-----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, I/F+jPtWjwz+aejdtYS9GmQB1IV1Ogi8I/rFQMZ+3+qP2SYNht2PzPKJ/cA9FAya YxcMylTiJAljZtKVtTc75w== 0000816151-99-000024.txt : 19990809 0000816151-99-000024.hdr.sgml : 19990809 ACCESSION NUMBER: 0000816151-99-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990730 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-Q SEC ACT: SEC FILE NUMBER: 000-15975 FILM NUMBER: 99675060 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 1999 -------------- 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 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 / / Number of shares outstanding of the only class of Registrant's common stock, $.01 par value, as of July 30, 1999 - 13,317,211 net of 1,682,789 shares held as treasury stock. Page 1 of 15 PART I. FINANCIAL INFORMATION ITEM 1 - Financial Statements LabOne, Inc. and Subsidiaries Consolidated Balance Sheets June 30, December 31, 1999 1998 ASSETS --------- --------- Current assets: Cash and cash equivalents $5,253,522 10,177,740 Accounts receivable-trade, net of allowance for doubtful accounts of $2,994,958 in 1999 and $2,326,716 in 1998 18,538,021 18,735,984 Income taxes receivable 2,183,166 282,229 Inventories 1,160,117 1,798,481 Real estate available for sale - 3,515,000 Prepaid expenses and other current assets 2,733,470 2,504,768 Deferred income taxes 2,095,546 3,972,575 ---------- ---------- Total current assets 31,963,842 40,986,777 Property, plant and equipment 78,345,672 72,915,797 Less accumulated depreciation 36,001,843 35,983,169 ---------- ---------- Net property, plant and equipment 42,343,829 36,932,628 Other assets: Intangible assets, net of accumulated amortization 6,789,998 7,414,319 Bond issue costs, net of accumulated amortization of $14,557 in 1999 and $5,823 in 1998 177,950 186,324 Deferred income taxes - noncurrent 110,198 - Deposits and other assets 216,918 206,127 --------- ---------- Total assets $81,602,375 85,726,175 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,081,257 4,353,733 Retainage and construction payable 694,517 3,809,193 Current portion of long-term debt 1,862,910 1,860,168 Accrued payroll and benefits 3,746,192 4,148,593 Other accrued expenses 411,789 610,315 Other current liabilities 371,983 274,198 ---------- ---------- Total current liabilities 12,168,648 15,056,200 Long-term debt 18,093,109 18,097,308 Deferred income taxes - noncurrent 6,906 27,087 ---------- ---------- Total liabilities 30,268,663 33,180,595 Stockholders' equity: Preferred stock, $.01 par value per share; 1,000,000 shares authorized, none issued - - Common stock, $.01 par value per share; 40,000,000 shares authorized, 15,000,000 shares issued 150,000 150,000 Additional paid-in capital 14,170,641 14,099,066 Equity adjustment from foreign currency translation (763,921) (849,098) Retained earnings 58,011,774 59,352,728 ---------- ---------- 71,568,494 72,752,696 Less treasury stock of 1,682,789 shares in 1999 and 1,688,550 shares in 1998 20,234,782 20,207,116 ---------- ---------- Total stockholders' equity 51,333,712 52,545,580 ---------- ---------- Total liabilities and stockholders' equity $81,602,375 85,726,175 ========== ========== See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. Page 2
LabOne, Inc. and Subsidiaries Consolidated Statements of Earnings Three months ended June 30, Six Months Ended June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Sales $ 28,572,152 25,762,263 55,900,237 49,095,697 Cost of sales 17,003,962 13,831,903 32,655,301 26,790,851 ---------- ---------- ---------- ---------- Gross profit 11,568,190 11,930,360 23,244,936 22,304,846 Selling, general and administrative expenses 8,741,997 8,001,910 17,306,082 15,450,322 ---------- ---------- ---------- ---------- Earnings from operations 2,826,193 3,928,450 5,938,854 6,854,524 Interest Expense (295,579) - (589,621) - Interest Income and other 62,781 167,897 154,825 400,796 ---------- ---------- ---------- ---------- Earnings before income taxes 2,593,395 4,096,347 5,504,058 7,255,320 Income tax expense 995,626 1,662,908 2,052,890 2,904,690 ---------- ---------- ---------- ---------- Net earnings $ 1,597,769 2,433,439 3,451,168 4,350,630 ========== ========== ========== ========== Basic earnings per common share $ 0.12 0.19 0.26 0.33 ====== ====== ===== ===== Diluted earnings per common share $ 0.12 0.18 0.26 0.33 ====== ====== ===== ===== Dividends per common share $ 0.18 0.18 0.36 0.36 ====== ====== ===== ===== Basic weighted average common shares outstanding 13,313,349 13,136,962 13,312,405 13,135,928 ========== ========== ========== ========== Diluted weighted average common shares outstanding 13,333,591 13,327,517 13,335,787 13,323,253 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. Page 3 LabOne, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity Six Months Ended June 30, 1999
