-----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, TNivj4cnZbvmDF3/gqpoXc5RdUijeeLF8n9+8GaaqY9dHdeH1chqGl/BujwLgEny fiIsi20pweQgcE6xg5rtaw== 0000830158-00-000003.txt : 20000327 0000830158-00-000003.hdr.sgml : 20000327 ACCESSION NUMBER: 0000830158-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LABONE 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-K SEC ACT: SEC FILE NUMBER: 333-92137 FILM NUMBER: 577129 BUSINESS ADDRESS: STREET 1: 10101 RENNER BLVD STREET 2: P. O. BOX 7568 CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9136483600 MAIL ADDRESS: STREET 1: 5000 W 95TH STREET STREET 2: SUITE 260 CITY: SHAWNEE MISSION STATE: KS ZIP: 66207 FORMER COMPANY: FORMER CONFORMED NAME: LAB HOLDINGS INC DATE OF NAME CHANGE: 19980406 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 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, 1999 ----------------- Commission file number 0-16946 ------- LabOne, Inc. ------------ 10101 Renner Blvd. Lenexa, Kansas 66219 (913) 888-1770 Incorporated in Missouri I.R.S. Employer Identification Number: 43-1039532 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: $65,912,000 (based on closing price as of March 1, 2000, of $6.875). 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, 2000: $0.01 par value common - 11,533,493 shares net of 1,516,527 shares held as treasury stock. The exhibit list for this Form 10-K begins on page 20 PAGE 1 of 79 PART I ------ ITEM 1. BUSINESS General - ------- LabOne, Inc., a Missouri corporation, provides laboratory testing, investigative services and paramedical examinations for the insurance industry, clinical laboratory 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., Systematic Business Services, Inc. (SBSI) and ExamOne World Wide, Inc., 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. LabOne provides risk-appraisal laboratory services to the insurance industry. The laboratory 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 acquired in 1998, the Company provides telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services. Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc. and World Wide Health Services of New Jersey, a provider of specimen collection and paramedical examination services to life and health insurers. These subsidiaries are operated under the name ExamOne World Wide and are included in the insurance services division of LabOne. This addition allows LabOne to expand the services it offers to its insurance industry clients. 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 program. 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. On August 10, 1999, the former LabOne, Inc. was merged into its parent corporation, Lab Holdings, Inc. upon the approval of the shareholders of both companies at their respective annual meetings. The combined company's name was then changed to LabOne, Inc. PAGE 2 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, 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 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 contracted paramedical personnel using LabOne's custom-designed collection kits and containers. These kits and containers are delivered to PAGE 3 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. In November 1999, LabOne's acquisition of ExamOne World Wide provided its entry into paramedical examinations for the life insurance industry. This enables LabOne to offer a wide range of services in the insurance services industry, complementing the laboratory testing and investigative services with paramedical examinations. LabOne believes it will be successful in extending its relationship with life insurance companies by providing these additional services, which should strengthen its position in laboratory testing and improve its market share in the paramedical industry. Healthcare Services: Healthcare 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. Healthcare 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 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 PAGE 4 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, including Principal Healthcare of Kansas City, BlueCross BlueShield of Tennessee, BlueCross BlueShield of Kansas City and Kaiser Permanente of Kansas City. With these arrangements the Company contracts with the managed care organizations, and they direct all testing for their members through LabOne. Substance Abuse Testing Services: LabOne markets substance abuse testing to large employers, third party administrators and occupational health providers. Certification by the Substance Abuse and Mental Health Services Administration 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. During February 2000, LabOne announced the introduction of the Intercept (TM) drug testing service, a laboratory-based service that identifies commonly-used illicit drugs in oral fluid samples. The Intercept (TM) test menu is used to detect the NIDA-5 drug panel (THC, cocaine, opiates, PCP and amphetamines). It is the first laboratory-based oral fluid drug testing system to be made commercially available in North America. Under terms of the collaborative agreement between LabOne, STC Technologies, Inc. and Epitope, Inc., all three companies will play pivotal roles in the marketing of the new lab service. STC, the leader in oral fluid immunoassay technology, will provide reagents as well as marketing support. Epitope produces the Intercept (TM) collection device and provides sales support for the criminal justice market. Laboratory testing, result reporting, worksite sales and account management support will be provided by LabOne. (See TRENDS Section for further discussion.) PAGE 5 Segment Information - ------------------- The following table summarizes the Company's revenues from services provided to the insurance, healthcare and substance abuse testing markets (dollars in thousands): Year ended December 31, 1999 1998 1997 -------------- -------------- -------------- Insurance $ 77,687 65% $ 69,149 68% $ 61,998 79% Clinical 24,793 21% 18,600 18% 7,512 9% Substance Abuse 17,187 14% 14,478 14% 9,416 12% ------- ------ ------ $ 119,667 $ 102,227 $ 78,926 ======= ====== ====== (See Note 7 of Notes to Consolidated Financial Statements for operating income and identifiable assets by segment.) 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 oversee quality programs to ensure that accurate and reliable test results are released to clients. This is accomplished by incorporating both internal and external PAGE 6 quality improvement programs in each area of the laboratory. In addition, quality improvement 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 account setup to specimen arrival and through final billing. Approximately 500 sample kits are prepared and submitted anonymously each month. These samples have at least 15 different indicators each representing 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, the American Association of Bioanalysts and the Centers for Disease Control. Even though only a small portion of LabOne's business encompasses fee-for- service Medicare/Medicaid, LabOne has appointed a Chief Compliance Officer and 12 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 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 accredited by the College of American Pathologists and licensed under the Clinical Laboratory Improvement Amendments 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 the Substance Abuse and Mental Health Services Administration 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. The act 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 these regulations may be required as early as 2002. Sales and Marketing - ------------------- LabOne's client base consists of insurance companies in the United States and Canada and employers primarily in the United States. The Company believes that its ability to provide prompt and accurate results on a cost-effective PAGE 7 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 healthcare 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. 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 $110 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 insurance 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 2000. 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 Company has entered the market for paramedical examinations and specimen collections for insurance companies through its acquired subsidiary, ExamOne World Wide. This market is estimated to be in excess of a $400 million industry annually. Approximately 80% of this market is controlled by three companies, Hooper Holmes, Inc., Examination Management Services, Inc. and American Para Professional Systems. ExamOne World Wide currently serves approximately 7% of this market. The outpatient clinical laboratory testing market is a $20 billion industry which is highly fragmented and very competitive. The Company faces PAGE 8 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 with large groups and managed care entities to provide laboratory services. 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 66 laboratories that are certified by the Substance Abuse and Mental Health Services Administration. The Company's major competitors are the three major clinical chains, Laboratory Corporation of America, Quest Diagnostics and SmithKline Beecham Clinical Laboratories, which collectively constitute approximately two-thirds of the substance abuse testing market. The Company's focus is fast turnaround with high-quality, low-cost service, with a strategic position of offering the new oral fluid product with exclusivity in the pre- employment market. 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) 1999 1998 1997 ---- ----- ---- Sales: United States $112.5 $95.7 $72.4 Canada 7.2 6.5 6.6 Operating Profit: United States 7.9 11.1 (5.5) Canada 0.1 0.3 0.6 Identifiable Assets: United States 116.3 95.2 71.3 Canada 2.1 2.8 3.2 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. PAGE 9 Employees - --------- As of March 1, 2000, the Company had 1,162 employees, including 63 part-time employees, representing an increase of 267 employees from the same time in 1999. None of the Company's employees are represented by a labor union. The Company believes its relations with employees are good. ITEM 2. PROPERTIES The Company is located in Lenexa, Kansas, approximately 15 miles from Kansas City, Missouri. Its new 268,000 square foot, custom-designed 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 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 three facilities in Independence, Missouri under leases expiring in 2001 and 2003. ExamOne World Wide has a five year lease expiring in 2004 for a facility used as office space in Voorhees, New Jersey and leases a regional office location in Tampa, Florida. LabOne leases 10 locations in Northern California and 9 in the Midwest which serve as LabOne Service Centers. 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. ITEM 3. LITIGATION In the normal course of business, LabOne had certain lawsuits pending at December 31, 1999. 