-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LA8iwsQn251nMQmWzYw1F+ioz/nt349VFD69obWQIx8ODtsglZVdjPEl3bl3ZnTs KRyr2VWos0FGhRAehNNXSQ== 0000816151-99-000003.txt : 19990402 0000816151-99-000003.hdr.sgml : 19990402 ACCESSION NUMBER: 0000816151-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LABONE INC CENTRAL INDEX KEY: 0000816151 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 480952323 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15975 FILM NUMBER: 99579764 BUSINESS ADDRESS: STREET 1: 10101 RENNER BLVD CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138888397 MAIL ADDRESS: STREET 1: 10101 RENNER BLVD CITY: LENEXA STATE: KS ZIP: 66219 FORMER COMPANY: FORMER CONFORMED NAME: HOME OFFICE REFERENCE LABORATORY INC DATE OF NAME CHANGE: 19940405 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------- Commission file number 0-15975 ------- LabOne, Inc. ------------ 10101 Renner Blvd. Lenexa, Kansas 66219 (913) 888-1770 Incorporated in Delaware I.R.S. Employer Identification Number: 48-0952323 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01 par value ----------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Approximate aggregate market value of voting stock held by non-affiliates of Registrant: $26,970,000 (based on closing price as of March 1, 1999, of $11.56). The non-inclusion of shares held by directors, officers and beneficial owners of more than 5% of the outstanding stock shall not be deemed to constitute an admission that such persons are affiliates of the Registrant within the meaning of the Securities and Exchange Act of 1934. Number of shares outstanding of the only class of Registrant's common stock as of March 1, 1999: $0.01 par value common - 13,311,450 shares net of 1,688,550 shares held as treasury stock. The exhibit list for this Form 10-K begins on page 29. Page 1 OF 86 PART I ------ ITEM 1 BUSINESS General - ------- LabOne, Inc., a Delaware corporation, provides laboratory and investigative services for the insurance industry, clinical testing services for the healthcare industry and substance abuse testing services for employers. LabOne, Inc., together with its wholly-owned subsidiaries Lab One Canada Inc. and Systematic Business Services, Inc. (SBSI), hereinafter collectively referred to as either LabOne or the Company, is the largest provider of life insurance laboratory testing services in the United States and Canada. (See Note 8 of Notes to Consolidated Financial Statements for financial information regarding foreign operations.) LabOne provides risk-appraisal laboratory services to the insurance industry. The tests performed by the Company are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. The Company also provides testing services on specimens of individuals applying for individual and group medical and disability policies. Effective October 30, 1998, LabOne acquired Systematic Business Services, Inc., a Missouri corporation. SBSI provides telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services to life and health insurers nationwide. LabOne's clinical testing services are provided to the healthcare industry as an aid in the diagnosis and treatment of patients. LabOne operates only one highly automated and centralized laboratory, which the Company believes has significant economic advantages over other conventional laboratory. competitors. LabOne markets its clinical testing services to the payers of healthcare--insurance companies and self-insured groups. The Company does this through exclusive arrangements with managed care organizations and through Lab Card(R), a Laboratory Benefits Management (LBM) program. LabOne is certified by the Substance Abuse and Mental Health Services Administration (SAMHSA) to perform substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. The Company's rapid turnaround times and multiple testing options help clients reduce downtime for affected employees and meet mandated drug screening guidelines. LabOne is currently 80.5% owned by Lab Holdings, Inc. On March 8, 1999, LabOne and Lab Holdings jointly announced that the Boards of Directors of both companies had approved an agreement to merge the two companies. Representatives of Lab Holdings negotiated the merger with a Special Committee of independent directors of LabOne that was established to represent the interests of the holders of the 19.5% of common stock of LabOne not owned by Lab Holdings. The Special Committee, which had the assistance of independent legal and financial advisors, also approved the merger agreement and PAGE 2 recommended its approval by the LabOne board and stockholders. The merger is expected to close in June or July following the satisfaction of a number of closing conditions. These include approval by the holders of two-thirds of the outstanding Lab Holdings shares and a majority of the shares voted by LabOne stockholders other than Lab Holdings and its affiliates. Financing must also be obtained sufficient to satisfy cash elections after the use of available cash of LabOne and Lab Holdings. See the Company's Current Report on Form 8-K dated March 8, 1999 for more information. Forward Looking Statements - -------------------------- This Annual report on Form 10-K may contain "forward-looking statements," including, but not limited to: projections of revenues, income or loss, capital expenditures, the payment or non-payment of dividends and other financial items, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements. Forward-looking statements involve known and unknown risks and uncertainties. Many factors could cause actual results to differ materially from those that may be expressed or implied in such forward-looking statements, including, but not limited to, the volume and pricing of laboratory tests performed by the Company, competition, the extent of market acceptance of the Company's testing services in the healthcare and substance abuse testing industries, market acceptance of the Company's Lab Card program, intense competition, the loss of one or more significant customers, general economic conditions and other factors detailed from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission, including the Cautionary Statement filed herewith as exhibit 99. Services Provided by the Company - -------------------------------- Insurance Services: Insurance companies require an objective means of evaluating the insurance risk posed by policy applicants in order to establish the appropriate level of premium payments, or to determine whether to issue a policy. Because decisions of this type are based on statistical probabilities of mortality and morbidity, insurance companies generally require quantitative data reflecting the applicant's general health. Standardized laboratory testing, tailored to the needs of the insurance industry and reported in a uniform format, provides insurance companies with an efficient means of evaluating the mortality and morbidity risks posed by policy applicants. The use of standardized blood, urine and oral fluid testing has proven a cost-effective alternative to individualized physician examinations, which utilize varying testing procedures and reports. LabOne's insurance testing services consist of certain specimen profiles that provide insurance companies with specific information that may indicate liver or kidney disorders, diabetes, the risk of cardiovascular disease, bacterial or viral infections and other health risks. The Company also offers tests to detect the presence of antibodies to human immunodeficiency virus (HIV). Insurance companies generally offer a premium discount for nonsmokers and often rely on testing to determine whether an applicant is a user of tobacco products. Standardized laboratory testing can be used to verify responses on PAGE 3 a policy application to such questions as whether the applicant is a user of tobacco products, certain controlled substances or certain prescription drugs. Cocaine use has been associated with increased risk of accidental death and cardiovascular disorders, and as a result of increasing cocaine abuse in the United States and Canada, insurance companies are testing a greater number of policy applicants to detect its presence. Therapeutic drug testing also detects the presence of certain prescription drugs that are being used by an applicant to treat a life-threatening medical condition that may not be revealed by a physical examination. Insurance specimens are normally collected from individual insurance. applicants by independent paramedical personnel using LabOne's custom-designed collection kits and containers. These kits and containers are delivered to LabOne's laboratory via overnight delivery services or mail, coded for identification and processed according to each client's specifications. Results are generally transmitted to the insurance company's underwriting department that same evening. LabOne provides a one-day service guarantee on oral fluid and urine HIV specimen results. In association with Lincoln National Risk Management, the Company provides electronic data collection services and software to enable insurance companies to receive data directly into their underwriting systems. LabOne offers LabOne NET, a combination network/software product that provides a connection for insurance underwriters for ordering and delivery of risk assessment information such as laboratory results, telephone inspections, motor vehicle reports and other applicant information. LabOne handles paramedical examination paperwork and assists with administration of data for insurance underwriting. Additionally, the Company can obtain attending physician statements, telephone inspections, motor vehicle reports, and perform claims investigation through its subsidiary, SBSI. Clinical Services: Clinical laboratory tests are generally requested by physicians and other healthcare providers to diagnose and monitor diseases and other medical conditions through the detection of substances in blood and other specimens. Laboratory testing is generally categorized as either clinical testing, which is performed on bodily fluids including blood and urine, or anatomical pathology testing, which is performed on tissue. Clinical and anatomical pathology tests are frequently performed as part of regular physical examinations and hospital admissions in connection with the diagnosis and treatment of illnesses. The most frequently requested tests include blood chemistry analyses, blood cholesterol level tests, urinalyses, blood cell counts, PAP smears and AIDS-related tests. Clinical specimens are collected at the physician's office or other specified sites. The Company's couriers pick up the specimens and deliver them to local airports for express transport to the Kansas laboratory. Specimens are coded for identification and processed. The Company's testing menu includes the majority of tests requested by its clients. Tests not performed in-house are sent to reference laboratories for testing, and results are transmitted into the Company's computer system along with all other completed results. The Company has established the Lab Card(R) Program, as a vehicle for delivering outpatient laboratory services. The Lab Card Program is marketed PAGE 4 to healthcare payers (self-insured groups and insurance companies), allowing them to avoid price mark-ups and cost shifting. The Lab Card Program provides laboratory testing at reduced rates as compared to traditional laboratories. It uses a unique benefit design that shares the cost savings with the patient, creating an incentive for the patient to help direct laboratory work to LabOne. Under the Program, the patient incurs no out-of-pocket expense when the Lab Card is used, and the insurance company or self-insured group receives substantial savings on its laboratory charges. LabOne has several exclusive arrangements with Managed Care Organizations (MCOs). The two most significant are Principal Healthcare of Kansas City and BlueCross BlueShield of Tennessee. With these arrangements the Company contracts with the MCO, and they direct all testing for their members through LabOne. Substance Abuse Testing Services: LabOne markets substance abuse testing to large companies, third party administrators and occupational health providers. Certification by SAMHSA enables the Company to offer substance abuse testing services to federally regulated industries. Specimens for substance abuse testing are typically collected by independent agencies who use LabOne's forms and collection supplies. Specimens are sealed with bar-coded, tamper-evident seals and shipped overnight to the Company. Automated systems monitor the specimens throughout the screening and confirmation process. Negative results are available immediately after testing is completed. Initial positive specimens are verified by the gas chromatography/mass spectrometry method, and results are generally available within 24 hours. Results can be transmitted electronically to the client's secured computer, printer or fax machine, or the client can use LabOne's LabLink Dial-In software to retrieve, store, search and print its drug testing results. Segment Information - ------------------- The following table summarizes the Company's revenues from services provided to the insurance, clinical and substance abuse testing markets (dollars in thousands): Year ended December 31, 1998 1997 1996 -------------- -------------- -------------- Insurance $ 69,149 68% $ 61,998 79% $ 50,801 85% Clinical 18,600 18% 7,512 9% 3,942 7% Substance Abuse 14,478 14% 9,416 12% 4,689 8% ------- ------ ------ $ 102,227 $ 78,926 $ 59,432 ======= ====== ====== (See Note 9 of Notes to Consolidated Financial Statements for operating income and identifiable assets by segment.) PAGE 5 Operations - ---------- The Company's operations are designed to facilitate the testing of a large number of specimens and to report the results to clients, generally within 24 hours of receipt of the specimens. The Company has internally developed, custom-designed laboratory and business processing systems. It is a centralized network system that provides an automated link between LabOne's testing equipment, data processing equipment and clients' computer systems. This system offers LabOne's clients the ability to customize their testing and reflex requirements by several parameters to best meet their needs. As a result of the number of tests it has performed over the past several years, LabOne has compiled and maintains a large statistical data base of test results. These summary statistics are useful to the actuarial and underwriting departments of an insurance client in comparing that client's test results to the results obtained by the Company's entire client base. Company-specific and industry-wide reports are frequently distributed to clients on subjects such as coronary risk.analysis, cholesterol and drugs of abuse. Additionally, the company's statistical engineering department is capable of creating customized reports to aid managed care entities or employers in disease management and utilization tracking to help manage healthcare costs. The Company considers the confidentiality of its test results to be of primary importance and has established procedures to ensure that results of tests remain confidential as they are communicated to the client that requested the tests. Substantially all of the reagents and materials used by the Company in conducting its testing are commercially purchased and are readily available from multiple sources. Regulatory Affairs - ------------------ The objective of the regulatory affairs department is to ensure that accurate and reliable test results are released to clients. This is accomplished by incorporating both internal and external quality assurance programs in each area of the laboratory. In addition, quality assurance specialists share the responsibility with all LabOne employees of an ongoing commitment to quality and safety in all laboratory operations. Internal quality and education programs are designed to identify opportunities for improvement in laboratory services and to meet all required safety training and education issues. These programs help ensure the reliability and confidentiality of test results. Procedure manuals in all areas of the laboratory help maintain uniformity and accuracy and meet regulatory guidelines. Tests on control samples with known results are performed frequently to maintain and verify accuracy in the testing process. Complete documentation provides record keeping for employee reference and meets regulatory requirements. All employees are thoroughly trained to meet standards mandated by OSHA in order to maintain a safe work environment. Superblind Testing Service(tm) controls are used to challenge every aspect of service at LabOne from specimen arrival through final billing. Approximately 500 sample kits are prepared and submitted anonymously each month. These samples have at least 15 different indicators each representing PAGE 6 over 7,500 challenges to the testing, handling and reporting procedures. Specimens requiring special handling are evaluated and verified by control analysis personnel. A computer edit program is used to review and verify clinically abnormal results and all positive HIV antibody and drugs-of-abuse records. As an external quality assurance program, LabOne participates in a number of proficiency programs established by the College of American Pathologists (CAP), the American Association of Bioanalysts and the Centers for Disease Control. LabOne is accredited by CAP. Even though only a small portion of LabOne'S business encompasses fee-for- service Medicare/Medicaid, LabOne has appointed a Chief Compliance Officer and nine Co-Compliance Officers. Additionally, the Company has developed the LabOne Compliance Plan, based on the Model Compliance Plan recommended by the Office of Inspector General (OIG) of the Department of Health and Human Services to ensure compliance with anti-fraud and abuse laws and rules governing federally-financed reimbursement for lab testing services. LabOne is licensed under the Clinical Laboratory Improvement Amendments (CLIA) of 1988. LabOne has additional licenses for substance abuse testing from the state of Kansas and all other states where such licenses are required. LabOne is certified by SAMHSA to perform testing to detect drugs of abuse in federal employees and in workers governed by federal regulations. Congress recently enacted the Health Insurance Portability and Accountability Act of 1996. As a transmitter of health information in electronic form, the Company will be required to maintain administrative, technical, and physical safeguards to protect the integrity and confidentiality of healthcare information against unauthorized uses or disclosures. HIPAA will also require the Company to convert healthcare information to electronic form that had previously been required under state law to be maintained in paper form. Compliance with HIPAA regulations may be required as early as the Fall of 2001. Sales and Marketing - ------------------- LabOne's client base consists primarily of insurance companies in the United States and Canada. The Company believes that its ability to provide prompt and accurate results on a cost-effective basis, and its responsiveness to customer needs have been important factors in servicing existing business. All of the Company's sales representatives for the insurance market have significant business experience in the insurance industry or clinical laboratory-related fields. These representatives call on major clients several times each year, usually meeting with a medical director or vice president of underwriting. An important part of the Company's marketing effort is directed toward providing its existing clients and prospects with information pertaining to the actuarial benefits of, and trends in, laboratory testing. The Company's sales representatives and its senior management also attend and sponsor insurance industry underwriters' and medical directors' meetings. The sales representatives for the clinical industry are experienced in the healthcare benefit market or clinical laboratory-related fields, and currently work in the geographic areas which they represent. Marketing efforts are directed at insurance carriers, self-insured employers and trusts, third party administrators and other organizations nationwide. PAGE 7 Substance abuse marketing efforts are primarily directed at Fortune 1000 companies, occupational health clinics and third party administrators. The Company's strategy is to offer quality service at competitive prices. The sales force focuses on LabOne's ability to offer multiple reporting methods, next-flight-out options, dedicated client service representatives and rapid reporting of results. Competition - ----------- The Company believes that the insurance laboratory testing market in the United States and Canada is approximately a $130 million industry. LabOne currently services more than half the market. LabOne has maintained its market leadership through the development of long term client relationships, its reputation for providing quality products and services at competitive prices, and its battery of tests which are tailored specifically to an insurance company's needs. LabOne has two other main laboratory competitors, Osborn Laboratories, Inc. and Clinical Reference Laboratory. The insurance testing industry continues to be highly competitive. The primary focus of the competition has been on pricing. This continued competition has resulted in a decrease in LabOne's average price per test. It is anticipated that prices may continue to decline in 1999. The Company continues to develop innovative data management services that differentiate its products from competitors. These services enable LabOne's clients to expedite the underwriting process, saving time and reducing underwriting costs. The outpatient clinical laboratory testing market is a $20 billion industry which is highly fragmented and very competitive. The Company faces competition from numerous independent clinical laboratories and hospital- or physician-owned laboratories. Many of the Company's competitors are significantly larger and have substantially greater financial resources than LabOne. The Company is working to establish a solid client base through the use of Lab Card and the establishment of exclusive arrangements to provide laboratory services with large groups and managed care entities. LabOne's business plan is to be the premier low-cost provider of high-quality laboratory services to self-insured employers and insurance companies in the healthcare market. The Company feels that its superior quality and centralized, low-cost operating structure enable it to