Accumulated Additional other Total Common paid-in comprehensive Retained Treasury stockholders' Comprehensive stock capital income earnings stock equity income Balance at December 31, 1998 $150,000 14,099,066 (849,098) 59,352,728 (20,207,116) 52,545,580 Comprehensive income: Net earnings 3,451,168 3,451,168 3,451,168 Equity adjustment from foreign currency translation 85,177 85,177 85,177 --------- Comprehensive income 3,536,345 ========= Cash dividends ($0.36 per share) (4,792,122) (4,792,122) Stock options exercised, net 51,771 (79,875) (28,104) Directors' stock issued (5,761 shares) 19,804 52,209 72,013 -------- ---------- --------- ---------- ---------- ---------- Balance at June 30, 1999 $150,000 14,170,641 (763,921) 58,011,774 (20,234,782) 51,333,712 ======== ========== ======= ========== ========== ==========
See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. Page 4 LabOne, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six months ended June 30, 1999 1998 --------- --------- Cash provided by (used for) operations: Net earnings $ 3,451,168 4,350,630 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation and amortization 3,096,106 2,366,687 Provision for loss on accounts receivable 1,281,495 650,405 Loss (gain) on disposal of property and equipment (842,975) 3,861 Directors' stock compensation 72,013 68,597 Provision for deferred taxes 1,750,721 (135,340) Changes in: Accounts receivable (1,083,532) (3,729,762) Income taxes (1,900,937 (65,573) Inventories 638,364 574,200 Prepaid expenses and other current assets (228,702) (49,753) Accounts payable (2,626,235) 745,761 Accrued payroll & benefits (402,401) (581,193) Accrued expenses 40,557 (25,992) Other current liabilities 97,785 223 ---------- ---------- Net cash provided by operations 3,343,427 4,172,751 ---------- ---------- Cash provided by (used for) investment transactions: Purchases of investments held to maturity - (5,461,090) Proceeds from maturities of investments held to maturity - 6,201,894 Property, plant and equipment, net (3,510,988) (6,318,937) Other (10,791) 56,153 ---------- ---------- Net cash used for investment transactions (3,521,779) (5,521,980) ---------- ---------- Cash provided by (used for) financing transactions: Issuance of treasury stock, net of proceeds from the exercise of stock options (28,104) 69,092 Payments on long term debt - capital lease (6,003) - Cash dividends (4,792,122) (4,728,844) ---------- ---------- Net cash used for financing transactions (4,826,229) (4,659,752) ---------- ---------- Effect of foreign currency translation 80,363 (55,505) ---------- ---------- Net decrease in cash and cash equivalents (4,924,218) (6,064,486) Cash and cash equivalents - beginning of period 10,177,740 18,284,672 ---------- ---------- Cash and cash equivalents - end of period $ 5,253,522 12,220,186 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 651,691 - Income Taxes $2,227,700 3,058,933 ========== ========== See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. Page 5 LabOne, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 1999 and 1998 The accompanying consolidated financial statements include the accounts of LabOne, Inc. and its wholly-owned subsidiaries Lab One Canada Inc. and Systematic Business Services, Inc. (SBSI). All significant intercompany transactions have been eliminated in consolidation. The financial information furnished herein as of June 30, 1999 and for the periods ended June 30, 1999 and 1998 is unaudited; however, in the opinion of management, it reflects all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state the Company's financial position, the results of its operations and cash flows. The balance sheet information as of December 31, 1998 has been derived from the audited financial statements as of that date. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances, and included in the financial statements are certain amounts based on management's estimates and judgments. The financial information herein is not necessarily representative of a full year's operations because levels of sales, capital additions and other factors fluctuate throughout the year. These same considerations apply to all year- to-year comparisons. See the Company's Annual Report on Form 10-K for the year ended December 31, 1998, for additional information not required by this Quarterly Report on Form 10-Q. On July 1, 1999, the Company announced a restatement of earnings for the year ended December 31, 1998. As requested by the staff of the Securities and Exchange Commission, the Company has changed the amortization schedule from fifteen years to five years on a customer list acquired during the first quarter 1997. The Company's original amortization period was based on historical performance, however the SEC has requested the amortization period be reduced to five years. This restatement is not the result of any changes in customer relationships and has no effect on any present or future cash flows. The effect of this restatement is as follows:
