welsh Carson
financing under certain circumstances.
Under the agreement, the Purchasers have two long-form demand registration
rights. A long-form registration may be requested by the holders of a majority
of the outstanding shares then subject to the agreement if the reasonably
anticipated aggregate net proceeds to such holders in the offering is at least
$2,500,000. The Purchasers have an unlimited number of rights to short-form
registration on Form S-3, provided that the anticipated aggregate net proceeds
to such holders in such proposed offering is at least $2,500,000.
The Purchasers have the right to include such securities in any registered
offering of stock by LabOne (other than offerings pursuant to employee benefit
plans or in acquisitions), provided that if the offering is underwritten the
shares of the Purchasers included are subject to cutback by the managing
underwriter under certain circumstances. The Purchasers have priority over any
other piggyback registration rights granted by LabOne.
LabOne is required to pay all expenses in connection with registrations
under the agreement, other than the selling expenses of the holders of shares
being registered, which are to be paid by such holders. The Agreement has
customary cross-indemnification provisions between LabOne and the holders of
stock to be registered.
LabOne may not grant registration rights that are inconsistent with or
that conflict with the registration rights granted to the Purchasers. The
registration rights continue until the Purchasers own in the aggregate stock
subject to the agreement constituting less than one percent of outstanding
Common Stock, on a Common Stock equivalent basis.
TERMS OF SHAREHOLDER RIGHTS PLAN AMENDMENT
In order to permit the consummation of the Welsh Carson financing, LabOne
amended its shareholder rights plan by entering into an amendment to the rights
agreement dated February 11, 2000 between LabOne and American Stock Transfer and
Trust Company.
The rights agreement was amended to, among other things, exclude WCAS IX
and certain related parties from the definition of "acquiring person" under the
agreement only so long as such parties comply with the standstill provisions of
the Securities Purchase Agreement. See "TERMS OF SECURITIES PURCHASE AGREEMENT -
Standstill Agreement".
TERMS OF VOTING AGREEMENT
In connection with the Welsh Carson financing, WCAS IX and certain members
of the Grant Family entered into a voting agreement (the "voting agreement").
Under the voting agreement, the Grant Family agreed to vote for approval of the
proposals presented in this proxy statement and for the election of the director
nominees of WCAS IX. Members of the Grant Family beneficially owned 2,007,157
shares of Common Stock as of the date of the voting agreement. WCAS IX also
agreed to vote in favor of the election of Company Directors. The agreement
terminates on August 31, 2008.
38
PROPOSAL 1
PROPOSAL TO APPROVE REMOVAL OF
THE CONVERSION LIMITATION
In connection with the Welsh Carson financing, the Board has adopted and
directed to be submitted to the shareholders for approval a proposal to remove
the Conversion Limitation (the 19.9% limit on the number of shares of Common
Stock that may be issued upon conversion of the Series B-1 Convertible Preferred
Stock and exercise of the Series B Warrants). The Board recommends that the
shareholders vote "FOR" approval of this proposal.
If Proposal 1 is approved, the Conversion Limitation will no longer apply
to the conversion of the Series B-1 Convertible Preferred Stock (including, if
Proposal 2 is approved, shares of Series B-1 Convertible Preferred Stock issued
upon automatic conversion of the Series B-2 Preferred Stock) or the exercise of
the Series B Warrants and any warrants that may be issued upon issuance of
Series B Senior Subordinated Notes.
PROPOSAL 2
PROPOSAL TO APPROVE AUTOMATIC CONVERSION OF
SERIES B-2 PREFERRED STOCK INTO
SERIES B-1 CONVERTIBLE PREFERRED STOCK
In connection with the Welsh Carson financing, the Board has adopted and
directed to be submitted to the shareholders for approval a proposal to cause
the automatic conversion of all outstanding shares of Series B-2 Preferred Stock
into shares of Series B-1 Convertible Preferred Stock ("B-2 to B-1 Conversion").
The Board recommends that the shareholders vote "FOR" approval of this proposal.
If Proposals 1 and 2 are approved, each share of Series B-2 Preferred
Stock will be automatically converted into one share of Series B-1 Convertible
Preferred Stock on the date of shareholder approval, without any further action
required by LabOne or any holder of Series B-2 Preferred Stock.
Discussion of Proposals 1 and 2 and Reasons For Board Recommendation
As more fully described under "TERMS OF THE WELSH CARSON FINANCING" and
"NASDAQ STOCK MARKET, INC. MARKETPLACE RULES" above, on August 31, 2001, LabOne
issued 14,000 shares of Series B-1 Convertible Preferred Stock and 21,000 shares
of Series B-2 Preferred Stock to the Purchasers. Although the issuance of these
securities did not require shareholder approval, the terms of these securities
include restrictions that will continue
39
to be applicable until the shareholders of LabOne vote to remove them. These
restrictions limit (1) the ability of the holders of the Series B-2 Preferred
Stock to convert their shares into Series B-1 Convertible Preferred Stock, (2)
the ability of the holders of the Series B-1 Convertible Preferred Stock to
convert their shares into Common Stock, and (3) the ability of the holders of
the Series B-1 Convertible Preferred Stock to elect representatives to the Board
of Directors and to vote their shares on an as-converted basis with the holders
of the Common Stock. Proposals 1 and 2 are being presented to the shareholders
of LabOne because the Board believes that it is in the best interests of LabOne
and its shareholders to remove the Conversion Limitation and to approve the B-2
to B-1 Conversion.
Approval of the B-2 to B-1 Conversion would result in substantial savings
to LabOne in the form of reduced dividend payments. The Series B-2 Preferred
Stock accrues PIK (pay-in-kind) dividends at 18% per year, while the Series B-1
Convertible Preferred Stock accrues dividends at only 8% per year. Over the
seven-year life of the Series B-2 Preferred Stock, LabOne could save nearly $34
million in PIK dividend payments if the B-2 to B-1 Conversion is approved. The
terms of the Series B-2 Preferred Stock also provide that if the shareholders
approve the B-2 to B-1 Conversion prior to February 28, 2002, the 18% dividend
rate on the Series B-2 Preferred Stock that has been in effect since its
issuance on August 31, 2001 will be retroactively reduced to 8%. As a result, if
the B-2 to B-1 Conversion is approved at the special meeting, LabOne could save
over $2.2 million in reduced PIK dividend payments in the first year alone.
The reduction in dividend payment obligations can only be realized,
however, if the shareholders also approve the removal of the Conversion
Limitation. Under the terms of the Series B-1 Convertible Preferred Stock, if
the shareholders vote to approve the B-2 to B-1 Conversion while the Conversion
Limitation is still in place, virtually all of the Series B-2 Preferred Stock
will be converted not into Series B-1 Convertible Preferred Stock, but instead
into an immediate obligation on the part of LabOne to pay the Purchasers
approximately $20 million in cash. This $20 million represents the aggregate
stated value of the Series B-2 Preferred Stock that would be in excess of the
Conversion Limitation. LabOne does not presently have the cash to make such a
payment and would be required to obtain financing to satisfy this obligation.
Consequently, unless the Conversion Limitation is removed, upon approval of the
B-2 to B-1 Conversion, LabOne would not realize the dividend savings described
above, and would instead accrue a very substantial payment obligation.
The removal of the Conversion Limitation, especially in conjunction with a
B-2 to B-1 Conversion, would provide LabOne with other benefits as well. The
Series B-2 Preferred Stock is redeemable only for cash. The Series B-1
Convertible Preferred Stock, on the other hand, is redeemable either for cash or
for stock, at the option of LabOne. If the Conversion limitation were removed
such that LabOne could issue an unrestricted number of shares of Common Stock to
the Purchasers, it would give LabOne the ability to use a greater number of
shares of Common Stock to redeem or repurchase Series B-1 Convertible Preferred
Stock if it believed that it was in the best interests of LabOne and its
shareholders to do so. If LabOne were given the option to redeem all of the
Series B-1 Convertible Preferred Stock for shares of stock, it would allow
LabOne to avoid a cash redemption payment of approximately $24 million, assuming
the Series B-1 Convertible Preferred Stock remained outstanding for its full
seven-year term. Moreover, if
40
both the B-2 to B-1 Conversion and the removal of the Conversion Limitation are
approved - such that all the Series B-2 Preferred Stock becomes Series B-1
Convertible Preferred Stock - LabOne would be able to redeem not just all of the
original Series B-1 Convertible Preferred Stock for stock, but also all of the
new Series B-1 Convertible Preferred Stock resulting from the B-2 to B-1
Conversion. This would give LabOne the option of avoiding a cash redemption
payment in respect of the Series B-2 Preferred Stock of over $70 million,
assuming the Series B-2 Preferred Stock remained outstanding for its full
seven-year term. LabOne may also be able to benefit from this ability to redeem
the Series B-1 Convertible Preferred Stock (including, if the B-2 to B-1
Conversion is approved, the converted Series B-2 Preferred Stock) for Common
Stock prior to the end of its full seven year term because the terms of the
Series B-1 Convertible Preferred Stock give LabOne the right to cause all of the
Series B-1 Convertible Preferred Stock to convert to Common Stock after August
31, 2004 and before August 31, 2008 if certain conditions are satisfied.
The B-2 to B-1 Conversion, in conjunction with the removal of the
Conversion Limitation, also provides LabOne with certain benefits. The B-2 to
B-1 Conversion would eliminate an entire class of securities that currently has
the benefit of a number of negative covenants that restrict LabOne's ability to
operate freely (although the B-2 to B-1 Conversion does not affect the Series A
Senior Subordinated Notes which also have the benefit of these negative
covenants). The B-2 to B-1 Conversion would eliminate the right of the holders
of Series B-2 Preferred Stock to require LabOne to redeem their shares for cash
after August 31, 2004. The B-2 to B-1 Conversion may improve LabOne's balance
sheet and enhance its ability to obtain future credit financing because the
Series B-2 Preferred Stock may be viewed by some potential lenders as
subordinated debt, while the Series B-1 Convertible Preferred Stock is uniformly
viewed as equity. Moreover, by converting all of the Purchasers' stock into
freely convertible stock, the B-2 to B-1 Conversion would more closely align the
interests of the Purchasers - LabOne's largest shareholders - with those of the
other shareholders. The Board believes that LabOne and the holders of Common
Stock would benefit if the largest investors in LabOne have the greatest
financial incentive to increase the value of the Common Stock.