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 $0.6 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 Comptroller's administrative law judge's office. The Company believes its reserves are adequate to cover any potential resolution in this matter. In the opinion of management, after consultation with legal counsel and based upon currently available information, none of these lawsuits are expected to PAGE 10 have a material impact on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None 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 3,750 shareholders of record. The Company paid quarterly dividends of $0.20 per common share in 1998 and the first two quarters of 1999. The Company paid quarterly dividends of $0.18 per common share in the third and fourth quarter of 1999. The Board of Directors reviews the dividend policy on a periodic basis and has eliminated the quarterly dividend to retain cash flow to finance the Company's growth plans. Additionally, the Company's expanded line of credit with Commerce Bank, N.A. prohibits the payment of dividends under the terms of the line of credit. The following are the high and low prices of the stock for each quarter of 1999 and 1998 (split adjusted): 1999 1998 ---- ---- High Low High Low ---- --- ---- --- 1st Quarter $12.75 10.08 $16.33 14.42 2nd Quarter 11.33 7.88 16.17 13.58 3rd Quarter 11.00 8.25 15.67 10.17 4th Quarter 10.00 5.88 12.42 9.33 On April 1, 1999, LabOne issued a Warrant to Health Plan Services, Inc. ("HPS") to purchase up to 500,000 shares of Common Stock of LabOne, at a purchase price of $12.375 per share. The Warrant was issued in connection with an Agreement entered into between LabOne and HPS, which is a third party administrator. No cash consideration was received by LabOne for the issuance of the Warrant. The Warrant was issued for a term of five years and is exercisable by HPS in respect of the number of shares of Common Stock of LabOne indicated below for each calendar quarter during the term in which the quarterly revenues received by LabOne pursuant to the Agreement with HPS are within the ranges specified below: LabOne Quarterly Revenues Number of LabOne Shares Received under HPS Exercisable under the Agreement Warrant ---------------------------- ------------------------ $0.5 million - $1.5 million 5,000 $1.0 million - $1.5 million 10,000 $1.5 million - $2.5 million 15,000 $2.5 million - $2.5 million 20,000 Over $2.5 million 25,000 PAGE 11 On May 14, 1999, LabOne issued a Warrant to STC Technologies, Inc. ("STC") to purchase 50,000 shares of Common Stock of LabOne, at a purchase price of $0.01 per share. The Warrant was issued in connection with a Distribution Agreement entered into between LabOne and STC. Under the Distribution Agreement, STC Technologies appointed LabOne as its exclusive distributor in the North American workplace testing market for its new product line that is designed to identify illicit drug abuse through oral fluids rather than urine or blood samples. No cash consideration was received by LabOne for the issuance of the Warrant. The Warrant was issued for a term of two years and two months and is exercisable beginning one year after the date of issuance of the Warrant. On November 5, 1999, LabOne issued a Warrant to Mr. Larry Glenn to purchase up to 250,000 shares of Common Stock of LabOne, at a purchase price of $9.97 per share. The Warrant was issued in connection with a Stock Purchase Agreement entered into between LabOne and Mr. Glenn pursuant to which LabOne acquired from Mr. Glenn the outstanding stock of World Wide Health Services, Inc. ("WWHS") in consideration of (1) a purchase price of $2 million in cash, as adjusted by a post-closing audit, (2) the issuance of the Warrant, and (3) WWHS's purchase from Mr. Glenn of the outstanding stock of World Wide Health Services of New Jersey, Inc. ("WWNJ") for a purchase price of (a) $250,000 in cash (provided by a loan from LabOne to WWHS), as adjusted pursuant to a post- closing audit, (b) $200,000 to be paid to Mr. Glenn in five annual installments of $40,000 each and (c) 10% of the annual gross revenues of WWNJ to be paid to Mr. Glenn for each of the next six years. (See Note 2 of Notes to Consolidated Financial Statements.) The Warrant was issued for a term of five years and is exercisable by Mr. Glenn in respect of the number of shares of Common Stock of LabOne indicated below in the event that LabOne earns "qualified revenues" from WWHS, (as defined in the Warrant) as indicated below in any calendar quarter within three years after November 5, 1999: LabOne Quarterly Qualified Number of LabOne Shares Revenues Received under WWHS Exercisable Under Stock Purchase Agreement the Warrant ---------------------------- ----------------------- $3,750,000 or more 83,333 $5,000,000 or more 83,333 $6,250,000 or more 83,334 Alternatively, LabOne agreed to make cash payments to Mr. Glenn on November 5, 2004 of up to $1,000,000, depending upon the trading price of LabOne's Common Stock. The above three Warrants and shares of Common Stock of LabOne issuable upon such exercise of the Warrants were not registered under the Securities Act of 1933 in reliance upon the exemptions from the registration requirements provided by Section 4(2) of the Act and Rule 506 under Regulation D. HPS, STC and Mr. Glenn are believed to be "accredited investors" within the meaning of Regulation D. 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 PAGE 12 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, 1999, 1998, 1997, 1996 and 1995, and the statement of earnings data for each of the years in the five-year period ended December 31, 1999, 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) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Sales $119,667 102,227 78,923 59,432 57,029 Earning (loss) from continuing operations 2,589 4,877 (8,103) (4,226) (1,826) Loss from discontinued operations -- -- (2,343) (770) (5,522) ------- ------- ------- ------- ------- Net earnings (loss) $ 2,859 4,877 (10,446) (4,996) (7,348) ======= ======= ======= ======= ======= Diluted earnings (loss) from continuing operations per common share $ 0.27 0.50 (0.83) (0.43) (0.19) Diluted loss from discontinued operations per common share -- -- (0.24) (0.08) (0.57) -------- ------ ------ ------ ------- Diluted earning (loss) per common share $ 0.27 0.50 (1.07) (0.51) (0.76) ======== ====== ====== ====== ====== Dividends per common share $ 0.76 0.80 0.80 0.80 0.80 ======== ====== ====== ====== ====== Total assets $118,443 98,007 74,482 196,783 198,018 Long term debt 29,615 18 097 -- -- -- Stockholders' equity 71,029 54,539 56,439 174,024 187,084 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- On July 1, 1999, the Company announced a restatement of earnings for the years ended December 31, 1997 and 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 requested the amortization period be reduced to five years. The amortization expense of this asset was originally reported at $252,000 and $275,000 in 1997 and 1998, respectively, and has been restated to $757,000 and $826,000, respectively. This restatement is not the PAGE 13 result of any changes in customer relationships and has no effect on any present or future cash flows. 1999 Compared to 1998 Revenue for the year ended December 31, 1999 was $119.7 million as compared to $102.2 million in 1998. The increase of $17.4 million, or 17%, was due to increases in insurance services revenue of $8.5 million, healthcare revenue of $6.2 million and SAT revenue of $2.7 million. The insurance services segment revenue increased from $69.1 million in 1998 to $77.7 million due to an increase in non laboratory services, including revenue of $7.4 million from the October 1998 acquisition of SBSI and revenue of $3.3 million from the November 1999 acquisition of ExamOne World Wide, partially offset by a 4% decrease in insurance laboratory revenue. This decrease is due to a 3% decrease in total applicants tested and a 1% decrease in the average revenue per applicant. Healthcare laboratory revenue increased from $18.6 million during 1998 to $24.8 million in 1999 primarily due to a 36% increase in testing volumes. SAT revenue increased from $14.5 million in 1998 to $17.2 million in 1999 primarily due to a 26% increase in testing volumes, partially offset by lower revenue per specimen. Cost of sales increased $14.8 million, or 26%, for the year as compared to the prior year. This increase is primarily due to increases in payroll, paramedical collections and the cost of motor vehicle and physician statements due to the addition of SBSI and ExamOne World Wide. Insurance segment cost of sales expenses were $41.9 million as compared to $32.3 million during 1998. Healthcare cost of sales expenses were $17.1 million as compared to $14.5 million during 1998. SAT cost of sales expenses were $12.6 million as compared to $9.9 million during 1998. These increases in the healthcare and SAT segments are due primarily to increased testing volumes. As a result of the above factors, gross profit increased $2.6 million, or 6%, from $45.5 million in 1998 to $48.1 million in 1999. Healthcare gross profit improved $3.7 million, from $4.1 million in 1998 to $7.7 million in 1999. SAT gross profit stayed at $4.6 million. Insurance gross profit decreased $1.1 million, or 3%, to $35.8 million in 1999. Selling, general and administrative expenses increased $6.8 million, or 20%, in 1999 as compared to 1998 primarily due to increases in depreciation and amortization expenses, payroll expenses and bad debt accruals. Depreciation expense increased primarily due to placing the Company's new facility in service during 1999, and amortization expense increased primarily due to merger goodwill. Payroll expenses increased 9% for the year due to a 29% increase in selling, general and administrative employees at year end as compared to last year. Bad debt expense increased primarily due to the revenue growth in the healthcare and SAT segments which also have higher bad debt experience than the insurance segment. Healthcare overhead was $12.2 million as compared to $10.3 million in 1998. SAT overhead increased from $4.3 million in 1998 to $5.4 million in 1999. These increases are due to the growth in each segment. The allocation of corporate overhead to the healthcare and SAT segments increased to $6.4 million for the year, as compared to $5.3 million in 1998, due to the increased share of total revenue for those segments. Insurance overhead expenditures increased to $20.3 million as compared to $16.8 million in 1998 primarily due to the addition of SBSI. Operating income including overhead allocations decreased from $11.4 million in 1998 to $8.0 million in 1999. The insurance services segment had operating PAGE 14 income of $15.5 million as compared to $18.6 million in 1998. The healthcare segment experienced an operating loss of $4.5 million for 1999 as compared to an operating loss of $6.2 million in 1998. The SAT segment had an operating loss of $0.8 million in 1999 as compared to a gain of $0.2 million in 1998. Unallocated operating expenses for the year were $2.2 million related to corporate and merger expenses, partially offset by gains on the sale of the former laboratory and administrative facilities. Unallocated operating expenses in 1998 were $2.7 million. Non operating expense increased $1.8 million in 1999 as compared to 1998, primarily due to interest expense on the industrial revenue bonds and lower investment income due to less funds available for investment. Average income tax expense was 48.1% of pretax income in 1999 as compared to 46.2% in 1998. The increase is due to an increase in amortization expenses incurred from the Lab Holdings merger which are not deductible for tax purposes. The combined effect of the above factors resulted in net earnings of $2.9 million, or $0.27 per share, in 1999 as compared to $4.9 million, or $0.50 per share, in 1998. 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 healthcare laboratory revenue of $11.1 million, insurance services revenue of $7.2 million and SAT revenue of $5.1 million. Healthcare 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. Healthcare 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. Healthcare 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 by $2.2 million to $4.5 million in 1998. Selling, general and administrative expenses decreased $1.2 million, or 3%, in 1998 as compared to 1997 primarily due to $4.6 million lower corporate expense at the Lab Holdings level due to the distribution of SLH Corporation and Response Oncology ownership to shareholders (see Note 10 to Notes to Consolidated Financial Statements), partially offset by $3.4 million increase in LabOne SGA due to increases in payroll expenses and bad debt accruals. Bad PAGE 15 debt expense increased primarily due to the revenue growth in the healthcare and SAT segments which also have higher bad debt experience. Healthcare overhead was $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 were due to the growth in each segment and increased overhead allocations due to the increased share of total revenue for those segments. The allocation of corporate overhead to the healthcare and SAT segments increased to $5.3 million for the year, as compared to $3.3 million in 1997. Insurance overhead expenditures decreased to $16.8 million as compared to $17.3 million in 1997 (see Note 7 to Notes to Consolidated Financial Statements). 