Three Months Ended Six Months Ended June 30, 1998 June 30,1998 --------------------------- ------------------------- As Previously As Previously Reported As Restated Reported As Restated ----------- ----------- ----------- ----------- Earnings before taxes $ 4,233,956 4,096,347 $ 7,530,538 7,255,320 Net earnings 2,516,310 2,433,439 4,516,371 4,350,630 Basic earnings per share 0.19 0.19 0.34 0.33 Diluted earnings per share 0.19 0.18 0.34 0.33
Effective October 30, 1998, LabOne acquired SBSI, a Missouri corporation. SBSI provides telephone inspections, motor vehicle reports, attending physician statements and claims investigation services to life and health insurers nationwide. LabOne is currently 80.4% owned by Lab Holdings, Inc. On March 8, 1999, Page 6 LabOne and Lab Holdings jointly announced that the Boards of Directors of both companies had approved an agreement to merge the two companies. If consummated, the proposed merger will have several effects which are fully discussed in the joint proxy statement/prospectus filed by Lab Holdings with the United States Securities and Exchange Commission on July 2, 1999 (File No. 333-76131). 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 19.6% 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 recommended its approval by the LabOne board and stockholders. The merger is expected to close in August pending the 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 at the annual meetings of shareholders of both LabOne and Lab Holdings. Forward Looking Statements -------------------------- This Quarterly report on Form 10-Q may contain "forward-looking statements," including projections, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements. Forward-looking statements involve known and unknown risks and uncertainties. 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, 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. Business Segment Information ---------------------------- The company operates in three lines of business: insurance risk appraisal testing, clinical diagnostic testing and substance abuse testing. The following table presents selected financial information for each segment: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 (As Restated) (As Restated) Sales: Insurance $ 18,473,769 17,571,796 36,058,016 34,394,248 Clinical 5,735,698 4,723,128 11,693,224 8,377,171 Substance abuse testing 4,362,685 3,467,339 8,148,997 6,324,278 ---------- ---------- ---------- ---------- Total sales $ 28,572,152 25,762,263 55,900,237 49,095,697 ========== ========== ========== ========== Operating income (loss): Insurance $ 3,795,315 5,435,802 7,809,540 10,510,455 Clinical (1,308,956) (1,509,398) (2,267,734) (3,444,445) Substance abuse testing (171,734) 40,165 (290,674) (138,622) General corporate income (expense) 511,568 (38,119) 687,772 (72,864) --------- --------- ---------- --------- Total earnings from operations 2,826,193 3,928,450 5,938,854 6,854,524 Other income (expense) (232,798) 167,897 (434,796) 400,796 --------- --------- --------- --------- Earnings before income taxes $ 2,593,395 4,096,347 5,504,058 7,255,320 ========= ========= ========= =========
Page 7 The Company's new facility was completed in early 1999, and the portions of the building identifiable to each segment have been allocated to those segments. Effective the second quarter, the associated depreciation expenses have been charged to the segments and are included in the operating income or loss information stated above. There were no other material changes in assets or in the basis of segmentation or measurement of segment operating income or loss. 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 $1.9 million. The Texas State Hearing Attorney has issued a position letter agreeing to amend the audit based on the exclusion of non-Texas applicants. At this time, the Company is unable to estimate the possible liability, if any, that may be incurred as a result of this assessment, but believes the amount will be less than $0.5 million. The Company continues to appeal this assessment arguing that its services do not fit within the definition of insurance services under the Texas code. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS - --------------------- Three Months Ended Six Months Ended June 30, June 30, 1999 1998 % Increase 1999 1998 % Increase (Decrease) (Decrease) ----------- ----------- ---------- ---------- ---------- --------- Sales $ 28,572,152 25,762,263 11% $55,900,237 49,095,697 14% Net earnings 1,597,769 2,433,439 (34%) 3,451,168 4,350,630 (21%) Diluted Earnings per common share $0.12 0.18 $0.26 0.33 Cash dividends per common share $0.18 0.18 $0.36 0.36