compete effectively in this market. LabOne competes in the substance abuse testing market nationwide. There are presently 71 laboratories that are SAMHSA certified. The Company's major competitors are the three major clinical chains, Laboratory Corporation of America, Quest Diagnostics and Smith Kline Beecham Laboratories, who collectively constitute approximately two-thirds of the substance abuse testing market. The Company's focus is fast turnaround with high-quality, low-cost service. PAGE 8 Foreign Markets - --------------- Lab One Canada Inc. markets insurance testing services to Canadian clients, with laboratory testing performed in the United States. The following table summarizes the revenue, profit and assets applicable to the Company's domestic operations and its subsidiary, Lab One Canada Inc. Year ended December 31, (in millions) 1998 1997* 1996 ---- ----- ---- Sales: United States $95.7 $72.4 $53.1 Canada 6.5 6.6 6.4 Operating Profit: United States 14.2 2.0 2.4 Canada 0.3 0.6 0.7 Identifiable Assets: United States 83.8 56.8 62.1 Canada 2.8 3.2 2.7 *1997 operating profit includes a one-time write-off of $6.6 million. (See Note 1 of Notes to Consolidated Financial Statements.) Technology Development - ---------------------- The technology development department evaluates new commercially available tests and technologies, or develops new assays, and compares them to competing products in order to select the most accurate laboratory procedures. Additionally, LabOne's scientists present findings to clients to aid them in choosing the best tests available to meet their requirements. Total technology development expenditures are not considered significant to the Company as a whole. Employees - --------- As of March 1, 1999, the Company had 895 employees, including 23 part-time employees, representing an increase of 230 employees from the same time in 1998. The addition of SBSI accounts for approximately 65% of the increase. None of the Company's employees are represented by a labor union. The Company believes its relations with employees are good. ITEM 2. PROPERTIES On December 26, 1998, the Company started moving into its new 268,000 square foot, custom-designed facility located in Lenexa, Kansas, approximately 15 miles from Kansas City, Missouri. This facility consolidates the Company's laboratory, administrative and warehouse functions into one building. The facility is owned by the Company and financed through $20 million in industrial revenue bonds issued by the City of Lenexa, Kansas in September, 1998. The testing laboratory has certain enhancements that improve the PAGE 9 efficiency of operations. Conveyor systems transport inbound test kits from the receiving area to the laboratory and remove waste after the opening process. All automated testing equipment requiring purified water is linked directly to a centralized water-purification system. Over 50,000 square feet of raised flooring allows laboratory instruments and PCs to be arranged or moved quickly and easily. The security system includes proximity card readers to control access and a ceiling detector system to prevent foreign substances from being thrown into the laboratory. In addition, three diesel generators and a UPS battery system are on-line in the event of electrical power shortage. These back-up power sources allow specimen testing and data processing to continue until full power is restored, thus assuring LabOne's. clients of continuous laboratory operation. SBSI utilizes two facilities in Independence, Missouri under five year leases expiring in 2003. LabOne leases 10 locations in Northern California and 9 in the Midwest which serve as LabOne Service Centers (LSCs). These facilities provide specimen collection services for patients and are typically located in medical office buildings. Lab One Canada Inc. leases office space in Ontario Canada, which is used for sales and client services. This lease expires in 2000. Additionally, Lab One Canada Inc. leases space in Quebec Canada for assembly and distribution of specimen collection kits for Canadian insurance testing. This lease expires in 2000. LabOne also owns two buildings which are currently under contract to be sold in the first and second quarter of 1999. Prior to moving to the new facility, these buildings were used for laboratory operations, administrative offices and data processing. LabOne's lease on its former warehouse facility expired in February 1999. ITEM 3. LITIGATION In the normal course of business, LabOne had certain lawsuits pending at December 31, 1998. The Comptroller of the State of Texas has conducted an audit of LabOne for sales tax compliance and contends that LabOne's insurance laboratory testing services are taxable under the Texas tax code and has issued an audit assessment, including interest and penalties, of approximately $1.9 million. The Company has appealed this assessment arguing that its services do not fit within the definition of insurance services under the Texas code. The assessment is under review by the Texas State Hearing Attorney. In the opinion of management, after consultation with legal counsel and based upon currently available information, none of these lawsuits are expected to have a material impact on the financial condition or results of operations of the Company. No provisions for loss related to litigation are included in the accompanying consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None PAGE 10 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Registrant's common stock trades on The NASDAQ Stock Market (R) under the symbol LABS. As of March 1, 1999, the outstanding shares were held by approximately 1850 shareholders of record. The Company paid quarterly dividends of $0.18 per common share in both 1998 and 1997. The Board of Directors reviews the dividend policy on a periodic basis. There are currently no restrictions that would limit the Company's ability to make future dividend payments. The following are the high and low prices of the stock for each quarter of 1998 and 1997: 1998 1997 ---- ---- High Low High Low ---- --- ---- --- 1st Quarter $18.25 15.75 $20.00 16.25 2nd Quarter 18.50 16.63 18.50 15.25 3rd Quarter 17.13 11.50 18.75 15.38 4th Quarter 16.75 9.25 18.50 15.13 PAGE 11 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial information and operating data regarding the Company. This information should be read in conjunction with Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Item 14. (a) (1) and (2), CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The balance sheet data as of December 31, 1998, 1997, 1996, 1995 and 1994, and the statement of earnings data for each of the years in the five-year period ended December 31, 1998, have been derived from the Company's Consolidated Financial Statements, which have been audited by KPMG LLP, the Company's independent certified public accountants. Years Ended December 31, (in thousands, except per share amounts) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Statement of Earnings Data: Sales $102,227 78,926 59,432 57,029 60,726 Cost of sales 56,720 42,017 32,717 29,934 29,073 ------- ------ ------ ------ ------ Gross profit 45,507 36,909 26,715 27,095 31,653 Selling, general and administrative expenses 31,028 27,707 23,623 24,908 24,821 Loss provision* -- 6,553 -- -- -- ------- ------ ------ ------ ------ Earnings from operations 14,479 2,649 3,092 2,188 6,833 Other income 702 1,122 1,784 2,562 1,700 ------- ------ ------ ------ ------ Earnings before income taxes 15,181 3,771 4,877 4,750 8,533 Income taxes 5,962 1,568 2,009 1,953 2,846 ------- ------ ------ ------ ------ Net earnings $ 9,219 2,202 2,868 2,797 5,687 ======== ====== ====== ====== ====== Diluted earnings per common share $ 0.69 0.17 0.22 0.21 0.43 ======== ====== ====== ====== ====== Dividends per common share $ 0.72 0.72 0.72 0.72 0.72 ======== ====== ====== ====== ====== Balance Sheet Data: Working capital 25,931 35,426 38,817 44,233 48,559 Total assets 86,781 59,973 64,743 70,048 76,758 Long term debt 18,097 - - - - Stockholders' equity 53,181 51,499 58,449 64,864 71,237 *The 1997 loss provision represents the one-time write-down on the value of the Company's facilities which are available for sale. (See Note 1 of Notes to Consolidated Financial Statements.) PAGE 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- 1998 COMPARED TO 1997 Revenue for the year ended December 31, 1998 was $102.2 million as compared to $78.9 million in 1997. The increase of $23.3 million, or 30%, was due to increases in clinical laboratory revenue of $11.1 million, insurance services revenue of $7.2 million and SAT revenue of $5.1 million. Clinical laboratory revenue increased from $7.5 million during 1997 to $18.6 million in 1998 primarily due to increased testing volumes. The insurance services segment revenue increased from $62.0 million in 1997 to $69.1 million due to an increase in the total number of insurance applicants tested and an increase in non laboratory services, including SBSI revenue of $1.3 million, partially offset by a 3% decrease in the average revenue per applicant. SAT revenue increased from $9.4 million in 1997 to $14.5 million in 1998 primarily due to a 48% increase in testing volumes. Cost of sales increased $14.7 million, or 35%, for the year as compared to the prior year. This growth is primarily due to increases in inbound freight, laboratory and kit supplies and payroll expenses due to the larger specimen volume for all three business segments. Insurance segment cost of sales expenses were $32.3 million as compared to $26.7 million during 1997. Clinical cost of sales expenses were $14.5 million as compared to $8.3 million during 1997. SAT cost of sales expenses were $9.9 million as compared to $7.0 million during 1997. These increases are due to increased testing volumes. As a result of the above factors, gross profit increased $8.6 million, or 23%, from $36.9 million in 1997 to $45.5 million in 1998. Insurance gross profit increased $1.5 million, or 4%, to $36.9 million in 1998. Clinical gross profit improved $4.9 million from a loss of $0.8 million in 1997 to a gain of $4.1 million in 1998. SAT gross profit increased $2.2 million to $4.5 million in 1998. Selling, general and administrative expenses increased $3.3 million, or 12%, in 1998 as compared to 1997 primarily due to increases in payroll expenses and bad debt accruals. Clinical overhead expenditures were $10.3 million as compared to $7.5 million in 1997. SAT overhead increased from $3.3 million in 1997 to $4.3 million in 1998. These increases are due to the growth in each segment. The allocation of corporate overhead to the clinical and SAT segments increased to $5.3 million for the year, as compared to $3.3 million in 1997, due to the increased share of total revenue for those segments. Insurance overhead expenditures decreased to $16.3 million as compared to $16.8 million in 1997. In 1997, the Company recorded a one-time write-down of $6.6 million on the value of the laboratory and administrative buildings in anticipation of their sale. (See Note 1 of Notes to Consolidated Financial Statements.) Operating income increased from $2.6 million in 1997 to $14.5 million in 1998. The insurance services segment operating income increased $2.1 million to $20.6 million in 1998. The clinical segment had an operating loss of $6.2 PAGE 13 million for 1998 as compared to an operating loss of $8.3 million in 1997. The SAT segment improved from an operating loss of $0.9 million in 1997 to a gain of $0.2 million in 1998. Other income decreased $0.4 million in 1998 as compared to 1997, primarily due to lower investment income due to less funds available to invest. Average income tax expense was 39.3% of pretax income in 1998 as compared to 41.6% in 1997. The reduction is primarily due to an increase in LabOne's income from U.S. sources taxed at U.S. rates as compared to income taxed at higher foreign rates. The combined effect of the above factors resulted in net earnings of $9.2 million, or $0.69 per share, in 1998 as compared to $2.2 million, or $0.17 per share, in 1997. Excluding the impact of the write-down in 1997, last year's net earnings would have been $6.1 million, or $0.46 per share. 1997 COMPARED TO 1996 Revenue for the year ended December 31, 1997 was $78.9 million as compared to $59.4 million in 1996. The increase of $19.5 million, or 33%, is due to increases in insurance segment revenue of $11.2 million, SAT revenue of $4.7 million and clinical laboratory revenue of $3.6 million. The insurance segment increased 22% due to an increase in the total number of insurance applicants tested and an increase in kit revenue, partially offset by a 1% decrease in the average revenue per applicant. The increase in insurance segment revenue is primarily due to an increase in market share and changes to testing thresholds. Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America. Concurrently, Prudential's Individual Insurance Group agreed to use LabOne as its exclusive provider of risk assessment testing services. At the time of the purchase, GIB served approximately 5% of the insurance laboratory testing market. SAT revenue increased from $4.7 million in 1996 to $9.4 million in 1997 due to a doubling in testing volumes. Clinical laboratory revenue increased from $3.9 million in 1996 to $7.5 million in 1997 due to increased testing volumes and higher revenue per patient. Cost of sales increased $9.3 million, or 28%, for the year as compared to the prior year. This increase is due primarily to increases in payroll, laboratory supplies and kit expenses due to the larger specimen volume for all three business segments. Direct and allocated clinical cost of sales expenses were $8.3 million as compared to $6.5 million during 1996. Direct and allocated SAT cost of sales expenses were $7.0 million as compared to $3.7 million during 1996. These increases are due to increased testing volumes. As a result of the above factors, gross profit increased $10.2 million, or 38%, from $26.7 million in 1996 to $36.9 million in 1997. Insurance gross profit increased $7.0 million, or 25%, in 1997 as compared to 1996. Clinical gross profit improved $1.8 million from a loss of $2.6 million in 1996 to a loss of $0.8 million in 1997. SAT gross profit increased from $1.0 million in 1996 to $2.4 million in 1997. Selling, general and administrative expenses increased $4.1 million, or 17%, in 1997 as compared to 1996 due primarily to increases in payroll expenses, travel and amortization expenses. Clinical overhead expenditures were $7.5 PAGE 14 million as compared to$5.4 million in 1996. SAT overhead increased from $2.2 million in 1996 to $3.3 million in 1997. These increases are due to the growth in each segment. In 1997, the Company recorded a one-time write-down of $6.6 million on the value of the laboratory and administrative buildings in anticipation of their sale. (See Note 1 of Notes to Consolidated Financial Statements.) Operating income decreased from $3.1 million in 1996 to $2.6 million in 1997, primarily due to the $6.6 million write down, partially offset by an increase in the insurance segment operating income of $5.9 million. The clinical segment had an operating loss of $8.3 million for 1997 as compared to a loss of $8.0 million in 1996, due to a $0.6 million increase in corporate overhead allocation over 1996. The SAT segment improved from an operating loss of $1.2 million in 1996 to a loss of $0.9 million in 1997, including a $0.9 million increase in corporate overhead allocation over last year. Other income decreased $0.7 million in 1997 as compared to 1996, due to lower investment income. Average income tax expense was 41.6% of pretax income in 1997 as compared to 41.2% in 1996. The combined effect of the above factors resulted in net earnings of $2.2 million, or $0.17 per share, in 1997 as compared to $2.9 million, or $0.22 per share, last year. Excluding the impact of the write-down, net income would have been $6.1 million, or $0.46 per share, in 1997. TRENDS - ------ The following is management's analysis of certain existing trends that have been identified as potentially affecting the future financial results of the Company. Due to the potential for a rapid rate of change in any number of factors associated with the insurance and healthcare laboratory testing industries, it is difficult to quantify with any degree of certainty LabOne's future volumes, sales or net earnings. The insurance laboratory testing industry continues to be highly competitive. The primary focus of the competition has been on pricing. LabOne continues to maintain its market leadership by providing quality products and services at competitive prices. Management expects that prices may continue to decline during 1999 due to competitive pressures. This trend may have a material impact on earnings from operations. The total number of insurance applicants tested by LabOne increased 11% in 1998 from the prior year. Approximately 80% of the increase represented oral fluid HIV tested applicants. The number of oral fluid tested applicants are expected to further increase in 1999 Effective October 30, 1998, LabOne acquired Systematic Business Services, Inc. (SBSI) which is operated as a wholly owned subsidiary of the insurance services division of LabOne. SBSI is a provider of information services to life and health insurers nationwide, and has annual revenues of approximately $7 million. With 148 employees in the Kansas City area, SBSI provides PAGE 15 telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services to life insurance companies. This addition allows LabOne to expand the services it offers to its insurance industry clients. In the clinical division, BlueCross BlueShield of Tennessee selected LabOne to provide routine outpatient laboratory testing services for BlueCare members throughout Tennessee effective February 1, 1998. BlueCare is BlueCross BlueShield of Tennessee's plan for Tenncare participants. Approximately 400,000 BlueCare members are currently covered by the program. To date, the Laboratory Benefit Management programs, including BlueCare and the Lab Card Program, have more than 2.3 million lives enrolled. In the fourth quarter, revenue from Lab Card accounts that have been active for more than one year rose 60% over the fourth quarter, 1997. The Company's new facility was financed through the City of Lenexa, Kansas, with industrial revenue bonds. In conjunction with the bonds, LabOne expects to receive income tax credits through the State of Kansas High Performance Incentive Plan to be applied against state income taxes for up to 10 years, or until the credit is completely used. The amount of the credit is expected to be approximately $4 million, and will lower LabOne's average income tax rate for the duration of the credit. PAGE 16 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- LabOne's working capital position declined from $35.4 million at December 31, 1997, to $25.9 million at December 31, 1998. This decrease is primarily due to dividends paid and capital additions, including building payments, in excess of bond proceeds and cash provided by operations. Net cash provided by operations increased from $8.1 million in 1997 to $9.0 million in 1998. During 1998, LabOne paid quarterly dividends of $0.18 per common share. The Board of Directors reviews this policy on a periodic basis. The total amount of dividends paid during 1998 was $0.72 per share, or $9.5 million, which was $0.5 million in excess of net cash provided by operations. There are no restrictions that would limit the Company's ability to make future dividend payments. During 1998, the Company invested $28.5 million in additional property, plant and equipment, as compared to $11.5 million in 1997 and $3.2 million in 1996. Of the amount spent in 1998, approximately $21.6 million was for construction the Company's new facility, and $3.0 net cash was used in the purchase of SBSI. The 1997 amount included land purchased related to the new facility and the GIB Laboratories acquisition. Future capital asset purchases are expected to be approximately $4 million to $5 million annually. The Company had no short-term borrowings during 1998. Management expects to be able to fund operations and future dividend payments, from a combination of cash flow from operations, cash reserves, building sales and short-term borrowings. Interest on the industrial revenue bonds issued to finance the construction of the Company's new facility is based on a taxable seven day variable rate which, including letter of credit and remarketing fees, is approximately 5.8% as of March 1, 1999. The bonds mature over 11 years in increments of $1.85 million per year plus interest. Total cash and investments at December 31, 1998, were $10.2 million, as compared to $19.5 million at December 31, 1997. YEAR 2000 - --------- LabOne is actively addressing Year 2000 computer concerns. The company has established an oversight committee which includes management from all parts of the Company and meets periodically to review progress. The Company's laboratory operating systems and its business processing systems were completely rewritten as of 1991 and were brought into compliance with Year 2000 date standards at that time. Non-IT systems, which include security systems, time clocks and heating and cooling systems, have been replaced with certified compliant systems as part of construction of the new facility. Ongoing remediation efforts include regularly scheduled software upgrades and replacement of personal computers and associated equipment. The Company expects to complete all remaining internal Year 2000 objectives by the end of the second quarter, 1999. PAGE 17 LabOne is assessing the Year 2000 preparation and contingency plans of the Company's clients and vendors. LabOne has material relationships and dependencies with its primary telecommunications provider, Sprint Corp., its inbound shipping provider, Airborne Express, and municipal services providers. In the event of a service interruption, the Company has the ability to switch telecommunications services to AT&T at any time, and maintains backup electrical generators capable of meeting its electrical needs. LabOne currently tracks and controls routing of its inbound specimens and can use USPS, airlines and other common carriers or express delivery services in the event of delivery problems with Airborne Express. The Company currently maintains approximately an eight week supply of most laboratory supplies, and does not expect significant problems in obtaining supplies. The Company continues to review the Year 2000 plans of these providers, and does not currently expect significant problems in these areas; however, there can be no assurance that the systems of clients and vendors will be converted to address Year 2000 problems in a timely and effective manner or that such conversions will be compatible with the Company's computer systems. Resources dedicated to the remaining effort are expected to cost less than $0.3 million and are not considered a material expense to the Company. These efforts have not caused delay to the Company's other ongoing information systems projects. LabOne has not hired any outside consultants or other independent validation provider at this time, and does not expect to do so. There can be no assurance that the Company's adjustments to its computer systems will completely eliminate all Year 2000 problems. Failure to properly address the Year 2000 problem could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A foreign currency risk exposure exists due to billing Canadian subsidiary revenue in Canadian dollars and the direct laboratory expenses associated with this revenue being incurred in US dollars. This exposure is not considered to be material. Any future material Canadian currency fluctuations against the US$ could result in a decision to hedge future foreign currency cash flows, or to increase Canadian prices. An interest rate risk exposure exists due to LabOne's liability of $20 million in industrial revenue bonds. The interest expense incurred on these bonds is based on a taxable seven day variable rate, which including letter of credit and remarketing fees, is approximately 5.8% as of March 1, 1999. This exposure is not considered material. Any future increase in interest rates would result in additional interest expense and could result in a decision to enter into a long-term interest rate swap transaction. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See ITEM 14.(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PAGE 18 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of LabOne as of March 26, 1999 are as follows: Name Age Position - ---- --- -------- W. Thomas Grant II 48 Chairman of the Board of Directors, President, Chief Executive Officer and Director Gregg R. Sadler, FSA 48 Executive Vice President- Administration, President - Insurance Laboratory Division, Secretary and Director Robert D. Thompson 37 Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director Roger K. Betts 56 Executive Vice President - Sales - Insurance Laboratory Division Thomas J. Hespe 42 Executive Vice President - Sales and Marketing and Director Carl W. Ludvigsen, Jr. 46 Executive Vice President - Corporate M.D., Ph.D., J.D., Development and Chief Medical Officer FCAP, FCLM Michael A. Peat, Ph.D. 51 Executive Vice President - Toxicology Thomas H. Bienvenu II 49 Executive Vice President - Information Systems and Technology Judith A. VonFeldt 52 Executive Vice President - Human Resource Kurt E. Gruenbacher, 39 Vice President - Finance, Chief CPA, CMA, CFM Accounting Officer and Treasurer Joseph H. Brewer, M.D. 47 Director William D. Grant 82 Director Richard A. Rifkind, M.D. 68 Director Richard S. Schweiker 72 Director James R. Seward 46 Director John E. Walker 60 Director R. Dennis Wright, Esq. 56 Director PAGE 19 The terms of office of the directors of LabOne will expire upon the election of their successors at the 1999 Annual Meeting of Stockholders. Executive officers serve at the pleasure of the Board of Directors. Mr. W. Thomas Grant II has been a director of LabOne since 1983. Mr. Grant was appointed Chairman of the Board of Directors, President and Chief Executive Officer of LabOne in October 1995. He served as Chairman of the Board of Lab Holdings, Inc. from May 1993 to September 1997. Mr. Grant is also a director of Commerce Bancshares, Inc., Kansas City Power & Light Company, Response Oncology, Inc., AMC Entertainment, Inc. He is the son of W. D. Grant. Mr. Sadler has been a director of LabOne since 1985. Mr. Sadler was appointed President-Insurance Laboratory Division in 1994 and Executive Vice President Administration in 1993. Mr. Sadler has served as Secretary since 1988. Mr. Thompson has been a director of LabOne since 1995. Mr. Thompson was appointed Chief Operating Officer in May 1997 and Executive Vice President - Finance and Chief Financial Officer in December 1993. He served as Treasurer from December 1993 to November 1997, and served as Vice President-Business Development Planning from August 1993 to December 1993. Mr. Betts was appointed Executive Vice President - Sales-Insurance Laboratory Division in 1994. From 1993 to 1994, Mr. Betts served as Senior Vice President - Sales of the Insurance Laboratory Division. Mr. Hespe has been a director of LabOne since 1995. Mr. Hespe was appointed Executive Vice President - Sales and Marketing in 1995. From 1990 to 1995, Mr. Hespe served as Executive Vice President Sales and Marketing of Allscrips Pharmaceuticals, Vernon Hills, Illinois, a distributor of managed care pharmaceutical products and services with annual revenues of approximately $70 million. Mr. Hespe's responsibilities with Allscrips included developing strategies for market expansion and developing business with managed care organizations, including hospitals, physicians, HMO organizations, third party administrators, consulting firms, self-insured employers and insurance companies. Dr. Ludvigsen has served as Executive Vice President - Corporate Development and Chief Medical Officer since December 1996. He served as Executive Vice President - Operations and Chief Operating Officer from December 1993 to November 1996. Dr. Peat was appointed Executive Vice President - Toxicology in May 1996. Dr. Peat served as Senior Vice President - Toxicology from 1994 to 1996. Prior to joining LabOne in 1994, Dr. Peat was Vice President of Toxicology of Roche Biomedical Laboratories, Inc., Research Triangle Park, North Carolina. Mr. Bienvenu was appointed Executive Vice President - Information Systems and Technology in May 1997. Mr. Bienvenu served as Senior Vice President - Information Systems and Technology from 1994 to 1997. He served as Vice President - Marketing Information Technology from October 1994 to December 1994. Prior to October 1994, he served as Director of Marketing Information Technology. Ms. VonFeldt has served as Executive Vice President - Human Resources since August 1998. She served as Senior Vice President - Human Resources from May 1997 to August 1998. PAGE 20 Mr. Gruenbacher was appointed Treasurer in November 1997. He was appointed Vice President - Finance and Chief Accounting Officer in May 1995. Mr. Gruenbacher served as Corporate Controller from 1994 to 1995, and Director, Financial Analysis and Budgets from 1993 to 1994. Dr. Brewer has been a director of LabOne since 1988. During the past five years, Dr. Brewer has been an Infectious Disease Specialist at St. Luke's Hospital, Kansas City, Missouri and an Assistant Clinical Professor of Medicine at the University of Missouri - Kansas City. Mr. William D. Grant has been a director of LabOne since 1989. Mr. Grant is retired. From August 1990 to December 1997, he served as a consultant to Lab Holdings, Inc. Mr. Grant also served as Chairman Emeritus of Lab Holdings, Inc. from May 1993 to September 1997 and served as Chairman of the Board of Lab Holdings, Inc. prior to May 1993. He is the father of W. Thomas Grant II. Dr. Rifkind has been a director of LabOne since 1987. Dr. Rifkind has been Chairman of the Sloan-Kettering Institute, New York, New York, a medical research institution, during the past five years. Mr. Schweiker has been a director of LabOne since 1995. Mr. Schweiker has been retired for the past five years. Prior to his retirement, Mr. Schweiker served as President of the American Council of Life Insurance, Washington, D.C., a life insurance trade association. Mr. Schweiker is also a director of Tenet Healthcare Corporation. Mr. Seward has been a director of LabOne since 1995. Mr. Seward has been self-employed as an investment adviser and consultant since August 1998. From December 1996 to August 1998, Mr. Seward 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 Lab Holdings, Inc. prior to its spin-off in March 1997. He was Executive Vice President of Lab Holdings, Inc. from 1993-1997 and served as its Chief Financial Officer from 1990-1997. Mr. Seward is also a director of Response Oncology, Inc. and Syntroleum Corporation and Concorde Career Colleges. Mr. Walker has been a director of LabOne since 1984. Mr. Walker retired as Managing Director - Reinsurance of Business Men's Assurance Company of America in 1996. Mr. Walker served as Vice Chairman of the Board of Directors of LabOne prior to 1994. Mr. Wright has been a director of LabOne since 1987. 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., Kansas City, Missouri and Chairman of its Executive Committee prior to its merger with Morrison & Hecker, L.L.P. in September 1998. Morrison & Hecker, L.L.P. is general counsel to LabOne. PAGE 21 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 reports of 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 all applicable Section 16(a) filing requirements for 1998 have been met, except with respect to one late Form 5 filing by W. D. Grant. Mr. Grant initially filed a Form 5 for the 1998 fiscal year in a timely manner, but the Form 5 omitted a transaction required to be reported therein. Upon discovery of the omission, Mr. Grant filed a corrected Form 5 approximately eight days late. PAGE 22 ITEM 11. 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 1998 and (ii) the four most highly compensated executive officers other than the chief executive officer serving as of December 31, 1998, for services rendered in all capacities to LabOne and its subsidiaries for each of the last three completed fiscal years. Long-Term Annual Compensation Compensation ------------------- ------------ Name and Fiscal Stock Option Shares All Other Principal Position Year Salary ($) Bonus ($) Granted (#) Compensation ($) (1) - ----------------- ---- ---------- --------- ----------- -------------------- W. Thomas Grant II 1998 164,769 107,261 -0- 21,670 Chairman of the 1997 86,019 131,173 75,000 9,922 Board of Directors, 1996 -0- -0- -0- -0- President and Chief Executive Officer Robert D. Thompson 1998 217,627 157,261 -0- 16,696 Executive Vice Presi- 1997 209,900 131,173 -0- 16,856 dent, Chief Operating 1996 209,277 75,000 -0- 17,086 Officer and Chief Financial Officer Carl W. Ludvigsen,Jr. 1998 239,781 42,661 -0- 21,670 Executive Vice Presi- 1997 230,900 131,173 -0- 21,470 dent-Corporate Devel- 1996 230,277 25,000 -0- 20,634 opment and Chief Medical Officer Thomas J. Hespe 1998 165,704 107,261 -0- 21,371 Executive Vice Presi- 1997 159,900 131,173 -0- 21,470 dent-Sales and 1996 159,277 50,000 -0- 20,490 Marketing Gregg R. Sadler 1998 165,704 107,261 -0- 21,670 Executive Vice Presi- 1997 156,900 131,173 -0- 21,865 dent-Administration 1996 150,277 50,000 -0- 20,923 and Secretary and President-Insurance Laboratory Division
(1) The amounts shown in this column for 1998 consist of (a) contributions by LabOne to the account of each of the named executive officers under LabOne's defined contribution pension plan in the amount of $16,421; (b) 50% matching contributions by LabOne under LabOne's profit-sharing 401(k) plan in the amount of $4,526 to the accounts of each of Messrs. Grant, Ludvigsen, Hespe and Sadler; and (c) insurance premium payments by LabOne with respect to group term life insurance in the amounts of $723 for the benefit of each of Messrs. Grant, Ludvigsen and Sadler, $274 for the benefit of Mr. Thompson and $424 for the benefit of Mr. Hespe. PAGE 23 Aggregate Option Exercises and December 31, 1998 Option Value Table The following table provides certain information concerning the exercise of stock options during 1998 by each of the named executive officers and the number and value of unexercised options held by such persons on December 31, 1998. Number of Shares Value of Underlying Unexercised Unexercised In-the-Money Options on Options on December 31, 1998 (#) December 31, 1998($) Shares Options Options Options Options Acquired on Value Exercis- Unexer- Exercis- Unexer- Name Exercise (#) Realized able cisable able cisable ------------ -------- ---- ------- ---- ------- W. Thomas 0 0 42,431 60,000 $ 84,007 $0 Grant II Robert D. 0 0 122,000 28,000 $ 39,375 $26,250 Thompson Carl W. . 0 0 81,000 8,000 $ 82,873 $10,000 Ludvigsen, Jr. Thomas J. 0 0 60,000 40,000 $ 78,750 $52,500 Hespe Gregg R. 0 0 90,400 9,600 $144,019 $0 Sadler
Compensation of Directors Directors who are not employees of LabOne receive an annual retainer fee of $5,000 in cash and a grant of a number of shares of common stock of LabOne having a value equal to $10,000, plus $500 for each Board and Committee meeting attended and reimbursement for reasonable expenses in attending meetings. Richard S. Schweiker, a Director of LabOne, has agreed to attend national meetings of insurance underwriters on LabOne's behalf and to make selected contacts in furtherance of LabOne's business, for which services LabOne will pay Mr. Schweiker additional fees of $30,000 annually. PAGE 24 Employment Agreements LabOne has Employment Agreements with Robert D. Thompson, Carl W. Ludvigsen Jr., Gregg R. Sadler and Thomas J. Hespe. Dr. Ludvigsen's Agreement provides for his employment for a two-year term ending in November 1998 and renewable annually thereafter for successive one-year terms unless LabOne elects not to extend the Agreement. Messrs. Thompson's and Sadler's Agreements are renewable annually for one-year terms unless LabOne elects not to extend them and Mr. Hespe's Agreement is terminable by LabOne on thirty days' notice. The annual base salaries provided under the Agreements are $200,900 to Mr. Thompson, $230,900 to Dr. Ludvigsen,$150,900 to Mr. Sadler and $150,900 to Mr. Hespe. In the event that LabOne terminates Messrs. Thompson, Ludvigsen or Sadler without cause (as defined in the Agreements), LabOne will pay the terminated officer a lump sum severance payment equal to his base salary for the balance of the term of the Agreement, plus 50% of one year's annual base salary. If LabOne terminates Mr. Hespe without cause, LabOne will pay Mr. Hespe a severance payment equal to one year's base salary. If a change of control of LabOne (as defined in the Agreements) occurs at any time during which the executive officer is in LabOne's full-time employment, and within one year after such a change in control the executive 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 shall be canceled. The proposed merger of LabOne with and into Lab Holdings, Inc. does not constitute a change of control of LabOne within the meaning of the Agreements. Under each Agreement, the executive officer agrees not to compete with LabOne for a period of two years after the termination of his employment with LabOne. Compensation Committee Interlocks and Insider Participation Mr. W. Thomas Grant II was a member of the Compensation Committee of the Board of directors of LabOne until his resignation from the Committee on February 14, 1998. Mr. Grant is Chairman of the Board of Directors, President and Chief Executive Officer of LabOne. PAGE 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table shows as of March 26, 1999, the total number of shares of common stock of LabOne beneficially owned by persons known to be beneficial owners of more than 5% of the outstanding stock of LabOne. Percentage of Shares Of LabOne Outstanding Shares Beneficially owned Of LabOne Owned Beneficial Owner March 26, 1999(1) March 26, 1999 - ---------------- ----------------- -------------- Lab Holdings, Inc. 10,712,200 80.5% 5000 West 95th Street Shawnee Mission, KS 66207 (1) Lab Holdings, Inc. has sole voting and investment power with respect to the shares listed. SECURITY OWNERSHIP OF MANAGEMENT The following table shows as of March 26, 1999, for each director of LabOne, each of the executive officers of LabOne named in the Summary Compensation Table in Item 11 hereof and all directors and executive officers of LabOne as a group, the total number of shares of common stock of LabOne and of Lab Holdings, Inc. beneficially owned by such persons. Percentage of Percentage of Outstanding Outstanding Shares of Shares of Shares of Lab Shares of Lab LabOne LabOne Holdings Holdings Beneficially Beneficially Beneficially Beneficially Beneficial Owner Owned (1),(2) Owned (3) Owned (1) Owned (3) - ---------------- ------------- --------- --------- --------- Joseph H. Brewer, M.D. 27,195 * 0 * William D. Grant 38,695 (4) * 1,086,647(5) 16.7% W. Thomas Grant II 81,596 (7) * 138,089(6) 2.1% Thomas J. Hespe 60,831 (7) * 0 * Carl W. Ludvigsen, Jr., 83,313 (7) * 0 * M.D. Richard A. Rifkind, M.D 27,098 * 0 * Gregg R. Sadler 102,993 (7) * 266 * Richard S. Schweiker 19,978 * 0 * James R. Seward 22,156 (4) * 0 * Robert D. Thompson 127,949 (7) * 0 * John E. Walker 27,195 (8) * 6,099(8) * R. Dennis Wright, Esq. 24,378 * 0 * All directors and 817,198 (7) 5.8% 1,231,101 19.0% executive officers of LabOne as a group (17 persons)
Less than 1% of outstanding shares PAGE 26 - ----------------------------------------- (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 of LabOne Common Stock which such persons have the right to acquire within 60 days pursuant to options granted under the LabOne Long-Term Incentive Plan: Joseph H. Brewer, 22,000 shares; William D. Grant, 22,000 shares; W. Thomas Grant II, 57,431 shares; Thomas J. Hespe, 60,000 shares; Carl W. Ludvigsen, Jr., 81,000 shares; Richard A. Rifkind, 22,000 shares; Gregg R. Sadler, 95,200 shares; Richard S. Schweiker, 17,600 shares; James R. Seward, 17,600 shares; Robert D. Thompson, 126,000 shares; John E. Walker, 22,000 shares; R. Dennis Wright, 22,000 shares; and all directors and executive officers as a group, 719,831 shares. (3) For purposes of determining the percentage ownership of each beneficial owner, the outstanding shares of the respective corporation include shares that the beneficial owner has the right to acquire within 60 days pursuant to options granted to such beneficial owner. (4) Does not include 10,712,200 shares of LabOne Common Stock owned by Lab Holdings, Inc. (see "Security Ownership of Certain Beneficial Owners of LabOne" above). Mr. William D. Grant disclaims beneficial ownership of the shares of LabOne Common Stock owned by Lab Holdings, Inc. (5) Includes 403,441 shares of Lab Holdings Common Stock held by 3 family trusts for which William D. Grant serves as a co-trustee with UMB Bank, N.A., and in that capacity shares voting and investment power and 28,916 shares owned by the wife of William D. Grant, as to which he disclaims beneficial ownership. (6) Includes 22,442 shares of Lab Holdings Common Stock held by W. Thomas Grant II as custodian for his children, 45,000 shares held in a family trust for which W. Thomas Grant II serves as a co-trustee with Laura Gamble and in that capacity shares voting and investment power, 12,480 shares owned by the wife of W. Thomas Grant II, as to which he disclaims beneficial ownership. (7) Includes the following numbers of shares of LabOne Common Stock 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: W. Thomas Grant II, 22,365 shares; Thomas J. Hespe, 831 shares; Carl W. Ludvigsen, Jr., 2,313 shares; Gregg R. Sadler, 5,793 shares; Robert D. Thompson, 1,949 shares; and all directors and executive officers as a group, 50,872 shares. (8) All of Mr. Walker's shares are owned by a revocable trust for Mr. Walker's wife, as to which he disclaims beneficial ownership. PAGE 27 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATIONSHIP WITH LAB HOLDINGS, INC. As of March 26, 1999, Lab Holdings, Inc. beneficially owned 10,712,200 shares, or 80.5%, of the outstanding common stock of LabOne. Lab Holdings, Inc., by virtue of its ownership of a majority of LabOne's common stock, has control of LabOne and is able to elect all of the members of LabOne's Board of Directors. LabOne operates independently of Lab Holdings, Inc., with the officers of LabOne having direct responsibility for all of LabOne's management and operations. Lab Holdings, Inc. and LabOne are parties to a Transition Agreement (Transition Agreement) pursuant to which they have agreed to an allocation of certain corporate opportunities and to mutual indemnification for certain liabilities and expenses. Under the Transition Agreement, so long as Lab Holdings, Inc., directly or indirectly, owns at least 20% of the outstanding voting shares of LabOne, Lab Holdings, Inc. agrees to refer to LabOne any product, service, idea or other corporate opportunity that is within the scope of LabOne's business. For purposes of this Agreement, LabOne's business is defined as providing laboratory testing services for the insurance and health care industry and the development and implementation of data processing and communications facilities for receiving test-related instructions from clients, for conducting laboratory operations and for the collection, use, storage, retrieval and transmission of test results data by both LabOne and its clients. In the event that a majority of the independent, disinterested Directors of LabOne informs Lab Holdings, Inc. that LabOne does not intend to pursue, or LabOne within a reasonable time fails to pursue, the consideration and development of any product, service, idea or other business opportunity referred to it by Lab Holdings, Inc., Lab Holdings, Inc. is entitled under the Transition Agreement to consider and develop the product, service, idea or business opportunity for its own benefit. Under the Agreement, LabOne also agrees to indemnify and hold harmless Lab Holdings, Inc., and any controlling person of Lab Holdings, Inc., with respect to certain civil liabilities, including any and all claims, losses, damages, liabilities, costs and expenses that arise from or are based on operations of LabOne. Similarly, Lab Holdings, Inc. agrees to indemnify and hold harmless LabOne and any controlling person of LabOne (other than Lab Holdings, Inc.), with respect to certain civil liabilities, including any and all claims, losses, damages, liabilities, costs and expenses that arise from or are based on the operations of Lab Holdings, Inc. (other than the business of LabOne). PAGE 28 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) (1) and (2) -- The following consolidated financial statements and schedule are attached as a separate section of this report entitled "Consolidated Financial Statements and Schedule": INDEPENDENT AUDITORS' REPORT CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets, December 31, 1998, and 1997 Consolidated Statements of Earnings, Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows, Years Ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements SCHEDULE: Schedule II - Valuation and qualifying accounts All other schedules are omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or the notes thereto. (b) Reports on Form 8-K A Form 8-K current report dated October 14, 1998, was filed with the Commission reporting under Other Events that LabOne had entered into an agreement to acquire Systematic Business Services, Inc. A Form 8-K current report dated October 22, 1998, was filed with the Commission providing under Other Events a cautionary statement in order to obtain the benefits of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. A Form 8-K current report dated March 8, 1999, was filed with the Commission reporting under Other Events that LabOne and Lab Holdings, Inc. had entered into an agreement to merge the two companies. (c) Exhibits required by Item 601 of Regulation S-K (Exhibits follow the Schedule): PAGE 29 Page ---- 3.1* Articles of Incorporation - attached as Exhibit (3) to the Registrant's Form 10-K Annual Report dated March 28, 1988. 