In evaluating Proposals 1 and 2, however, the shareholders should bear in
mind the following information. While the Series B-2 Preferred Stock accrues
dividends at the rate of 18% per year, is redeemable for cash at the option of
the holder after August 31, 2004, and has the benefit of certain restrictive
covenants, it also has no voting rights and is not convertible into any other
security without shareholder approval. The Series B-1 Convertible Preferred
Stock into which the Series B-2 Preferred Stock would convert, on the other
hand, does have voting rights and is convertible into Common Stock. As a result,
if the shareholders approve the B-2 to B-1 Conversion and vote to remove the
Conversion Limitation, they would experience immediate significant dilution of
their voting power. If the resulting Series B-1 Convertible Preferred Stock is
later converted into Common Stock, the shareholders would upon conversion
experience immediate significant dilution of their ownership interests in
LabOne. Removal of the Conversion Limitation would also allow the Purchasers to
exercise their Series B Warrants, which exercise would serve to further dilute
the ownership and voting interests of the shareholders. For example, if Proposal
1 is approved and if the Series B-1 Convertible Preferred Stock accrues PIK
dividends for the full seven-year period after issuance, the Series B-1
Convertible Preferred stock would be convertible into, and the Series B Warrants
would be
41
exercisable for, an aggregate of 3,263,877 shares of common stock, or 23.2% of
the outstanding shares of common stock on a fully diluted basis. If Proposals 1
and 2 are approved, and if the Series B-1 Convertible Preferred Stock accrues
PIK dividends for the full seven-year period after issuance, the Series B-1
convertible Preferred Stock would be convertible into, and the Series B Warrants
would be exercisable for, an aggregate of 7,634,694 shares of Common Stock, or
41.5% of the outstanding shares of Common Stock on a fully diluted basis.
If the shareholders approve the removal of the Conversion Limitation, the
holders of the Series B-1 Convertible Preferred Stock would obtain the benefit
of certain additional restrictive covenants, including restrictions on LabOne's
ability to undertake acquisitions for consideration greater than $10 million or
capital projects for in excess of $3 million.
If Proposal 1 is approved, the Purchasers would also become entitled to
nominate up to three candidates for election to the Board. Currently, the
Purchasers are only entitled to nominate one candidate for election to the
Board. If Proposals 1 and 2 are both approved, the holders of Series B-1
Convertible Preferred Stock would be entitled to directly elect one director to
the Board and may ultimately be entitled to directly elect as many as two
directors to the Board.
If Proposals 1 and 2 are both approved, the vesting schedule of options to
purchase a total of [425,740] shares of Common Stock issued under LabOne's 1987,
1997 and 2001 long-term incentive plans will be accelerated. As of [November 5],
2001, these options were in-the-money in an aggregate amount equal to
$[2,857,952], based upon the closing price of the Common Stock on that date of
$[15.05]. The vesting of the following options would be accelerated: (a) options
to purchase a total of 217,200 shares of Common Stock having an average exercise
price of $7.27 per share (and which are presently in-the-money in the aggregate
amount of [$1,690,629], issued to executive officers of LabOne; (b) options to
purchase a total of 184,140 shares of Common Stock having an average exercise
price of $9.16 per share (and which presently are in-the-money in the aggregate
amount of [$1,084,853], issued to employees of LabOne other than executive
officers and directors of LabOne; and (c) options to purchase a total of 24,400
shares of Common Stock having an average exercise price of $11.67 per share (and
which are presently in-the-money in the aggregate amount of [$82,470], issued to
directors who are not executive officers or employees of LabOne. Stock options
granted to directors pursuant to the Stock Program for Outside Directors under
the 2001 Long-Term Incentive Plan will not vest as a result of shareholder
approval of Proposals 1 and 2.
If Proposals 1 and 2 are both approved, LabOne would also incur a one-time
non-cash charge against earnings to the extent the market price of the Common
Stock as of the date of shareholder approval exceeds the $8.32 per share
conversion price of the newly issued Series B-1 Convertible Preferred Stock. In
such event, the amount of the charge would equal the excess of the market price
over the conversion price, multiplied by the number of shares of Common Stock
underlying the newly issued Series B-1 Preferred Stock on such date. Based on a
[$15.05] closing price for the Common Stock on [November 5, 2001], if
shareholder approval of Proposals 1 and 2 had been obtained on November 5th, the
one-time non-cash charge against earnings would have been approximately [$17.6
million]. Because this is a non-cash charge it would be reportable by LabOne as
a charge against earnings for accounting purposes, but it would not require
LabOne to make any payments or use any of its cash.
42
Finally, if the B-2 to B-1 Conversion is approved in conjunction with the
removal of the Conversion Limitation, LabOne will lose certain redemption rights
with respect to the Series B-2 Preferred Stock because the Series B-2 Preferred
Stock is, after August 31, 2004, redeemable at the option of LabOne subject only
to LabOne's willingness to pay a 5% premium for such redemption if it occurs
prior to August 31, 2006 (and no premium if it occurs thereafter), while the
Series B-1 Convertible Preferred Stock is only redeemable after August 31, 2004
if a condition beyond the control of LabOne - the market price of Common Stock
being above a certain level for a certain sustained period of time - is
satisfied.
The Board has determined that the positive consequences of the removal of
the Conversion Limitation and the approval of the B-2 to B-1 Conversion outweigh
the possible negative consequences described above, and that the approval of
Proposals 1 and 2 is in the best interests of LabOne and its shareholders.
Vote Required
The approval of each of Proposal 1 - the removal of the Conversion
Limitation and Proposal 2 - the B-2 to B-1 Conversion requires the affirmative
vote of the holders of a majority of the shares of Common Stock present in
person or by proxy and voting on the proposal. Holders of the Series B-1
Convertible Preferred Stock may not vote their shares on either proposal.
Pursuant to the voting agreement, certain members of the Grant family have
agreed to vote their shares of Common Stock in favor of both Proposal 1 and
Proposal 2. Such members owned an aggregate of 2,007,157 shares, or 18.6%, of
outstanding Common Stock as of the record date for determination of shareholders
entitled to vote at the special meeting.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" PROPOSAL 1 - REMOVAL OF THE
CONVERSION LIMITATION.
THE BOARD ALSO RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" PROPOSAL 2 - APPROVAL OF
THE B-2 TO B-1 CONVERSION.
PROPOSAL 3
PROPOSAL TO APPROVE AMENDMENTS TO ARTICLE X
OF THE ARTICLES OF INCORPORATION
In connection with the Welsh Carson financing, the Board has adopted,
declared advisable and directed to be submitted to the shareholders for approval
the proposed amendments to Article X of the Articles of Incorporation set forth
in Appendix A attached hereto. The Board recommends that the shareholders vote
"FOR" the proposed amendments.
Article X of the Articles of Incorporation is a "fair price" provision
which applies to certain "business combinations" involving "related persons", as
defined in Article X. Article X
43
provides that no "business combination" may be consummated unless it is approved
by the affirmative vote of the holders of not less than 80% of the total voting
power of all outstanding shares of voting stock of the company; provided,
however, that such 80% vote shall not be required, and the provisions of
Missouri law relating to the vote required for shareholder approval, if any,
shall apply to any such business combination if: (a) (i) the consideration
received by shareholders other than the related persons meets certain fair price
requirements and (ii) a proxy statement shall have been mailed to all
shareholders for the purpose of soliciting shareholder approval of the business
combination or (b) the "continuing directors" shall have expressly approved such
business combination by the affirmative vote of not less than two-thirds of all
of the continuing directors either in advance of or subsequent to the
acquisition of outstanding shares of stock of LabOne that caused the related
person involved to become a related person.
The term "business combination" is defined in Article X to include a
number of transactions between LabOne or any subsidiary and a related person,
including any merger, consolidation or share exchange, sales of substantially
all of the assets of LabOne, purchases of assets from or securities of a related
person, issuances of securities by LabOne to a related person or any plan or
proposal for the liquidation or dissolution of LabOne. The term "related person"
is defined as any person or entity, including certain related parties, that
beneficially owns 10% or more of the outstanding shares of any class or series
of stock of LabOne. The term "continuing director" is defined as any director of
LabOne elected to a term of office or whose term of office continued as of the
effective time of the merger of Lab Holdings, Inc. and LabOne, and any other
director that a majority of continuing directors shall designate as a continuing
director or shall recommend or approve for election or nomination for election
as a director of LabOne.
Proposed Amendments
The definition of "continuing director" is proposed to be amended to
include in the definition individuals nominated, appointed or selected by the
holders of Series B-1 Convertible Preferred Stock or nominated, appointed or
selected in accordance with the Securities Purchase Agreement. The current
definition may not include these persons because such persons may be deemed to
be elected as directors under the terms of the Securities Purchase Agreement and
not designated by a majority of the continuing directors. See "SECURITIES
PURCHASE AGREEMENT - Board Composition and Representation".
The definition of "related person" is also proposed to be amended to
exclude WCAS IX and certain related parties from the definition.
Discussion and Reasons For Board Recommendation
The Board recommends that the shareholders approve the proposed amendments
to Article X of the Articles of Incorporation. The Board believes that the
amendment to the definition of "Continuing Director" is necessary to reflect the
Board representation rights under the Securities Purchase Agreement and
Certificate of Designation of the Series B-1 Convertible Preferred Stock and to
more accurately reflect the present character of the Board and the shareholder
base.
44
The Board believes that the exclusion of WCAS IX and related parties from
the definition of "related person" will not harm the holders of Common Stock,
because (a) WCAS IX is not entitled to unilaterally appoint a majority of the
directors of LabOne, (b) WCAS IX and related parties are subject to both a
standstill agreement and LabOne's shareholder rights plan and (c) WCAS IX and
related parties are subject to state law requirements regarding related party
transactions. See "TERMS OF SECURITIES PURCHASE AGREEMENT - Standstill
Agreement" and "TERMS OF SHAREHOLDER RIGHTS PLAN AMENDMENT". The shareholders
should note, however, that if the amendment is adopted, certain transactions,
such as sales of assets or securities by WCAS IX to LabOne, would require
approval of a majority of the directors voting thereon, rather than two-thirds
of the Continuing Directors (as such term is presently defined in the Articles
of Incorporation). WCAS IX is prohibited by the standstill agreement from
engaging in most of the other types of transactions subject to Article X for a
period of seven years.