The Company provides high-quality laboratory testing services to insurance companies, physicians and employers. LabOne provides risk-appraisal laboratory services to the insurance industry. The tests performed by the Company are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. The Company also provides testing services on specimens of individuals applying for individual and group medical and disability policies. Through its subsidiary, SBSI, the Company provides telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services to life and health insurers nationwide. LabOne's clinical testing services are provided to the healthcare industry to aid in the diagnosis and treatment of patients. LabOne operates only one highly automated and centralized laboratory, which the Company believes has significant economic advantages over other conventional laboratory Page 8 competitors. LabOne markets its clinical testing services to the payers of healthcare--insurance companies and self-insured groups. The Company does this through Lab Card (registered), a Laboratory Benefits Management program. The Lab Card Program provides laboratory testing at reduced rates as compared to traditional laboratories. It uses a unique benefit design that shares the cost savings with the patient, creating an incentive for the patient to help direct laboratory work to LabOne. Under the Program, the patient incurs no out-of-pocket expense when the Lab Card is used, and the insurance company or self-insured group receives substantial savings on its laboratory charges. The Company's Laboratory Benefits Management programs, including BlueCross BlueShield of Tennessee and the Lab Card program, have more than 2.3 million lives enrolled. LabOne is certified by the Substance Abuse and Mental Health Services Administration to perform substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. The Company's rapid turnaround times and multiple testing options help clients reduce downtime for affected employees and meet mandated drug screening guidelines SECOND QUARTER ANALYSIS Net sales increased 11% in the second quarter 1999 to $28.6 million from $25.8 million in the second quarter 1998. The increase of $2.8 million is due to increases in clinical laboratory revenue of $1.0 million, substance abuse testing (SAT) revenue of $0.9 million and insurance services revenue of $0.9 million. Clinical diagnostic testing revenue increased from $4.7 million to $5.7 million for the quarter due to a 34% increase in testing volumes partially offset by a 9% decrease in average revenue per patient related to lower capitated billing rates. SAT revenue increased from $3.5 million in 1998 to $4.4 million in 1999 due to a 30% increase in testing volumes as compared to last year. The insurance services division revenue increased $0.9 million due to the addition of SBSI revenue and growth in non laboratory services revenue, reduced by lower laboratory and kit revenue. SBSI was acquired in October 1998 and contributed revenue of $2.1 million, and non laboratory services revenue increased $0.4 million. Insurance laboratory testing revenue decreased $1.1 million as a result of reductions in volume and price and a retroactive pricing credit. The total number of insurance applicants tested in the second quarter 1999 decreased by 6% as compared to the same quarter last year due to competitive pressures. Average revenue per applicant decreased 1% primarily due to price reductions and a shift in product mix to lower price products partially offset by increased ancillary test volumes. Kit and container revenue declined due to a decrease in the number of kits sold. Cost of sales increased $3.2 million or 23% in the second quarter 1999 as compared to the prior year, due to increases in payroll, information services such as state motor vehicle report fees, and postage expense. A significant portion of these increases are related to the addition of SBSI and the growth of the SAT and clinical segments. These increases were partially offset by a decrease in insurance kit expenses due to lower sales volumes. Clinical cost of sales expenses were $4.1 million as compared to $3.6 million in the second quarter 1998. SAT cost of sales expenses were $3.2 million as compared to Page 9 $2.3 million in the second quarter 1998. Insurance cost of sales expenses increased from $7.9 million to $9.7 million primarily due to the addition of SBSI. As a result of the above factors, gross profit for the quarter decreased $0.4 million or 3% from $11.9 million in 1998 to $11.6 million in 1999. Clinical gross profit increased $0.5 million on an increase in revenue of $1.0 million. SAT gross profit was flat as compared to the second quarter last year. Insurance gross profit, decreased $0.9 million for the quarter. Selling, general and administrative expenses increased $0.7 million or 9% in the second quarter 1999 as compared to the prior year due primarily to the inclusion of SBSI, increases in bad debt and depreciation expenses and moving expenses. Closure on the sale of the former administrative facility resulted in a gain of $0.6 million, partially offsetting the increases. Bad debt expense increased primarily due to the revenue growth in clinical and SAT segments which have inherently higher bad debt experience than the insurance testing segment. Insurance expenditures increased to $5.0 million for the quarter as compared to $4.2 