3.2* Certificate of Amendment of Articles of Incorporation - attached as Exhibit (3.2) to the Registrant's Form 10-K Annual Report dated March 14, 1994. 3.3* Bylaws - attached as Exhibit (3) to the Registrant's Form 10-K Annual Report dated March 28, 1988. 4.1* Trust Indenture dated as of September 1, 1998, between the City of Lenexa, Kansas and Intrust Bank, N.A. related to the issuance of Taxable Industrial Revenue Bonds for the LabOne, Inc. Facility Project - attached as Exhibit (4.1) to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1998. 4.2* Lease Agreement dated as of September 1, 1998, between the City of Lenexa, Kansas and LabOne, Inc. related to the Trust Indenture - attached as Exhibit (4.2) to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1998. 4.3* Reimbursement Agreement dated as of September 1, 1998, between LabOne, Inc. and Commerce Bank, N.A. - attached as Exhibit (4.3) to the Registrant's Quarterly Report on Form 10-Q dated November 13, 1998. 4.4* Warrant to Purchase Shares of Common Stock of LabOne, Inc., issued to National Support Services, Inc.,- attached as Exhibit (4) to the Registrant's Quarterly Report on Form 10-Q dated May 13, 1998. 4.5 Warrant to Purchase Shares of Common Stock of LabOne, Inc., issued to USA Managed Care Organization. 57 10.1* Registrant's 1997 Long Term Incentive Plan - attached as Exhibit (10.1) to the Registrant's Quarterly Report on Form 10-Q dated August 12, 1998. ** 10.2* Form of Stock Option Agreement pursuant to the LabOne 1997 Long-Term Incentive Plan.- attached as Exhibit (10.2) to the Registrant's Quarterly Report on Form 10-Q dated August 12, 1998. ** 10.3 Registrant's Annual Incentive Plan. ** 65 10.4* Registrant's Stock Plan for nonemployee directors - attached as Exhibit (A) to the Registrant's Proxy Statement dated April 10, 1992. *** 10.5 Form of Indemnification Agreement between the Registrant and its directors dated February 12, 1999. 66 10.6* Form of Employment Agreement between the Registrant and its executive officers and certain key employees - attached as Exhibit (10) to the Registrant's Form 10-K Annual Report dated March 28, 1988. ** PAGE 30 Page ---- 10.7* Amended Employment Agreement between the Registrant and Robert D. Thompson- attached as Exhibit (10.11) to the Registrant's Form 10-K Annual Report dated March 21, 1996. ** 10.8* Employment Agreement between the Registrant and Gregg R. Sadler - attached as Exhibit (10.14) to the Registrant's Form 10-K Annual Report dated March 14, 1994. ** 10.9* Amendment to Employment Agreement between the Registrant and Gregg R. Sadler- attached as Exhibit (10.13) to the Registrant's Form 10-K Annual Report dated March 21, 1996. ** 10.10*Employment Agreement between the Registrant and Thomas J. Hespe- attached as Exhibit (10.14) to the Registrant's Form 10-K Annual Report dated March 21, 1996. ** 10.11*Amended Employment Agreement between the Registrant and Carl W. Ludvigsen, Jr. - attached as Exhibit (10.15) to the Registrant's Form 10-K Annual Report dated March 7, 1997. ** 10.12*Employment Agreement between the Registrant and Robert F. Thompson - attached as Exhibit (10.17) to the Registrant's Form 10-K Annual Report dated March 23, 1995. ** 10.13*Form of Amendment to Employment Agreement between the Registrant and Robert F. Thompson - attached as Exhibit (10.18) to the Registrant's Form 10-K Annual Report dated March 23, 1995. ** 10.14*Registrant's Long Term Incentive Plan as amended - attached as Exhibit the Registrant's Form 10-K Annual Report dated March 19, 1992. ** 10.15*Amendment to paragraphs 6 (d) and 24 (d) of the Registrant's Long Term Incentive Plan - attached as Exhibit (10.2) to the Registrant's Form 10-K Annual Report dated March 14, 1994. ** 10.16*Amendment to paragraph 3 of the Registrant's Long Term Incentive Plan - attached as Exhibit (10.3) to the Registrant's Form 10-K Annual Report dated March 14, 1994. ** 10.17*Amendment to paragraph 3 of the Registrant's Long Term Incentive Plan - attached as Exhibit (10.4) to the Registrant's Form 10-K Annual Report dated March 21, 1996. ** 10.18*Amendment to paragraph 2(a) of the Registrant's Long Term Incentive Plan- attached as Exhibit (10.5) to the Registrant's Form 10-K Annual Report dated March 23, 1998. ** 11. Statement regarding computation of per share earnings - see Note 1 of Notes to Consolidated Financial Statements, "Earnings Per Share." PAGE 31 Page ---- 21. Subsidiaries of Registrant - see Note 1 of Notes to Consolidated Financial Statements, "Principles of Consolidation and Basis of Presentation." 24. Powers of Attorney. 79 27. Financial Data Schedule - as submitted electronically by the Registrant in conjunction with this 1998 Form 10-K. 99. Cautionary Statement under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 80 * Incorporated by reference pursuant to Rule 12b-23 ** Management Compensatory Plan *** Non-Management Director Compensatory Plan These exhibits may be obtained by stockholders of Registrant upon written request to LabOne, Inc., 10101 Renner Blvd., Lenexa, KS 66219. (d) Not applicable PAGE 32 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LabOne, Inc. By: /s/ Robert D. Thompson By: /s/ Kurt E. Gruenbacher ---------------------- ----------------------- Robert D. Thompson Kurt E. Gruenbacher Title: Executive V.P., Chief Title: V.P. Finance, CAO Operating Officer and and Treasurer Chief Financial Officer Date: March 30, 1999 Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant on March 30, 1999 in the capacities indicated. By: /s/ W. Thomas Grant II. By: /s/ Robert D. Thompson ---------------------- ---------------------- W. Thomas Grant II. Robert D. Thompson Title: Chairman of the Board, President. Title: Executive V.P. , Chief and Chief Executive Officer Operating Officer and Chief Financial Officer By: /s/ Gregg R. Sadler . By: /s/ Thomas J. Hespe ------------------- ------------------- Gregg R. Sadler.. Thomas J. Hespe Title: Executive V.P. Administration, Title: Executive V.P. Sales Secretary and Director. and Director By: /s/ Kurt E. Gruenbacher By: */s/ Joseph H. Brewer ----------------------- --------------------- Kurt E. Gruenbacher.. Joseph H. Brewer Title: V.P. Finance, CAO and Treasurer Title: Director By: */s/ William D. Grant By:. */s/ Richard A Rifkind --------------------- ---------------------- William D. Grant. Richard A. Rifkind Title: Director Title: Director By: */s/ Richard S. Schweiker. By: */s/ James R. Seward ------------------------- -------------------- Richard S. Schweiker.. James R. Seward Title: Director. Title: Director By: */s/ John E. Walker By: */s/ R. Dennis Wright ------------------- --------------------- John E. Walker R. Dennis Wright Title: Director Title: Director .. *By: /s/ Gregg R. Sadler ------------------- Gregg R. Sadler Attorney-in-fact PAGE 33 LABONE, INC. AND SUBSIDIARIES Consolidated Financial Statements and Schedule December 31, 1998, 1997 and 1996 (With Independent Auditors' Report Thereon) PAGE 34 LABONE, INC. AND SUBSIDIARIES Table of Contents Page Independent Auditors' Report 36 Consolidated Financial Statements: Consolidated Balance Sheets, December 31, 1998 and 1997 37 Consolidated Statements of Earnings, Years ended December 31, 1998,1997 and 1996 39 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1998, 1997 and 1996 40 Consolidated Statements of Cash Flows, Years ended December 31, 1998, 1997 and 1996 41 Notes to Consolidated Financial Statements 43 Schedule: Schedule II - Valuation and Qualifying Accounts 56 PAGE 35 Independent Auditors' Report The Board of Directors LabOne, Inc.: We have audited the accompanying consolidated balance sheets of LabOne, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LabOne, Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Kansas City, Missouri January 29, 1999, except as to note 12, which is as of March 8, 1999 PAGE 36 LABONE, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 Assets 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents $ 10,177,740 18,284,672 Short-term investments (note 1) - 1,204,638 Accounts receivable, net of allowance for doubtful accounts of $2,326,716 in 1998 and $968,295 in 1997 18,735,984 12,604,687 Income taxes receivable 282,229 508,704 Inventories 1,798,481 2,203,471 Real estate available-for-sale (note 1) 3,515,000 3,515,000 Prepaid expenses and other current assets 2,504,768 2,279,619 Deferred income taxes (note 5) 3,972,575 3,299,387 ----------- ----------- Total current assets 40,986,777 43,900,178 Property, plant, and equipment: Land 2,379,334 2,379,334 Laboratory equipment 18,101,286 19,044,329 Data processing equipment and software 18,878,942 17,130,254 Office and transportation equipment 5,787,762 4,909,970 Leasehold improvements 700,842 492,684 Construction in progress 27,067,631 - ----------- ----------- 72,915,797 43,956,571 Less accumulated depreciation 35,983,169 33,515,280 ----------- ----------- Net property, plant, and equipment 36,932,628 10,441,291 ----------- ----------- Other assets: Intangible assets, net of accumulated amortization (note 2) 8,469,322 5,229,708 Bond issue costs, net of accumulated amortization of $5,823 186,324 - Deferred income taxes - noncurrent (note 5) - 321,799 Deposits and miscellaneous 206,127 80,497 ----------- ----------- Total assets $ 86,781,178 59,973,473 =========== =========== (Continued) See accompanying notes to consolidated financial statements. PAGE 37 LABONE, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued December 31, 1998 and 1997 Liabilities and Stockholders' Equity 1998 1997 ------------ ------------ Current liabilities: Accounts payable $ 4,353,733 3,326,451 Retainage and construction accounts payable 3,809,193 - Accrued payroll and benefits 4,148,593 4,530,235 Other accrued expenses 610,315 423,396 Other current liabilities 274,198 194,148 Current portion of long-term debt (note 4) 1,860,168 - ----------- ----------- Total current liabilities 15,056,200 8,474,230 Deferred income taxes (note 5) 446,745 - Long-term debt (note 4) 18,097,308 - ----------- ----------- Total liabilities 33,600,253 8,474,230 ----------- ----------- Commitments and Contingencies Stockholders' equity: Preferred stock, $0.01 par value per share; 1,000,000 shares authorized, none issued - - Common stock, $0.01 par value per share; 40,000,000 shares authorized, 15,000,000 shares issued (note 7) 150,000 150,000 Additional paid-in capital 14,099,066 13,723,250 Accumulated other comprehensive income (849,098) (666,927) Retained earnings 59,988,073 60,259,272 ----------- ----------- 73,388,041 73,465,595 Less treasury stock of 1,688,550 shares in 1998 and 1,874,706 shares in 1997, at cost 20,207,116 21,966,352 ----------- ----------- Total stockholders' equity 53,180,925 51,499,243 ----------- ----------- Total liabilities and stockholders' equity $ 86,781,178 59,973,473 =========== =========== See accompanying notes to consolidated financial statements. PAGE 38 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ----------- ---------- ---------- Sales $ 102,227,216 78,926,119 59,431,855 Cost of sales 56,719,603 42,017,179 32,716,833 ----------- ---------- ---------- Gross profit 45,507,613 36,908,940 26,715,022 Selling, general, and administrative expenses 31,028,323 27,706,822 23,622,545 Provision for loss on disposal of assets - 6,553,279 - ----------- ---------- ---------- Earnings from operations 14,479,290 2,648,839 3,092,477 ----------- ---------- ---------- Other income (expenses): Investment income 814,343 1,179,947 1,769,182 Other, net (112,277) (58,245) 14,930 ----------- ---------- ---------- Total other income, net 702,066 1,121,702 1,784,112 ----------- ---------- ---------- Earnings before income taxes 15,181,356 3,770,541 4,876,589 ----------- ---------- ---------- Income taxes (benefit) (note 5): Current 6,057,345 4,392,742 2,485,473 Deferred (95,356) (2,824,296) (476,783) ----------- ---------- ---------- Total income taxes 5,961,989 1,568,446 2,008,690 ----------- ---------- ---------- Net earnings $ 9,219,367 2,202,095 2,867,899 =========== ========== ========== Basic earnings per share $ 0.70 0.17 0.22 =========== ========== ========== Diluted earnings per share $ 0.69 0.17 0.22 =========== ========== ========== See accompanying notes to consolidated financial statements. PAGE 39 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1998, 1997 and 1996 Accumulated other comprehensive income - Additional foreign Compre- Total Common paid-in currency Retained Treasury hensive stockholders' stock capital translation earnings stock income equity --------- ----------- ----------- ---------- ---------- -------- ------------ Balance at December 31, 1995 $ 150,000 13,377,728 (545,818) 74,040,870 (22,158,451) 64,864,329 Comprehensive income: Net earnings - - - 2,867,899 - 2,867,899 2,867,899 Adjustment from foreign currency translation - - 1,859 - - 1,859 1,859 ---------- Comprehensive income 2,869,758 ========== Cash dividends ($.72 per share) - - - (9,414,332) - (9,414,332) Net issuance of 30,149 shares of treasury stock - 168,393 - - (38,855) 129,538 --------- ----------- ----------- ---------- ------------ ------------ Balance at December 31, 1996 150,000 13,546,121 (543,959) 67,494,437 (22,197,306) 58,449,293 Comprehensive income: Net earnings - - - 2,202,095 - 2,202,095 2,202,095 Adjustment from foreign currency translation - - (122,968) - - (122,968) (122,968) ----------- Comprehensive income 2,079,127 ============ Cash dividends ($.72 per share) - - - (9,437,260) - (9,437,260) Net issuance of 41,129 shares of treasury stock - 177,129 - - 230,954 408,083 --------- ----------- ----------- ---------- ------------- ----------- Balance at December 31, 1997 150,000 13,723,250 (666,927) 60,259,272 (21,966,352) 51,499,243 Comprehensive income: Net earnings - - - 9,219,367 - 9,219,367 9,219,367 Adjustment from foreign currency translation - - (182,171) - - (182,171) (182,171) ---------- Comprehensive income 9,037,196 ========== Cash dividends ($.72 per share) - - - (9,490,566) - (9,490,566) Issuance of 168,885 shares of treasury stock related to acquisition - 275,050 - - 1,724,950 2,000,000 Net issuance of 17,271 shares of treasury stock - 100,766 - - 34,286 135,052 --------- ----------- ----------- ---------- ------------ ------------ Balance at December 31, 1998 $ 150,000 14,099,066 (849,098) 59,988,073 (20,207,116) 53,180,925 ========= =========== ========== ========== ============ ============
See accompanying notes to consolidated financial statements. PAGE 40 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---------- --------- --------- Cash provided by (used for) operations: Net earnings $ 9,219,367 2,202,095 2,867,899 Adjustments to reconcile net earnings to net cash provided by operations, net of acquisitions: Depreciation and intangibles amortization 4,168,638 4,770,415 4,014,304 Amortization of investment premiums (36,767) (251,233) (103,146) Deferred income taxes (96,263) (2,832,976) (476,783) (Gain) loss on disposal of equipment (18,606) (120,087) 155,587 Provision for loss on disposal of assets - 6,553,279 - Directors' stock compensation 62,619 66,834 62,096 Changes in: Accounts receivable (5,274,751) (3,005,980) (1,871,421) Income tax receivable 226,475 (271,331) - Inventories 404,990 (755,422) 173,093 Prepaid expenses and other current assets (201,551) (442,454) 808,589 Accounts payable 886,932 355,075 863,000 Income taxes payable - - (50,560) Accrued payroll and benefits (619,281) 1,727,669 830,091 Other accrued expenses 186,919 29,585 (508,486) Other current liabilities 80,050 68,019 (23,668) ---------- --------- --------- Net cash provided by operations 8,988,771 8,093,488 6,740,595 ---------- --------- --------- Cash provided by (used for) investment activities: Purchase of investments held-to-maturity (5,461,090) (15,893,902) (15,752,895) Proceeds from maturities of investments held-to-maturity 6,701,893 18,155,062 23,394,571 Property, plant, and equipment additions, net (25,485,294) (6,676,615) (3,225,956) Acquisition of businesses (note 2) (2,967,883) (4,815,889) - Deposits and miscellaneous (5,147) (57,295) 17,559 ---------- --------- --------- Net cash provided by (used for) investment activities (27,217,521) (9,288,639) 4,433,279 ---------- --------- --------- Cash provided by (used for) financing activities: Issuance of treasury stock, net of proceeds from exercise of stock options 72,433 341,249 67,442 Proceeds from bond issue 19,900,000 - - Bond issue costs (192,147) - - Payments on long-term debt (1,937) - - Cash dividends (9,490,566) (9,437,260) (9,414,332) ---------- --------- --------- Net cash provided by (used for) financing activities 10,287,783 (9,096,011) (9,346,890) ---------- --------- --------- Effect of foreign currency translation on cash (165,965) (71,544) 11,976 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents (8,106,932) (10,362,706) 1,838,960 Cash and cash equivalents at beginning of year 18,284,672 28,647,378 26,808,418 ---------- --------- --------- Cash and cash equivalents at end of year $ 10,177,740 18,284,672 28,647,378 ========== ========== ========== Continued) PAGE 41 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 6,458,641 4,586,078 2,251,320 ========== ========== ========== Interest $ 240,586 - - ========== ========== ========== Supplemental schedule of noncash investing and financing activities for the year ended December 31, 1998: Details of acquisition: Fair value of assets acquired $ 6,223,162 Liabilities assumed (645,198) Stock issued (2,000,000) ---------- Cash paid 3,577,964 Less: cash acquired 610,081 ---------- Net cash paid for acquisition $ 2,967,883 ==========
See accompanying notes to consolidated financial statements. PAGE 42 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies - ----------------------------------------------- Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of LabOne, Inc. (LabOne or the Company), and its wholly-owned subsidiaries, Lab One Canada Inc. and Systematic Business Services, Inc. All significant intercompany transactions have been eliminated in consolidation. LabOne was 80.5%-owned by Lab Holdings, Inc. (Lab Holdings) at December 31, 1998. Cash and Cash Equivalents Cash and cash equivalents include demand deposits in banks, marketable securities with original maturities of three months or less, money market investments and overnight investments that are stated at cost, which approximates market value. Investment Securities LabOne determines the appropriate classification of debt and equity securities at the time of purchase. Debt securities are classified as held-to-maturity when LabOne has the intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost and investment income is included in earnings. Inventories Inventories consist of completed specimen collection kits and various materials used in the assembly of specimen collection kits for sale to clients. Inventory is valued at the lower of cost (first-in, first-out) or market. Property, Plant, and Equipment Property, plant, and equipment additions are recorded at cost which includes interest capitalized during construction, when material. Facilities leased pursuant to revenue bond financing transactions are accounted for as purchases with the cost of the leased property included in property, plant, and equipment and the related obligation included in long-term debt. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings 30 years Laboratory equipment 3 - 5 years Data processing equipment 3 - 5 years Office equipment 5 years Cost of Borrowings Expenses directly related to the issuance of debt are deferred and amortized over the period the debt is expected to be outstanding using the interest method. PAGE 43 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Intangible Assets Intangible assets are recorded at their acquisition cost, net of amortization. the patent process utilized in coating the plates on which blood and urine testing is performed was amortized on a straight-line basis over the estimated life of the patent (184 months at date of acquisition). The excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over periods of fifteen to twenty years. Impairment of Long-lived Assets When facts and circumstances indicate potential impairment, LabOne evaluates the recoverability of carrying values of long-lived assets, including intangibles, using estimates of undiscounted future cash flows over remaining asset lives. When impairment is indicated, any impairment loss is measured by the excess of carrying values over fair values. During the fourth quarter of 1997, LabOne decided to dispose of its office and headquarters building and lab facility, which, net of accumulated depreciation, has been classified as real estate available-for-sale (note 9). An impairment loss of $6,553,279 related to the anticipated sale was recorded in 1997 which reduced the carrying value to $3,515,000. At December 31, 1998, the Company has entered into real estate sales contracts to sell all real estate available-for-sale for $4,530,000. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect the estimates. The fair market value of LabOne's financial instruments at December 31, 1998 and 1997 approximates their carrying values. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. PAGE 44 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Earnings Per Share Basic earnings per share is computed using the weighted average number of common shares and diluted earnings per share is computed using the weighted average number of common shares and dilutive stock options. The following table reconciles the weighted average common shares used in the basic earnings per share calculation and the weighted average common shares and common share equivalents used in the diluted per share calculation: 1998 1997 1996 ---------- ---------- ---------- Weighted average common shares (basic) 13,168,394 13,106,383 13,076,103 Employee stock options 135,174 215,655 190,013 ---------- ---------- ---------- Weighted average common shares and common shares equivalents (diluted) 13,303,568 13,322,038 13,266,116 ========== ========== ========== Financial Statement Presentation In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which established standards for reporting and display of comprehensive income and its components. SFAS No. 130 became effective for the year ended December 31, 1998. The presentation of previous periods has been changed to reflect the provisions of this statement. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which established standards for reporting operating segments. SFAS No. 131 became effective for the year ended December 31, 1998. This statement did not effect the presentation of segment information. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for LabOne's quarter ending September 30, 1999. Retroactive application will not be required. The Company does not expect this statement to have a significant impact on the Company's financial position or results of operations. PAGE 45 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (2) Acquisitions and Intangible Assets - --------------------------------------- The cost and accumulated amortization of intangible assets at December 31, 1998 and 1997 are as follows: 1998 1997 ------------ ---------- Patent $ 8,000,000 8,000,000 Accumulated amortization 8,000,000 7,782,574 ------------ ---------- - 217,426 ------------ ---------- Excess of cost over fair value of assets acquired 12,587,993 8,598,959 Accumulated amortization 4,118,671 3,586,677 ------------ ---------- 8,469,322 5,012,282 ------------ ---------- Intangible assets, net of accumulated amortization $ 8,469,322 5,229,708 ============ ========== Effective October 30, 1998, LabOne acquired Systematic Business Services, Inc. (SBSI) for approximately $5.7 million. SBSI is a provider of information support services to insurance underwriters. The purchase was comprised of $3.7 million of cash and the issuance of 168,885 shares of LabOne stock having a fair market value of $2 million. The acquisition was accounted for using the purchase method of accounting. The purchase price could increase if the aquired company achieves certain levels of earnings in 1999 and 2000. The excess of the aggregate purchase price over the fair market value of net assets acquired of approximately $4 million is being amortized over twenty years. The operating results of SBSI have been included in the consolidated statements of earnings from the date of acquisition. The following unaudited pro forma consolidated results of operations of the Company for the years ended December 31, 1998 and 1997 assumes the SBSI acquisition occurred as of January 1, 1997: 1998 1997 ----------- ---------- Sales $ 108,239,000 85,032,000 Net earnings 9,869,000 2,434,000 Earnings per share: Basic 0.74 0.18 Diluted 0.73 0.18 =========== ========== Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results. PAGE 46 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America, for $4,815,889. Concurrently, Prudential's Individual Insurance Group agreed to use LabOne as its exclusive provider of risk assessment testing services. The excess costs over fair value of GIB Laboratories, Inc. assets acquired was $4,128,275 and is being amortized over fifteen years. (3) Investment Securities --------------------- LabOne held no investment securities at December 31, 1998. A summary of investment securities information relating to quoted market values and unrealized holding gains and losses at December 31, 1997 is as follows: Amount at which Approxi- carried Unrealized Unrealized Amortized mate in the holding holding 1997 cost market balance gains losses sheet - ----------------------- ----------- ----------- ----------- ----------- ---------- Held-to-maturity invest- ments, all with maturities less than one year: Canadian government notes $ 702,495 702,495 702,495 - - Obligations of states and political sub- divisions 502,143 501,541 502,143 - 602 ----------- ----------- ----------- ----------- ---------- Total short-term investments $ 1,204,638 1,204,036 1,204,638 - 602 =========== ========= ========= =========== ==========
(4) Long-term Debt Long-term debt consists of the following as of December 31, 1998: Taxable industrial revenue bonds, Series 1998A, principal payable annually through September 1, 2009, interest payable monthly at a rate adjusted weekly based on short- term United States treasury obligations (5.14% at December 31, 1998), secured by the Company's facility and an irrevo- cable bank letter of credit $ 20,000,000 Various capital leases, principal and interest payable monthly through May 2003, interest ranging from 7% to 12%, collateralized by office equipment 54,446 ------------- Total long-term debt 20,054,446 Less: Current portion 1,860,168 Unamortized discount 96,970 Long-term debt, net $ 18,097,308 ============= PAGE 47 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Aggregate maturities of long-term debt as of December 31, 1998 are as follows: Bonds payable Capital leases Total 1999 $ 1,850,000 10,168 1,860,168 2000 1,850,000 13,551 1,863,551 2001 1,850,000 14,933 1,864,933 2002 1,850,000 11,188 1,861,188 2003 1,800,000 4,606 1,804,606 Thereafter 10,800,000 - 10,800,000 ---------- ---------- ---------- $ 20,000,000 54,446 20,054,446 ========== =========== ========== Interest expense in 1998 amounted to approximately $70,000, net of interest capitalized as a component of property, plant, and equipment of $314,638. (5) Income Taxes ------------ The components of income taxes and deferred taxes (benefit) applicable to temporary differences are as follows (for the years ended December 31): 1998 1997 1996 Current: Federal $ 4,853,744 3,452,979 1,878,022 State 1,086,479 633,839 347,809 Foreign 117,122 305,924 259,642 ---------- ---------- ---------- Total current 6,057,345 4,392,742 2,485,473 ---------- ---------- ---------- Deferred: Federal (89,408) (2,339,175) (490,408) State (31,125) (487,993) (118,293) Foreign 25,177 2,872 131,918 ---------- ---------- ---------- Total deferred (95,356) (2,824,296) (476,783) ---------- ---------- ---------- $ 5,961,989 1,568,446 2,008,690 ========= ========= ========== PAGE 48 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Total income taxes differ from the amounts computed by applying the federal statutory income tax rate of 34% to earnings before income taxes for the following reasons (for the years ended December31): 1998 1997 1996 --------- --------- --------- Application of statutory income tax rate $ 5,161,661 1,281,984 1,658,040 Foreign taxes, net 7,599 72,062 113,803 State income taxes, net 696,534 99,649 151,481 Tax-exempt interest (5,788) (18,730) (44,708) Other, net 101,983 133,481 130,074 --------- --------- --------- $ 5,961,989 1,568,446 2,008,690 ========= ========= ========= The tax effects of temporary differences that create significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below: 1998 1997 ---------- ---------- Deferred current income tax assets (liabilities): Unrealized loss on real estate available-for-sale $ 2,541,126 2,606,698 Accrued vacation 303,180 253,832 Accrued medical claims 63,644 79,554 Bad debts 925,635 384,600 Inventory adjustment 40,830 26,673 Other items 98,160 (51,970) ---------- ---------- Total deferred current income tax assets, net $ 3,972,575 3,299,387 ========== ========== Deferred noncurrent tax assets (liabilities): Depreciation and amortization $ 12,878 321,799 Acquired subsidiary cash to accrual adjustment (196,438) - Other items (263,185) - ---------- ---------- Total deferred noncurrent tax assets (liabilities), net $ (446,745) 321,799 ========== ========== A valuation allowance for deferred tax assets was not necessary at December 31, 1998 or 1997. PAGE 49 1 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 In conjunction with building its new facility, LabOne has applied for the Kansas High Performance Incentive Program (HPIP) credit. If LabOne qualifies for the program as certified by the state of Kansas, LabOne will receive a credit available to offset all or a portion of its 1999 Kansas income tax liability related to operations of the new facility. Any unused portion of the credit can be carried forward for a period of ten years, provided LabOne continues to meet requirements of the program. HPIP credits which may be available to LabOne over the next ten years are estimated to aggregate approximately $4,000,000. (6) Benefit Plans ------------- LabOne maintains a money purchase pension plan for all employees who have completed one-half year of service and have attained age twenty and one-half years. The plan is a defined contribution plan under which LabOne contributes a percentage of a participant's annual compensation. LabOne's contributions to the plan were $1,803,000, $1,422,000 and $1,187,000 for the years ended December 31, 1998, 1997 and 1996, respectively. LabOne has a profit sharing plan for all employees who have completed six months of service and a minimum of 500 hours of service and have attained the age of twenty and one-half years. LabOne contributes on behalf of each participant an amount equal to 50% of the participant's annual contributions, but not in excess of 5% of the participant's annual compensation. LabOne contributions are invested in LabOne common stock. LabOne's contributions to the plan for the years ended December 31, 1998, 1997 and 1996 were $663,000, $558,000 and $509,000, respectively. (7) Stock Options and Warrants -------------------------- LabOne has a long-term incentive plan which provides for granting awards, including stock options, for not more than 3,150,000 shares of LabOne common stock. LabOne has granted certain stock options which entitle the grantee to purchase shares for a price equal to the fair market value at date of grant with option periods up to ten years. The Company accounts for stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (APB 25). As such, compensation expense s recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On December 31, 1995, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, (SFAS 123) which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternately, SFAS 123 allows entities to continue to apply the provisions of APB 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123. PAGE 50 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 A summary of the status of the Company's stock option plan as of December 31, 1998, 1997 and 1996 and changes during the years then ended is presented below: 1998 1997 1996 ------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Number average Number average Number average of exercise of exercise of exercise Fixed options shares price shares price shares price - --------------------- --------- --------- --------- --------- --------- --------- Outstanding at begin- ing of year 1,614,068 $ 14.30 1,459,559 $ 13.63 1,572,167 $ 13.07 Granted 330,859 15.02 253,316 17.36 314,297 16.39 Exercised (40,300) 10.64 (71,907) 10.84 (120,305) 10.67 Forfeited (66,700) 17.87 (26,900) 15.95 (306,600) 14.74 --------- --------- --------- --------- --------- --------- Outstanding at end of year 1,837,927 14.38 1,614,068 14.30 1,459,559 13.63 ========= ========= ========= ========= ========= ========= Options exercisable at year-end 968,683 $ 13.44 820,609 $ 12.94 718,705 $ 12.21 ========= ========= ========= ========= ========= =========
The following table summarizes information about stock options at December 31, 1998. Options outstanding Options exercisable ------------------------------------- ----------------------- Weighted- average Weighted- Weighted- remaining average average Range of Number contractual exercise Number exercise exercise prices outstanding life (years) price exercisable price ---------------- ----------- ----------- ---------- ----------- ----------- $ 9.88 - 9.88 188,583 2.0 $ 9.88 188,583 $ 9.88 11.13 - 11.63 420,513 5.2 11.44 313,513 11.38 13.38 - 14.13 154,397 6.3 13.93 85,618 13.95 14.38 - 14.38 205,859 6.7 14.38 120,000 14.38 14.75 - 15.22 241,000 9.3 15.04 24,000 14.75 15.50 - 16.63 305,885 7.9 16.42 117,877 16.44 16.69 - 23.88 321,690 7.4 18.65 119,092 19.96 ---------- ---------- 9.88 - 23.88 1,837,927 6.5 14.38 968,683 13.44 ================ ========== ========== ========== ========== ==========
The weighted-average per share fair value of stock options granted during 1998, 1997 and 1996 was $3.54, $5.08 and $4.77, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: 1998 - expected dividend yield of 4.8%, risk-free interest rate of 5.0%, expected volatility factor of 33.9% and an expected PAGE 51 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 life of six years; 1997 - expected dividend yield of 4.2%, risk-free interest rate of 6.3%, expected volatility factor of 35.4% and an expected life of six years; 1996 - expected dividend yield of 4.4%, risk-free interest rate of 6.0%, expected volatility factor of 36.6% and an expected life of six years. Since the Company applies APB 25 in accounting for its plans, no compensation cost has been recognized for its stock options in the financial statements. Had the Company recorded compensation cost based on the fair value of options at the grant date the Company's net earnings and earnings per share would have been reduced by approximately the following: $515,000, or $.04 per share, in 1998; $416,000, or $.03 per share, in 1997; and $199,000, or $.02 per share, in 1996. Pro forma net earnings reflect only options granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net earnings amounts presented above because compensation costs are reflected over the options' vesting period of five years for the 1998, 1997, and 1996 options. Compensation cost for options granted prior to January 1, 1995 is not considered. LabOne entered marketing agreements with two companies during 1998. In conjunction with these agreements, LabOne granted warrants for the purchase of 1,000,000 shares of common stock at an exercise price equal to the fair value of the stock at the grant date (500,000 shares at $17.00 and 500,000 shares at $15.44). A portion of the warrants become exercisable each quarter for five years provided certain conditions are met including achievement of certain levels of revenues. LabOne has reserved 1,000,000 shares of common stock for issuance of shares upon exercise of the warrants. (8) Foreign Operations ------------------ The following summarizes financial information for LabOne's wholly-owned Canadian subsidiary, Lab One Canada Inc., for the years ended December 31: 1998 1997 1996 ----------- ----------- ----------- Revenues $ 6,462,814 6,564,786 6,379,505 Operating earnings 314,112 644,842 718,567 Total assets 2,841,854 3,192,854 2,668,434 =========== =========== ========== (9) Business Segment Information ---------------------------- The Company operates principally in three lines of business: insurance, clinical testing, and substance abuse testing. The insurance line of business involves risk appraisal laboratory testing and information services to the insurance industry. The tests performed and information provided by the Company are specifically designed to assist an insurance company in objectively evaluating the risks posed by policy applicants. Clinical testing services are provided to the health care industry to aid in the diagnosis and PAGE 52 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 treatment of patients. Substance abuse testing services are provided to both regulated and nonregulated employers who employ drug screening guidelines. Operating income (loss) of each line of business is computed as sales less identifiable and allocated expenses. In computing operating income (loss) of lines of business, none of the following items have been added or deducted: general corporate expenses, investment income or other income (expenses). Identifiable assets by line of business are those assets that are used in the Company's operations in each line of business. General corporate assets are principally cash and investment securities. Following is a summary of line of business information as of and for the years ended December 31, 1998, 1997, and 1996: 1998 1997 1996 ------------ ----------- ----------- Sales: Insurance services $ 69,149,050 61,997,817 50,800,650 Clinical services 18,599,583 7,511,889 3,941,704 Substance abuse testing 14,478,583 9,416,413 4,689,501 ------------ ----------- ----------- Total sales $ 102,227,216 78,926,119 59,431,855 ============ =========== =========== Operating income (loss): Insurance services $ 20,630,337 18,507,849 12,610,224 Clinical services (6,187,744) (8,303,741) (7,967,348) Substance abuse testing 203,828 (933,832) (1,235,982) General corporate expenses (167,131) (188,245) (158,830) Investment income 814,343 1,179,947 1,769,182 Other expense, net (112,277) (6,491,437) (140,657) ------------ ----------- ----------- Earnings before income taxes 15,181,356 3,770,541 4,876,589 ------------ ----------- ----------- Income tax expense 5,961,989 1,568,446 2,008,690 Net earnings $ 9,219,367 2,202,095 2,867,899 ============ =========== =========== Identifiable assets: Insurance services $ 29,295,799 25,020,052 24,327,970 Clinical services 5,492,624 3,512,587 4,022,258 Substance abuse testing 6,448,663 4,994,104 3,323,245 General corporate assets 45,544,092 26,446,730 33,069,702 ------------ ----------- ----------- Total assets $ 86,781,178 59,973,473 64,743,175 ============ =========== =========== Capital expenditures: Insurance services $ 2,089,869 3,308,320 2,558,275 Clinical services 501,380 468,538 162,814 Substance abuse testing 423,664 946,268 504,867 General corporate 22,470,381 2,553,218 - ============ =========== =========== Depreciation and amortization: Insurance services $ 2,560,962 3,185,661 2,504,472 Clinical services 797,385 940,223 1,141,210 Substance abuse testings 810,291 644,531 368,622 ============ =========== =========== PAGE 53 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (10) Quarterly Financial Data (Unaudited) ------------------------------------ A summary of unaudited quarterly results of operations for 1998 and 1997 is as follows (in thousands except per share data): Three months ended --------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 1998: Sales $ 23,333 25,762 25,834 27,298 Gross profit 10,374 11,931 11,305 11,898 Earnings before income taxes 3,297 4,234 3,630 4,020 Net earnings 2,000 2,516 2,227 2,476 Basic earnings per share 0.15 0.19 0.17 0.19 Diluted earnings per share 0.15 0.19 0.17 0.18 Dividends per share 0.18 0.18 0.18 0.18 ============ ============ ============ ============ 1997: Sales $ 17,740 20,307 19,728 21,151 Gross profit 8,290 9,671 9,064 9,884 Earnings (loss) before income taxes 2,287 2,853 2,603 (3,972) Net earnings (loss) 1,359 1,687 1,536 (2,380) Basic earnings (loss) per share 0.10 0.13 0.12 (0.18) Diluted earnings (loss) per share 0.10 0.13 0.12 (0.18) Dividends per share 0.18 0.18 0.18 0.18 ============ ============ ============= =========== (11) Commitments and Contingencies ----------------------------- Tax Assessment The Comptroller of the State of Texas has conducted an audit of LabOne for sales and use tax compliance for the years 1991 through 1997 and contends that LabOne's insurance laboratory services are taxable under the Texas tax code. The Texas Comptroller has issued a tax audit assessment, including interest and penalties, of approximately $1,900,000. The Company has appealed this assessment arguing that its services do not fit within the definition of insurance services under the Texas code. The assessment is under review by the Texas State Hearing Attorney. At this time, the Company is unable to estimate the possible liability, if any, that may be incurred as a result of this assessment. PAGE 54 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Leases LabOne has several noncancelable operating leases, primarily for land and buildings, and other commitments that expire through 2003, including a lease for office space from an entity owned by an employee. Rental expense for these operating leases during 1998, 1997, and 1996 amounted to $538,000, $486,000, and $626,000, respectively. Future minimum lease payments and other commitments under these agreements as of December 31, 1998 are: Year Amount ---- -------- 1999 $ 519,880 2000 346,912 2001 228,510 2002 195,192 2003 162,660 ======== Construction Costs Management estimates cost to complete construction of the new facility to house its headquarters and lab approximates $1,500,000. (12) Subsequent Event - Merger Agreement ----------------------------------- On March 8, 1999, LabOne and Lab Holdings jointly announced that the Board of Directors of both companies have approved an agreement to merge the two companies. Under the merger agreement, LabOne is to be merged into Lab Holdings and the merged entities name will be changed to LabOne, Inc. Stockholders of Lab Holdings will have their Lab Holdings shares split immediately before the merger into 1.5 shares of the merged entity. Stockholders of LabOne, other than Lab Holdings, will be entitled to elect to have each of their existing LabOne shares exchanged for one share of the merged entity or $12.75 in cash or a combination of cash and shares up to a limit of $16.6 million in cash (approximately 50% of eligible shares). LabOne will use cash from operations and additional borrowings, if necessary, to cover the purchase of shares from stockholders that choose the cash election option. The merger is subject to approval by the holders of two-thirds of the outstanding Lab Holdings shares and a majority of the shares voted by LabOne stockholders, other than Lab Holdings and its affiliates, and other closing conditions. PAGE 55 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Schedule II Additions - charged to Balance selling, at general, and Deductions - Balance beginning administrative uncollectible at end Description of year expenses accounts of year Allowance for doubtful accounts: Year ended December 31,1998 $ 968,295 1,502,572 144,151 2,326,716 ============== ============== ============= ============== Year ended , December 31,1997 $ 657,558 521,193 210,456 968,295 ============== ============== ============= ============== Year ended December 31, 1996 $ 329,995 493,760 166,197 657,558 ============== ============== ============= ==============