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 a loss of $4.9 million in 1997 to a gain of $11.4 million in 1998. The insurance services segment operating income increased $2.1 million to $18.6 million in 1998. The healthcare segment had an operating loss of $6.2 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 $4.0 million in 1998 as compared to 1997, primarily due to a Lab Holdings gain in 1997 of $3 million on the sale of marketable common stock and lower investment income in 1998 due to less funds available to invest. Average income tax expense was 46% of pretax income in 1998, primarily reflecting nondeductibility of goodwill amortization. Tax expense in 1997 was based on the write-off of approximately $5 million of deferred income tax assets related to assets spun-off in the SLH distribution and the write-off 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 $4.9 million in 1998 as compared to a $8.1 million loss from continuing operations 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, SAT and healthcare laboratory testing industries, it is difficult to quantify with any degree of certainty LabOne's future volumes, sales or net earnings. Amortization of goodwill during 1999, including amortization from the Lab Holdings merger starting in August and amortization from the acquisition of ExamOne World Wide starting in November, was $3.2 million. Amortization of goodwill in the future, excluding any adjustments or future goodwill from additional acquisitions, is scheduled to be $4.1 million in 2000 and 2001, $3.4 million in 2002, $2.1 million in 2003 and $1.6 million in 2004. The majority of the amortization expense is not deductible for tax purposes and has the effect of increasing the average income tax rate. The insurance laboratory testing industry continues to be highly competitive. PAGE 16 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 2000 due to competitive pressures. This trend may have a material impact on earnings from operations. Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc. and World Wide Health Services of New Jersey, a provider of specimen collection and paramedical examination services to life and health insurers. These subsidiaries are operated under the name ExamOne World Wide and included in the insurance services division of LabOne. This addition allows LabOne to expand the services it offers to its insurance industry clients. Prior to its acquisition by LabOne, ExamOne World Wide had annual revenues of approximately $9 million. In the first two months of 2000, ExamOne World Wide has billed revenue of approximately $4 million. The paramedical industry is a low gross margin industry. A substantial percentage of the revenue from a specimen collection is paid back to the contracted phlebotomist or physician. As the revenue from ExamOne World Wide grows as a percentage of total LabOne revenue, its lower gross margins will add to the total profitability of LabOne but will reduce the average gross profit margin percentage. In the healthcare division, the Company continued its trend of growth led by its Lab Card Program. The Lab Card Program now has more than 1.7 million members. In 1999, the program continued to expand through new members as well as increased participation from existing members. The healthcare division also signed exclusive outpatient laboratory service contracts with Blue Cross and Blue Shield of Kansas City and Kaiser Permanente of Kansas City in early 2000. With the addition of these managed care organizations, LabOne has over 750,000 lives in its managed care programs. Managed care organizations and the physicians who are under their contracts continue to choose LabOne for its high-quality testing, disease management data capabilities, and responsive customer service and support. In addition to its urine drug testing, the SAT division of LabOne has introduced the Intercept (TM) drug testing service, a laboratory-based service that identifies commonly used illicit drugs in oral fluid samples. The oral fluid collection avoids the process of collecting and handling of urine samples which has been criticized for being invasive, demeaning and expensive. The collection with the Intercept device is directly observable and efficient. LabOne will market this new service to employers nationwide starting in 2000. 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 is expected to lower LabOne's average income tax rate for the duration of the credit. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- LabOne's working capital position declined from $31.3 million at December 31, 1998, to $19.4 million at December 31, 1999. This decrease is primarily due to cash used in the merger with Lab Holdings, dividends paid, capital additions and debt payments exceeding cash provided by operations and line of credit borrowings. Net cash provided by operations increased from $10.3 PAGE 17 million in 1998 to $12.0 million in 1999. Accounts receivable grew from $18.7 million as of December 31, 1998 to $26.3 million as of December 31, 1999, due primarily to an increase in revenue growth from all three segments. Total cash and investments at December 31, 1999, were $3.0 million, as compared to $15.2 million at December 31, 1998. Management expects to be able to fund operations from a combination of cash flow from operations, cash reserves and short-term borrowings. During 1999, LabOne paid dividends of $0.20 per common share (split adjusted) in the first and second quarter. The Company paid dividends of $0.18 per common share in the third and fourth quarter. The total amount of dividends paid during 1999 was $0.76 per share, or $9.0 million. During the first quarter 2000, the Board of Directors decided to eliminate the quarterly dividend to retain cash flow to finance the Company's growth plans and for other corporate purposes. During 1999, the Company spent $12.8 million for capital investments, as compared to $28.5 million in 1998 and $11.5 million in 1997. Of the amount spent in 1999, $5.2 million was spent on completion of the Company's new facility and $2.1 million was spent on the purchase of ExamOne World Wide. Of the amount spent in 1998, approximately $21.6 million was for construction the Company's new facility, and $3.0 million 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. As of April 1999, the new facility was completely operational. Future capital asset expenditures, excluding strategic expansions, are expected to be approximately $5 million annually. On August 10, 1999, the former LabOne, Inc. was merged into its parent corporation, Lab Holdings, Inc. upon the approval of the shareholders of both companies at their respective annual meetings. The combined company's name was then changed to LabOne, Inc. The merger provisions included a 3 for 2 stock split for all Lab Holdings common shares, the par value of the common shares was changed from $1.00 per share to $0.01 per share, and the authorized number of common shares was increased to 40 million. The Company paid $12.6 million, including transaction costs, to complete the merger and purchase 0.8 million shares of LabOne stock. The minority 2.6 million shares of former LabOne stock were exchanged on a one for one basis for the combined company stock. The transaction was recorded under purchase accounting and resulted in $24.1 million in goodwill which is being amortized over 20 years. 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 6.6% as of March 1, 2000. The bonds mature over 11 years in increments of $1.85 million per year plus interest. The first principal payment of $1.85 million was paid in September 1999. The Company spent $10.3 million in the third quarter 1999 to fund cash elections from the merger. Interest on the line of credit is currently based on the 30 day LIBOR rate plus 75 basis points and is currently approximately 6.6%. During the first quarter 2000, the Board of Directors approved a stock repurchase program pursuant to which LabOne is authorized to repurchase up to $10 million of its common stock. The Company has arranged for an increase in its available line of credit from $15 million to $25 million to accommodate stock repurchases. The timing of purchases and the actual number of shares purchased will depend upon market conditions. PAGE 18 ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A foreign currency risk exposure exists due to billing Canadian subsidiary revenue in Canadian dollars and the direct laboratory expenses associated with this revenue being incurred in US dollars. This exposure is not considered to be material. Any future material Canadian currency fluctuations against the US$ 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 $18 million in industrial revenue bonds and $12 million borrowing on its line of credit. The interest expense incurred on the bonds is based on a taxable seven day variable rate, which including letter of credit and remarketing fees, is approximately 6.6% as of March 1, 2000. The interest expense on the line of credit is based on the 30 day LIBOR rate plus three quarters of one percent and is currently approximately 6.6%. 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 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the captions entitled "Information Concerning Nominees for Election as Directors," "Security Ownership of Management," "Security Ownership of Certain Beneficial Owners," and "Executive Compensation" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A with respect to its annual meeting of stockholders to be held May 11, 2000, is incorporated into Items 10, 11, 12 and 13 above by reference. PAGE 19 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, 1999 and 1998 Consolidated Statements of Operations, Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 1997 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 January 6, 2000 was filed with the Commission reporting under Other Events that Robert D. Thompson, executive vice president, chief operating officer and chief financial officer had resigned from the company. A Form 8-K current report dated February 11, 2000 was filed with the Commission reporting under Other Events the Company's adoption of a shareholder rights plan and a dividend distribution of one Right for each outstanding share of Common Stock of the Company. The rights plan replaces and modernizes a shareholder rights plan which was adopted by the Company in 1988 and expired in 1998. A Form 8-K current report dated March 2, 2000 was filed with the Commission reporting under Other Events that John McCarty had been hired as executive vice president and chief financial officer effective April 1, 2000. (c) Exhibits required by Item 601 of Regulation S-K (Exhibits follow the Schedule): Page 2.1* Distribution Agreement, dated December 20, 1996, between the Registrant and SLH Corporation - attached as Exhibit 2(a) to SLH Corporation's Form 10/A (Amendment No. 1) dated February 4, 1997 (File No. 0-21911). 2.2* Blanket Assignment, Bill of Sale, Deed and Assumption Agreement, dated as of February 28, 1997, between the Registrant and SLH Corporation - attached as Exhibit 2(b) to SLH Corporation's Form 10/A (Amendment No. 1) dated February 4, 1997 (File No. 0-21911). PAGE 20 Page 2.3* Agreement and Plan of Merger by and between Lab Holdings, Inc. and LabOne, Inc., dated March 7, 1999 - attached as Appendix A to the Joint Proxy Statement/Prospectus filed as a part of the Registrant's Registration Statement on Form S-4, filed July 2, 1999 (File No. 333-76131). 