-----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, GVrOoCyNZP49Fx+4Qh4S6ZZqHrskHcVH/Z+zBOH5FLGy06yNqNbyF51ohx76BbLm SfZPJdVP5oD3sSzNHIwErw== 0000830158-98-000007.txt : 19980817 0000830158-98-000007.hdr.sgml : 19980817 ACCESSION NUMBER: 0000830158-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAB HOLDINGS INC CENTRAL INDEX KEY: 0000830158 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 431039532 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16946 FILM NUMBER: 98688473 BUSINESS ADDRESS: STREET 1: 5000 W. 95 STREET STREET 2: P. O. BOX 7568 CITY: SHAWNEE MISSION STATE: KS ZIP: 66207 BUSINESS PHONE: 913-648-3600 MAIL ADDRESS: STREET 1: 5000 W 95TH STREET STREET 2: SUITE 260 CITY: SHAWNEE MISSION STATE: KS ZIP: 66207 FORMER COMPANY: FORMER CONFORMED NAME: SEAFIELD CAPITAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BMA CORP /MO/ DATE OF NAME CHANGE: 19910520 FORMER COMPANY: FORMER CONFORMED NAME: SEAFIELD CAPTIAL CORP DATE OF NAME CHANGE: 19910520 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-16946 LAB HOLDINGS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Missouri 43-1039532 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 7568 5000 W. 95th Street, Suite 260 Shawnee Mission, KS 66207 -------------------------------- ---------------- (Address of principal (Zipcode) executive offices) Registrant's telephone number, including area code (913) 648-3600 -------------- - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Number of shares outstanding of only class of Registrant's common stock as of August 11, 1998: $1 par value common - 6,489,103 PART I. FINANCIAL INFORMATION Item 1. Financial Statements LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets - -------------------------------------------------------------------------- (unaudited) June 30, December 31, 1998 1997 - -------------------------------------------------------------------------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 15,910 22,129 Short-term investments 1,876 2,648 Accounts and notes receivable 15,684 12,608 Current income taxes 1,545 1,400 Inventories 1,629 2,203 Real estate available for sale 3,515 3,515 Prepaid expenses and other current assets 2,410 2,459 Deferred income taxes 3,682 3,386 ---------------------- Total current assets 46,251 50,348 Property, plant and equipment 15,093 10,441 Intangible assets 11,855 13,058 Deferred income taxes 606 858 Other assets 24 81 ---------------------- $ 73,829 74,786 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,075 3,367 Accrued payroll and benefits 3,949 4,530 Other accrued expenses 398 423 Other current liabilities 194 303 ---------------------- Total liabilities 8,616 8,623 ---------------------- Minority interests 9,562 9,476 ---------------------- Stockholders' equity: Preferred stock of $1 par value. Authorized 3,000,000 shares; none issued -- -- Common stock of $1 par value. Authorized 24,000,000 shares; issued 7,500,000 shares 7,500 7,500 Paid-in capital 1,772 1,772 Retained earnings 77,118 78,103 Accumulated other comprehensive income (loss) (595) (544) ---------------------- 85,795 86,831 Less cost of 1,010,897 shares of treasury stock 30,144 30,144 ---------------------- Total stockholders' equity 55,651 56,687 ---------------------- $ 73,829 74,786 ====================== See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. LAB HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------ (unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 - ---------------------------------------------------------------------------- (in thousands except share amounts) Sales $ 25,763 20,308 49,096 38,048 Cost of sales 13,832 10,636 26,791 20,086 --------------------- --------------------- Gross profit 11,931 9,672 22,305 17,962 Selling, general and administrative 8,424 10,736 16,283 19,182 --------------------- --------------------- Earnings (loss) from operations 3,507 (1,064) 6,022 (1,220) Investment income - net 289 395 656 4,200 Other income (expense) (25) (28) (26) 84 --------------------- --------------------- Earnings (loss) before income taxes 3,771 (697) 6,652 3,064 Income taxes 1,607 3,259 2,911 9,573 --------------------- --------------------- Earnings (loss) before minority interests 2,164 (3,956) 3,741 (6,509) Minority interests 464 330 833 598 --------------------- --------------------- Earnings (loss) from continuing operations 1,700 (4,286) 2,908 (7,107) Loss from discontinued healthcare business -- (2,946) -- (2,342) --------------------- --------------------- Net earnings (loss) $ 1,700 (7,232) 2,908 (9,449) ===================== ===================== Basic earnings (loss) per share: Earnings (loss) from continuing operations $ .26 (.66) .45 (1.10) Loss from discontinued healthcare business -- (.45) -- (.36) --------------------- --------------------- Net earnings (loss) $ .26 (1.11) .45 (1.46) ===================== ===================== Diluted earnings (loss) per share: Earnings (loss) from continuing operations $ .26 (.66) .44 (1.10) Loss from discontinued healthcare business -- (.45) -- (.36) --------------------- --------------------- Net earnings (loss) $ .26 (1.11) .44 (1.46) ===================== ===================== Dividends $ .30 .30 .60 .60 Book value $ 8.58 17.36 8.58 17.36 Weighted average shares outstanding 6,489,103 6,489,103 6,489,103 6,488,176 Shares outstanding end of period 6,489,103 6,489,103 6,489,103 6,489,103 See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity and Comprehensive Income Six Months Ended June 30, 1998 (unaudited) - --------------------------------------------------------------------------- Comprehensive Stockholders' Income Equity - --------------------------------------------------------------------------- (in thousands) Common stock: Balance, beginning and end of period $ 7,500 -------- Paid-in capital: Balance, beginning and end of period 1,772 -------- Retained earnings: Balance, beginning of year 78,103 Net earnings 2,908 2,908 Cash dividends paid -------- (3,893) -------- Balance, end of period 77,118 -------- Accumulated other comprehensive income (loss) Balance, beginning of year (544) Foreign currency translation (51) Tax expense - -------- (51) (51) -------- -------- Balance, end of period (595) -------- Less: Treasury stock: Balance, beginning and end of period 30,144 -------- Totals $ 2,857 55,651 ======== ======== See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows - ------------------------------------------------------------------ (unaudited) Six Months Ended June 31, 1998 1997 - ------------------------------------------------------------------ (In thousands) OPERATING ACTIVITIES Earnings (loss) from continuing operations $ 2,908 (7,107) Adjustments to reconcile earnings(loss) from continuing operations to net cash provided by continuing operations: Depreciation and amortization 2,828 2,954 Earnings applicable to minority interests 833 598 Change in trading portfolio, net 69 34,490 Change in accounts receivable (3,076) (3,746) Change in accounts payable 708 36 Income taxes and other, net (214) 6,523 ------------------- Net cash provided by continuing operations 4,056 33,748 Net cash used by discontinued healthcare business -- (1,006) Net cash provided by discontinued real estate operations -- 581 ------------------- Total cash provided by operations 4,056 33,323 ------------------- INVESTING ACTIVITIES Sales of investments available for sale -- 1,350 Purchases of investments held to maturity (5,461) (10,190) Maturities of investments held to maturity 6,202 5,232 Additions to property, plant and equipment, net (6,319) (2,391) Acquisition of assets -- (4,128) Other, net (748) (623) ------------------- Net cash used by investing activities (6,326) (10,750) ------------------- FINANCING ACTIVITIES Regular quarterly dividends paid (3,893) (3,893) Cash portion of SLH dividend -- (19,590) Net issuance of treasury stock pursuant to stock option plans -- (7) ------------------- Net cash used by financing activities (3,893) (23,490) ------------------- Effect of foreign currency translation (56) (19) ------------------- Net decrease in cash and cash equivalents (6,219) (936) Cash and cash equivalents at beginning of period 22,129 4,957 ------------------- Cash and cash equivalents at end of period $ 15,910 4,021 =================== Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest $ -- -- =================== Income taxes, net $ 3,059 1,417 =================== Supplemental disclosures of non-cash information: SLH dividend $ -- 28,373 =================== See accompanying notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations. LAB HOLDINGS, INC. Notes to Consolidated Financial Statements June 30, 1998 and 1997 (1) The interim financial information furnished herein is unaudited while the balance sheet at December 31, 1997 is derived from audited financial statements. In the opinion of management, the financial information reflects all adjustments which are necessary to fairly state Lab Holdings' financial position at June 30, 1998 and December 31, 1997 and the results of its operations and cash flows for the periods ended June 30, 1998 and 1997. All adjustments made in the interim period were of a normal recurring nature. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances, and therefore included in the financial statements are certain amounts based on management's informed estimates and judgments. The financial information herein is not necessarily representative of a full year's operations because levels of sales, interest rates and other factors fluctuate throughout the fiscal year. These same considerations apply to all year to year comparisons. Certain 1997 amounts have been reclassified for comparative purposes with no effect on net earnings (loss). See Lab Holdings' Annual Report pursuant to Section 13 to the Securities Exchange Act of 1934 (Form 10-K as amended) for additional information not required by this Quarterly Report on Form 10-Q. (2) On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH Corporation (SLH). For each shareholder of record on February 24, 1997, one share of SLH