PAGE 56 EX-24 2 Exhibit 24 ---------- Power of Attorney The undersigned hereby appoint Gregg R. Sadler as attorney-in-fact, to execute in name and on behalf of the undersigned the Form 10-K Annual Report of LabOne, Inc., to be filed with the Securities and Exchange Commission for its fiscal year ended December 31, 1998. Dated: March 1, 1999 /s/ Joseph H. Brewer MD ------------------------------ Joseph H. Brewer, MD, Director /s/ William D. Grant ------------------------------ William D. Grant, Director /s/ Richard A. Rifkind ------------------------------ Richard A. Rifkind, MD, Director /s/ Richard S. Schweiker ------------------------------ Richard S. Schweiker, Director /s/ James R. Seward ------------------------------ James R. Seward, Director /s/ John E. Walker ------------------------------ John E. Walker, Director /s/ R. Dennis Wright ------------------------------ R. Dennis Wright, Director -79- EX-27 3
5 This schedule contains summary financial information extracted from the 1998 Annual Report on Form 10-K for LabOne, Inc. and is qualified in its entirety by reference to such financial statements. 0000816151 LABONE, INC. YEAR DEC-31-1998 DEC-31-1998 10,177,740 0 21,062,700 2,326,716 1,798,481 40,986,777 72,915,797 35,983,169 86,781,178 15,056,200 18,097,308 0 0 150,000 53,030,925 86,781,178 0 102,227,216 0 56,719,603 0 1,502,572 70,127 15,181,356 5,961,989 9,219,367 0 0 0 9,219,367 0.70 0.69
EX-10 4 Exhibit 10.3 ------------ LabOne Annual Incentive Plan ---------------------------- The Annual Incentive Plan is designed to motivate and reward the accomplishment of targeted operating results. Prior to the beginning of the fiscal year, the Compensation Committee establishes an operating earnings goal under the Plan based upon the Committee's judgment of reasonable operating earnings growth over the previous fiscal year. The size of the incentive pool increases pursuant to a formula established by the Committee as operating earnings increase over the minimum threshold. The incentive pool is distributed in cash ratably 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 the Company's financial and strategic goals for the year, and is reviewed and approved by the Committee. 65 EX-10 5 Exhibit 10.5 ------------ LABONE, INC. INDEMNIFICATION AGREEMENT ------------------------- This INDEMNIFICATION AGREEMENT (the "Agreement") is made as of February 12, 1999 by and between LABONE, INC., a Delaware corporation (the "Company"), and DIRECTOR (the "Indemnitee"). -------------- WHEREAS, highly competent persons are reluctant to serve publicly-held corporations as officers, directors and in certain other capacities unless they are provided with adequate protection through insurance or indemnification against claims brought against them as a result of such service; WHEREAS, Indemnitee is presently serving as a director of the Company and as a member of the Special Committee of Independent Directors (the "Special Committee") and/or other committees of the Board of Directors of the Company, and/or as an officer of the Company, and/or at the request of the Company in certain other capacities; WHEREAS, the Company believes that the Indemnitee's continuing service in such capacities is important to the Company; WHEREAS, the Company and the Indemnitee have reviewed the indemnification and exculpation provisions in the Company's governing documents and in the General Corporation Law of Delaware, have investigated the availability and sufficiency of liability insurance and have concluded that additional protection is required to induce persons to serve or to continue to serve the Company in the foregoing capacities; WHEREAS, the Board of Directors has determined that this Agreement is reasonable, prudent and necessary in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or to continue to serve the Company in the foregoing capacities; WHEREAS, Indemnitee is willing, subject to certain conditions, including without limitation the execution and performance of this Agreement by the Company, to continue to serve in his present capacities and/or to take on additional service for and on behalf of the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: ----------- (a) The term "Proceeding" shall include, without limitation, any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature. -66- (b) The term "Expenses" shall include, without limitation, attorneys' fees, disbursements, retainers, accounting and witness fees, travel and deposition costs, expenses of investigations, judicial or administrative proceedings and appeals, court costs, court reporter fees and any expenses of establishing a right to indemnification and/or advancement of expenses pursuant to this Agreement or otherwise. The term "Expenses" does not include amounts paid in settlement by or on behalf of Indemnitee or the amount of judgments, fines, penalties or liabilities incurred by Indemnitee. (c) References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax, penalty or other amount assessed with respect to any employee benefit plan pursuant to the Employee Retirement Income Security Act of 1974, as amended from time to time, the Internal Revenue Code of 1986, as amended from time to time, any other statute or the common law; references to "serving at the request of the Company" shall include, without limitation, any service as a director, officer, employee or agent which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or its beneficiaries. 2. Agreement to Serve. ------------------- The Indemnitee agrees to serve or to continue to serve as a director (including as a member of any committee of directors) and/or officer of the Company and/or at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, in each case so long as he or she is duly elected and qualified to serve in such capacity or until he or she resigns or is removed. The provisions of this Section relating to service by the Indemnitee shall not be deemed to affect the terms of any employment or other agreement now or hereafter in effect between the Company and the Indemnitee governing such service. 3. Indemnification. --------------- The Company shall, subject to the provisions of this Agreement, indemnify the Indemnitee if the Indemnitee is or was involved or is or was threatened to be made involved as a party, witness or otherwise in any Proceeding (including, without limitation, any Proceeding by or in the right of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director (including a member of any committee of directors) or officer of the Company, or is or was serving at the request of the Company as a director (including as a member of any committee of directors), officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction of the Indemnitee while acting in any of the foregoing capacities, against all Expenses, judgments, fines, penalties, liabilities and amounts paid in settlement (including without limitation, all interest, assessments and other charges paid or payable in connection therewith) actually and reasonably incurred by the Indemnitee in connection with such Proceeding, provided that no such indemnity shall indemnify Indemnitee on account of Indemnitee's conduct which was finally adjudged by a court of competent jurisdiction to have been knowingly fraudulent, deliberately dishonest or willful misconduct. -67- 4. No Presumption. -------------- For purposes of this Agreement, the termination of any Proceeding by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification of Indemnitee is not permitted under this Agreement or applicable law. 5. Partial Indemnification. ----------------------- If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties, liabilities or amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any Proceeding but not, however, for the total amount thereof, the Company shall indemnify the Indemnitee for the portion thereof to which the Indemnitee is entitled. 6. Limitations on Indemnification. ------------------------------ No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee for Expenses with respect to proceedings initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification or advances under this Agreement or otherwise, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee on account of any matter finally adjudged by a court of competent jurisdiction to be a violation of the provisions of Section 16 of the Securities Exchange Act of 1934 ("Exchange Act"), and the rules and regulations promulgated thereunder, as amended from time to time; (c) To indemnify the Indemnitee for the return of any remuneration paid to the Indemnitee that is finally adjudged by a court of competent jurisdiction to have been illegal or improper; or (d) To indemnify the Indemnitee with respect to any matter if a court of competent jurisdiction shall finally determine that such indemnification is not lawful. 7. Notice and Defense of Proceeding. Within a reasonable time after receipt by the Indemnitee of actual and not constructive notice of the commencement of any Proceeding, the Indemnitee shall provide written notice to the Company of the commencement thereof by delivery of a notice substantially in the form attached hereto as Exhibit A or in such other form as the Company may reasonably accept. The omission to so notify the Company will relieve it from any liability which it may have to the Indemnitee in connection with such Proceeding under this Agreement, but shall not relieve the Company from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such Proceeding: -68- (a) The Company shall be entitled to participate in the Proceeding at its own expense. (b) Except as otherwise provided below, the Company may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense of the Proceeding, with legal counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for Expenses incurred by the Indemnitee in connection with such Proceeding under this Agreement, including Section 8 hereof, other than Indemnitee's reasonable costs of investigation or participation in such Proceeding (including, without limitation, travel expenses) and except as provided below. The Indemnitee shall have the right to employ Indemnitee's own counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, or (iii) the Company shall not in fact have employed counsel to assume the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advanced by the Company as provided in Section 8 hereof. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company. (c) If two or more persons, including the Indemnitee, may be entitled to indemnification from the Company as parties to any Proceeding, the Company may require the Indemnitee to use the same legal counsel as the other parties. The Indemnitee shall have the right to use separate legal counsel in the Proceeding, but the Company shall not be liable to the Indemnitee under this Agreement, including Section 8 hereof, for the fees and expenses of separate legal counsel incurred after notice from the Company of the requirement to use the same legal counsel as the other parties, unless the Indemnitee reasonably concludes that there may be a conflict of interest between the Indemnitee and any of the other parties required by the Company to be represented by the same legal counsel. (d) The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent, which shall not be unreasonably withheld. The Indemnitee shall permit the Company to settle any Proceeding that the Company assumes the defense of, except that the Company shall not, without the Indemnitee's written consent, settle any action or claim unless such settlement includes a provision whereby the parties to the settlement unconditionally release Indemnitee from all liabilities, damages, costs and expenses in respect of claims by reason of the settlement or release of the parties in such Proceeding. 8. Advancement of Expenses. ------------------------ (a) Except as provided in Section 7 hereof, the Expenses incurred by the Indemnitee in any Proceeding shall be paid by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee. Except as expressly provided in Section 8(b) hereof, no security shall be required by the Company in making Expense advances, and such advances -69- shall be made without regard to the Indemnitee's ability to repay the amount advanced and without regard to the Indemnitee's ultimate entitlement to indemnification under this Agreement or otherwise. (b) Indemnitee shall make an Expense advance request by delivery to Company of a signed request substantially in the form attached hereto as Exhibit B or in such other form as the Company may reasonably accept. As long as Delaware law requires such an undertaking, the request shall include an undertaking by Indemnitee to repay any advances to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification. Advances requested by Indemnitee hereunder shall be paid by the Company no later than ten days after receipt by the Company of the written request. In the event the Company does not honor Indemnitee's request for an Expense advance, Indemnitee may bring an action in any court of competent jurisdiction to enforce the right to the advance, and the Company shall have the burden of proof in such action to demonstrate that Indemnitee is not entitled to such advance. (c) Expenses submitted to the Company for reimbursement must be reasonable and comply with the then existing billing procedures of the Company so that the Company can reasonably monitor and audit such Expenses. 9. Claim for Indemnification; Enforcement. --------------------------------------- (a) In the event that Indemnitee becomes liable for any judgment, penalty or fine, or pursuant to any settlement agreement, for which indemnification may be provided under this Agreement, Indemnitee shall deliver to the Company within a reasonable time a signed request substantially in the form attached hereto as Exhibit C or in such other form as the Company may reasonably approve. The Company shall make a determination as to Indemnitee's right to indemnification and, if applicable, pay Indemnitee's claim, no later than 60 days after receipt by the Company of the written request for indemnification. The determination of Indemnitee's right to indemnification shall be made: (i) by a majority vote of directors who were not parties to the Proceeding, even though less than a quorum, (ii) if there are no such directors, or if such directors so direct, or if Indemnitee so requests in writing at the time the Indemnitee submits the claim for indemnification, by independent legal counsel in a written opinion, or (iii) by the stockholders of the Company. Such independent legal counsel shall be selected by the persons specified in (i), or if there are none or if a majority vote thereof is not obtainable, by a majority vote of the entire Board of Directors, which independent legal counsel shall be approved by the Indemnitee in writing (which approval shall not be unreasonably withheld). The Indemnitee shall be conclusively presumed to have met the applicable standards of conduct for indemnification pursuant to this Agreement, unless Indemnitee receives written notice of a determination that the Indemnitee has not met such applicable standards of conduct within such 60 day period. If a determination denying Indemnitee's claim is made by the persons specified in (i) or (iii) above, such notice shall disclose with particularity the reasons for such determination. If a determination denying Indemnitee's claim is made by independent legal counsel, the notice shall include a copy of the related legal opinion of such counsel. (b) If a claim for indemnification by Indemnitee under this Agreement is denied by the Company or is not paid by the Company within 60 days after receipt by the Company of the written request for indemnification, the -70- Indemnitee may bring suit in any court of competent jurisdiction against the Company to enforce the right to indemnification provided by this Agreement. The burden of proving that indemnification is not appropriate shall be on the Company. An actual determination by the directors or stockholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct shall not be admissible in such action as evidence that the Indemnitee has not met the applicable standard of conduct. (c) The Indemnitee shall be entitled to indemnification and advancement of Expenses as provided in this Agreement with regard to Expenses incurred in connection with any action by the Indemnitee enforcing the right to indemnification or advances in whole or in part pursuant to this Agreement regardless of the outcome of such action, unless a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such action was not made in good faith or was frivolous. 10. Subrogation. ------------ In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 11. Duplication of Payments. ------------------------ (a) The Company will not be liable under this Agreement to make any payment to Indemnitee in connection with any Proceeding to the extent the Indemnitee has actually received payment of the claim otherwise payable hereunder under any insurance policy, the Company's Certificate of Incorporation or By-laws or otherwise; provided, however, that nothing in this Section shall affect the liability, if any, of the Company to Lab Holdings, Inc. ("Lab Holdings") in connection with a claim brought by Lab Holdings as subrogee of Indemnitee's rights under this Agreement. (b) Notwithstanding any provision to the contrary, if the Company denies or has not paid Indemnitee's claim for indemnification within 60 days after receipt by the Company of the written request for indemnification by the Indemnitee, then Indemnitee may submit a request for indemnification from Lab Holdings pursuant to the Indemnification Agreement between Lab Holdings and Indemnitee; provided, however, that the Company's denial or failure to pay the Indemnitee's claim for indemnity within such 60 day period shall not relieve the Company or Lab Holdings from their obligations to indemnify Indemnitee under the respective Indemnification Agreements or otherwise. 12. Maintenance of Liability Insurance. ----------------------------------- (a) The Company represents that it currently has in effect the following policy or policies of directors' and officers' liability insurance (the "D&O Insurance") which cover Indemnitee as an insured: -71- INSURER POLICY NO. AMOUNT ------- ---------- ------ Executive Risk Indemnity, Inc. 751-084861-97 $15,000,000 Royal Surplus Lines Insurance Company KS F000197 $10,000,000 (b) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and/or at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and thereafter as long as the Indemnitee may be subject to any possible Proceeding, or is a party or is threatened to be made a party to any Proceeding, the Company shall promptly obtain and maintain the D&O Insurance policies in full force and effect to the extent that such policies are obtainable at an annual cost of not greater than twice the annual premium on the date hereof, provided that if such coverage is not available for such amount, the Company shall obtain and maintain as much coverage as possible for such amount. (c) In all D&O Insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors. (d) In addition to the other obligations of the Company under this Agreement, and not in limitation thereof, if the Company, acting under paragraph (b) of this Section 12, is unable to maintain in effect the D&O Insurance policies, the Company shall indemnify and hold harmless Indemnitee to the full extent of the coverage which would otherwise have been provided for the benefit of Indemnitee pursuant to the D&O Insurance policies. 13. Change in Control. ------------------ In the event that the Company shall be a constituent corporation in a consolidation or merger, whether the Company is the resulting or surviving corporation or is absorbed, or if there is a change in control of the Company as defined in this Section, Indemnitee shall stand in the same position under this Agreement with respect to the resulting, surviving or changed corporation as he would have with respect to the Company if its separate existence had continued or if there had been no change in control of the Company. "Change in control" shall include any change in the ownership of a majority of the capital stock of the Company or in the composition of a majority of the members of the Board of Directors of the Company. 14. Non-Exclusivity, etc. --------------------- The rights of Indemnitee hereunder shall be in addition to any other rights to which the Indemnitee may be entitled under the Company's Certificate of Incorporation, Bylaws, any agreement, vote of stockholders or disinterested directors, provision of Delaware law, insurance policy or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity on behalf of the Company while holding such office, and such rights shall continue as to Indemnitee even though Indemnitee may have ceased to be a director or officer of the Company or ceased to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial -72- decision) permits greater rights to indemnification and advancement of expenses by agreement than would be afforded currently under this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 15. Deposit of Funds in Trust. -------------------------- In the event that the Company decides to voluntarily dissolve or to file a voluntary petition for relief under applicable bankruptcy, moratorium or similar laws, then not later than 10 days prior to such dissolution or filing, the Company shall deposit in trust for the exclusive benefit of Indemnitee a cash amount equal to all amounts previously authorized to be paid to Indemnitee hereunder, such amounts to be used to discharge the Company's obligations to Indemnitee hereunder. Any amount in such trust not required for such purpose shall be returned to the Company. This Section 15 shall not apply to any dissolution of the Company in connection with a transaction as to which Section 13 hereof applies. 16. Change in Other Rights. ----------------------- The Company will not adopt any amendment to the Certificate of Incorporation or By-Laws of the Company the effect of which would be to deny, diminish or encumber the Indemnitee's rights to indemnification, advancement of expenses, exculpation or maintenance of the D&O Insurance hereunder, under such other documents or under applicable law, as applied to any act or failure to act occurring in whole in or part prior to the date upon which any such amendment was approved by the Board of Directors or the stockholders, as the case may be. Notwithstanding the foregoing, if the Company adopts any amendment to the Certificate of Incorporation or By-Laws the effect of which is to so deny, diminish or encumber such rights, such amendment will apply only to acts or failures to act occurring entirely after the effective date thereof. 