3.1* Amended Articles of Incorporation - attached as Exhibit B to Appendix A to the Joint Proxy Statement/Prospectus filed as a part of the Registrant's Registration Statement on Form S-4, filed July 2, 1999 (File No. 333-76131). 3.2 Certificate of Designations, Preferences, Qualifications 50 and Rights of Series A Preferred Stock, dated February 11, 2000 3.3* Amended and Restated Bylaws - attached as Exhibit C to Appendix A to the Joint Proxy Statement/Prospectus filed as a part of the Registrant's Registration Statement on Form S-4, filed July 2, 1999 (File No. 333-76131) 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 Quarterly Report on Form 10-Q of LabOne, Inc., a Delaware corporation, for the quarter ended September 30, 1998 (File No. 0-15975). 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 Quarterly Report on Form 10-Q of LabOne, Inc., a Delaware corporation, for the quarter ended September 30, 1998 (File No. 0-15975). 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 Quarterly Report on Form 10-Q of LabOne, Inc., a Delaware corporation, for the quarter ended September 30, 1998 (File No. 0-15975). 4.4* Letter agreement dated September 4, 1998, between the Registrant and Commerce Bank, N.A. relating to the Registrant's obligations with respect to the Reimbursement Agreement and letters of credit to be issued thereunder - attached as Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 4.5* Warrant to Purchase Shares of Common Stock of LabOne, Inc., issued to USA Managed Care Organization - attached as Exhibit 4.5 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1998 (File No. 0-15975). PAGE 21 Page 4.6* Warrant to Purchase Shares of Common Stock of LabOne, Inc., issued to Health Plan Services, Inc., dated April 1, 1999 - attached as Exhibit 10.19 to the Registrant's Registration Statement on Form S-4, filed July 2, 1999 (File No. 333- 76131). 4.7* Warrant to Purchase Shares of Common Stock of LabOne, Inc., issued to STC Technologies, Inc., dated April 27, 1999 - attached as Exhibit 10.18 to the Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S- 4, filed July 2, 1999 (File No. 333-76131). 4.8 Warrant to Purchase Shares of Common Stock of LabOne, Inc., 55 issued to Larry Glenn, dated November 5, 1999.55 4.9* Rights Agreement and attached exhibits A, B and C, dated as of February 11, 2000, between the Registrant and American Stock Transfer & Trust Company, - attached as Exhibit 4.1 to the Registrant's Form 8-K Current Report, filed February 14, 2000. 10.1* Registrant's 1997 Directors' Stock Option Plan, as amended - attached as Exhibit 10.4 to the Registrant's Form 10-Q for the quarter ended September 30, 1998. ** 10.2* Form of Option Agreement with Directors under the Directors' Stock Option Plan, as amended - attached as Exhibit 10.5 to the Registrant's Form 10-Q for the quarter ended September 30, 1998. ** 10.3* 1987 Long-Term Incentive Plan of LabOne, Inc., approved May 16, 1991, with amendments adopted May 21, 1993 and November 9, 1993 - attached as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.** 10.4* Amendment to 1987 Long-Term Incentive Plan of LabOne, Inc., effective February 10, 1995 - attached as Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for year ended December 31, 1995. ** 10.5* Amendment to 1987 Long-Term Incentive Plan of LabOne, Inc., effective May 9, 1997 - attached as Exhibit 10.5 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1997 (File No. 0-15975). ** 10.6* 1997 Long Term Incentive Plan of LabOne, Inc. - attached as Exhibit 10.1 to the Quarterly Report on Form 10-Q of LabOne, Inc., a Delaware corporation, for the quarter ended June 30, 1998 (File No. 0-15975). ** 10.7* Form of Stock Option Agreement pursuant to the LabOne 1997 Long-Term Incentive Plan - attached as Exhibit 10.2 to the Quarterly Report on Form 10-Q of LabOne, Inc., a Delaware corporation, for the quarter ended June 30, 1998 (File No. 0-15975). ** PAGE 22 Page 10.8* Stock Plan for nonemployee directors of LabOne, Inc.- attached as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. *** 10.9 Registrant's Annual Incentive Plan. ** 63 10.10 Form of Amended and Restated Indemnification Agreement between the Registrant and its directors. 64 10.11* Form of Employment Agreement between LabOne, Inc. and its executive officers and certain key employees - attached as Exhibit 10 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1987 (File No. 0-15975). ** 10.12* Amended Employment Agreement between LabOne, Inc. and Robert D. Thompson- attached as Exhibit 10.11 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1995 (File No. 0-15975). ** 10.13* Employment Agreement between LabOne, Inc. and Gregg R. Sadler - attached as Exhibit 10.14 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1993 (File No. 0-15975). ** 10.14* Amendment to Employment Agreement between LabOne, Inc. and Gregg R. Sadler- attached as Exhibit 10.13 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1995 (File No. 0-15975). ** 10.15* Employment Agreement between LabOne, Inc. and Thomas J. Hespe- attached as Exhibit 10.14 to the Annual Report on Form 10-K of LabOne, Inc., a Delaware corporation, for the year ended December 31, 1995 (File No. 0-15975). ** 10.16* Tax Sharing Agreement, dated as of February 28, 1997, between the Registrant and SLH Corporation - attached as Exhibit 10(b) to SLH Corporation's Registration Statement on Form 10/A (Amendment No. 1) filed February 4, 1997 (File No. 0-21911). 11. Statement regarding computation of per share earnings - see Note 1 of Notes to Consolidated Financial Statements, "Earnings Per Share." 21. Subsidiaries of Registrant - see Note 1 of Notes to Consolidated Financial Statements, "Principles of Consolidation and Basis of Presentation." 24. Powers of Attorney. 75 27. Financial Data Schedule - as submitted electronically by the Registrant in conjunction with this 1999 Form 10-K. PAGE 23 Page 99. Cautionary Statement under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. 76 * 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 24 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Registrant has duly caused this report, as amended to be signed on its behalf by the undersigned, thereunto duly authorized. LabOne, Inc. By: /s/ W. Thomas Grant II By: /s/ Kurt E. Gruenbacher ---------------------- ----------------------- W. Thomas Grant II Kurt E. Gruenbacher Title: Chairman, President Title: V.P. Finance, Chief Executive Officer CAO and Treasurer Date: March 23, 2000 Date: March 23, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report, as amended has been signed below by the following persons on behalf of the Registrant on March 23, 2000 in the capacities indicated. By: /s/ W. Thomas Grant II By: /s/ Kurt E. Gruenbacher ---------------------- ----------------------- W. Thomas Grant II Kurt E. Gruenbacher Title: Chairman of the Board, President Title: V.P. Finance, CAO And Chief Executive Officer and Treasurer By: */s/ Joseph H. Brewer By */s/ Peter C. Brown --------------------- ------------------- Joseph H. Brewer Peter C. Brown Title: Director 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/ Janet M. Stallmeyer By: */s/ Chester B. Vanatta ------------------------ ----------------------- Janet M. Stallmeyer Chester B. Vanatta 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 Title: Attorney-in-fact PAGE 25 LABONE, INC. AND SUBSIDIARIES Consolidated Financial Statements and Schedule December 31, 1999, 1998 and 1997 (With Independent Auditors' Report Thereon) LABONE, INC. AND SUBSIDIARIES PAGE 26 Table of Contents Independent Auditors' Report 28 Consolidated Financial Statements: Consolidated Balance Sheets, December 31, 1999 and 1998 29 Consolidated Statements of Operations, Years ended December 31, 1999, 1998 and 1997 31 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1999, 1998 and 1997 32 Consolidated Statements of Cash Flows, Years ended December 31, 1999, 1998 and 1997 33 Notes to Consolidated Financial Statements 35 Schedule: Schedule II - Valuation and Qualifying Accounts 49 PAGE 27 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, 1999 and 1998 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, 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 February 4, 2000 except as to Note 3, which is as of March 9, 2000 PAGE 28 LABONE, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998 Assets 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents $ 2,983,644 15,223,336 Accounts receivable, net of allowance for doubtful accounts of $1,981,285 in 1999 and $2,326,716 in 1998 26,331,960 18,729,939 Income taxes receivable 1,643,520 399,776 Inventories 3,186,853 1,798,481 Real estate available-for-sale (note 1) -- 3,515,000 Prepaid expenses and other current assets 1,772,884 2,752,732 Deferred income taxes (note 4) 1,328,027 3,972,575 ----------- ----------- Total current assets 37,246,888 46,391,839 ----------- ----------- Property, plant, and equipment: Land 2,380,654 2,379,334 Building 28,441,638 -- Laboratory equipment 20,387,176 18,101,286 Data processing equipment and software 19,932,302 18,882,559 Office and transportation equipment 8,224,223 5,787,762 Leasehold improvements 240,244 700,842 Construction in progress 1,304,649 27,067,631 ----------- ----------- 80,910,886 72,919,414 Less accumulated depreciation 38,106,948 35,983,169 ----------- ----------- Net property, plant, and equipment 42,803,938 36,936,245 ----------- ----------- Other assets: Intangible assets, net of accumulated amortization (note 2) 37,868,921 13,770,280 Bond issue costs, net 168,856 186,324 Deferred income taxes - noncurrent (note 4) 93,326 484,621 Deposits and miscellaneous 260,795 237,864 ----------- ----------- Total assets $ 118,442,724 98,007,173 =========== =========== (Continued) See accompanying notes to consolidated financial statements. PAGE 29 LABONE, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued December 31, 1999 and 1998 Liabilities and Stockholders' Equity 1999 1998 ------------ ------------ Current liabilities: Accounts payable $11,852,403 4,392,689 Retainage and construction accounts payable -- 3,809,193 Accrued payroll and benefits 2,793,721 4,148,593 Other accrued expenses 727,241 610,315 Other current liabilities 551,146 274,198 Current portion of long-term debt (note 3) 1,873,577 1,860,168 ----------- ----------- Total current liabilities 17,798,088 15,095,156 Long-term payable (note 2) 1,360,000 -- Long-term debt (note 3) 28,255,139 18,097,308 ----------- ----------- Total liabilities 47,413,227 33,192,464 ----------- ----------- Minority interest (note 2) -- 10,275,611 ----------- ----------- Stockholders' equity (note 2): Preferred stock, $0.01 par value per share; 3,000,000 shares authorized, none issued -- -- Common stock, $0.67 par value per share; 36,000,000 shares authorized, 11,250,000 shares issued -- 7,500,000 Common stock, $0.01 par value per share; 40,000,000 shares authorized, 13,050,020 shares issued 130,500 -- Additional paid-in capital 32,035,445 2,920,357 Accumulated other comprehensive income (750,115) (683,270) Retained earnings 69,758,872 74,945,615 ----------- ----------- 101,174,702 84,682,702 Less treasury stock of 1,516,527 shares in 1999 and 1,516,345 shares in 1998, at cost 30,145,205 30,143,604 ----------- ----------- Total stockholders' equity 71,029,497 54,539,098 ----------- ----------- Total liabilities and stockholders' equity $ 118,442,724 98,007,173 =========== =========== See accompanying notes to consolidated financial statements. PAGE 30 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 ----------- ---------- ---------- Sales $ 119,666,534 102,227,216 78,926,119 Cost of sales 71,543,532 56,719,603 42,017,179 ----------- ---------- ---------- Gross profit 48,123,002 45,507,613 36,908,940 Selling, general, and administrative expenses 40,942,628 34,100,884 35,269,668 Provision for loss on disposal (gain on sale) of assets (864,340) -- 6,553,279 ----------- ---------- ---------- Earnings (loss) from operations 8,044,714 11,406,729 (4,914,007) ----------- ---------- ---------- Other income (expenses): Investment income 370,262 861,359 4,670,529 Interest expense (1,410,009) (70,335) -- Other, net (24,118) (42,118) 66,769 ----------- ---------- ---------- Total other income (expenses), net (1,063,865) 748,906 4,737,298 ----------- ---------- ---------- Earnings (loss) before income taxes 6,980,849 12,155,635 (176,709) ----------- ---------- ---------- Income taxes (benefit) (note 4): Current 849,758 5,823,543 (428,828) Deferred 2,505,940 (203,496) 8,006,107 ----------- ---------- ---------- Total income taxes 3,355,698 5,620,047 7,577,279 ----------- ---------- ---------- Earning(loss) before minority interest 3,625,151 6,535,588 (7,753,988) Minority interest 766,375 1,658,308 349,466 ----------- ---------- ---------- Earnings (loss) before discontinued operations 2,858,776 4,877,280 (8,103,454) Loss from discontinued health care operations -- -- (2,342,286) ----------- ---------- ---------- Net earning (loss) $ 2,858,776 4,877,280 (10,445,740) =========== ========== ========== Basic and diluted earning (loss) per share: Earning (loss) from continuing operations 0.27 0.50 (0.83) Loss from discontinued health care operations -- -- (0.24) =========== ========== ========== Net earnings (loss) per share $ 0.27 0.50 (1.07) =========== ========== ========== See accompanying notes to consolidated financial statements. PAGE 31 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1999, 1998 and 1997 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, 1996 $7,500,000 1,748,501 (439,240) 195,328,610 (30,113,649) 174,024,222 Comprehensive income: Net loss -- -- -- (10,445,740) -- (10,445,740) (10,445,740) Adjustment from foreign currency translation -- -- (104,972) -- -- (104,972) (104,972) ---------- Comprehensive loss (10,550,712) ========== Cash dividends ($.80 per share) -- -- -- (7,786,923) -- (7,786,923) SLH Corporation spin-off -- -- -- (47,963,199) -- (47,963,199) Response Oncology, Inc. distribution -- -- -- (51,277,489) -- (51,277,489) Exercise of stock options -- 23,123 -- (29,955) (6,832) --------- ---------- --------- ---------- ----------- ------------ Balance at December 31, 1997 7,500,000 1,771,624 (544,212) 77,855,259 (30,143,604) 56,439,067 Comprehensive income: Net earnings -- -- -- 4,877,280 -- 4,877,280 4,877,280 Adjustment from foreign currency translation -- -- (139,058) -- -- (139,058) (139,058) ----------- Comprehensive income 4,738,222 =========== Cash dividends ($.80 per share) -- -- -- (7,786,924) -- (7,786,924) Issuance of 168,885 shares of treasury stock related to acquisition -- 1,148,733 -- -- -- 1,148,733 --------- --------- --------- ---------- ----------- ----------- Balance at December 31, 1998 7,500,000 2,920,357 (683,270) 74,945,615 (30,143,604) 54,539,098 Comprehensive income: Net earnings -- -- -- 2,858,776 -- 2,858,776 2,858,776 Adjustment from foreign currency translation -- -- (66,845) -- -- (66,845) (66,845) ----------- Comprehensive income 2,791,931 =========== Cash dividends ($.76 per share) -- -- -- (8,045,519) -- (8,045,519) Stock split and change in par value (7,369,500) 7,369,500 -- -- -- -- Merger transaction -- 21,745,588 -- -- -- 21,745,588 Purchase of 182 shares of Common stock for treasury -- -- -- -- (1,601) (1,601) --------- ---------- --------- ---------- ----------- ------------ Balance at December 31, 1999 $ 130,500 32,035,445 (750,115) 69,758,872 (30,145,205) 71,029,497 ========= ========== ========= ========== =========== ============
See accompanying notes to consolidated financial statements. PAGE 32 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---------- --------- --------- Cash provided by (used for) operations: Net earnings (loss) $ 2,858,776 4,877,280 (8,103,454) Adjustments to reconcile net earnings(loss)to net cash provided by (used in) operations, net of acquisitions and divestitures: Depreciation and intangibles amortization 8,518,958 6,191,577 6,781,800 Amortization of investment premiums -- (36,767) (251,233) Deferred income taxes 3,040,662 (315,215) 4,173,744 Gain on disposal of property, plant, and equipment (874,305) (18,606) (120,087) Provision for loss on disposal of assets -- -- 6,553,279 Provision for loss on accounts receivable 2,877,949 1,502,571 571,192 Earnings applicable to minority interest 766,375 1,658,308 349,466 Directors' stock compensation (20,317) 62,620 66,834 Changes in: Short-term investments -- 1,443,254 2,645,080 Accounts receivable (8,160,453) (6,774,958) (3,551,006) Income tax receivable (1,243,744) 1,111,284 617,904 Inventories (1,363,041) 404,990 (755,422) Prepaid expenses and other current assets 979,848 (269,709) (421,839) Accounts payable 5,499,704 892,401 (18,024) Income taxes payable (45,249) -- -- Accrued payroll and benefits (1,354,872) (619,281) 1,727,669 Other accrued expenses 69,998 186,919 (214,624) Other current liabilities 196,948 (28,793) (1,533,334) ---------- --------- --------- Net cash provided by continuing operations 11,747,237 10,267,875 8,517,945 Net cash used by discontinued operations -- -- (424,835) ---------- --------- --------- Net cash provided by operations 11,747,237 10,267,875 8,093,110 ---------- --------- --------- Cash provided by (used for) investment activities: Sales of investments available-for-sale -- -- 1,350,000 Purchase of investments held-to-maturity -- (5,461,090) (15,893,902) Proceeds from maturities of investments held-to-maturity -- 6,701,893 18,155,062 Property, plant, and equipment additions, net (10,521,118) (25,489,014) (6,683,292) Acquisition of businesses (note 2) (2,058,460) (2,967,883) (4,815,889) Acquisition of minority interest (note 2) (12,640,443) -- -- Deposits and miscellaneous 6,280 (1,710,496) (3,948,558) ---------- --------- --------- Net cash used for investment activities (25,213,741) (28,926,590) (11,836,579) ---------- ---------- ---------- Cash provided by (used for) financing activities: Issuance of treasury stock, net of proceeds from exercise of stock options -- -- (6,832) Purchase of treasury stock (1,601) -- -- Proceeds from bond issue/line of credit 12,000,000 19,900,000 -- Bond issue costs -- (192,147) -- Cash dividends to minority interest (935,730) -- -- Payments on long-term debt (1,864,006) (1,937) -- Cash portion of SLH Corporation dividend -- -- (19,590,476) Cash dividends (8,045,519) (7,786,924) (7,786,923) ---------- --------- --------- Net cash provided by (used for) financing activities 1,153,144 11,918,992 (27,384,231) ---------- --------- --------- (Continued) PAGE 33 LABONE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---------- --------- --------- Effect of foreign currency translation on cash 73,668 (165,965) (71,544) ---------- --------- --------- Net decrease in cash and cash equivalents (12,239,692) (6,905,688) (31,199,244) Cash and cash equivalents at beginning of year 15,223,336 22,129,024 53,328,268 ---------- --------- --------- Cash and cash equivalents at end of year $ 2,983,644 15,223,336 22,129,024 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 2,279,366 5,450,841 2,675,182 ========== ========== ========== Interest $ 1,377,621 240,586 934,000 ========== ========== ========== Supplemental schedule of noncash investing and financing activities for the years ended December 31, 1999 and 1998: Fair value of assets acquired-acquisition $ 5,796,621 6,223,162 Fair value of assets acquired-merger 34,259,789 -- Liabilities assumed-acquisition (2,078,342) (645,198) Note payable issued-acquisition (1,440,000) -- Common stock issued-merger (19,278,214) -- Common stock issued-acquisition -- (2,000,000) Fair value of stock options and warrants-merger (2,341,132) -- ---------- --------- Cash paid 14,918,722 3,577,964 Less cash acquired 219,819 610,081 ---------- --------- Net cash paid for acquisition of businesses $ 14,698,903 2,967,883 ========== =========
See accompanying notes to consolidated financial statements. PAGE 34 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (1) Summary of Significant Accounting Policies - ----------------------------------------------- Principles of Consolidation and Basis of Presentation On August 10, 1999, LabOne, Inc. was merged into Lab Holdings, Inc. (Lab Holdings), its parent. The combined company's name was then changed to LabOne, Inc. (see note 2). The accompanying consolidated financial statements include the accounts of LabOne, Inc. (LabOne or the Company) and its wholly owned subsidiaries: LabOne Canada Inc.; Systematic Business Services, Inc.; and ExamOne World Wide (and its wholly owned subsidiary, ExamOne World Wide of New Jersey, Inc.). All significant intercompany transactions have been eliminated in consolidation. 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, laboratory supplies, 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 PAGE 35 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 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. Intangible Assets Intangible assets are recorded at their acquisition cost, net of amortization. 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. In July of 1999, the Company changed its amortization of acquired customer lists from fifteen years to five years based upon an SEC request. The effect of this change was an increase in amortization expense from $252,000 and $275,000 to $757,000 and $826,000 in 1997 and 1998, respectively. 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, was classified as real estate available-for-sale at December 31, 1998. 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. In 1999, the Company sold all real estate available-for-sale for $4,379,340 and recognized a gain of $864,340. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of consolidated 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 consolidated 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, 1999 and 1998 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 PAGE 36 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 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. Earnings Per Share Basic earnings per share are computed using the weighted average number of common shares and diluted earnings per share are 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: 1999 1998 1997 ---------- ---------- ---------- Weighted average common shares (basic) 10,443,728 9,733,655 9,732,965 Employee stock options 7,704 -- -- ---------- ---------- ---------- Weighted average common shares and common shares equivalents (diluted) 10,451,432 9,733,655 9,732,965 ========== ========== ========== New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. This statement will not have a significant impact on the Company's financial position or results of operations. (2) Merger, Acquisitions, and Intangible Assets - ------------------------------------------------ The cost and accumulated amortization of intangible assets at December 31, 1999 and 1998 are as follows: 1999 1998 ---------- ---------- Excess of cost over fair value of net assets acquired 58,383,300 31,059,008 Accumulated amortization 20,514,409 17,288,729 ---------- ---------- Intangible assets, net of accumulated amortization $ 37,868,921 13,770,280 ========== ========== On August 10, 1999, LabOne, Inc. was merged into Lab Holdings, its parent, upon the approval of the required number of shareholders of both companies at their respective annual meetings. The combined company's name was then PAGE 37 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 changed to LabOne, Inc. The merger provisions included a 3-for-2 stock split for all Lab Holdings shares. LabOne shares which did not elect the cash option were exchanged for combined company shares on a 1-for-1 basis. The Company paid $10,264,000 in cash for 805,000 shares of LabOne common stock which were exchanged for cash of $12.75 per share. Also, the Company paid $2,318,000 in related transaction costs. The transaction was accounted for as the acquisition of minority interest under the purchase method. The result