Vote Required
Approval of the proposed amendments to Article X of the Articles of
Incorporation requires the affirmative vote of the holders of a majority of the
shares of Common Stock and Series B-1 Convertible Preferred Stock entitled to
vote thereon, voting on an as-converted basis as a single class.
Pursuant to the voting agreement, certain members of the Grant family have
agreed to vote their shares of Common Stock in favor of Proposal 3. Such members
owned an aggregate of 2,007,157 shares, or 18.6%, of outstanding Common Stock on
the record date for determination of shareholders entitled to vote at the
special meeting.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PROPOSED
AMENDMENTS TO ARTICLE X OF THE ARTICLES OF INCORPORATION.
PROPOSAL 4
ELECTION OF DIRECTORS
The Board presently consists of seven directors divided into three
classes, classes A and B consisting of two directors each and class C consisting
of three directors. One class of directors is elected each year to hold office
for a three-year term and until the successors of such class are duly elected
and qualified. The class B directors were elected at the 2001 annual meeting of
shareholders held on May 24, 2001.
In order to comply with the terms of the Welsh Carson financing, three
Company Directors have submitted their resignations to the Board, subject to and
effective upon shareholder approval of Proposal 1.
45
If Proposal 1 is approved by the shareholders, the shareholders will be
asked to elect the three nominees listed below as directors of LabOne to fill
the vacancies created by the resignations of the three Company Directors. Two of
the nominees, D. Scott Mackesy and Sean M. Traynor, are nominees of WCAS IX and
one nominee, ____________, is the Jointly Selected Director. ___________ has
been nominated as a class ___ director to fill the vacancy created by the
resignation of ________ for his remaining term of office, to serve until the
200_ annual meeting of shareholders and until such person's successor is elected
and qualified. __________ has been nominated as a class ___ director to fill the
vacancy created by the resignation of ________ for his remaining term of office,
to serve until the 200_ annual meeting of shareholders and until such person's
successor is elected and qualified. __________ has been nominated as a class ___
director to fill the vacancy created by the resignation of ________ for his
remaining term of office, to serve until the 200_ annual meeting of shareholders
and until such person's successor is elected and qualified.
It is expected that each of the following nominees will be available for
election, but in the event that any of them should become unavailable, the
persons named in the accompanying proxy will vote for a substitute nominee or
nominees designated by the Board.
Nominees for Election as Directors
Name Age Class Principal Occupation
- ---- --- ----- --------------------
D. Scott Mackesy 33 __ Mr. Mackesy is a general partner of Welsh
Carson, where he focuses primarily on
investments in the healthcare industry, and is
a managing member of the general partner of
WCAS IX. Prior to joining Welsh Carson in
1998, Mr. Mackesy was a Vice President in the
Investment Research Department at Morgan
Stanley Dean Witter, where he was a health
care equity research analyst. Mr. Mackesy
received his bachelor's degree from The
College of William & Mary. He is a member of
the boards of directors of Pediatrix Medical
Group, Inc., MedCath, Inc., United Surgical
Partners, Inc. and several private companies.
Sean M. Traynor 32 __ Mr. Traynor is a principal at Welsh
Carson, where he focuses primarily on
investments in the healthcare and
telecommunications industries. Prior to
joining Welsh Carson in 1999, Mr. Traynor
worked in the healthcare and insurance
investment banking groups at Bankers
Trust Alex Brown. Mr. Traynor is a
certified public accountant and spent
three years with Coopers & Lybrand. Mr.
Traynor earned his bachelor's degree from
Villanova University and an MBA from the
Wharton School of Business. He is a
member of the boards of directors of
several private companies.
46
- ---------------- -- ----------------------------------------------
Directors Continuing in Office After the Special Meeting [3 of the following
will be omitted]
Name Age Class Principal Occupation
- ---- --- ----- --------------------
W. Thomas Grant II 50 C Mr. W.T. Grant II was appointed Chairman
of the Board, President, Chief Executive
Officer and a class C director of LabOne
upon the merger of LabOne, Inc., a
Delaware corporation (the Delaware
corporation) into LabOne in August 1999
(the merger). Mr. Grant served as a
director of the Delaware corporation from
1993 to the time of the merger. He
served as Chairman of the Board,
President and Chief Executive Officer of
the Delaware corporation from October
1995 to the time of the merger. He
served as Chairman of the Board of LabOne
from May 1993 to September 1997. Mr.
Grant is also a director of Commerce
Bancshares, Inc., Kansas City Power &
Light Company, Response Oncology, Inc.
and AMC Entertainment, Inc.
Paul B. Queally 37 B Mr. Queally is a general partner of Welsh
Carson, where he focuses primarily on
investments in the healthcare industry,
and is a managing member of the general
partner of WCAS IX. Prior to joining
Welsh Carson in 1996, Mr. Queally was a
general partner at the Sprout Group, the
private equity group of Donaldson, Lufkin
& Jenrette. Mr. Queally received his
bachelor's degree from the University of
Richmond and an MBA from Columbia
Business School. He is currently
Chairman of the Board of Concentra
Managed Care, Inc., and a member of the
boards of directors of MedCath, Inc.,
United Surgical Partners, Inc. and
several private companies.
Richard S. Schweiker 74 C Mr. Schweiker was appointed a class C
director of LabOne at the time of the
merger. Mr. Schweiker served as a
director of the Delaware corporation from
1995 to the time of the merger. He has
been retired for the past five years.
Prior to his retirement, he served as
President of the American Council of Life
Insurance, Washington, D.C., a life
insurance trade association.
James R. Seward 48 A Mr. Seward was appointed a class A
director of LabOne at the time of the
merger. Mr. Seward was a director of the
Delaware corporation from 1987 to the
time of the merger.
47
Mr. Seward has been self-employed
as an investment adviser and
consultant since August 1998. From
December 1996 to August 1998, he served
as President, Chief Executive Officer and
a director of SLH Corporation, Shawnee
Mission, Kansas, an asset management
company. SLH Corporation was a
wholly-owned subsidiary of LabOne prior
to its spin-off in March 1997. He was
Executive Vice President of LabOne from
1993 - 1997 and served as its Chief
Financial Officer from 1990 - 1997. Mr.
Seward is also a director of Response
Oncology, Inc., Syntroleum Corporation
and Concorde Career Colleges.
Chester B. Vanatta 65 B Mr. Vanatta was appointed a class B
director of LabOne at the time of the
merger. Mr. Vanatta is a business
consultant. From 1985 until May 1990, he
was an Executive in Residence and the
Paul J. Adam Distinguished Lecturer for
the School of Business at the University
of Kansas. He was formerly Vice Chairman
of Arthur Young & Company (now Ernst &
Young), certified public accountants.
Mr. Vanatta is a director of Atlantis
Plastics, Inc.
John E. Walker 62 C Mr. Walker was appointed a class C
director of LabOne at the time of the
merger. Mr. Walker was a director of the
Delaware corporation from 1984 to the
time of the merger. He retired as
Managing Director - Reinsurance of
Business Men's Assurance Company of
America in 1996. He served as Vice
Chairman of the Board of the Delaware
corporation prior to 1994. Mr. Walker is
a director of FBL Financial Group, Inc.
R. Dennis Wright 59 A Mr. Wright was appointed a class A
director of LabOne at the time of the
merger. Mr. Wright was a director of the
Delaware corporation from 1987 to the
time of the merger. Mr. Wright has been
a partner in the law firm of Morrison &
Hecker L.L.P., Kansas City, Missouri,
since September 1998. Mr. Wright was a
member of Hillix, Brewer, Hoffhaus,
Whittaker & Wright, L.L.C. and Chairman
of its Executive Committee prior to its
merger with Morrison & Hecker L.L.P. in
September 1998. Morrison & Hecker L.L.P.
serves as independent legal counsel to
LabOne.
48
Directors Resigning Effective Upon Approval of Proposal 1 [3 of the
following will be omitted]
Name Age Class Principal Occupation
- ---- --- ----- --------------------
W. Thomas Grant II 50 C Mr. W.T. Grant II was appointed Chairman
of the Board, President, Chief Executive
Officer and a class C director of LabOne
upon the merger of LabOne, Inc., a
Delaware corporation (the Delaware
corporation) into LabOne in August 1999
(the merger). Mr. Grant served as a
director of the Delaware corporation from
1993 to the time of the merger. He
served as Chairman of the Board,
President and Chief Executive Officer of
the Delaware corporation from October
1995 to the time of the merger. He
served as Chairman of the Board of LabOne
from May 1993 to September 1997. Mr.
Grant is also a director of Commerce
Bancshares, Inc., Kansas City Power &
Light Company, Response Oncology, Inc.
and AMC Entertainment, Inc.
Richard S. Schweiker 74 C Mr. Schweiker was appointed a class C
director of LabOne at the time of the
merger. Mr. Schweiker served as a
director of the Delaware corporation from
1995 to the time of the merger. He has
been retired for the past five years.
Prior to his retirement, he served as
President of the American Council of Life
Insurance, Washington, D.C., a life
insurance trade association.
James R. Seward 48 A Mr. Seward was appointed a class A
director of LabOne at the time of the
merger. Mr. Seward was a director of the
Delaware corporation from 1987 to the
time of the merger. Mr. Seward has been
self-employed as an investment adviser
and consultant since August 1998. From
December 1996 to August 1998, he served
as President, Chief Executive Officer and
a director of SLH Corporation, Shawnee
Mission, Kansas, an asset management
company. SLH Corporation was a
wholly-owned subsidiary of LabOne prior
to its spin-off in March 1997. He was
Executive Vice President of LabOne from
1993 - 1997 and served as its Chief
Financial Officer from 1990 - 1997. Mr.
Seward is also a director of Response
Oncology, Inc., Syntroleum Corporation
and Concorde Career Colleges.
Chester B. Vanatta 65 B Mr. Vanatta was appointed a class B
director of LabOne at the time of the
merger. Mr. Vanatta is a business
consultant. From 1985 until May 1990, he
was an Executive in Residence and the
Paul J. Adam Distinguished Lecturer for
the School of Business at the University
of Kansas. He was
49
formerly Vice Chairman of Arthur Young &
Company (now Ernst & Young), certified
public accountants. Mr. Vanatta is a
director of Atlantis Plastics, Inc.