17. Separability. ------------- Each provision of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. To the extent required, any provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under Delaware law. 18. Savings Clause. --------------- If this Agreement or any provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties, liabilities and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection with any Proceeding to the fullest extent permitted by any applicable provision of this Agreement that has not been invalidated and to the fullest extent permitted under Delaware law. 19. Amendments. ----------- No amendment, waiver, modification, termination or cancellation of this -73- Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The rights to indemnification and advancement of expenses afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Certificate of Incorporation, Bylaws or by other agreements, including D&O Insurance policies. 20. Counterparts. ------------- This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 21. Successors and Assigns. ----------------------- This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his heirs, executors, administrators and personal representatives, and the Company and its successors and assigns. 22. Notices. -------- All notices, requests and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) upon delivery by hand to the party to whom the notice, request or other communication shall have been directed or (b) on the third business day after the date on which it is mailed by certified or registered mail with postage prepaid, addressed as follows: (i) if to the Indemnitee, to the address indicated on the signature page, below said Indemnitee's signature, and (ii) if to the Company, to: LabOne, Inc. 10310 W. 84th Terrace Lenexa, Kansas 66214 Attention: Secretary or to such other address as either shall designate in writing. 23. Governing Law. -------------- This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof. 24. Prior Agreement. ---------------- The prior Indemnification Agreement between the Company and the Indemnitee is superseded by this Agreement and is no longer in effect. IN WITNESS WHEREOF, the parties have executed this Indemnification Agreement as of the date first written above. LABONE, INC. By: --------------------------- -74- ----------------------------- DIRECTOR "Indemnitee" Address of Indemnitee: -75- Exhibit A LABONE, INC. NOTICE OF COMMENCEMENT OF PROCEEDING -------------------------- 1. This notification is provided pursuant to the Indemnification Agreement, dated as of February 12, 1999 (the "Indemnification Agreement"), between LabOne, Inc., a Delaware corporation (the "Company"), and the undersigned. 2. I have received actual notice of a Proceeding with respect to which I may have certain rights under the Indemnification Agreement. The following is a description of the Proceeding and my involvement in the Proceeding (as a party, witness or otherwise): - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3. I have attached such documents relating to the matter described above as are reasonably available to me and are reasonably necessary to determine whether the Proceeding is subject to the terms of the Indemnification Agreement. ------------------------------- Name: DIRECTOR Date: ------------------ -76- Exhibit B LABONE, INC. REQUEST FOR ADVANCEMENT OF EXPENSES ----------------------- 1. This Request is submitted pursuant to the Indemnification Agreement, dated as of February 12, 1999 (the "Indemnification Agreement"), between LabOne, Inc., a Delaware corporation (the "Company"), and the undersigned. 2. I am requesting advancement of Expenses (as defined in the Indemnification Agreement) which I have incurred or will incur in connection with a Proceeding (as defined in the Indemnification Agreement) for which I may be entitled to indemnification pursuant to the Indemnification Agreement. 3. I hereby undertake to repay this advancement of Expenses if it is ultimately determined that I am not entitled to be indemnified by the Company under the Indemnification Agreement. 4. The Expenses for which advancement is requested are, in general, all Expenses related to - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5. I have attached such documents relating to the matter described above as are reasonably available to me and are reasonably necessary to determine whether and to what extent I am entitled to advances of Expenses under the Indemnification Agreement. ------------------------------- Name: DIRECTOR Date: ------------------ -77- Exhibit C LABONE, INC. INDEMNIFICATION CLAIM --------------------- 1. This Indemnification Claim is submitted pursuant to the Indemnification Agreement, dated as of February 12, 1999 (the "Indemnification Agreement"), between LabOne, Inc., a Delaware corporation (the "Company"), and the undersigned. 2. I am requesting indemnification in connection with a Proceeding (as defined in the Indemnification Agreement) in which I was or am involved or am threatened to be made involved. 3. With respect to all matters related to any such Proceeding or claim, I believe that I am entitled to be indemnified pursuant to the provisions of the Indemnification Agreement. 4. Without limiting any other rights which I have or may have, I am requesting indemnification against liabilities which have or may arise out of - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5. To the extent known to me, the amount requested for indemnification is as follows - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 6. I have attached such documents supporting this request as are reasonably available to me and are reasonably necessary to determine whether and to what extent I am entitled to indemnification under the Indemnification Agreement. ------------------------------- Name: DIRECTOR Date: ------------------ -78- EX-4 6 Exhibit 4.5 ----------- THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,AS AMENDED, OR ANY STATE SECURITIES LAWS AND CANNOT BE OFFERED, SOLD, HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SUCH LAWS AS PROVIDED IN THIS WARRANT No. of Shares: 500,000 Warrant No. A-2 Original Issue Date: November 13, 1998 WARRANT To Purchase Shares of Common Stock of LabOne, Inc. This certifies that, for value received, USA Managed Care Organization, ("USA MCO") is entitled to purchase from LABONE, INC., a Delaware corporation (the "Company"), from time to time prior to the Expiration Date in accordance with the terms and conditions hereof, up to 500,000 shares of Common Stock of the Company at a Purchase Price per share set forth below. The number of shares of Common Stock purchasable hereunder and the Purchase Price therefor are subject to adjustment as hereinafter set forth in Section 6. 1. CERTAIN DEFINITION. ------------------ For all purposes of this Warrant the following terms shall have the meanings indicated: (a) "Common Stock" shall mean the Company's presently authorized shares of Common stock, par value $0.01 per share, and any other securities into which or for which the Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sales of assets or otherwise. (b) "Company" shall mean LABONE, INC., a Delaware corporation, and any company which shall succeed to, or assume, the obligations of said corporation hereunder. (c) "Expiration Date" shall mean 12:01 o'clock a.m. Central Daylight Time on December 31, 2003, which is twenty (20) calendar quarters plus forty-five (45) days after the date hereof. (d) "Lab Revenues" shall mean all revenues received by the Company during the applicable calendar quarter, pursuant to the Marketing Agreement between USA MCO and the Company dated October 19, 1998,and Third Party Administrator Agreement between Fountainhead Administrators, Inc., Atlas Administrators, Inc., and the Company dated October 19, 1998, ("Agreements"). Revenues paid to the Company from the Agreements may only be counted once in determining the exercise of Warrants in Section 2 hereof. (e) "Purchase Price" or "Purchase Price per share" shall mean the purchase price per Warrant Share (as defined below), which shall equal $15.44, being the closing sale price or, if no sales were reported, then average of the closing bid and asked prices of the Common Stock, as reported by the NASDAQ Stock market, on the last business day prior to the date of the -57- Warrant, as such purchase price may thereafter be adjusted from time to time pursuant to the provisions of Section 6 hereof (rounded to the nearest whole cent). (f) "Warrantholder" or "Registered Holder" shall mean USA MCO, or its registered transferee. (g) "Warrant" shall mean this Warrant and all Warrants issued in exchange therefor or replacement thereof. (h) "Warrant Shares" shall mean the share of Common Stock purchasable by the Registered Holder upon the exercise of the Warrant pursuant to Section 2 hereof, as adjusted from time to time pursuant to Section 6 hereof. All terms used in this Warrant which are not defined in Section 1 have the meanings respectively set forth therefor elsewhere in this Warrant. 2. Exercise of Warrant. -------------------- (a) Subject to the terms and conditions hereof, this Warrant may be exercised only within sixty (60) days after the end of each applicable calendar quarter and prior to the Expiration Date as follows: (i) for each calendar quarter in which the Lab Revenues reach $500,000 and are less than $1,000,000, this Warrant may be exercised in respect of 5,000 shares of Common Stock subject to this Warrant; (ii) for each calendar quarter in which the Lab Revenues reach $1,000,000 and are less than $1,500,000, this Warrant may be exercised in respect of 10,000 shares of Common Stock subject to this Warrant; (iii) for each calendar quarter in which the Lab Revenues reach $1,500,000 and are less than $2,000,000, this Warrant may be exercised in respect of 15,000 shares of Common Stock subject to this Warrant; (iv) for each calendar quarter in which the Lab Revenues reach $2,000,000 and are less than $2,500,000, this Warrant may be exercised in respect of 20,000 shares of Common Stock subject to this Warrant; (v) for each calendar quarter in which the Lab Revenues reach $2,500,000 or greater, this Warrant may be exercised in respect of 25,000 shares of Common Stock subject to this Warrant; The foregoing rights to exercise shall be limited to one of the categories set forth in 2(a)(i)-(v), above, as applicable each calendar quarter. Anything in this Warrant to the contrary notwithstanding, this Warrant may not be exercised at any time after a breach of any of the Agreements referred -58- to in Section 1 d), unless and until such breach is cured under the applicable provisions, if any, of such Agreements. Any specific references or terms about this Warrant contained in any such Agreement shall and is incorporated into the terms hereof. (b) In order to exercise this Warrant in whole or in part, the Registered Holder shall complete the "Notice of Intention to Exercise Warrant" attached hereto (the "Notice Form"), and deliver this Warrant, the completed Notice Form and either cash, a cashier's check payable to the order of the Company or a wire transfer of funds in an amount equal to the then aggregate Purchase Price of the Warrant Shares being purchased, to the Corporate Secretary of the Company at the Company's office located at 10310 West 84th Terrace, Lenexa, Kansas 66214 (or such other office or agency of the Company as the Company may designate by written notice in writing to the Registered Holder). In no event may the Warrantholder exercise the Warrant with respect to more than 500,000 shares of Common Stock in the aggregate, subject as provided in this Warrant. 3. Delivery of Stock Certificate, Etc. Upon Exercise. ------------------------------------------------- As soon as practicable after exercise of this Warrant, the Company shall cause to be issued and delivered to the Registered Holder (a) a certificate or certificates representing the aggregate number of shares of Common Stock specified in said Notice Form, all of which shares shall be duly authorized and validly issued, fully paid and nonassessable, (b) cash in lieu of any fractional share based upon the fair market value of a share of Common Stock, as determined by the Company and (c) any other securities or property (including cash) to which such Registered Holder is entitled upon such exercise pursuant to the terms of this Warrant. Each stock certificate representing shares of Common Stock so issued and delivered shall be registered in the name of the Registered Holder or, subject to the provision of Section 4 and 5 hereof, such other name as shall be designated by the Registered Holder. Such certificate or certificates shall be deemed to have been issued and the Warrantholder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares of Common Stock only as of the date the certificate representing such shares is issued by the Company. 4. Ownership and Transfer of Warrant and Warrant Shares. ---------------------------------------------------- (a) Registered Holder. The Company may deem and treat the Registered Holder of this Warrant as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes, notwithstanding any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Section 4. (b) No Transfer. This Warrant may not be sold, transferred, or assigned by the Registered Holder in whole or in part at any time. -59- 5. Compliance with Securities Laws. ------------------------------- (a) Accredited Investor. By acceptance of this Warrant, the Registered Holder represents and warrants that it is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), the Registered Holder being a corporation with total assets in excess of $5,000,000 not formed for the specific purpose of acquiring the Warrant or the Warrant Shares. (b) Investment Intent. By Acceptance of this Warrant, the Registered Holder represents and warrants that it is acquiring this Warrant and any Warrant Shares for its own account and for the purpose of investment and not with a view to the sale or distribution thereof. The Registered Holder understands that this Warrant and the Warrant Shares that may be issued upon exercise of this Warrant will not have been registered under the Securities Act or any state securities law (the Company being under no obligation to effect such registration) and that this Warrant and the Warrant Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt from registration as provided herein. (c) Limitation on Transfer. By acceptance of this Warrant, the Registered Holder represents, covenants, and agrees that it will not sell or otherwise dispose of this Warrant or of the Warrant Shares in the absence of (i) registration under the Securities Act and applicable state securities laws or (ii) an opinion acceptable in form and substance to the Company from counsel reasonably satisfactory to the Company, or an opinion of counsel to the Company, to the effect that no registration is required for such disposition. (d) Restrictive Legend. Each Warrant shall bear on the face thereof a legend substantially in the form of the notice set forth on the first page of this Warrant. Upon exercise of any part of the Warrant and the issuance of any Warrant Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to such Warrant Shares, and the certificates representing such Warrant Shares shall have stamped or imprinted thereon or affixed thereto a legend to the following effect: The securities represented by this certificate have not been registered under the Securities Act of 1933 or any state securities laws and may not be sold, transferred or otherwise disposed of in the absence of registration under such laws or an opinion in form and substance acceptable to the Company from counsel reasonably satisfactory to the Company to the effect that no such registration is required. (e) State Securities Laws. This Warrant has been offered to and accepted by the Registered Holder at its principal executive office in the State of Texas and has not been offered to the Registered Holder in any other State. -60- 6. Adjustments to the Purchase Price and Number of Warrant Shares. -------------------------------------------------------------- (a) Subdivision of Stock, etc. In the event of a stock dividend or other distribution payable in Common Stock, or any stock split or subdivision of Common Stock into a greater number of shares, the number of Warrant Shares subject to the Warrant immediately prior to such event shall be proportionately increased and the Purchase Price in effect immediately prior to such event shall be proportionately reduced, and in the event that the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the number of Warrant Shares subject to the Warrant immediately prior to such combination shall be proportionately reduced and the Purchase Price in effect immediately prior to such combination shall be proportionately increased. (b) Reorganization, Consolidation, Merger, etc. In the event that the Company shall (a) effect a reorganization or recapitalization pursuant to which all of the outstanding shares of Common Stock are converted into or exchanged for other securities or property (including cash), (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person in such a way that holders of Common Stock shall be entitled to receive securities or property (including cash) with respect to or in exchange for Common Stock; then in each such case, the Warrant holder, upon the exercise hereof as provided in Section 2 at any time after the consummation of such reorganization or recapitalization, consolidation, merger or sales of assets, as the case may be, shall be entitled to receive (and the Company shall be required to deliver) in lieu of the Warrant Shares issuable upon such exercise prior to such and other securities and property (including cash) to which such holder would have been entitled upon such consummation, if such Warrantholder had so exercised this Warrant immediately prior thereto. The above provision shall apply to successive reorganizations, recapitalizations, consolidations, mergers or transfers described therein. 7. Notice of Record Date, etc. In the event of -------------------------- (a) any taking by the Company of a record of the holders of Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend (excluding any cash dividend payable out of earnings or earned surplus of the Company), or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any transfer of all or substantially all of the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each event the Company shall cause to be mailed to the Warrantholder a notice containing a brief description of the proposed action and stating the date on which either a record is to be taken for the purpose of such dividend, distribution or rights, or the date upon -61- which such transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place and the time, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall also state that the action in question or the record is subject to the effectiveness of a registration statement under the Securities Act or a favorable vote of stockholders, if either is required. Such notice shall be mailed to the Warrant holder at least ten (10) days prior to the date specified in such notice on which any such action is to be taken or the record date, whichever is earlier. 8. Reservation of Warrant Shares. ----------------------------- During the term of this Warrant, the Company shall at all times reserve and keep available from its authorized but unissued and treasury shares such number of shares of its Common Stack as shall be issuable upon exercise of the Warrant. 9. Notices. ------- Any notice or other document required or permitted to be given or delivered to the Registered Holder shall be delivered at, or sent certified or registered mail to the Registered Holder at the last address shown on the books of the Company maintained for the registry and transfer of the Warrants. 10. No Rights as Stockholder. ------------------------ This Warrant shall not entitle the Registered Holder to any voting or other rights as a stockholder of the Company. 11. Replacement of Warrant. ---------------------- Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of such loss, theft or destruction, upon delivery of an indemnity bond reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 12. Law Governing. ------------- This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware (excluding the choice of law provisions thereof). -62- 13. Miscellaneous. ------------- This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party (or any predecessor in interest thereof) against which enforcement of the same is sought. The headings in this Warrant are for purposes of reference only and shall not effect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, this Warrant is executed effective as of the day and year first above written. LABONE, INC. By: /s/ W. Thomas Grant II - ----------------------- W. Thomas Grant II Its Chairman of the Board, President, and Chief Executive Officer -63- NOTICE OF INTENTION TO EXERCISE WARRANT ------------ The undersigned hereby notifies LabOne, Inc. that he has elected to exercise its right under the within Warrant to purchase shares of Common Stock, and has effected a wire transfer to LabOne, Inc. or enclosed herewith cash or a cashier's check payable to LabOne, Inc. in the total amount of $ in payment of the Purchase Price for shares. The certificate(s) representing the shares of Common Stock being purchased should be delivered in the denominations and to the persons described below: No. of Name Address Shares - ---- --------- ------ Date: By: -------------------- ---------------------------------- (Signature) ---------------------------------- (Print Name) ---------------------------------- (Title) -64- EX-99 7 Exhibit 99 ---------- CAUTIONARY STATEMENT UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain written and oral statements which have been made and which may be made from time to time by the Company, or by its officers, directors or employees acting on its behalf, that are not statements of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, without limitation, any statement specifically identified by the Company as a forward- looking statement. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, the payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Company or its management or Board of Directors, including plans or objectives relating to the products or services of the Company, (iii) statements of future economic performance, and (iv) statements of assumptions underlying the statements described in (i), (ii) and (iii). Forward-looking statements can often be identified by the use in such statements of forward- looking terminology, such as "believes," "expects," "may," "will," "should," "could," "intends," "plans," "estimates" or "anticipates," or the negative thereof, other variations thereon or comparable terminology. Forward-looking statements made by or on behalf of the Company involve risks and uncertainties which may cause actual results to differ materially from those in such statements. The Company cautions investors that any forward-looking statement made by the Company is not a guarantee of future performance or results. Any forward-looking statement made by or on behalf of the Company speaks only as of the time at which the statement is made. The Company does not undertake to publicly update or correct any forward-looking statement made by or on behalf of the Company. The list set forth below of factors which could cause actual results to differ materially from those discussed in forward-looking statements made by or on behalf of the Company is not exhaustive. Other factors not identified herein could also have such an effect. Important factors which could cause actual results to differ materially from those discussed in forward-looking statements made by or on behalf of the Company include the following: Insurance Testing. - ------------------ A substantial portion of the Company's revenues and net earnings are derived from the Company's provision of risk appraisal laboratory services to the insurance industry. The tests performed by the Company are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. The Company also provides testing services on specimens of individuals applying for individual and group medical and disability policies. -80- The Company's results of operations from insurance testing services are subject to a number of risks and uncertainties, including, without limitation, the number of life insurance applications written in the industry, the policy amount thresholds at which insurance companies order tests, the type and cost of tests requested by insurance companies (i.e. blood, urine, saliva, hair, etc.), innovations in the types and cost of tests available for testing which are approved by the Food and Drug Administration, the prices which the Company can charge for performing tests, the nature and extent of competition in the industry and the extent to which insurance companies maintain in-house testing facilities. Changes in these factors are generally beyond the Company's control and are difficult to predict. As a result of these and other risks and uncertainties, future results of the Company's insurance testing operations may be materially better or worse than expected or projected. Expansion into New Markets. - --------------------------- The Company's growth strategy entails expanding its laboratory testing services to include: (a) testing for the healthcare industry and (b) substance abuse testing. The Company began offering testing services in these areas in 1994. With respect to testing services for the healthcare industry, the Company provides clinical testing services to aid in the diagnosis and treatment of patients. The Company markets its clinical testing services to the payers of healthcare - insurance companies and self-insured groups - through exclusive arrangements with managed care organizations and through the Lab Card Program. The Lab Card Program provides laboratory testing at substantial savings, which savings are shared with the patient to create an incentive for the patient to direct laboratory work to the company. Prior to the Company's adoption of the Program in 1994, the Program was untested in the marketplace. The Program will be successful only to the extent that the Company can continue to convince potential customers of its efficacy and value, patients direct laboratory work to the Company and competitors do not adopt equivalent or superior marketing programs. With respect to substance abuse testing, the Company is certified by the Substance Abuse and Mental Health Services Administration (SAMHSA) to perform substance abuse testing for federally regulated employers. The Company is currently marketing substance abuse testing services throughout the country to both regulated and non-regulated employers, including Fortune 1000 companies, third party administrators and occupational health providers. Although the Company has met with initial success in marketing its testing services in the healthcare and substance abuse testing industries, there can be no assurance that the Company will be able to continue increasing its market share in these industries or that the Company's provision of testing services in these industries will become profitable. The Company's continued expansion in, and results of operations from, these industries is subject to a number of risks and uncertainties, including, without limitation, the nature and extent of competition, the Company's ability to comply with additional regulatory and certification requirements applicable to testing in these industries, the extent of future efforts in the healthcare industry to control or reduce costs, and the Company's ability to successfully market its services to new customers in new markets. -81- Cost Reduction Efforts in the Healthcare Industry. - -------------------------------------------------- The clinical testing industry has been affected by the growth of managed care organizations and the efforts of third party payers to control the utilization and costs of health care services. Managed care organizations have become a significant force in the health care industry. Managed care providers typically contract with a limited number of clinical laboratories and negotiate discounts to the fees charged by such laboratories in an effort to control costs. Many managed care providers have used capitated payment contracts, pursuant to which the managed care provider and the laboratory agree to a per member, per month payment to cover an agreed upon schedule of laboratory tests during the month, regardless of the number or cost of those tests actually performed. The effect of capitated payment contracts is to shift the risks of additional testing beyond that covered by the capitated payment to the clinical laboratory. As a result of the expansion of managed care, many clinical laboratories have experienced declines in test utilization and per-test revenue. In addition, Medicare, Medicaid and insurance companies have increased efforts to control the cost and delivery of health care services, including testing services. These efforts have also reduced prices, added costs and decreased test utilization in the clinical laboratory industry. There is a substantial risk that further reductions in reimbursement rates of third-party payers will occur. The Company believes that it can effectively compete with existing clinical laboratories in providing low cost testing services to managed care companies and third party payers. Even if the Company is successful in marketing its services to managed care companies and insurance companies, continued cost- cutting efforts may further erode the volume of testing and profit margins in the industry and adversely affect the Company's clinical laboratory operations. Competition. - ------------ The Company currently services over half of the insurance laboratory testing market. The Company has two other main competitors, Osborn Laboratories, Inc. and Clinical Reference Laboratory. The insurance testing industry is highly competitive. The primary focus of the competition is pricing. This continued competition has resulted in a decrease in the average price per test charged by the Company. The clinical laboratory testing market is highly fragmented and very competitive. The Company faces competition from numerous independent clinical laboratories and hospital-owned or physician- owned laboratories. Many of the Company's competitors are significantly larger and have substantially greater financial resources than the Company. The Company competes in the substance abuse testing market nationwide. The Company's major competitors are the three major clinical chains, Laboratory Corporation of America, Quest Diagnostics and SmithKline Beecham Laboratories, who collectively service approximately two-thirds of the substance abuse testing market. The principal methods of competition in the clinical laboratory and substance abuse testing markets are price and timeliness of service. The Company's competitors may take actions to meet the Company's marketing programs and other initiatives, and may be willing to accept lower margins and to reduce prices in order to more effectively compete in the Company's industries. As a result of such actions, the Company could fail to achieve sales and revenues increases or otherwise fail to meet its anticipated results. There can be no assurance that increased competition in the Company's industries will not have a material adverse effect on the Company's business, financial condition and results of operations. -82- Certification. - -------------- The Company's laboratory is currently certified to conduct laboratory testing under the Clinical Laboratory Improvement Amendments of 1988 (collectively, as amended, CLIA '88), by the Substance Abuse and Mental Health Services Administration (SAMHSA) and by all other states that require separate licensure. The Company is also accredited by the College of American Pathologists (CAP). Certification and accreditation is essential to the Company's business because some of its customers are required to use certified laboratories, and many of its customers look to certification and accreditation as an indication of accuracy and reliability of results. In order to remain certified and accredited, the Company is subject to frequent inspections and proficiency testing challenges. Failure to meet any of the numerous certification requirements to which the Company is subject could result in suspension or loss of certification. Such suspension or loss of certification could have a material adverse effect on the Company. General Economic Conditions. - ---------------------------- Demand for the Company's services is dependent on general economic conditions. The Company generally conducts fewer tests for the insurance industry during periods of recession. In addition, recessions and economic slow-downs generally result in fewer new hires, and therefore may lead to fewer pre-employment drug tests for public and private employer customers. Because expenses associated with maintaining the Company's testing work force are relatively fixed over the short term, the Company's profit margins tend to increase in periods of higher testing volume and decrease in periods of lower testing volume. Fluctuations in Quarterly Operating Results - ------------------------------------------- The Company's quarterly operating results will be influenced by a host of factors, which include those discussed herein and the following: regulatory matters; the extent to which the Company's services gain market acceptance in new markets; competition; changes in the mix of testing services provided in a given quarter; changes in pricing policies by the Company and by its competitors; acquisition costs and restructuring and other charges associated with acquisitions; the Company's success in implementing its growth strategy; personnel changes; and general economic conditions. As a result of the influence of these factors, the Company's results of operations may fluctuate from quarter to quarter, and the Company's results of operations in any particular quarter may be materially better or worse than expected or projected. Legal Proceedings. - ------------------ In the ordinary course of its business, claims are made against the Company by individuals alleging false positive or false negative reports. To date, the Company has not experienced any material liability related to these claims, although there can be no assurance that the Company will not at some time in the future experience significant liability in connection with such claims. The Company believes that its liability insurance coverage is adequate for its business. However, there can be no assurance that the Company's existing insurance coverage limits will be adequate to protect the Company from any liabilities it might incur in connection with its operations. Any liabilities in excess of coverage could have a material adverse affect on the Company's business, results of operations and financial condition. -83- Dependence on Key Personnel. - ---------------------------- The Company is dependent upon a number of key management and technical, sales and marketing personnel. The loss of a number of key employees could have a material adverse effect on the Company. The Company believes that its future success will depend in part upon its continued ability to attract, retain and motivate highly skilled personnel. Governmental Regulation. - ------------------------ Operation of Clinical Laboratory. --------------------------------- The clinical laboratory industry is subject to significant governmental regulation at the Federal, state and local levels. Virtually all clinical laboratories, including the laboratory owned by the Company, are required to be certified or licensed under CLIA, the Medicare and Medicaid programs and various state and local laws, and may be subject to periodic inspections by regulatory agencies. In 1992, the Department of Health and Human Services issued regulations implementing CLIA '88 which establish quality standards for the conduct of different categories of laboratory tests. The potential penalties for failure to comply with these regulations include denial of the right to conduct business, significant fines and criminal penalties. The Company is also subject to state regulations which may impose more stringent requirements than federal law. Although the Company has instituted programs to ensure that its operations meet all applicable regulatory requirements, there can be no assurance that the Company will always be able to comply with all of such requirements. The loss of a license, imposition of a fine or future changes in such Federal, state and local laws and regulations could have a material adverse effect on the Company. Medicare/Medicaid Regulations. ------------------------------ A small portion of the Company's revenues from clinical laboratory services are received from Medicare or Medicaid programs. Although the Company does not expect the percentage of its revenues derived from Medicare and Medicaid reimbursements to increase substantially in the future, to the extent that such revenues do increase, the Company's results of operations may be affected by Medicare and Medicaid reimbursement policies. In 1984, Congress established a Medicare fee schedule for clinical laboratory services performed for patients under Part B of the Medicare program. Subsequently, Congress imposed a national ceiling on the amount that can be paid under the fee schedule. Since 1984, Congress has periodically reduced the ceilings on Medicare reimbursement to clinical laboratories from previously authorized levels. In addition, state Medicaid programs are prohibited from paying more than the Medicare fee schedule for clinical laboratory services provided to Medicaid recipients. It is impossible to predict if additional Medicare reductions will be implemented. The Federal government has adopted policies for administration of Medicare payments to clinical laboratories for the most frequently performed automated blood chemistry profiles. The policies establish a consistent nationwide standard for the content of automated blood chemistry profiles and require laboratories performing certain profiles to obtain and provide documentation of the medical necessity of tests included in the profiles for each Medicare beneficiary. The Company incurs additional costs in complying with these regulations. -84- Future changes in Federal, state and local regulations affecting government reimbursement of clinical laboratory testing could have an adverse effect on the Company. The materiality of any such adverse effect will depend in part upon the extent to which the Company receives its revenues from Medicare and Medicaid programs. Fraud and Abuse Regulations. ---------------------------- A wide array of fraud and abuse provisions apply to clinical laboratories participating in Medicare and Medicaid programs. Penalties for violations of these laws include exclusion from participation in Medicare/Medicaid programs and civil and criminal penalties. Even though only a small portion of the Company's business encompasses fee-for-service Medicare/Medicaid, LabOne has appointed a Chief Compliance Officer and nine Co-Compliance Officers. Additionally, the Company has developed the LabOne Compliance Plan, based on the Model Compliance Plan recommended by the Office of Inspector General (OIG) of the Department of Health and Human Services to ensure compliance with anti- fraud and abuse laws and rules governing federally-financed reimbursement for lab testing services. Drug Testing. ------------- Drug testing for certain public sector employees is regulated by SAMHSA, which has established detailed quality standards for drug testing on employees of federal government contractors and certain other entities. Certification by SAMHSA is essential to the Company's substance abuse testing business. See "Certification." Environmental and Occupational Safety. -------------------------------------- The Company is subject to various federal, state and local laws and regulations concerning the environment and occupational safety and health, including laws and regulations relating to the handling, transportation and disposal of specimens, infectious and hazardous waste and radioactive materials. The Company is subject to extensive regulation relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne pathogens such as HIV. Although the Company is not aware of any material non-compliance with such laws and regulations, any failure to comply could subject the Company to denial of the right to conduct business, fines, criminal and civil penalties and civil liability. The Company cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted, nor can it predict the amount of future expenditures which may be required in order to comply with any environmental or health and safety laws or regulations. Dividends. - ---------- The Company has paid quarterly dividends with respect to shares of Common Stock over the past several years. Declaration and payment of dividends are subject to the discretion of the Company's Board of Directors and may be made only from funds legally available therefor. The Board of Directors reviews the Company's dividend policy on a periodic basis. The Company's ability to pay dividends depends upon the Company's financial condition and results of operations. The Company has paid dividends per share in excess of earnings per share in recent years. There can be no assurance that the Company will be able to, or will continue to, declare and pay dividends with respect to shares of Common Stock. -85- Single Facility. - ---------------- The Company's testing operations are contained in a single facility located in Lenexa, Kansas. Although the Company has a full-time alternative power source in the event of an electrical power shortage and has taken steps to limit the possibility of a fire, the facility is subject to risk of fire, earthquake, tornado, telecommunications failure and similar events. Even though the Company does carry business interruption insurance to compensate for losses which might occur, the occurrence of such an event with respect to the Company's testing facility could materially adversely affect the Company's business, results of operations and financial condition. Year 2000 Computer Concerns. - ---------------------------- The Company is actively addressing Year 2000 computer concerns. The Company has established an oversight committee which includes management from all parts of the Company and meets periodically to review progress. The Company's laboratory operating systems and its business processing systems were completely rewritten as of 1991 and were brought into compliance with Year 2000 date standards at that time. Non-IT systems, which include security systems, time clocks and heating and cooling systems, have been replaced with certified compliant systems as part of construction of the new facility. Ongoing remediation efforts include regularly scheduled software upgrades and replacement of personal computers and associated equipment. The Company expects to complete all remaining internal Year 2000 objectives by the end of the second quarter, 1999. LabOne is assessing the Year 2000 preparation and contingency plans of the Company's clients and vendors. LabOne has material relationships and dependencies with its primary telecommunications provider, Sprint Corp., its inbound shipping provider, Airborne Express, and municipal services providers. In the event of a service interruption, the Company has the ability to switch telecommunications services to AT&T at any time, and maintains backup electrical generators capable of meeting its electrical needs. LabOne currently tracks and controls routing of its inbound specimens and can use USPS, airlines and other common carriers or express delivery services in the event of delivery problems with Airborne Express. The Company currently maintains approximately eight weeks supply of most laboratory supplies, and does not expect significant problems in obtaining supplies. The Company continues to review the Year 2000 plans of these providers, and does not currently expect significant problems in these areas, however, there can be no assurance that the systems of clients and vendors will be converted to address Year 2000 problems in a timely and effective manner or that such conversions will be compatible with the Company's computer systems. Additionally, there can be no assurance that the Company's adjustments to its computer systems will completely eliminate all Year 2000 problems. Failure to properly address the Year 2000 problem could have a material adverse effect on the Company's business, financial condition and results of operations. Supplies. - --------- The Company's operations require the supply of insurance testing kits, testing agents and other laboratory supplies. The Company has several suppliers for most of these materials. There can be no assurance, however, that the Company will not experience shortages of such materials or be forced to seek alternative sources of supply. In addition, there can be no assurance that prices for such materials will remain stable. Any shortages of such materials may result in service delays and increased costs which could have a material adverse effect on the Company's business, financial condition and results of operations. -86- -----END PRIVACY-ENHANCED MESSAGE-----