common stock was distributed for each four shares of Lab Holdings common stock owned. In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities, including two wholly-owned subsidiaries, Scout Development Corporation and BMA Resources, Inc., to SLH. The net assets distributed to SLH totaled approximately $48 million. The spinoff was accounted for as a dividend. The Lab Holdings shareholders paid no consideration for any shares of SLH stock received in the distribution. (3) On July 25, 1997, Lab Holdings distributed to its shareholders all of the shares of common stock of Response Oncology, Inc. (Response) owned by Lab Holdings. For each shareholder of record on July 11, 1997, 1.2447625 shares of Response common stock were distributed for each share of Lab Holdings common stock outstanding. The distribution of all shares of Response stock to Lab Holdings' shareholders was effected as a dividend. The Lab Holdings shareholders paid no consideration for any shares of Response stock received in the distribution. Lab Holdings' share of Response's earnings are shown as a discontinued business in the accompanying financial statements. As a result of the SLH and Response distributions, Lab Holdings' principal asset consists of its approximate 82% ownership of LabOne, Inc. (LabOne). (4) Cash and cash equivalents include demand deposits in banks, money market investments and overnight investments that are stated at cost, which approximates market value. (5) Basic earnings per share is computed using the weighted average number of common shares and diluted earnings per share is computed using the weighted average number of common shares and dilutive stock options. Earnings available to common shareholders was adjusted to reflect the Company's share of LabOne's earnings based on a diluted ownership after taking into account LabOne's common stock equivalents. The following table reconciles net earnings and weighted average shares used to compute basic and diluted earnings per share. June 30, 1998 ----------------------------------- Earnings from Continuing Per Share Operations Shares Amount ----------------------------------- Basic earnings per share $ 2,908,000 6,489,103 $ .45 Effect of dilutive securities: Lab Holdings stock options -- -- LabOne stock options (52,000) -- ----------------------------------- Dilutive earnings per share $ 2,856,000 6,489,103 $ .44 =================================== June 30, 1997 ----------------------------------- Loss from Continuing Per Share Operations Shares Amount ----------------------------------- Basic loss per share $(9,449,000) 6,488,176 $ (1.46) Effect of dilutive securities: Lab Holdings stock options -- -- LabOne stock options -- -- ----------------------------------- Dilutive loss per share $(9,449,000) 6,488,176 $ (1.46) =================================== Computation of dilutive loss per share at June 30, 1997 did not include the effect of stock options because to do so would have been antidilutive. (6) LabOne operates in three lines of business: insurance risk appraisal testing, clinical diagnostic testing and substance abuse testing. The following table presents the Company's selected financial information for each segment. Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ------------------ ------------------ (in thousands) Sales Insurance risk appraisal testing $ 17,572 15,897 34,394 30,326 Clinical diagnostic testing 4,723 2,120 8,377 3,661 Substance abuse testing 3,468 2,291 6,325 4,061 ------------------- ------------------- Total sales $ 25,763 20,308 49,096 38,048 =================== =================== Operating Income (Loss) Insurance risk appraisal testing $ 5,573 4,735 10,786 9,046 Clinical diagnostic testing (1,509) (1,895) (3,444) (3,999) Substance abuse testing 40 (198) (139) (507) General corporate expense (597) (3,706) (1,181) (5,760) ------------------- ------------------- Earnings (loss) from operations 3,507 (1,064) 6,022 (1,220) Investment income - net 289 395 656 4,200 Other income (expense) (25) (28) (26) 84 ------------------- ------------------- Earnings (loss) before income taxes $ 3,771 (697) 6,652 3,064 =================== =================== There were no material changes in asset levels by segment or in the basis of segmentation or measurement of segment operating income or loss. (7) The Company adopted the provisions of the Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" on January 1, 1998. Comprehensive income is defined as any change in equity from transactions and other events originating from non-owner sources. For Lab Holdings, those changes are composed of reported net income and changes in unrealized foreign currency translation adjustments. The components of comprehensive income are as follows. June 30, 1998 1997 ------------------ (in thousands) Net earnings (loss) $ 2,908 (9,449) ------------------ Other comprehensive income Foreign currency translation (51) (37) Tax expense -- -- ------------------ Total other comprehensive income (51) (37) ------------------ Total Comprehensive Income $ 2,857 (9,486) ================== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Selected Financial Data Three months ended Six months ended June 30, June 30, ---------------------- -------------------- 1998 1997 1998 1997 ---------- ---------- --------- ------- Sales $25,763,000 20,308,000 49,096,000 38,048,000 Earnings (Loss) from operations $ 3,507,000 (1,064,000) 6,022,000 (1,220,000) Investment income - net $ 289,000 395,000 656,000 4,200,000 Earnings (Loss) from continuing operations $ 1,700,000 (4,286,000) 2,908,000 (7,107,000) Loss from discontinued healthcare business $ -- (2,946,000) -- (2,342,000) Net earnings (loss) $ 1,700,000 (7,232,000) 2,908,000 (9,449,000) Basic earnings per share: Earnings (loss) from continuing operations $ .26 (.66) .45 (1.10) Loss from discontinued healthcare business -- (.45) -- (.36) Net earnings (loss) $ .26 (1.11) .45 (1.46) Dividends per share $ .30 .30 .60 .60 Book value per share $ 8.58 17.36 8.58 17.36 Introductory remarks about results of operations Lab Holdings, Inc.'s (Lab Holdings or Registrant) principal assets consist of a majority ownership of LabOne, Inc. (LabOne) and approximately $5.1 million in cash and short-term investments. Prior to October 20, 1997, Lab Holdings was named Seafield Capital Corporation (Seafield). Seafield changed its name to Lab Holdings for better identification with its primary asset, the approximate 82% ownership of LabOne. Lab Holdings had a majority ownership position in Response Oncology, Inc. (Response). On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. The distribution of Response stock was effected as a taxable dividend by Lab Holdings. Response's 1997 operations are presented as a discontinued healthcare business in Lab Holdings' financial statements. Response, previously 67%-owned by Lab Holdings, is a publicly-traded company (NASDAQ-ROIX). On February 26, 1997, Lab Holdings converted a $23.5 million Response note receivable and accrued interest into 3,020,536 shares of Response common stock. The conversion increased Lab Holdings' ownership of Response shares outstanding from 56% at December 31, 1996 to approximately 67%. Additionally, Lab Holdings had investments in real estate, energy businesses and miscellaneous assets. On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH Corporation (SLH). In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities to SLH. The SLH spin- off was accounted for as a dividend. LabOne provides high-quality laboratory services to insurance companies, physicians and employers. LabOne provides risk-appraisal laboratory services to the insurance industry. The tests performed are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. LabOne also provides testing services on specimens of individuals applying for individual and group medical and disability policies. LabOne's clinical testing services are provided to the healthcare industry to aid in the diagnosis and treatment of patients. LabOne operates only one highly automated and centralized laboratory, which LabOne believes has significant economic advantages over other conventional laboratory competitors. LabOne markets its clinical testing services to the payers of healthcare--insurance companies and self-insured groups. LabOne does this through Lab Card(trademark), a Laboratory Benefits Management (LBM) program. The Lab Card Program provides laboratory testing at reduced rates as compared to traditional laboratories. It uses a unique benefit design that shares the cost savings with the patient, creating an incentive for the patient to help direct laboratory work to LabOne. Under the Program, the patient incurs no out-of-pocket expense when the Lab Card is used, and the insurance company or self-insured group receives substantial savings on its laboratory charges. Additionally, BlueCross BlueShield of Tennessee selected LabOne to provide routine outpatient laboratory testing services for BlueCare members throughout Tennessee effective February 1, 1998. BlueCare is BlueCross BlueShield of Tennessee's plan for Tenncare participants and covers approximately 350,000 members. LabOne's LBM programs, including BlueCare and the Lab Card program, have approximately 2 million lives enrolled. LabOne is certified by the Substance Abuse and Mental Health Services Administration (SAMHSA) to perform substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. 