John E. Walker 62 C Mr. Walker was appointed a class C
director of LabOne at the time of the
merger. Mr. Walker was a director of the
Delaware corporation from 1984 to the
time of the merger. He retired as
Managing Director - Reinsurance of
Business Men's Assurance Company of
America in 1996. He served as Vice
Chairman of the Board of the Delaware
corporation prior to 1994. Mr. Walker is
a director of FBL Financial Group, Inc.
R. Dennis Wright 59 A Mr. Wright was appointed a class A
director of LabOne at the time of the
merger. Mr. Wright was a director of the
Delaware corporation from 1987 to the
time of the merger. Mr. Wright has been
a partner in the law firm of Morrison &
Hecker L.L.P., Kansas City, Missouri,
since September 1998. Mr. Wright was a
member of Hillix, Brewer, Hoffhaus,
Whittaker & Wright, L.L.C. and Chairman
of its Executive Committee prior to its
merger with Morrison & Hecker L.L.P. in
September 1998. Morrison & Hecker L.L.P.
serves as independent legal counsel to
LabOne.
Meetings of the Board and Committees
There were four meetings of the Board during 2000. The Board has an audit
committee, a compensation committee and an executive committee. During 2000, the
audit committee met five times, the compensation committee met two times and the
executive committee did not meet. All incumbent directors attended 75 percent or
more of the total number of all meetings of the Board and of committees of which
they were members during 2000.
The audit committee consists of Chester B. Vanatta, chairman, R. Dennis
Wright and John E. Walker. The audit committee recommends to the Board the
engagement and discharge of the independent auditors of LabOne's financial
statements; reviews the independent auditors' independence and terms of
engagement; reviews the results of all audits and management's responses
thereto; reviews the financial statements and any disputes with management
arising over their preparation; considers with the independent and internal
auditors the adequacy of LabOne's internal controls; serves as a channel of
communication between the independent auditors and the Board; and supervises
special investigations deemed necessary by the committee.
The compensation committee consists of Richard S. Schweiker, chairman,
Paul B. Queally and Chester B. Vanatta. The compensation committee reviews
and makes recommendations to the Board with respect to: the salary structure
and any discretionary annual bonuses for officers; the compensation of
non-officer directors; appropriate amendments to
50
LabOne's long-term incentive plans, performance goals, aggregate amounts of
incentive bonuses and payments to participants under LabOne's annual incentive
plan; contributions or amendments to LabOne's profit-sharing 401(K) plan;
amendments to all other employee benefit plans of LabOne; and any significant
employee supplementary pension or termination arrangements.
The executive committee consists of W. Thomas Grant II, chairman, Paul B.
Queally and James R. Seward. The executive committee exercises all the powers
and authority of the Board when the Board is not meeting; develops, recommends
and reviews policy guidelines for all LabOne investments and borrowings;
recommends and reviews the performance of outside investment management firms
performing services for LabOne; and reports all of its actions to the Board.
LabOne does not have a standing nominating committee of the Board or a
committee performing a similar function.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers and beneficial owners of more than ten percent of
the Common Stock of LabOne to file reports of beneficial ownership and changes
in beneficial ownership with the Securities and Exchange Commission and to
provide copies to LabOne. Based solely upon a review of the copies of such
reports provided to LabOne and written representations from directors and
executive officers, LabOne believes that such persons have complied with all
applicable Section 16(a) filing requirements for 2000, except that William D.
Grant reported late, on an amended Form 5 filed February 22, 2001: (a) four
distributions from charitable remainder trusts of an aggregate of 43,884 shares
to Mr. Grant and his wife in March, June and December 2000 and (b) a gift by Mr.
Grant of 1,000 shares.
Required Vote
Nominees for director will be elected by the affirmative vote of a
plurality of shares of Common Stock present and entitled to vote, in person or
by proxy, at the special meeting. The three nominees receiving the greatest
number of votes will be elected as directors. Holders of Series B-1 Convertible
Preferred Stock will not vote on Proposal 4.
Pursuant to the voting agreement, certain members of the Grant family have
agreed to vote their shares of Common Stock in favor of the election of the
nominees for director. Such members owned an aggregate of 2,007,157 shares, or
18.6%, of outstanding Common Stock as of the record date for determination of
shareholders entitled to vote at the special meeting.
THE BOARD RECOMMENDS THAT SHAREHOLDERS GRANT AUTHORITY TO VOTE THEIR SHARES
"FOR" THE ELECTION OF EACH OF THE THREE NOMINEES FOR DIRECTOR.
51
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by LabOne to or on behalf of (i) the person who
served as its chief executive officer during 2000 and (ii) the four most highly
compensated executive officers other than the chief executive officer serving as
of December 31, 2000, for services rendered in all capacities to LabOne and its
subsidiaries for each of the last three completed fiscal years.
- -------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
- ----------------------------- -------- --------------- ----------- -----------
Stock All Other
Fiscal Option Compensation
Name, Principal Position Year Salary Bonus Shares ($) (1)
($) ($) Granted(#)
- ----------------------------- -------- ------- -------- ---------- -----------
W. Thomas Grant II, Chairman 2000 246,577 0 50,000 22,050
of the Board, President and 1999 159,000 0 0 20,710
Chief Executive Officer 1998 164,769 107,261 0 21,670
- ----------------------------- -------- ------- -------- ---------- -----------
Thomas J. Hespe, Former 2000 203,335 0 30,000 21,738
Executive Vice President - 1999 159,900 0 0 20,488
Sales and Marketing and 1998 165,704 107,261 0 21,371
Former President - Clinical
Sales and Marketing
- ----------------------------- -------- ------- -------- ---------- -----------
John W. McCarty, Executive 2000 131,485 51,614(2) 70,000 164
Vice President and Chief 1999 -- -- -- --
Financial Officer 1998 -- -- -- --
- ----------------------------- -------- ------- -------- ---------- -----------
Gregg R. Sadler, Executive 2000 181,219 0 15,000 22,050
Vice President - 1999 159,900 0 0 20,710
Administration and President 1998 165,704 107,261 0 21,670
- - Insurance Laboratory
Division
- ----------------------------- -------- ------- -------- ----------- -----------
Roger K. Betts, Executive 2000 125,100 50,000 12,000 19,051
Vice President - Sales, 1999 125,100 0 0 21,541
Insurance Laboratory Division 1998 129,750 107,261 0 22,742
- ----------------------------- -------- ------- -------- ----------- -----------
(1) The amounts shown in this column for 2000 consist of:
o contributions by LabOne to the accounts of the named executive officers
under LabOne's defined contribution pension plan in the amounts of
$17,247 for Messrs. Grant, Hespe, Sadler and Betts.
o 50% matching contributions by LabOne to the accounts of such persons
under LabOne's profit-sharing 401(K) plan in the amounts of $4,251 for
Messrs. Grant, Hespe and Sadler and $814 for Mr. Betts; and
o insurance premium payments by LabOne with respect to group term life
insurance for the benefit of such persons in the amounts of $552 for
Messrs. Grant and Sadler, $164 for Mr. McCarty, $240 for Mr. Hespe and
$991 for Mr. Betts.
(2) Amount paid to Mr. McCarty in connection with his hiring by LabOne,
including $50,000 to cover costs of relocating to the Kansas City, Missouri
metropolitan area in April, 2000 and $1,614 to cover COBRA health care
insurance costs.
52
Option Grants in 2000
- -------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise Option Term ($)
Granted in Fiscal Price Expiration
Name (1)(#) Year ($/Sh) Date 5% 10%
- -------------------------------------------------------------------------------
W. T. Grant II 50,000 18.2% 6.94 2/10/10 218,148 552,829
- -------------------------------------------------------------------------------
T. J. Hespe 30,000 10.9% 6.94 2/10/10 130,889 331,698
- -------------------------------------------------------------------------------
J. W. McCarty 70,000 25.5% 6.56 3/31/10 288,898 732,125
- -------------------------------------------------------------------------------
G. R. Sadler 15,000 5.5% 6.94 2/10/10 65,444 165,849
- -------------------------------------------------------------------------------
R. K. Betts 12,000 4.4% 6.94 2/10/10 52,355 132,679
- -------------------------------------------------------------------------------
(1) Each of the options vests in five equal annual installments, subject to
immediate vesting upon a "change of control" of LabOne as defined in the
stock option agreements governing the stock options, which would include
the acquisition by WCAS IX and the other Purchasers of 20% or more of the
combined voting power of the outstanding securities of LabOne. See the
discussion under "PROPOSAL 1 - PROPOSAL TO APPROVE TERMINATION OF LIMIT ON
CONVERSION OF SERIES B-1 CONVERTIBLE PREFERRED STOCK AND EXERCISE OF
SERIES B WARRANTS - POTENTIAL NEGATIVE EFFECTS OF APPROVAL OF PROPOSAL 1 -
Acceleration Of Vesting Of Stock Options".
Aggregate Option Exercises and December 31, 2000 Option Value Table
The following table provides certain information concerning the exercise
of stock options during 2000 by each of the named executive officers and the
number and value of unexercised options held by such persons on December 31,
2000.
- --------------------------------------------------------------------------------
Number of Shares Value of
Underlying Unexercised
Unexercised In-the-Money
Options on Options on
December 31, 2000 (#) December 31, 2000 ($)
- --------------------------------------------------------------------------------
Shares
Acquired
on
Exercise Value Options Options Options Options
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------
W.T. Grant II 0 0 72,431 80,000 0 0
- ---------------------------- -------------------------- ------------------------
T.J. Hespe 0 0 100,000 30,000 0 0
- ---------------------------- -------------------------- ------------------------
J.W. McCarty 0 0 0 70,000 0 0
- ---------------------------- -------------------------- ------------------------
G.R. Sadler 0 0 100,000 15,000 0 0
- ---------------------------- -------------------------- ------------------------
R.K. Betts 0 0 31,000 16,000 0 0
- ---------------------------- -------------------------- ------------------------
53
Compensation of Directors
Directors who are not employees of LabOne or any parent or affiliate
receive an annual retainer fee of $7,500 in cash, a grant of a number of shares
of Common Stock having a value equal to $2,500 and a stock option having a value
of $15,000. The number of shares subject to the option is determined by dividing
50,000 by the fair market value of LabOne Common Stock on the date of grant, the
stock option opportunity value thus being valued at 30% of the fair market value
of the shares subject to the option. Directors who are not employees of LabOne
also receive $1,250 for each board meeting attended, $500 for each committee
meeting attended that is not held within one day of a board meeting and $500 for
each telephonic board meeting attended. Each such director who also serves as
Chairman of a committee also receives $1,000 per year for serving in such
capacity. Directors also receive reimbursement for reasonable expenses in
attending meetings.