of the merger was approximately $24,124,000 of goodwill which is being amortized over a twenty-year period and the elimination of minority interest. On November 5, 1999, LabOne acquired a paramed services company and a paramed billing service provider. The paramed services company was acquired for $279,000 and cash installments of $40,000 each year beginning in 2000 for five years and 10% of gross revenue for the next six years. The minimum payments under the gross revenue agreement provision are estimated to be $240,000. The current portion of the cash installments and the gross revenue percentage payments is recorded in other current liabilities with the remainder of the minimum purchase price recorded as a long-term payable. The excess of the aggregate minimum purchase price over the fair market value of net assets acquired of approximately $469,000 is being amortized over fifteen years. The paramed billing service provider was acquired for $1,912,000 in cash and a stock warrant purchase agreement. In the agreement, the former owner of the paramed billing service provider may receive up to 250,000 common shares if specified revenue targets are achieved. Alternatively, the Company may be obligated to make cash payments of up to $1,000,000 depending on the Company's stock price. The Company believes it is likely the cash payment will be required and has, therefore, reported the $1,000,000 cash payment as a component of the purchase price. The excess of the aggregate purchase price over the fair market value of net assets acquired of approximately $2,731,000 is being amortized over fifteen years. Effective October 30, 1998, LabOne acquired a provider of information support services to insurance underwriters for approximately $5.7 million. The purchase was comprised of $3.7 million of cash and the issuance of 168,885 shares of LabOne common 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 acquired company achieves certain levels of earnings in 2000. The excess of the aggregate purchase price over the fair market value of net assets acquired of approximately $3,989,000 is being amortized over twenty years. The above acquisitions have been accounted for under the purchase method and, accordingly, the operating results of the acquired companies have been included in the consolidated statements of operations from the dates of acquisition. Contingent consideration will be recorded when earned and will increase goodwill. The following unaudited pro forma consolidated results of operations of the Company for the years ended December 31, 1999 and 1998 assumes the acquisitions occurred as of January 1, 1998: PAGE 38 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 1999 1998 ----------- ----------- Sales $ 128,581,000 118,278,000 Net earning 2,598,000 4,198,000 Earnings per share- basic and diluted 0.25 0.43 =========== =========== 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. Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America (Prudential), 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 $4,128,000 and is being amortized over five years. (3) Long-term Debt - ------------------- Long-term debt consists of the following as of December 31, 1999 and 1998: 1999 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 (6.40% at December 31, 1999), secured by the Company's facility and an irrevocable bank letter of credit $ 18,150,000 20,000,000 Line of credit, variable interest rate (6.40% at December 31, 1999), principal due October 31, 2000 12,000,000 -- Various capital leases, principal and interest payable monthly through May 2003, interest ranging from 7% to 12%, collateralized by office equipment 66,595 54,446 ---------- ---------- Total long-term debt 30,216,595 20,054,446 Less: Current portion 1,873,577 1,860,168 Unamortized discount 87,879 96,970 ---------- ---------- Long-term debt, net $ 28,255,139 18,097,308 ========== ========== PAGE 39 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 Aggregate maturities of long-term debt as of December 31, 1999 are as follows: Bonds Line of Capital payable credit leases Total ---------- ---------- ---------- ---------- 2000 1,850,000 12,000,000 23,577 13,873,577 2001 1,850,000 -- 26,077 1,876,077 2002 1,850,000 -- 14,468 1,864,468 2003 1,800,000 -- 2,473 1,852,473 2004 1,800,000 -- -- 1,800,000 Thereafter 8,950,000 -- -- 8,950,000 ---------- ---------- ---------- ---------- $ 18,150,000 12,000,000 66,595 30,216,595 ========== ========== ========== ========== On March 9, 2000, the Company increased its line from $15 million to $25 million. The proceeds of the additional $10 million are to be used to finance the repurchase of the Company's common stock and to finance daily operations. The line of credit bears variable interest, which at March 9 was approximately 6.6%. The principal of the line of credit is due on February 10, 2002. Under the terms of the agreement, the Company agrees not to merge or consolidate with another entity, not to pay dividends or make any other payments to shareholders, and to maintain a certain tangible net worth and certain other financial ratios. (4) Income Taxes - ----------------- The components of income taxes and deferred taxes (benefit) are as follows for the years ended December 31: 1999 1998 1997 ---------- --------- --------- Current: Federal $ 652,087 4,602,389 (1,371,830) State 82,612 1,104,033 637,078 Foreign 115,059 117,121 305,924 ---------- ---------- ---------- Total current 849,758 5,823,543 (428,828) ---------- ---------- ---------- Deferred: Federal 2,490,548 (164,999) 7,554,482) State (12,669) 25,177 448,753 Foreign 28,061 (63,674) 2,872 ---------- ---------- ---------- Total deferred 2,505,940 (203,496) 8,006,107 ---------- ---------- ---------- $ 3,355,698 5,620,047 7,577,279 ========= ========= ========== The tax benefit associated with 1997 discontinued operations was $6,263,231. 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 December 31): PAGE 40 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 1999 1998 1997 --------- --------- --------- Application of statutory income tax rate $ 2,373,488 4,132,916 (60,081) Goodwill amortization 803,920 576,618 663,575 Increase in valuation allowance and write- offs of deferred tax assets -- -- 6,532,673 Foreign taxes, net 61,379 7,598 72,062 State income taxes, net 46,162 631,076 716,649 Tax-exempt interest -- (5,788) (18,730) Other, net 70,749 277,627 (328,869) --------- --------- --------- $ 3,355,698 5,620,047 7,577,279 ========= ========= ========= The tax effects of temporary differences that create significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below: 1999 1998 ---------- ---------- Deferred current income tax assets (liabilities): Unrealized loss on real estate available-for-sale $ -- 2,606,731 Accrued vacation 361,914 302,483 Accrued medical claims 109,648 63,644 Bad debts 763,403 925,620 Inventory adjustment 33,391 40,830 Other items 59,671 33,267 ---------- ---------- Total deferred current income tax assets, net $ 1,328,027 3,972,575 ========== ========== Deferred noncurrent tax assets (liabilities): Capital loss and net operating loss carryforward $ 934,658 2,291,148 Depreciation and amortization (168,796) 391,645 Acquired subsidiary cash to accrual adjustment (92,767) (192,027) Other items 16,143 371,746 Kansas High Performance Incentive Program credit carryforward, net 3,363,000 -- ---------- ---------- 4,052,238 2,862,512 Valuation allowance (3,958,912) (2,377,891) ---------- --------- Total deferred noncurrent tax assets (liabilities), net $ 93,326 484,621 ========== ========== PAGE 41 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 In conjunction with building its new facility, LabOne has received the Kansas High Performance Incentive Program (HPIP) tax credit. LabOne was certified by the State of Kansas and received a credit to offset all of its 1999 and 2000 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 qualified in 1999 were for potential use in 1999 and subsequent years approximately $4,060,000. In 1999, LabOne used HPIP credits of approximately $170,000. A valuation allowance has been provided because the Company must prove it has the requisite employee wage scale and other specified items before it may use the credits already qualified. LabOne has certain capital loss carryovers that were attributes of the former Lab Holdings. These loss deductions give rise to deferred tax assets, however, a valuation allowance has been provided because full realization of the deferred tax assets is not expected. (5) 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 $2,056,000, $1,803,000, and $1,422,000 for the years ended December 31, 1999, 1998, and 1997, respectively. LabOne has a profit sharing (401(k)) plan for all employees who have completed six months of service and a minimum of five hundred 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's contributions are invested in LabOne common stock. LabOne's contributions to the plan for the years ended December 31, 1999, 1998, and 1997 were $830,000, $663,000, and $558,000, respectively. (6) Stock Options and Warrants - ------------------------------- LabOne has a long-term incentive plan which provides for granting awards, including stock options, for not more than 2,215,252 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 (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is 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 SFAS No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants as if the fair value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. PAGE 42 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 In connection with the merger transaction, stock options held by pre-merger LabOne employees were converted on a one for one basis to options on the Company's common shares. All eligible Company employees are now covered by this plan. A summary of the status of this stock option plan as of December 31, 1999, 1998, and 1997 and changes during the years then ended is presented below: 1999 1998 1997 ------------------- -------------------- -------------------- 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 1,837,927 $ 14.30 1,614,068 $ 14.30 1,459,559 $ 13.63 Granted 315,060 11.48 330,859 15.02 253,316 17.36 Exercised (27,000) 10.31 (40,300) 10.64 (71,907) 10.84 Forfeited (172,688) 15.71 (66,700) 17.87 (26,900) 15.95 --------- --------- --------- Outstanding at end of year 1,953,299 13.85 1,837,927 14.38 1,614,068 14.30 ========= ========= ========= ========= ========= ========= Options exercisable at year-end 1,138,489 $ 13.87 968,683 $ 13.44 820,609 $ 12.94 ========= ========= ========= ========= ========= =========
The following table summarizes information about stock options at December 31, 1999. 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 ---------------- ----------- ----------- ---------- ----------- ----------- $ 9.38 - 9.97 323,185 7.76 $ 9.78 169,685 $ 9.88 11.13 - 11.63 390,411 4.08 11.44 341,911 11.41 12.17 - 14.13 279,897 7.19 13.10 113,777 13.94 14.38 - 15.00 332,171 7.21 14.68 166,171 14.61 15.22 - 16.63 286,885 7.37 16.09 140,854 16.25 16.69 - 20.88 302,942 6.89 17.73 168,283 17.88 23.88 - 23.88 37,808 4.36 23.88 37,808 23.88 ---------- ---------- 9.38 - 23.88 1,953,299 6.10 13.85 1,138,489 13.87 ================ ========== ========== ========== ========== ==========