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 Revenues increased 27% to $25.8 million in the second quarter 1998 from $20.3 million in the second quarter 1997 due to increases in all business segments. Insurance segment revenue increased to $17.6 million during the second quarter 1998 as compared to $15.9 million in the same quarter last year. The increase was due to an increase in market share and an increase in oral fluid testing on applicants applying for smaller face-amount policies. The total number of insurance applicants tested in the second quarter 1998 increased by 13% as compared to the same quarter last year. Average revenue per applicant decreased 4% during the same periods due to competitive pricing pressures. Insurance kit and container revenue increased, due primarily to an increase in the number of blood and oral fluid kits sold. Clinical (diagnostic) laboratory revenue increased 123% from $2.1 million in the second quarter 1997 to $4.7 million in 1998 due to a 94% increase in testing volumes and a 15% increase in the average revenue per patient. Substance abuse testing (SAT) revenue increased 51% from $2.3 million in the second quarter 1997 to $3.5 million in 1998 primarily due to increased testing volumes. Cost of sales increased $3.2 million in the second quarter 1998 as compared to the prior year, due primarily to increases in supplies, inbound freight and outside laboratory testing and collection services. Laboratory supplies increased due to the increased specimen volumes tested in each segment. Insurance kit supplies increased due to the higher volume of kits sold. Inbound freight and outside laboratory testing and collection services increased primarily due to the increased specimen volumes in the clinical and SAT segments. Clinical cost of sales expenses were $3.6 million as compared to $2.1 million in the second quarter 1997. SAT cost of sales expenses were $2.3 million as compared to $1.7 million in the second quarter 1997. As a result of the above factors, gross profit for the quarter increased $2.3 million (23%) from $9.7 million in the second quarter 1997 to $11.9 million in the second quarter 1998. Clinical gross profit increased to $1.1 million in the second quarter 1998 from $39,000 in the second quarter 1997. SAT gross profit increased to $1.1 million in the second quarter 1998 from $600,000 in the second quarter 1997. LabOne's selling, general and administrative expenses increased $800,000 (11%) in the second quarter 1998 as compared to the prior year, due primarily to increases in payroll expenses and bad debt accruals. These were partially offset by a decrease in depreciation expenses. Clinical expenses, including allocated overhead, were $2.6 million as compared to $1.9 million in 1997. SAT expenditures, including allocations, were $1.1 million as compared to $700,000 last year. The overhead allocation to the clinical and SAT testing segments for the second quarter 1998 was $1.3 million as compared to an allocation of $800,000 in 1997. Lab Holding's selling, general and administrative expenses decreased to $191,000 in the second quarter 1998 from $3.3 million in the second quarter of 1997 as Lab Holding's significantly reduced its corporate structure after the SLH and Response distributions. Goodwill amortization of $368,000 associated with Lab Holdings' investment in LabOne was included in the second quarter operating results of both 1998 and 1997. Consolidated earnings from operations increased to $3.5 million in 1998's second quarter from a loss of $1.1 million in the second quarter of 1997 reflecting both Lab Holdings reduction in corporate structure expenses and improvements in LabOne's operating results. LabOne's insurance segment operating income increased $800,000. The clinical segment improved $400,000 to an operating loss of $1.5 million. The SAT segment improved $200,000 from an operating loss of approximately $200,000 in the second quarter 1997 to an operating gain of $40,000 in 1998. Other investments contributing earnings include venture capital and liquidity investments. The return on short-term investments is included in the investment income line in the consolidated statements of operations. Investment income decreased to $289,000 in 1998's second quarter from $395,000 in 1997's second quarter, which primarily reflected less funds available for investment. Miscellaneous items produced a $25,000 loss in 1998's second quarter as compared to a loss of $28,000 in 1997's second quarter. Tax expense decreased to $1.6 million in 1998's second quarter from $3.3 million in 1997's second quarter. During 1997's second quarter, approximately $3.2 million of unused deferred income tax assets not utilized in the Response distribution were written off. The combined effect of the above factors resulted in the second quarter 1998 earnings from continuing operations of $1.7 million, compared with a loss from continuing operations of $4.3 million in the second quarter 1997. Discontinued Healthcare Business: On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. Response's operations are presented as a discontinued healthcare business in Lab Holdings' financial statements. The second quarter of 1997 was the last period in which Response significantly impacted Lab Holdings' financial results. The distribution of Response stock was effected as a taxable dividend by Lab Holdings in which Lab Holdings utilized tax loss carryforwards to offset a resulting tax liability in the financial statements. The second quarter 1997 loss of $2.9 million from discontinued healthcare operations reflected a $3.8 million non-cash tax expense net of $878,000 for Lab Holdings' share of earnings by Response during the quarter. For the second quarter