Richard S. Schweiker, a director of LabOne, attended national meetings of
insurance underwriters on LabOne's behalf and made selected contacts in
furtherance of LabOne's business, for which services LabOne paid Mr. Schweiker
additional fees of $30,000 annually through December 31, 2000, at which time
this arrangement ended.
James R. Seward, a director of LabOne, entered into a consulting agreement
with LabOne following the January 6, 2000 resignation of Robert D. Thompson as
Executive Vice President, Chief Operating Officer and Chief Financial Officer of
LabOne. Mr. Seward agreed during the period from January 6 through April 5, 2000
to (a) assist LabOne in securing a new Chief Financial Officer, (b) perform the
services generally performed by the Chief Financial Officer, and (c) assist
LabOne in conducting investor relations and performing financial analysis of any
potential business acquisitions. In consideration for Mr. Seward's performance
of such services, LabOne granted Mr. Seward a non-qualified stock option for
25,000 shares of Common Stock, at an option price of $6.125 per share, which
option became 100% vested on April 6, 2000 and has been exercised. Mr. Seward
also entered into a consulting agreement with LabOne beginning October 1, 2001.
See "Employment Agreements" below.
Employment Agreements
LabOne has employment agreements with W. Thomas Grant II, John W.
McCarty, Gregg R. Sadler and Roger K. Betts. Mr. Grant's agreement provides
for his employment for a two-year term from February 2000 to February 2002
and is renewable annually thereafter for successive one-year terms unless
LabOne elects not to extend the agreement. Mr. Sadler's agreement is
renewable annually for successive one-year terms unless LabOne elects not to
extend it. The agreements with Messrs. Betts and McCarty are terminable on 30
days' notice. The annual base salaries provided pursuant to these agreements
are $249,000 to Mr. Grant, $175,000 to Mr. McCarty, $175,000 to Mr. Sadler
and $120,900 to Mr. Betts. In the event that LabOne terminates Mr. Grant
without cause (as defined in the agreement), LabOne will pay Mr. Grant a lump
sum severance payment equal to his base salary for the balance of the term of
his agreement, plus one year's annual base salary. If LabOne terminates Mr.
Sadler without cause (as defined), LabOne will pay Mr. Sadler a lump sum
severance payment equal to his base salary for the balance of the term of his
agreement, plus 50% of one year's annual base salary. If
54
LabOne terminates Mr. McCarty without cause, LabOne will pay him a
severance payment equal to one year's base salary. If LabOne terminates Mr.
Betts without cause, LabOne will pay him a severance payment equal to six
months' base salary.
Under the agreements with Messrs. Grant, McCarty and Sadler, if a change
of control of LabOne (as defined in the agreements) occurs when any of such
officers is in LabOne's full-time employment, and within one year after such a
change in control the officer's employment is terminated for any reason other
than permanent disability, death or normal retirement, LabOne will pay the
officer as termination compensation a lump sum amount equal to three times the
officer's average annual compensation for the most recent five taxable years
(subject to certain limitations prescribed in the Internal Revenue Code) and any
remaining term of the officer's agreement will be cancelled. Under each
agreement, the officer agrees not to compete with LabOne for a period of two
years after the termination of his employment. The transactions contemplated by
the Welsh Carson financing will not constitute a "change of control" under the
employment agreements.
Prior to August 31, 2001, LabOne had an employment agreement with Mr.
Hespe terminable on 30 days' notice. The annual base salary provided pursuant to
that agreement was $200,000. As of September 1, 2001, Mr. Hespe's employment
agreement was terminated pursuant to a severance agreement entitling Mr. Hespe
to aggregate compensation of approximately $50,000 in cash and a car allowance
of $2,250 for services provided from September 1, 2001 to December 2, 2001 and
monthly compensation of approximately $1,044 per month for services to be
provided from December 3, 2001 to August 31, 2002.
James R.Seward, a director of LabOne, entered into a consulting agreement
with LabOne as of October 1, 2001. This consulting agreement is terminable on
written notice and entitles Mr. Seward to compensation of $4,000 per month.
During the first five years of the agreement, LabOne has agreed to pay the
annual premiums due in connection with a rate saver medical insurance policy on
Mr. Seward, but in no event to exceed $1,200 per year. If the consulting
agreement is terminated, LabOne is obligated to continue to pay the premiums on
this policy for the five year term of the agreement.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the Board consists of Richard S. Schweiker,
Chairman, Paul B. Queally and Chester B. Vanatta. All of the members of the
committee are non-employee directors of LabOne, have not been employees or
officers of LabOne or any of its subsidiaries and have had no relationships or
transactions with LabOne other than those described in this proxy statement.
R. Dennis Wright is a partner in the law firm of Morrison & Hecker L.L.P.,
Kansas City, Missouri, which provides legal services to LabOne and its
subsidiaries. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Fees for
Legal Services" on page __ for the fees paid to such law firm in 2000.
55
Board Compensation Committee Report on Executive Compensation
All issues pertaining to executive compensation are reviewed by the
compensation committee and recommendations are submitted by the committee to the
full Board for approval.
Compensation Philosophy
The philosophy governing executive compensation is based on a belief that
management and shareholders have a common goal of increasing the value of
LabOne. The business strategy for achieving this goal is expressed in LabOne's
mission statement: "LabOne is dedicated to maximizing the return on investment
for our shareholders . . . to providing the lowest-cost, highest-quality
laboratory testing services for our clients . . . to providing a working
environment that emphasizes accountability for results and rewards employees
based on their contribution to LabOne's success".
Three principal elements of executive compensation base salary - annual
incentive plan, and stock options - are used to motivate and reward the
accomplishment of annual corporate objectives, reinforce a strong orientation
toward operating excellence, provide variability in individual awards based on
contributions to business results, and maintain a competitive compensation
package to attract, retain and motivate individuals of the highest professional
quality.
Base Salary
Base salaries for 2000 were developed based on a survey conducted in 1999
by the Hay Group, a compensation consulting firm. Base salaries were targeted at
the median level of pay for comparable positions in the Hay Group
All-Organization Database. The committee also considered an individual
performance evaluation for each executive officer in determining his or her base
salary. Base salary decisions were not based upon any specific financial
performance measure or criterion with respect to LabOne.
Annual Incentive Plan
The annual incentive plan is designed to motivate and reward the
accomplishment of targeted growth in operating results. Prior to the beginning
of 2000 fiscal year, the committee established an operating earnings goal under
the 2000 plan based upon the committee's judgment of reasonable operating
earnings growth over the previous fiscal year. No incentive bonuses are payable
under the plan if the minimum operating earnings threshold is not met. The size
of the incentive pool increases pursuant to a formula established by the
committee as operating earnings increase over the minimum threshold. Under the
plan, the incentive pool is distributed in cash to designated officers and
managers at year end according to a pre-established weighting. The weighting is
based upon senior management's subjective evaluations of each individual's
potential contribution to LabOne's financial and strategic goals for the year,
and is reviewed and approved by the committee. No bonuses were paid under the
plan for 2000.
LabOne also pays discretionary annual bonuses to executive officers and
key employees of LabOne and its subsidiaries on an irregular basis upon the
recommendation of the committee.
56
In making determinations as to recommended bonuses, the committee
considers the financial condition and the operating results over the last fiscal
year, the level of salary, bonus, fringe and other benefits currently provided
to the executive and the individual performance of the executive. The
committee's recommendations are based upon its subjective review of these
factors and are not based upon any specific criteria or financial performance
measure. No discretionary bonuses were paid for 2000.
Stock Options
The compensation committee, as well as the Board, believes that
significant stock ownership through stock options by key employees and directors
should be a major incentive in aligning the interests of employees and
shareholders, because value is only provided if the stock price increases and
because stock options have an effective long-term reward and retention function.
LabOne administers the 1987 long-term incentive plan and the 1997
long-term incentive plan. Under the plans, ten-year nonqualified stock options
are granted to executive officers and other key employees when they are hired or
promoted into eligible positions, with vesting generally occurring over five
years. In addition to executive officers and employees, each non-employee
director of the LabOne joining the Board prior to May 2001 was granted at the
time of joining the Board a ten-year nonqualified stock option vesting over five
years.
LabOne also administers the 2001 Long-Term Incentive Plan. The plan
includes three separate programs designed to further align the interests of
employees and directors with the interests of shareholders. The plan includes
the Bonus Replacement Stock Option Program, under which LabOne may permit or
require employees who are eligible to receive annual cash incentive compensation
under LabOne's incentive programs to receive nonqualified stock options in lieu
of cash. Under the 2001 Bonus Replacement Stock Option Program offering,
eligible employees will automatically receive 20 - 50% (depending upon job
title) of any cash incentive compensation earned in the form of stock options
and will have the right to elect to receive all or a portion of their remaining
incentive compensation in the form of stock options. The Stock Program for
Outside Directors provides that outside directors of LabOne will receive their
annual retainer fees in a combination of cash, shares of LabOne Common Stock and
stock options. The Stock Incentive Program permits discretionary awards of stock
incentives to officers, directors, key employees and consultants of LabOne.
Chief Executive Officer's Compensation
In February 2000, the committee recommended and the Board approved an
increase in the salary of W. Thomas Grant II, Chairman of the Board, President
and Chief Executive Officer of LabOne, from $150,000 per annum to $249,000 per
annum. Mr. Grant also received a car allowance of $9,000. Prior to the increase,
Mr. Grant's salary had been established at a level below that of LabOne's other
senior management at Mr. Grant's request. The increase was designed to bring Mr.