PAGE 43 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 The weighted average per share fair value of stock options granted during 1999, 1998, and 1997 was $2.46, $3.54, and $5.08, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: 1999 1998 1997 ---- ---- ---- Expected dividend yield 7.0 % 4.8 4.2 Risk-free interest rate 5.8 % 5.0 6.3 Expected volatility factor 43.0 % 33.9 35.4 Expected life (years) 6 6 6 ==== ==== ==== Since the Company applies APB No. 25 in accounting for its plans, no compensation cost has been recognized for its stock options in the consolidated 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: $633,000, or $0.05 per share, in 1999; $515,000, or $.04 per share, in 1998; and $416,000, or $.03 per share, in 1997. Pro forma net earnings reflect only options granted in 1999, 1998, and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation costs are reflected over the options' vesting periods. Compensation cost for prior option grants is not considered. At December 31, 1998, the directors of Lab Holdings had 60,000 stock options at a weighted average price of $26.50 per share, of which 20,000 were exercisable. As a result of the merger, the exercisable options were adjusted to reflect the 3-for-2 stock split. The resulting 30,000 LabOne stock options have an exercise price of $17.66 per share. 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). During the first quarter of 1999, the marketing agreement with shares valued at $17.00 was terminated. The remaining warrants become exercisable each quarter for five years provided certain conditions are met, including achievement of certain levels of revenues. During 1999 and 1998, warrants to purchase 125,000 shares were forfeited. (7) Business Segment Information - --------------------------------- The Company operates principally in three lines of business: insurance, healthcare, and substance abuse testing. The insurance line of business involves risk-appraisal laboratory testing, paramed physical evaluations, and information and billing services to the insurance industry. The tests and evaluations performed and information provided by the Company are specifically designed to assist an insurance company in objectively evaluating the risks PAGE 44 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 posed by policy applicants. The billing services provide insurance companies with a centralized billing structure for services performed by parameds. Healthcare services are provided to the health care industry to aid in the diagnosis and 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 directly identifiable and allocated expenses. In computing operating income (loss) of lines of business, none of the following items have been allocated: general corporate expenses, investment income, goodwill 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, investment securities and merger goodwill. PAGE 45 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 Following is a summary of line of business information as of and for the years ended December 31, 1999, 1998, and 1997 (in thousands): 1999 1998 1997 ------------ ----------- ----------- Sales: Insurance services $ 77,687 69,149 61,998 Healthcare services 24,793 18,600 7,512 Substance abuse testing 17,187 14,478 9,416 ------------ ----------- ----------- Total sales $ 119,667 102,227 78,926 ============ =========== =========== Operating income (loss): Insurance services $ 15,465 18,607 16,530 Healtcare services (4,472) (6,188) (8,304) Substance abuse testing (771) 204 (934) General corporate expenses (2,178) (1,217) (5,774) Investment income 370 861 4,671 Other expense, net (1,433) (112) (6,366) ------------ ----------- ----------- Earnings (Loss)before income taxes 6,981 12,155 (177) Income tax expense (3,356) (5,620) (7,577) Minority Interests (766) (1,658) (349) Discontinued operations -- -- (2,343) ------------ ----------- ----------- Net earnings $ 2,859 4,877 (10,446) ============ =========== =========== Identifiable assets: Insurance services $ 57,434 34,597 32,343 Healthcare services 12,001 5,493 3,513 Substance abuse testing 11,588 6,449 4,994 General corporate assets 37,420 51,468 33,632 ------------ ----------- ----------- Total assets $ 118,443 98,007 74,482 ============ =========== =========== Capital expenditures: Insurance services $ 7,334 2,090 3,308 Healthcare services 927 501 469 Substance abuse testing 1,389 424 946 General corporate 5,016 22,474 2,553 ============ =========== =========== Depreciation and amortization: Insurance services $ 3,948 3,112 3,690 Healthcare services 1,019 797 940 Substance abuse testing 1,146 810 645 General corporate 2,406 1,473 1,507 ============ =========== =========== PAGE 46 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (8) Quarterly Financial Data (Unaudited) A summary of unaudited quarterly results of operations for 1999 and 1998 is as follows (in thousands except per share data): Three months ended --------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 1999: Sales $ 27,328 28,572 28,814 34,952 Gross profit 11,677 11,568 11,712 13,166 Earnings before income Taxes 2,340 2,022 1,345 1,273 Net earnings 999 794 523 543 Basic and diluted earnings per share 0.10 0.08 0.05 0.05 Dividends per share 0.20 0.20 0.18 0.18 ============ ============ ============ ============ 1998: Sales $ 23,333 25,763 25,834 27,297 Gross profit 10,374 11,981 11,305 11,897 Earnings before income taxes 2,743 3,634 2,379 3,399 Net earnings 1,140 1,632 909 1,196 Basic and diluted earnings per share 0.12 0.16 0.10 0.12 Dividends per share 0.20 0.20 0.20 0.20 ============ ============ ============= =========== Share and per share data have been adjusted for the 3-for-2 stock split in connection with the merger transaction (see note 2). Quarterly earnings per share amounts do not add to annual earnings per share for 1999 because of rounding of quarterly computations. (9) 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 $622,000. 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 Comptroller's administrative law judge's office. At this time, the Company is unable to predict the ultimate outcome of this appeal. Leases LabOne has several noncancelable operating leases, primarily for land and buildings, and other commitments that expire through 2004, including a lease PAGE 47 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 for office space from an entity owned by an employee. Rental expense for these operating leases during 1999, 1998, and 1997 amounted to $513,000, $539,000, and $529,000, respectively. Future minimum lease payments and other commitments under these agreements as of December 31, 1999 are: Year Amount ------ -------- 2000 $ 621,000 2001 478,000 2002 370,000 2003 317,000 2004 254,000 (10) Dispositions - ------------------ 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, on the basis of one share of common stock of SLH Corporation for each four shares of Lab Holdings common stock held. In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH Corporation, 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 Corporation. The net assets distributed to SLH Corporation totaled approximately $47,963,199 on the date of distribution. The spin-off was accounted for as a 1997 dividend. In July 1997, Lab Holdings' Board of Directors declared a dividend to Lab Holdings' shareholders of all 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 on July 25, 1997 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 or SLH Corporation stock received in the distributions. PAGE 48 LABONE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 Schedule II ----------- Additions- charged to Balance Selling, At general, and Deductions- Balance Beginning administrative uncollectible at Description of year expenses accounts of year - ------------------------------ --------- -------------- ------------- --------- Allowance for doubtful accounts: Year ended December 31, 1999 $ 2,326,716 2,877,949 3,223,380 1,981,285 ========= ========= ========= ========= 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 ========= ========= ========= =========
See accompanying independent auditors' report PAGE 49 EX-3 2 Exhibit 3.2 LABONE, INC. CERTIFICATE OF DESIGNATIONS, PREFERENCES QUALIFICATIONS AND RIGHTS OF SERIES A PREFERRED STOCK I, W. Thomas Grant II, the duly elected Chairman of the Board of Directors, President and Chief Executive Officer of LabOne, Inc., a corporation organized and existing under the laws of the State of Missouri (the "Corporation"), do hereby certify that: 1. The name of the Corporation is LabOne, Inc. The Corporation was formerly named Lab Holdings, Inc. 2. The following resolutions were duly adopted by the Board of Directors of the Corporation at a meeting held on February 11, 2000: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation by the provisions of Articles of Incorporation of the Corporation, there is hereby created a series of Preferred Stock designated as Series A Preferred Stock, consisting of Three Hundred Thousand (300,000) shares of the authorized but unissued shares of preferred stock, $.01 par value per share, of the Corporation; and FURTHER RESOLVED, that the Series A Preferred Stock shall have the powers, designations, preferences and relative, participating, optional or other rights and the qualifications, limitations or restrictions set forth in Appendix I attached hereto. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its President and attested by its Secretary on this 11th day of February, 2000. LABONE, INC. By: /s/ W. Thomas Grant II W. Thomas Grant II Chairman of the Board of Directors, President and Chief Executive Officer ATTEST: /s/ Gregg R. Sadler Gregg R. Sadler Secretary PAGE 50 State of Missouri County of Jackson I, Lisa L. Meland, a Notary Public, do hereby certify that on the 28th day of February, 2000, personally appeared before me W. Thomas Grant II, who being by me first duly sworn declared that he is the Chairman of the Board of Directors, President and Chief Executive Officer of LabOne, Inc, that he signed the foregoing document as Chairman of the Board of Directors, President and Chief Executive Officer of the corporation, and that the statements therein contained are true. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my notarial seal, the day and year last above mentioned. /s/ Lisa L. Meland Notary Public My Commission Expires: Lisa L. Meland Notary Public - Notary Seal STATE OF MISSOURI - Jackson County My Commission Expires AUGUST 25, 2000 PAGE 51 APPENDIX I RELATIVE RIGHTS AND PREFERENCES OF SERIES A PREFERRED STOCK 1. Designation. Three Hundred Thousand (300,000) authorized and unissued shares of preferred stock, $.01 par value per share, of the Corporation are hereby designated as "Series A Preferred Stock" ("Series A"). 2. Dividends. (a) Each holder of a share of Series A shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for that purpose, subject to adjustment as hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (except any Excluded Dividend), declared (but not withdrawn) on the Common Stock, $.01 par value per share, of the Corporation (the "Common Stock"), at any time after February 11, 2000 (the "Rights Dividend Declaration Date"). As used herein, an "Excluded Dividend" shall mean a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise). (b) Except with respect to an Excluded Dividend, the Corporation shall declare a dividend or distribution on the Series A as provided in paragraph (a) above concurrently with or immediately after it declares a dividend or distribution on the Common Stock, and such dividend or distribution shall be payable concurrently with the dividend or distribution on the Common Stock. Except with respect to an Excluded Dividend, the Corporation shall not pay a dividend or make a distribution to holders of Common Stock unless the Corporation concurrently pays a dividend or makes a distribution to holders of the Series A in accordance with paragraph (a) above. (c) In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A were entitled immediately prior to such event under paragraph (a) above shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 3. Voting Rights. In addition to any other voting rights required by law, the holders of shares of Series A shall have the following voting rights: (a) The holders of shares of Series A shall be entitled to 100 votes for each share of Series A held on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of the Series A were entitled immediately PAGE 52 prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or required by law, the holders of shares of Series A and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (c) Except as otherwise provided herein or required by law, the holders of shares of Series A shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of shares of Common Stock as set forth herein or as otherwise required by law) for the taking of any corporate action. 