million in 1998 primarily due to the addition of SBSI. Total clinical costs increased $0.3 million to $3.0 million in 1999 primarily due to an increase in bad debt expense and an increase in corporate overhead allocations to $0.9 million in 1999 from $0.8 million in 1998. SAT expenditures were $1.3 million as compared to $1.1 million last year. Earnings from operations decreased from $3.9 million in the second quarter 1998 to $2.8 million in 1999. The clinical segment improved $0.2 million to an operating loss of $1.3 million. The SAT segment declined $0.2 million to a loss of $0.2 million in the second quarter 1999. The insurance segment, including SBSI, declined $1.6 million to an operating profit of $3.8 million. The corporate segment retained an operating income of $0.5 million for the quarter primarily related to the gain on the sale of the former administrative facility. The gain resulted from the sales price of $2.5 million being greater than originally anticipated. Non operating expense increased $0.4 million primarily due to interest expense on the industrial revenue bonds and a reduction in capital available for investment. The effective income tax rate declined from 41% in the second quarter 1998 to 38% in 1999. The combined effect of the above factors resulted in net earnings of $1.6 million or $0.12 per share in the second quarter 1999 as compared to $2.4 million or $0.18 per share in the same period last year. YEAR-TO-DATE ANALYSIS Revenue in the six month period ended June 30, 1999 was $55.9 million as compared to $49.1 million in the same period last year. The increase of $6.8 million is due to increases in clinical revenue of $3.3 million, SAT revenue of $1.8 million and insurance revenue of $1.7 million Clinical laboratory revenue increased 40% from $8.4 million during the first six months of 1998 to $11.7 million for the same period in 1999 due to increased testing volumes. SAT revenue increased from $6.3 million in 1998 to $8.1 million in 1999 due to a 33% increase in testing volumes. The total number of insurance applicants tested in the six month period decreased by 5% as compared to last year, while average revenue per applicant declined 2%. Kit and container revenue decreased $1.1 million due primarily to a decrease in the number of kits sold. Page 10 Cost of sales increased $5.9 million year to date as compared to the prior year. This increase is due primarily to increases in payroll expenses, insurance information services and inbound freight. A significant portion of these increases are related to the addition of SBSI and the growth of the SAT and clinical segments. These increases were partially offset by a decrease in insurance kit expenses due to lower sales volumes. Clinical cost of sales expenses were $8.0 million as compared to $7.0 million during the first six months of 1998. SAT cost of sales expenses were $6.0 million as compared to $4.4 million during 1998. As a result of the above factors, gross profit for the first six months increased from $22.3 million in 1998 to $23.2 million in 1999. Clinical gross profit improved from $1.4 million in 1998 to $3.7 million in 1999. SAT gross profit increased to $2.2 million in the first six months of 1999 from $1.9 million last year. Selling, general and administrative expenses increased $2.7 million (18%) in the six month period ended June 30, 1999 as compared to the prior year due to the addition of SBSI and increases in depreciation expenses, bad debt accruals and moving expenses. Clinical expenditures were $6.0 million as compared to $4.9 million in 1998. SAT expenses increased from $2.1 million in 1998 to $2.5 million in 1999. The overhead allocation to the clinical and SAT segments for the period was $3.1 million as compared to an allocation of $2.4 million in 1998. Operating income decreased from $6.9 million in the first six months of 1998 to $5.9 million in 1999. The insurance segment had operating income of $7.8 million as compared to $10.5 million in the first six month of last year. The clinical segment had an operating loss of $2.3 million for the six month period ended June 30, 1999 as compared to an operating loss of $3.4 million in 1998. The SAT segment had an operating loss of $0.3 million in 1999 as compared to an operating loss of $0.1 million in 1998. The corporate segment retained an operating income of $0.7 million for the first six months primarily related to gains on sale of the former laboratory and administrative facilities. Interest expense on the industrial revenue bonds was $0.6 million in the first six months of 1999. Investment income decreased $0.3 million primarily due to less funds available for investment. The effective income tax rate declined from 40% in 1998 to 37% in 1999. The combined effect of the above factors resulted in net earnings of $3.5 million or $0.26 per share in the six month period ended June 30, 1999 as compared to $4.4 million or $0.33 per share in the same period last year. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES - --------------------------------------------------- LabOne's working capital position decreased by $6.1 million to $19.8 million at June 30, 1999 from $25.9 million at December 31, 1998. This decrease is primarily due to dividends paid and capital additions exceeding cash provided by operations. Cash flow from operations decreased by $0.8 million year to date primarily due to lower net income. Additions to property, plant and equipment, net of the sale of the former laboratory and administrative facilities, were $3.5 million in the first six Page 11 months of 1999, primarily related to construction and fixtures for the new facility. Net additions in the first six months of 1998 were $6.3 million. Capital additions are expected to be approximately $5.0 million annually. In May 1999, LabOne's Board of Directors declared a dividend of $0.18 per common share. This dividend was paid on June 2, 1999, to stockholders of record as of May 25, 1999, and totaled approximately $2.4 million. The board reviews the dividend payment policy on a periodic basis. There are currently no restrictions that would limit the Company's ability to make future dividend payments. If the proposed merger between LabOne and Lab Holdings is consummated, the future dividend policy of the combined company in the merger will be determined by its new Board of Directors, a majority of whom will be independent non-management directors. Although nine of the eleven current LabOne directors are expected to continue as directors of the combined company, there can be no assurance as to any dividend determinations by that board in the future. That determination will be subject to the financial condition, operating results, and liquidity of the combined company and numerous other factors. In addition, the pursuit by the combined company of LabOne's growth and diversification strategy, the increased financial leverage that is expected to result from the merger, changes in the market for LabOne's products and services, negative impacts caused by other risks described in the Registration Statement on Form S-4 filed by Lab Holdings with the United States Securities and Exchange Commission on July 2, 1999 (File No. 333- 76131), or any of them singly or together with other factors could influence the board of the combined company to reduce or eliminate the quarterly dividend. Under the merger agreement, LabOne shareholders (other than Lab Holdings) may elect to exchange each LabOne share for either one share of the combined company, $12.75 in cash, or a combination of shares and cash. Cash elections are subject to an aggregate cash limit of $16.6 million. It is expected that the combined company will need to borrow up to $13.6 million to satisfy cash elections in excess of $3 million. Additional cash could be needed if any Lab Holdings shareholders perfect dissenters' rights. These additional borrowings will increase annual interest expense and subject the combined company to the normal risks associated with debt financing. However, the amount of these borrowings is not expected to have a negative impact on earnings per share because the increased borrowing expense would be offset by the reduction in the number of shares of the combined company issued in the merger as a result of cash elections by LabOne stockholders. The additional financial leverage could also impair the ability of the combined company to pursue acquisition and growth strategies that would otherwise be available or impact future operating results due to higher debt service in the event that future acquisitions are completed. Existing loan agreements do not contain covenants that will directly prohibit the board of directors of the combined company from continuing Holdings' quarterly dividends at the current amount. However, the increased debt combined with other circumstances could cause the board of the combined company to reduce or discontinue the quarterly dividend. Other circumstances include negative operating results, acquisition or other expenditures or commitments incurred to continue LabOne's diversification and growth strategy, or the effect of general financial covenants contained in the loan agreements. One effect of the merger will be to add transaction goodwill to the balance sheet of the combined company in an estimated amount ranging from about $22.4 million to $25.1 million. This transaction goodwill reflects the expected difference between the cost of LabOne shares that Lab Holdings will be treated Page 12 as acquiring in the merger and the fair value of the LabOne net assets allocated to these acquired shares. If the merger is consummated, the combined company's balance sheet will also include about $6.0 million in existing historical goodwill that currently is a Lab Holdings asset that resulted from Holding's prior acquisitions of LabOne stock. Following the merger, this historical and transaction goodwill is expected to negatively impact reported earnings