Grant's salary in line with that paid to other executive officers of LabOne and
was consistent with the salary levels recommended to the committee by the Hay
Group. The salary paid to Mr. Grant for 2000 was $238,000. Mr. Grant also
participated in LabOne's 2000 annual incentive plan. Based on 2000 plan results,
Mr. Grant received no incentive bonus for 2000.
57
Deductibility Cap on Compensation Exceeding $1,000,000
The committee has considered the potential impact of section 162(m) of the
Internal Revenue Code regarding non-deductibility of annual compensation in
excess of $1,000,000. The committee does not believe that section 162(m) will
have any material impact upon LabOne, given the current salary and bonus levels
of officers of LabOne and the treatment in the regulations of compensation under
LabOne's long-term incentive plans. The committee believes that many of the
options currently outstanding are exempt from the deductibility limit under the
transition provisions set forth in the regulations under section 162(m). It is
the committee's current intention that options granted under LabOne's long-term
incentive plans will qualify as performance-based compensation and be exempt
from the deductibility limits of section 162(m). The committee will continue to
evaluate the advisability of qualifying executive compensation for deductibility
under section 162(m).
Submitted by the Compensation Committee
Richard S. Schweiker, Chairman
Paul B. Queally
Chester B. Vanatta
58
Comparison of Five Year Cumulative Total Return Among
LabOne, Nasdaq Composite Index and Peer Group
(Graphic Omitted)
The table assumes the investment at the close of business on December 31, 1995,
of $100 in LabOne Common Stock and in the portfolio represented in each index,
and assumes that all dividends were reinvested.
The NASDAQ Composite is a NASDAQ Stock Market index consisting of U.S.
companies that is provided by the Center for Research in Security Prices of
the University of
59
Chicago. LabOne has selected an index of seven testing laboratories and
insurance services companies as its peer group: AmeriPath, Dianon Systems, Inc.,
DynaCare, Hooper Holmes, Inc., Laboratory Corporation of America and Qwest
Diagnostics, Inc. Four companies, AmeriPath, DynaCare, Hooper Holmes and Impath,
were added to more fully represent the insurance services and clinical
laboratory markets, and four companies used in prior performance graphs,
Bio-Reference Labs, Medtox Scientific, Pharmchem and Psychemedics, were deleted.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
2000 Stock Purchase Loan Program
In November, 2000, LabOne adopted the 2000 Stock Purchase Loan Program,
which provides for the extension of loans to eligible executive officers of
LabOne and its subsidiaries to purchase shares of LabOne Common Stock. The
purpose of the program is to enable participants to increase their ownership of
LabOne Common Stock by financing their purchases, thereby better aligning their
interests with the interests of the shareholders of LabOne. The maximum number
of shares of LabOne Common Stock that may be acquired under the program is
25,000 shares. All loans under the program are full-recourse loans, secured by
the LabOne Common Stock purchased with the proceeds of the loan and all other
assets of the participant held as collateral pursuant to any other agreement
entered into between the participant and LabOne or any subsidiary.
On November 20, 2000, LabOne made loans in the following amounts to the
following eligible executive officers of LabOne to purchase the following number
of shares of LabOne Common Stock:
Principal Number
Executive Amount of Shares
Officer of Loan Purchased
------- ------- ---------
Roger K. Betts $15,312 2,500 shares
Thomas H. Bienvenu II $ 9,188 1,500 shares
W. Thomas Grant II $30,625 5,000 shares
Troy L. Hartman $ 6,125 1,000 shares
The shares of LabOne Common Stock sold by LabOne pursuant to the program
were sold from its treasury shares at a price per share equal to $6.125, which
was the last sale price reported on the Nasdaq National Market on the trading
day immediately prior to the day the loans were granted, as reported in the Wall
Street Journal. Each loan provides for the payment of interest at an annual rate
of eight percent (8%), which was the prime rate as of the date the loan was
issued. Each loan made under the program is evidenced by a collateral note to
LabOne by the executive officer receiving the loan.
60
Each loan provides that, commencing the calendar month after the month in
which the loan is issued, the participant shall pay the outstanding principal
balance of the loan and all accrued interest thereon biweekly in 130 equal
installments, commencing with the first pay period in that month and continuing
in each pay period thereafter, by means of automatic payroll deductions. In
addition, the outstanding principal and accrued interest of each loan becomes
due and fully payable on the first to occur of the following events: (a)
termination of employment of the participant for any reason other than death;
(b) 180 days after the death of the participant or (c) the fifth anniversary of
the date the loan is issued. Upon the maturity of the loan, LabOne has the right
to offset the outstanding principal and accrued interest under the loan against
any compensation owing to the participant, including but not limited to any
salary payments, severance payments and benefits, accrued vacation pay, business
expense reimbursements and any other payments due LabOne or any subsidiary by
the participant under the employment agreement between LabOne and the
participant.
LabOne holds possession of any certificates representing the LabOne Common
Stock pledged as collateral for each loan until the loan is paid in full. Each
participant is prohibited from selling or otherwise disposing of the shares of
LabOne Common Stock acquired with the loan for a period of one year following
the date of purchase of the shares by the participant.
Fees for Legal Services
R. Dennis Wright, a director of LabOne, is a partner in the law firm of
Morrison & Hecker L.L.P., Kansas City, Missouri, which provides legal
services to LabOne and its subsidiaries. LabOne paid $536,000 to Morrison &
Hecker L.L.P. for legal services in 2000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows as of _____________, 2001, the total number of
shares of Common Stock beneficially owned by persons known to be beneficial
owners of more than 5% of the outstanding stock.
- -------------------------------------------------------------------------------
Shares of
LabOne Percentage of
Beneficial Owner Beneficially Outstanding Shares
Owned of LabOne
--------, 20011 Beneficially Owned
- -------------------------------------------------------------------------------
WCAS Management Corporation 1,634,4922 13.1%
Welsh, Carson, Anderson & Stowe, IX, L.P.
320 Park Avenue, Suite 2500
New York, New York 10022-6815
- -------------------------------------------------------------------------------
Dimensional Fund Advisors, Inc. 658,4003 6.1%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- -------------------------------------------------------------------------------
William D. Grant 1,817,1094 16.9%
One Ward Parkway, Suite 130
Kansas City, Missouri 64112
- -------------------------------------------------------------------------------
61
- -------------------------------------------------------------------------------
The Southern Fiduciary Group, Inc. 670,3673,5 6.2%
2325 Crestmoor Road, Suite 202
Nashville, Tennessee 37215
- -------------------------------------------------------------------------------
1. Unless otherwise indicated, each person has sole voting and investment power
with respect to the shares listed.
2. Based on holdings that were convertible into or exercisable for Common Stock
as of the date of this proxy statement. Does not include shares issuable as a
result of dividend accruals since August 31, 2001. In its Schedule 13D filed
September 10, 2001, WCAS Management Corporation reported that it had sole voting
and investment power with respect to 2,189 shares of Common Stock issuable upon
conversion of Series B-1 Convertible Preferred Stock and Series B-2 Preferred
Stock and exercise of Series B Warrants. In the same Schedule 13D, Welsh,
Carson, Anderson & Stowe, IX, L.P. reported that it had sole voting and
investment power with respect to 4,423,934 shares of Common Stock issuable upon
conversion of Series B-1 Convertible Preferred Stock and Series B-2 Preferred
Stock and exercise of Series B Warrants. As of the date of this proxy, neither
the Series B-2 Preferred Stock nor the Series B Warrants were convertible or
exercisable. Of the 4,426,123 shares reported as beneficially owned by Welsh,
Carson, Anderson & Stowe, IX, L.P., 2,451,682 shares of Common Stock are
issuable upon conversion of Series B-1 Convertible Preferred Stock that is only
issuable upon the automatic conversion of Series B-2 Preferred Stock. According
to the Schedule 13D, the reporting persons made a single, joint filing because
they may be deemed to constitute a "group" within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended. The Schedule 13D
reports that WCAS IX Associates, L.L.C., the sole general partner of Welsh,
Carson, Anderson & Stowe, IX, L.P., may be deemed to beneficially own the shares
beneficially owned by Welsh, Carson, Anderson & Stowe, IX, L.P. See "TERMS OF
THE SERIES B-1 CONVERTIBLE PREFERRED STOCK", "TERMS OF THE SERIES B-2 PREFERRED
STOCK", "TERMS OF THE SERIES B WARRANTS", "PROPOSAL 1 - PROPOSAL TO APPROVE
TERMINATION OF LIMIT ON CONVERSION OF SERIES B-1 CONVERTIBLE PREFERRED STOCK AND
EXERCISE OF SERIES B WARRANTS" and "PROPOSAL 2 - PROPOSAL TO APPROVE AUTOMATIC
CONVERSION OF SERIES B-2 PREFERRED STOCK INTO SERIES B-1 CONVERTIBLE PREFERRED
STOCK". The Schedule 13D reports that the reporting persons and the members of
the Grant family may be deemed to constitute a group as a result of the voting
agreement between members of the Grant family and Welsh Carson. See "TERMS OF
VOTING AGREEMENT".
3. As reported in a Schedule 13G filed by the beneficial owner as of December
31, 2000. 4. Mr. Grant has sole voting and investment power with respect to
901,695 shares and shared voting and investment power with respect to 915,414
shares. The shares as to which Mr. Grant has shared voting and investment power
consist of 478,237 shares held by three family trusts as to which Mr. Grant, as
co-trustee, shares voting and investment power with UMB Bank, N.A.; 295,158
shares held by two family trusts as to which Mr. Grant has the right to direct
the voting and disposition of such shares and therefore shares voting and
investment powers with the trustee, UMB Bank, N.A.; 60,649 shares in a family
trust for Mr. Grant's niece, as to which Mr. Grant, as co-trustee, shares voting
and investment power with UMB Bank, N.A.; and 81,370 shares owned by the wife of
Mr. Grant, as to which Mr. Grant disclaims beneficial ownership. Mr. Grant
disclaims beneficial ownership of any shares owned by WCAS IX and its affiliates
which WCAS IX is required to vote in accordance with the voting agreement
between members of the Grant Family and WCAS IX. See "TERMS OF VOTING
AGREEMENT".
5. According to the Schedule 13G filed by the reporting person, the reporting
person has sole voting power with respect to 407,435 shares and no voting power
with respect to 262,992 shares.