of 1997, Response's revenues were $25.6 million and net earnings totaled $1.2 million. YEAR-TO-DATE ANALYSIS Revenue in the six month period ended June 30, 1998 was $49.1 million as compared to $38 million in the same period last year. The increase of approximately $11 million is due to increases in clinical laboratory revenue of $4.7 million, insurance laboratory revenue of $2.8 million, SAT revenue of $2.3 million and kit revenue of $1.3 million. The total number of insurance applicants tested in the six month period increased by 15% as compared to last year, while average revenue per applicant declined 3%. Kit and container revenue increased $1.3 million due primarily to an increase in the number of full blood and oral fluid kits sold. Clinical laboratory revenue increased from $3.7 million during the first six months of 1997 to $8.4 million for the same period in 1998 due to increased testing volumes and higher revenue per patient. SAT revenue increased from $4.1 million in 1997 to $6.3 million in 1998 due to a 55% increase in testing volumes. Cost of sales increased $6.7 million year to date as compared to the prior year. This increase is due primarily to increases in laboratory and kit supplies, payroll expenses, inbound freight and outside laboratory services. Lab supplies increased 27% due to the larger volume of all specimen types processed, and insurance kit expense increased due to the higher volume of kits sold. Payroll increased 16%. Freight and outside testing increased primarily due to the substantial growth in clinical and SAT specimen volumes. Clinical cost of sales expenses were $7 million as compared to $4 million during the first six months of 1997. SAT cost of sales expenses were $4.4 million as compared to $3.1 million during 1997. As a result of the above factors, gross profit for the first six months increased from $18 million in 1997 to $22.3 million in 1998. Clinical gross profit improved from a loss of $300,000 in 1997 to a gain of $1.4 million in 1998. SAT gross profit increased to $1.9 million in the first six months of 1998 from $900,000 last year. LabOne's selling, general and administrative expenses increased $1.8 million (13%) in the six month period ended June 30, 1998 as compared to the prior year due primarily to increases in payroll expenses and bad debt accruals. Payroll expense increased primarily due to a 13% increase in headcount and increased benefit expenses. These were partially offset by a decrease in depreciation expense. Clinical expenditures were $4.9 million as compared to $3.7 million in 1997. SAT expenses increased from $1.5 million in 1997 to $2.1 million in 1998. The overhead allocation to the clinical and SAT segments for the period was $2.4 million as compared to an allocation of $1.5 million in 1997. Lab Holding's selling, general and administrative expenses decreased to $372,000 in the first six months of 1998 from $5.1 million in the first six months of 1997 as Lab Holding's significantly reduced its corporate structure after the SLH and Response distributions. Goodwill amortization of $736,000 associated with Lab Holdings' investment in LabOne was included in the first six months operating results of both 1998 and 1997. Consolidated earnings from operations increased to $6 million in 1998's first six months from a loss of $1.2 million in the first six months of 1997 reflecting both Lab Holdings reduction in corporate structure expenses and improvements in LabOne's operating results. LabOne's operating income increased from $4.5 million in the first six months of 1997 to $7.1 million in 1998, primarily due to an increase in the insurance segment operating income of $1.7 million. The clinical segment had an operating loss of $3.4 million for the six month period ended June 30, 1998 as compared to an operating loss of $4.0 million in 1997. The SAT segment improved from an operating loss of $500,000 in 1997 to a loss of $100,000 in 1998. Other investments contributing earnings include venture capital and liquidity investments. The return on short-term investments is included in the investment income line in the consolidated statements of operations. Investment income decreased to $656,000 in 1998's first six months from $4.2 million in 1997's first six months, which primarily reflected a $3 million gain by Lab Holdings on the sale of marketable common stock. Tax expense decreased to $2.9 million in 1998's first six months from $9.6 million in 1997's first six months. During 1997's first six months, tax expense included the write off of approximately $5 million of the deferred income tax assets related to assets spun off in the SLH distribution and the write off of approximately $3.2 million of unused deferred income tax assets not utilized in the Response distribution. The combined effect of the above factors resulted in earnings from continuing operations of $2.9 million for the first six months of 1998 , compared with a loss from continuing operations of $7.1 million in the first six months of 1997. Discontinued Healthcare Business: On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. Response's operations are presented as a $2.3 million loss from discontinued healthcare business in Lab Holdings' financial statements. During the first six months of 1997, Response's revenues were $50 million and net earnings totaled $2.1 million. The combined effect of the above factors resulted in net earnings of $2.9 million or $0.45 basic earnings per share in the six month period ended June 30, 1998 as compared to a net loss of $9.4 million or $1.46 basic loss per share in the same period last year. Publicly-Traded Subsidiary Lab Holdings' majority-owned subsidiary, LabOne, is publicly-traded. At June 30, 1998, based on the market prices of publicly-traded shares of this subsidiary, pretax unrealized gains of approximately $129.2 million on this investment were not reflected in either Lab Holdings' book value or stockholders' equity. LIQUIDITY AND CAPITAL RESOURCES On June 30, 1998, at the holding company level, Lab Holdings had available for operations approximately $5.1 million in cash and short-term investments. Lab Holdings' working capital at June 30, 1998 decreased slightly to $6.2 million from $6.3 million at December 31, 1997. On a consolidated basis, Lab Holdings had $17.8 million in cash and short- term investments at June 30, 1998. Current assets totaled approximately $46.3 million while current liabilities totaled $8.6 million. Accounts receivable increased $3.1 million or 24% from December 31, 1997 due to LabOne's increase in revenues for the six month period. Net cash provided by continuing operations totaled $4.1 million in 1998's first six months compared with $33.7 million in 1997's first six months, primarily reflecting net earnings in 1998, a net loss in 1997 and a $34 million net change in the trading portfolio in 1997. Additionally in 1997, the discontinued healthcare business used $1 million and discontinued real estate operations provided $581,000. Net cash used by investing activities in 1998's first six months totaled $6.3 million, as compared with $10.8 million in 1997's first six months. The net cash used in 1998 primarily reflects LabOne's net additions to property plant and equipment related to construction of a new facility. Net cash used by investing activities in 1997's first six months included a net increase in long-term investments of $3.6 million, $2.4 million of net additions to property, plant and equipment supporting expanded laboratory capacity and $4.1 million of intangible asset purchases by LabOne associated with its purchase of the assets and customer list of GIB Laboratories, Inc. Net cash used by financing activities of $3.9 million in 1998's first six months reflects Lab Holdings regular cash dividends to its shareholders. Net cash used by financing activities in 1997's first six months totaled $23.5 million primarily due to the $19.6 million cash transferred to SLH and regular cash dividends of $3.9 million. Lab Holdings is currently a holding company. Sources of cash are investment income and subsidiary dividends. There are currently no restrictions that would limit LabOne's ability to make future dividend payments. The primary uses of cash for Lab Holdings are investments, operating expenses and dividends to shareholders. LabOne paid regular quarterly dividends in 1998 and 1997. As an 82% owner, Lab Holdings received $3.8 million of cash as dividends from LabOne in 1998. LabOne's working capital position declined $3.9 million to $31.5 million at June 30, 1998 from $35.4 million at December 31, 1997. This decrease is primarily due to capital additions and dividends paid exceeding LabOne's cash provided by operations before changes in working capital. LabOne's new facility project is expected to cost approximately $33 million and will be financed with an industrial revenue bond (IRB) approved by the City of Lenexa (Kansas). The IRB is expected to be in place during the third quarter 1998. Interest on the bond will be based on a taxable seven day variable rate. LabOne will sell $20 million of the $33 million IRB, and $13 million will be purchased by LabOne. LabOne expects to repay the bond over 11 years at $1.85 million per year plus interest. As of June 30, 1998, total capital expenditures for this project were $10 million. LabOne had no short-term borrowings in the first six months of 1998. LabOne expects to fund operations and future dividend payments from a combination of cash flows from operations and cash reserves. LabOne is actively addressing Year 2000 computer concerns. LabOne has established an oversight committee which includes management from all parts of LabOne that meets periodically to review progress. LabOne expects to complete all internal Year 2000 objectives by the end of the first quarter, 1999 and is assessing the Year 2000 preparation and contingency plans of its clients and vendors. Total expenses related to this project are not expected to be material to LabOne. However, there can be no assurance that LabOne's adjustments to its computer systems will completely