of the combined company at an estimated annual rate from about $2.6 million to $2.8 million until the historical goodwill is fully amortized in April 2003, and thereafter at an estimated annual rate from about $1.1 million to $1.3 million until the 20th anniversary of the merger. The amounts in this paragraph are hypothetical assuming that the merger had occurred as shown on the pro forma financial statements included in the above Registration Statement. The actual amount of goodwill incurred in the merger will depend on the number of combined company shares issued in the merger, the actual amount of transaction costs and the fair value of the LabOne net assets at the time of the merger. The total number of shares of LabOne stock held in treasury at June 30, 1999 was approximately 1.7 million at a total cost of $20.2 million or $12.02 per share. The Company had no short-term borrowings in the second quarter 1999. The Company expects to fund operations and future dividend payments from a combination of cash flows from operations, cash reserves and short term borrowings. Proceeds from the industrial revenue bond have been used to finance the construction of the Company's new facility project. Interest on the bond is based on a taxable seven day variable rate and is currently approximately 6.0%. The Company expects to repay the bond over 11 years at $1.85 million per year plus interest. The first principle payment of $1.85 million is due September 1, 1999. At June 30, 1999, LabOne had total cash and investments of $5.3 million as compared to $10.2 million at December 31, 1998. 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 in the past ten years and were brought into compliance with Year 2000 date standards at that time. As part of construction of the new facility, certified compliant security systems, time clocks and heating and cooling systems (non-IT systems) were installed. As of 4/1/99 all mission critical systems meet LabOne's compliance criteria. The Company is currently engaged in a comprehensive system validation, running production systems in a year 2000 simulation. This effort will continue through the balance of 1999 as updates are made to our systems. LabOne is assessing the Year 2000 preparation and contingency plans of 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 the United States Postal Service, airlines and other common carriers or express delivery services in the event of delivery problems with Airborne Express. The Company currently maintains approximately 8 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 Page 13 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 $0.2 million and are not considered a material expense to the Company. These efforts have not caused delay to the Company's other ongoing information systems projects. LabOne has not hired any outside consultants or other independent validation provider at this time, and does not expect to do so. There can be no assurance that the Company's adjustments to its computer systems will completely eliminate all Year 2000 problems. Failure to properly address the Year 2000 problem could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A foreign currency risk exposure exists due to billing Canadian subsidiary revenue in Canadian dollars and the direct laboratory expenses associated with this revenue being incurred in US dollars. This exposure is not considered to be material. Any future material Canadian currency fluctuations against the US$ 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 day variable rate, which including letter of credit and remarketing fees, is approximately 6.0% as of July 30, 1999. This exposure is not considered material. Any future increase in interest rates would result in additional interest expense and could result in a decision to enter into a long-term interest rate swap transaction. PART II. OTHER INFORMATION Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule - as filed electronically by the Registrant in conjunction with this second quarter 1999 Form 10-Q. (b) Reports on Form 8-K None Page 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LabOne, Inc. Date: July 30, 1999 By /s/ Kurt E. Gruenbacher ------------------------ Kurt E. Gruenbacher, V.P. Finance, CAO and Treasurer Date: July 30, 1999 By /s/ Robert D. Thompson ------------------------ Robert D. Thompson, Executive V.P., Chief Operating Officer and Chief Financial Officer Page 15 EX-27 2
5 This schedule contains summary financial information extracted from the second quarter 1999 Report on Form 10-Q for LabOne, Inc. and is qualified in its entirety by reference to such financials. 0000816151 LABONE, INC. 6-MOS DEC-31-1999 JUN-30-1999 5,253,522 0 21,532,979 2,994,958 1,160,117 31,963,842 78,345,672 36,001,843 81,602,375 12,168,648 18,093,109 0 0 150,000 51,183,712 81,602,375 0 55,900,237 0 32,655,301 0 1,281,495 589,621 5,504,058 2,052,890 3,451,168 0 0 0 3,451,168 0.26 0.26
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