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows as of [December 1, 2001,] for each director,
each of the executive officers of LabOne on such date who are named in the
summary compensation table on page 59 hereof, and all directors and executive
officers of LabOne as a group, the total number of shares of Common Stock
beneficially owned by such persons.
- ---------------------------------------------------------------------
Percentage of
Shares of LabOne Outstanding Shares
Beneficial Owner Beneficially of LabOne
Owned1,2 Beneficially Owned3
- ---------------------------------------------------------------------
Roger K. Betts 43,3094 *
- ---------------------------------------------------------------------
W. Thomas Grant II 218,8854,5 1.7%
- ---------------------------------------------------------------------
Thomas J. Hespe 110,919 *
- ---------------------------------------------------------------------
D. Scott Mackesy 1,634,4946 13.1%
- ---------------------------------------------------------------------
John W. McCarty 20,000 *
- ---------------------------------------------------------------------
62
- ---------------------------------------------------------------------
Paul B. Queally 1,637,0187 13.1%
- ---------------------------------------------------------------------
Gregg R. Sadler 49,0344 *
- ---------------------------------------------------------------------
Sean M. Traynor 7218 *
- ---------------------------------------------------------------------
Richard S. Schweiker 27,457 *
- ---------------------------------------------------------------------
James R. Seward 79,935 *
- ---------------------------------------------------------------------
Chester B. Vanatta 13,395 *
- ---------------------------------------------------------------------
John E. Walker 17,4229 *
- ---------------------------------------------------------------------
R. Dennis Wright, Esq. 5,457 *
- ---------------------------------------------------------------------
All directors and executive
officers of LabOne as a group 2,332,206
(16 persons)
- ---------------------------------------------------------------------
* Less than 1% of outstanding shares
1. Unless otherwise indicated, each person has sole voting and investment power
with respect to the shares listed.
2. Includes the following numbers of shares which such persons have the right to
acquire within 60 days after [December 1, 2001] pursuant to options granted
under the LabOne Long-Term Incentive Plan: Roger K. Betts, 37,400 shares; W.
Thomas Grant II, 70,000 shares; Thomas J. Hespe, 106,000 shares; John W.
McCarty, 14,000 shares; Gregg R. Sadler, 33,000 shares; Richard S. Schweiker,
22,000 shares; James R. Seward, 38,800 shares; Chester B. Vanatta, 8,800 shares;
and all directors and executive officers as a group, 418,400 shares. The vesting
of certain outstanding stock options will accelerate if Proposals 1 and 2 are
approved. The table does not include the following numbers of additional shares
which such persons will have the right to acquire within 60 days after [December
1, 2001] if Proposals 1 and 2 are approved: Roger K. Betts, 9,600 shares; W.
Thomas Grant II, 55,000 shares; Thomas J. Hespe, 24,000 shares; John W. McCarty,
56,000 shares; Gregg R. Sadler, 12,000 shares; Chester B. Vanatta, 13,200
shares; James R. Seward, 11,200 shares; and all directors and executive officers
as a group, 284,600 shares.
3. For purposes of determining this percentage, the outstanding shares of LabOne
include shares which such persons have the right to acquire within 60 days after
[December 1, 2001] pursuant to options granted under LabOne's long-term
incentive plans.
4. Includes the following numbers of shares held in individually directed
accounts of the named persons under LabOne's 401(k) profit-sharing plan, as to
which each of such persons has sole investment power only: Roger K. Betts, 3,409
shares; W. Thomas Grant II, 29,346 shares; Thomas J. Hespe, 2,419 shares; Gregg
R. Sadler, 8,635 shares; and all directors and executive officers as a group,
68,014 shares.
5. Includes 31,773 shares held by W. Thomas Grant II as custodian for his
children, 67,500 shares held in a family trust for which W. Thomas Grant II
serves as co-trustee and in that capacity shares voting and investment powers,
and 2,473 shares owned by the wife of W. Thomas Grant II, as to which he
disclaims beneficial ownership.
6. Based on holdings that were convertible into or exercisable for Common Stock
as of the date of this proxy statement. Does not include shares issuable as a
result of dividend accruals since August 31, 2001. Includes 1,633,653 shares
owned by Welsh, Carson, Anderson & Stowe, IX, L.P. Mr. Mackesy is a managing
member of WCAS IX Associates, L.L.C. ("IX Associates"), which is the general
partner of Welsh, Carson, Anderson & Stowe, IX, L.P. The managing members of IX
Associates may be deemed to share the power to vote or direct the voting or to
dispose or direct the disposition of the shares beneficially owned by Welsh,
Carson, Anderson & Stowe, IX, L.P. or IX Associates. Mr. Mackesy disclaims
beneficial ownership of the shares beneficially owned by Welsh, Carson, Anderson
& Stowe, IX, L.P. and IX Associates.
7. Based on holdings that were convertible into or exercisable for Common Stock
as of the date of this proxy statement. Does not include shares issuable as a
result of dividend accruals since August 31, 2001. Includes 1,633,653 shares
owned by Welsh, Carson, Anderson & Stowe, IX, L.P. Mr. Queally is a managing
member of WCAS IX Associates, L.L.C. ("IX Associates"), which is the general
partner of Welsh, Carson, Anderson & Stowe, IX, L.P. The managing members of IX
Associates may be deemed to share the power to vote or direct the voting or to
dispose or direct the disposition of the shares beneficially owned by Welsh,
Carson, Anderson & Stowe, IX, L.P. or IX Associates. Mr. Queally disclaims
beneficial ownership of the shares beneficially owned by Welsh, Carson, Anderson
& Stowe, IX, L.P. and IX Associates.
8. Based on holdings that were convertible into or exercisable for Common
Stock as of the date of this proxy statement. Does not include shares
issuable as a result of dividend accruals since August 31, 2001.
9. All of Mr. Walker's shares are owned by a revocable trust for Mr. Walker's
wife, as to which he disclaims beneficial ownership.
SHAREHOLDER PROPOSALS
Shareholder nominations or other proposals may be brought before the 2002
annual meeting of shareholders only by shareholders entitled to vote at such
meeting who give timely written notice thereof in compliance with Article VI of
the by-laws, which notice must be delivered to the Secretary of LabOne on the
earlier of (a) 90 days prior to the date of such
63
meeting or (b) if LabOne does not provide at least 100 days' prior notice or
public announcement of the date of such meeting, the shareholder notice must be
delivered to the Secretary not more than ten days following the mailing date of
the notice or public announcement of the date of the meeting. To be considered
for inclusion in the proxy statement and proxy for the 2002 annual meeting of
shareholders, any shareholder proposal must be received at LabOne's corporate
office by December 14, 2001.
GENERAL
The Board knows of no other matters which will be presented for
consideration at the special meeting other than those stated in the notice of
special meeting which is part of this proxy statement. If any other matters do
properly come before the meeting, proxies in the accompanying form confer upon
the persons named in such proxies discretionary authority to vote upon such
matters, to the extent permitted under the applicable rules of the Securities
and Exchange Commission.
In addition to the solicitation of proxies from shareholders by mail,
proxies may be solicited by directors, officers and other employees, by personal
interview, telephone or telegram. Such persons will receive no additional
compensation for such services. LabOne requests that brokerage houses and other
custodians, nominees and fiduciaries forward the soliciting material to the
beneficial owners of the shares of Common Stock held of record by such persons
and will pay such brokers and other fiduciaries their reasonable out-of-pocket
expenses incurred in connection therewith. All costs of solicitation, including
the costs of preparing, assembling and mailing this proxy statement and all
papers which now accompany or may hereafter supplement the same, will be borne
by LabOne.
In addition, LabOne has retained _____ to assist LabOne in the
solicitation of proxies from shareholders in connection with the special
meeting. LabOne will pay ______________ a fee of $__________ as compensation for
its services and will reimburse its out-of-pocket expenses. LabOne has agreed to
indemnify _________ against certain liabilities arising out of or in connection
with its engagement.
DOCUMENTS INCORPORATED BY REFERENCE
The following information is incorporated by reference to LabOne's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000: Item 8
("Financial Statements and Supplementary Data"); Item 7 ("Management's
Discussion and Analysis of Financial Condition and Results of Operations"); Item
9 ("Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure"); and Item 7A ("Quantitative and Qualitative Disclosures about
Market Risk").
The financial statements of Osborn (including the notes thereto and
accountants' report thereon) and certain pro forma financial information of
LabOne is incorporated by reference to Item 7 ("Financial Statements and
Exhibits") of LabOne's Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on ________, 2001.
64
All information updating the foregoing information included in any
document filed by LabOne pursuant to Section 13 (a), 13 (c), 14 or 15 (d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
proxy statement and prior to the special meeting shall be deemed to be
incorporated by reference into this proxy statement and to be a part hereof from
the date of filing of such document.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this proxy
statement, or in any other subsequently filed document which is also
incorporated herein by reference, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part of this proxy statement except as so modified or superseded.
Representatives of KPMG LLP, independent auditors of the Company, are
expected to be present at the special meeting to make any statement they may
desire and to respond to appropriate questions.
By Order of the Board of Directors
JOSEPH C. BENAGE
Secretary
December ___, 2001
65
APPENDIX A
PROPOSED AMENDMENTS TO ARTICLE X
OF THE ARTICLES OF INCORPORATION
OF
LABONE, INC.
----------------------------------
RESOLVED, that Article X of LabOne's Articles of Incorporation is hereby amended
by deleting in its entirety Section B(2) and replacing it with the following:
"2. The term "Related Person" shall mean any individual, corporation,
partnership or other person or entity which, as of the record date
for the determination of shareholders entitled to notice of and to
vote on any Business Combination, or immediately prior to the
consummation of any such Business Combination, is a "Beneficial
Owner" (as defined in Rule 13d-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934 as in effect at the date of
the adoption of this Article X by the shareholders of the
Corporation) (collectively and as so in effect, the "Exchange Act")
of shares of any class or series of capital stock of the Corporation
which, when combined with the shares of such class or series of stock
of which any "Affiliates" or "Associates" (as defined in Rule 12b-2
of the Exchange Act) of such individual, corporation, partnership or
other person or entity are Beneficial Owners, amount to ten percent
(10%) or more of the outstanding shares of such class or series of
stock, and any Affiliate or Associate of such Related Person;
provided, however, that neither Welsh, Carson, Anderson & Stowe IX,
L.P. ("WCAS") nor any of its general partners or Controlled Entities
("WCAS Parties") shall be considered a Related Person. "Controlled
Entities" shall mean entities in which any one or more of the WCAS
Parties owns a majority of the voting shares or securities or has the
ability (whether through the ownership of voting securities, contract
or otherwise) to elect a majority of the Board of directors or
similar governing body or of which any one or more of the WCAS
Parties has the authority to control or direct investment decisions".