eliminate all Year 2000 problems. In addition, there can be no assurance that the systems of Lab Holdings' and LabOne's 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 Lab Holdings' and LabOne's computer systems. A 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. Lab Holdings has completed its Year 2000 internal compliance program and believes that its limited computer systems are now Year 2000 compliant. The SLH Corporation/Syntroleum Corporation merger was completed on August 7, 1998. Per the Facilities Sharing and Interim Services Agreement between Lab Holdings, SLH and Syntroleum, the former employees of SLH are now employees of Lab Holdings. Concurrently, SLH/Syntroleum is providing facilities to Lab Holdings in exchange for certain limited accounting, bookkeeping, tax and administrative services by Lab Holdings personnel. RECENTLY ISSUED ACCOUNTING STANDARDS No recently issued accounting standards presently exist which will require adoption in future periods. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities (a) Changes in Securities: None (b) Under the Missouri General Corporation Law, no dividends to stockholders may be declared or paid at a time when the net assets of the corporation are less than its stated capital or when the payment thereof would reduce the net assets of the corporation below its stated capital. At June 30, 1998, the net assets of Lab Holdings, Inc. exceeded its stated capital by $48,151,000. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Securities Holders (a) The annual meeting of shareholders was held on May 14, 1998 for the purpose of electing a board of directors, approving the adoption of the 1997 Directors' Stock Option Plan and approving the appointment of auditors. Proxies for the meeting were solicited and there was no solicitation in opposition to management's solicitations. Holders of 6,489,103 shares were eligible to vote and 5,270,200 shares were represented at the meeting either in person or by proxy. (b) Management's nominee for director as listed in the proxy statement was elected with the following vote: Director Shares Voted Shares Shares Not For Withheld Voted -------- ------------ -------- ---------- Steven K. Fitzwater 5,260,943 8,856 401 The shareholders approved the adoption of the Lab Holdings, Inc. 1997 Directors' Stock Option Plan by the following vote: Shares Voted Shares Voted Shares Shares Not For Against Abstaining Voted ------------ ------------ ---------- ---------- 5,066,871 184,325 18,600 404 The shareholders approved the appointment of KPMG Peat Marwick LLP as independent auditors for the year ending December 31, 1998 by the following vote: Shares Voted Shares Voted Shares Shares Not For Against Abstaining Voted ------------ ------------ ---------- ---------- 5,261,128 586 8,084 402 Item 5. Other Information Stockholders who intend to present proposals for inclusion in the Company's proxy statement for the 1999 annual meeting of shareholders, must forward them to the Company at 5000 W. 95th Street, Suite 260, Shawnee Mission, Kansas 66207, ATTENTION: Secretary, so that they are received not later than December 20, 1998. In addition, proxies solicited by management may confer discretionary authority to vote on matters which are not included in the proxy statement but which are raised at the annual meeting by shareholders, unless the Company receives written notice of the matter on or before March 8, 1999, at the above address. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 1997 Long-Term Incentive Plan of LabOne, Inc. (incorporated by reference to Exhibit 10.1 to the LabOne, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-15975). 10.2 Form of Stock Option Agreement pursuant to the LabOne 1997 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the LabOne, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-15975). 10.3 Lab Holdings, Inc. Facilities Sharing and Interim Services Agreement, dated as of June 1, 1998 (incorporated by reference to Exhibit 10.29 to the SLH Corporation Registration Statement on Form S-4, Registration No. 333-50253). 27 Financial Data Schedule - as filed electronically by the Registrant in conjunction with this Form 10-Q. (b) Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Lab Holdings, Inc. Date August 11, 1998 By /s/ Steven K. Fitzwater ---------------------------- Steven K. Fitzwater Executive Vice President, Chief Operating and Financial Officer Date August 11, 1998 By /s/ Linda K. McCoy ---------------------------- Linda K. McCoy Vice President and Chief Accounting Officer EX-27 2
5 This schedule contains summary financial information extracted from the Form 10-Q for the period ending June 30, 1998 and is qualified in its entirety by reference to such Form 10-Q. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 15,910 1,876 0 0 1,629 46,251 0 0 73,829 8,616 0 0 0 7,500 48,151 73,829 49,096 0 26,791 0 0 0 0 6,652 2,911 2,908 0 0 0 2,908 .45 .44 Disclosure not required on interim financial statements.
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