FURTHER RESOLVED, that Article X of LabOne's Articles of Incorporation is hereby
amended by deleting in its entirety Section B(3) and replacing it with the
following:
"3. The term "Continuing Directors" shall mean the individuals who
constituted the Board of Directors of the Corporation on the date of
this amendment to Article X (the "Incumbent Directors"); provided,
that any individual becoming a director during any year shall be
considered to be an Incumbent Director if (i) such individual's
election, appointment or nomination was recommended or approved by at
least two-thirds of the other Incumbent Directors continuing in
office following such election, appointment or nomination present, in
person or by telephone, at any meeting of the Board of Directors of
the Corporation, after the giving of a sufficient notice to each
Incumbent Director so as to provide a
i
reasonable opportunity for such Incumbent Directors to be present at
such meeting or (ii) such individual was nominated, appointed or
selected by the holders of Series B-1 Convertible Preferred Stock or
nominated, appointed or selected in accordance with Section 6.02 of
that certain securities purchase agreement dated August 31, 2001
among LabOne, WCAS and the other purchasers named on Schedule I
thereto".
ii
APPENDIX B
SUNTRUST ROBINSON HUMPHREY
- --------------------------------------------------------------------------------
Capital Markets Investment Banking
A Division of SunTrust Capital Markets, Inc.
August 24, 2001
Mr. W. Thomas Grant, II
Chairman of the Board,
President and Chief Executive Officer
LabOne, Inc.
10101 Renner Boulevard
Lenexa, Kansas 66219-9752
Members of the Board of Directors:
We understand that LabOne, Inc. ("LabOne" or the "Company") is considering
an acquisition of the Osborn Group, Inc. ("Osborn"), a division of ChoicePoint
Inc. ("ChoicePoint") by means of a stock purchase (the "Proposed Transaction").
We understand that pursuant to the Proposed Transaction, ChoicePoint will
receive total consideration of approximately $49 million (the "Consideration").
The Consideration will be paid as approximately $49 million in cash. The terms
and conditions of the Proposed Transaction are set forth in more detail in the
Stock Purchase Agreement to be executed by the Company (the "Agreement"). In
addition, we understand that the financing for the Proposed Transaction (the
"Proposed Financing") will primarily be supplied by Welsh, Carson, Anderson &
Stowe ("WCAS"). The Proposed Financing will include $14 million of Series B- I
convertible preferred stock, $21 million in Series B-2 convertible preferred
stock, and $15 million in non-convertible subordinated debt. The terms and
conditions of the Proposed Financing are set forth in more detail in the
Securities Purchase Agreement and Warrant Agreement to be executed by the
Company, (collectively, the "Financing Agreement").
We have been requested by LabOne to render our opinion to the Board of
Directors of the Company with respect to the fairness, from a financial point of
view, of the Consideration to be paid in connection with the Proposed
Transaction and the terms of the Proposed Financing.
In arriving at our opinion, we have, among other things:
1. Reviewed the Agreement;
2. Reviewed and analyzed certain publicly available information concerning
LabOne and Osborn which SunTrust Robinson Humphrey believed to be
relevant to its analysis;
i
Board of Directors
LabOne, Inc.
August 24, 2001
Page 2
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3. Reviewed certain historical and projected financial and operating
data concerning LabOne furnished to SunTrust Robinson Humphrey by
LabOne and certain historical and projected financial and operating
data concerning Osborn furnished to SunTrust Robinson Humphrey by
LabOne and Osborn;
4. Conducted discussions with certain members of management of LabOne and
Osborn concerning their respective business, operations, present
conditions and prospects;
5. Reviewed the trading histories of the common stock of LabOne;
6. Reviewed the historical market prices and trading activity for the
common stock of LabOne and compared them with those of selected
publicly traded companies which SunTrust Robinson Humphrey deemed
relevant;
7. Compared the historical financial results and present financial
condition of LabOne and Osborn with those of selected publicly traded
companies which SunTrust Robinson Humphrey deemed relevant;
8. Reviewed the financial terms, to the extent publicly available, of
selected comparable merger and acquisition transactions which
SunTrust Robinson Humphrey deemed relevant;
9. Performed certain financial analyses with respect to LabOne's and
Osborn's projected future operating performance;
10. Reviewed the Financing Agreement;
11. Reviewed the publicly available financial terms of comparable financing
transactions which SunTrust Robinson Humphrey deemed relevant;
12. Reviewed the terms of other indications of interest received in
connection with the Proposed Financing; and
13. Reviewed certain other financial statistics and undertook other
analyses and investigations and took into account those other matters
as SunTrust Robinson Humphrey deemed appropriate.
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion without
independent verification. With respect to the financial forecasts of the Company
and Osborn, including estimates of the cost savings and other potential
synergies anticipated to result from the Proposed Transaction, we have assumed
that such forecasts have been reasonably prepared and reflect the best currently
available estimates and judgments of the Company's and Osborn's respective
management as to future financial performance of the Company and Osborn and that
such performances will be achieved, and we express no opinion as to such
financial projections or the assumptions on
ii
Board of Directors
LabOne, Inc.
August 24, 2001
Page 3
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which they are based. We have also assumed that there has been no material
change in the Company's or Osbom's financial condition, results of operations,
business or prospects since the date of the most recent financial statements
made available to us. We have assumed in all respects material to our analysis
that the Company and Osborn will remain as going concerns for all periods
relevant to our analysis, that all the representations and warranties contained
in the Agreement and all related agreements, including the Financing Agreement,
are true and correct, that each party to such agreements will perform all of the
covenants required to be performed by such party under such agreements, and that
the conditions precedent in the Agreement and Financing Agreement are not
waived. In arriving at our opinion, we conducted only a limited physical
inspection of the properties and facilities of the Company. We have not made or
obtained any evaluations or appraisals of the assets or liabilities of the
Company or Osobm.
Our opinion is necessarily based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this
letter. Events occurring after the date hereof could materially affect this
opinion. We are expressing no opinion herein as to the prices at which the
Company's common stock will trade at anytime.
The Company has agreed to indemnify us for certain liabilities arising out
of the rendering of this opinion. We have been engaged by the Board of Directors
of the Company to render an opinion with respect to the Proposed Transaction and
Proposed Financing and will receive a fee for our services. We have also
provided financial advisory services to ChoicePoint in the past and have
received customary fees for such services. In the ordinary course of our
business, we actively trade in the equity securities of the Company and
ChoicePoint for our own accounts and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof, that the Consideration to be paid to ChoicePoint in the Proposed
Transaction is fair from a financial point of view to the common stockholders of
the Company. In addition, we are of the opinion as of the date hereof, that the
terms of the Proposed Financing are fair from a financial point of view to the
common stockholders of the Company.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered in connection with its consideration of the Proposed
Transaction and Proposed Financing. This opinion is not intended to be and does
not constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote with respect to the Proposed Transaction or Proposed
Financing.
Very truly yours,
SUNTRUST CAPITAL MARKETS, INC.
iii
LabOne, Inc.
10101 Renner Boulevard
Lenexa, Kansas 66219
The undersigned hereby appoints W. Thomas Grant II and Joseph C. Benage,
and each of them, jointly and severally, as proxies, with full power of
substitution, for the undersigned at the special meeting of shareholders of
LabOne, Inc., at 10101 Renner Boulevard, Lenexa, Kansas, on January __, 2002, at
3:00 p.m. local time, and at any adjournment or postponement, to vote the shares
of common stock the undersigned would be entitled to vote, if personally
present, upon the election of directors, the proposals stated on the reverse
side of this proxy card and any other matter brought before the meeting, all as
set forth in the proxy statement delivered with respect to the special meeting.
(Continued and to be signed on the reverse side)
Please sign, date and mail your
proxy card back as soon as possible!
Special Meeting of Shareholders
LabOne, Inc.
January __, 2002
Please Detach and Mail in the Envelope Provided.
- --------------------------------------------------------------------------------
[ X ] Please mark your
votes as in this
example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ON PROPOSALS 1, 2 AND 3
AND "GRANTED" ON PROPOSAL 4
1. Approval of the termination of the FOR AGAINST ABSTAIN
19.9% limit on the conversion of
Series B-1 Convertible Preferred Stock [ ] [ ] [ ]
and the exercise of Series B Warrants.
2. Approval of the automatic conversion FOR AGAINST ABSTAIN
of Series B-2 Preferred Stock into
Series B-1 Convertible Preferred Stock. [ ] [ ] [ ]
3. Approval of the proposed amendments to FOR AGAINST ABSTAIN
Article X of the Articles of
Incorporation. [ ] [ ] [ ]
4. Authority granted to or withheld from Authority Authority
the proxies to vote for the following GRANTED to vote WITHHELD to
nominees as directors (or a substitute for all nominees vote for all
nominee or nominees if any of them nominees
becomes unavailable): D. Scott
Mackesy, Sean Traynor and [ ] [ ]
---------------------.
(INSTRUCTIONS: To withhold authority
to vote for any individual nominee,
line through that nominee's name in
the list above.)
This proxy confers discretionary authority to vote upon certain matters, as
described in the accompanying proxy statement. Unless otherwise marked, this
proxy will be deemed marked "FOR" on proposals 1, 2 and 3 and "GRANTED" on
proposal 4.
This proxy is solicited by the board of directors.
(Please sign, date and return this proxy in the enclosed envelope.)
SIGNATURE DATE: SIGNATURE DATE:
---------------- -----------,200_ ---------------- -----------,200_
(Note: Please sign exactly as name appears on this proxy. Executors,
administrators, trustees, etc., should so indicate when signing, giving
their full title as such. If a signer is a corporation or other entity,
execute in full corporation or entity name by authorized officer. If
shares are held in the name of two or more persons, all should sign.)