4. Reacquired Shares. Any shares of Series A purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, in any other Certificate of Designations establishing a series of Preferred Stock or any similar stock or as otherwise required by law. 5. Liquidation, Dissolution or Winding Up. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the shares of the Series A shall be entitled to receive the greater of (i) $100.00 per share ($1.00 per one one-hundredth of a share), or (ii) an amount per share, subject to adjustment as hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock. No distribution upon liquidation, dissolution or winding up shall be made to holders of shares of Common Stock or holders of any other shares of stock ranking junior to the Series A with respect to the distribution of assets upon liquidation, dissolution or winding up until all holders of shares of Series A shall have received the amounts to which such holders are entitled under this Section. (b) In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A were entitled immediately prior to such event pursuant to clause (ii) of paragraph (a) above shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. PAGE 53 6. Consolidation, Merger, etc. (a) In the event the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such event shares of Series A shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. (b) In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in paragraph (a) above with respect to the exchange or change of shares of the Series A shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Ranking. Nothing herein shall preclude the Board of Directors of the Corporation from creating any series of Preferred Stock or any similar stock ranking on a parity with or prior to Series A shares as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up. 8. Redemption. Shares of Series A shall not be redeemable at the option of the Corporation or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Corporation may acquire shares of Series A in any other manner permitted by law and the Articles of Incorporation and By- laws of the Corporation. 9. Amendment. The Articles of Incorporation of the Corporation, including without limitation the provisions hereof, shall not hereafter be amended, either directly or indirectly, or through merger, consolidation or share exchange with another corporation or entity, in any manner which would alter or change the powers, preferences or special rights of the Series A so as to affect the holders thereof adversely, without the affirmative vote of the holders of a majority of the shares of Series A, voting separately as a class. 10. Fractional Shares. The Series A may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of shares of the Series A. PAGE 54 EX-4 3 Exhibit 4.8 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: 250,000 Warrant No. ---- Original Issue Date: November 5, 1999 WARRANT To Purchase Shares of Common Stock of LABONE, INC. This certifies that, for value received, Larry Glenn ("Glenn") is entitled to purchase from LABONE, INC., a Missouri corporation, from time to time prior to the Expiration Date in accordance with the terms and conditions hereof, up to 250,000 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 Definitions. 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 $.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, sale of assets or otherwise. (b) "Company" shall mean LABONE, INC., a Missouri corporation, and any company that shall succeed to, or assume, the obligations of said corporation hereunder. (c) "Expiration Date" shall mean 12:01 o'clock a.m. Central Time on November 5, 2004, which is the fifth anniversary of the Original Issue Date. (d) "Qualified Revenues" shall mean (i) sales revenues (sales net of discount) of World Wide Health Services, Inc. ("World Wide"), a wholly- owned subsidiary of the Company, plus (ii) sales revenues on attending physician statement accounts served by World Wide on the Original Issue Date and earned by Systematic Business Services, Inc., a wholly-owned subsidiary of the Company, by any other affiliate of the Company and by the Company, plus (iii) all revenues from any physician and/or paramedical examination business serving the insurance industry and conducted by the Company and/or its affiliates except revenues attributable to any other physician and/or paramedical examination business serving the insurance industry acquired by the Company or its affiliates. (e) "Purchase Price" or "Purchase Price per share" shall mean the purchase price per Warrant Share (as defined below), which shall equal $9.97, being the closing sale price of the Common Stock, as reported by the NASDAQ Stock Market, on September 27, 1999, as such purchase price may thereafter be PAGE 55 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 Glenn, or his registered transferee. (g) "Warrant" shall mean this Warrant and all Warrants issued in exchange therefor or replacement thereof. (h) "Warrant Shares" shall mean the shares of Common Stock purchasable by the Registered Holder upon the exercise of this 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, from and after the Original Issue Date and prior to the Expiration Date, this Warrant may be exercised in whole or in part in respect of vested shares. Shares of Common Stock shall become vested under this Warrant as follows: (i) with respect to 83,333 shares of Common Stock if the Company earns Qualified Revenues of three million seven hundred fifty thousand dollars ($3,750,000) or more in any calendar quarter within three years after the Original Issue Date ("Threshold #1"), (ii) with respect to an additional 83,333 shares of Common Stock if the Company earns Qualified Revenues of five million dollars ($5,000,000) or more in any calendar quarter within three years after the Original Issue Date ("Threshold #2") and (iii) with respect to the remaining 83,334 shares of Common Stock subject to this Warrant if the Company earns Qualified Revenues of six million two hundred fifty thousand ($6,250,000) or more in any calendar quarter within three years after the Original Issue Date ("Threshold #3"). The rights to exercise shall not be cumulative. Once a Threshold is achieved in a calendar quarter, this Warrant will not become exercisable with respect to additional shares solely by reason of the same Threshold being achieved in a subsequent calendar quarter. (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 10101 Renner Road, Lenexa, Kansas 66219 (or such other office or agency of the Company as the Company may designate by notice in writing to the Registered Holder). In no event may the Warrantholder exercise the Warrant with respect to more than 250,000 shares of Common Stock in the aggregate, subject to adjustment as provided in this Warrant. PAGE 56 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 provisions of Sections 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) Transfer. This Warrant may not be sold, transferred, or assigned by the Registered Holder in whole or in part at any time, except pursuant to (i) registration of the Warrant under the Securities Act of 1933 and any applicable state securities laws (collectively, the "Securities Laws") or (ii) receipt by LabOne and the Company of an opinion, in the form and substance acceptable to LabOne and the Company, from counsel of the transferee reasonably satisfactory to LabOne and the Company, to the effect that registration under the Securities Laws is not required. 5. Compliance with Securities Laws. (a) Accredited Investor. By acceptance of this Warrant, the Registered Holder represents and warrants that he 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 natural person that either (i) has an individual net worth, or joint net worth with his spouse, in excess of $1,000,000 or (ii) had an individual net income in excess of $200,000 in each of the two most recent years or joint income with his spouse of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. (b) Investment Intent. By acceptance of this Warrant, the Registered Holder represents and warrants that he is acquiring this Warrant and any Warrant Shares for his 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 PAGE 57 Securities Act of 1933, as amended (the "Securities Act") or any state securities laws (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 he 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 (collectively, the "Securities Laws") and may not be sold, transferred or otherwise disposed of in the absence of registration under the Securities Laws or receipt by LabOne and the Company of an opinion, in the form and substance acceptable to LabOne and the Company, from counsel of the transferee reasonably satisfactory to LabOne and the Company, to the effect that registration under the Securities Laws is not required. (e) State Securities Laws. This Warrant has been offered to and accepted by the Registered Holder at his principal residence in the State of New Jersey and has not been offered to the Registered Holder in any other State. 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 (i) 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), (ii) consolidate with or merge into any other person, or (iii) transfer all or substantially PAGE 58 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 Warrantholder, upon the exercise hereof as provided in Section 2 at any time after the consummation of such reorganization or recapitalization, consolidation, merger or sale 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, such other securities and property (including cash) into which such Warrant Shares shall have been converted or exchanged pursuant to such transaction. 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 any of the following occurring prior to the Expiration Date and while this Warrant is exercisable in respect of vested shares: (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 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 date 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 Warrantholder 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. Required Payments. If this Warrant becomes exercisable with respect to Threshold #1, and does not become exercisable with respect to Thresholds #2 and #3 within three (3) years after the Original Issue Date, the Company agrees to pay to Warrantholder promptly after the fifth anniversary of the Original Issue Date an amount in cash equal to the amount, if any, by which $120,000 exceeds the Threshold #1 Spread. The Threshold #1 Spread shall equal 83,333 multiplied by the amount by which the Highest Closing Price for Threshold #1 (as defined below) exceeds the exercise price per share. If this Warrant becomes exercisable with respect to Threshold #2 and does not become exercisable with respect to Threshold #3 within three (3) years after PAGE 59 the Original Issue Date, the Company agrees to pay to Warrantholder promptly after the fifth anniversary of the Original Issue Date an amount in cash equal to the amount, if any, by which $400,000 exceeds the sum of the Threshold #1 Spread and the Threshold #2 Spread. The Threshold #2 Spread shall equal 83,333 multiplied by the amount by which the Highest Closing Price for Threshold #2 exceeds the exercise price per share. If this Warrant becomes exercisable with respect to Threshold #3 within three (3) years after the Original Issue Date, the Company agrees to pay to Warrantholder promptly after the fifth anniversary of the Original Issue Date an amount equal to the amount, if any, by which $1,000,000 exceeds the sum of the Threshold #1 Spread, the Threshold #2 Spread and the Threshold #3 Spread. The Threshold #3 Spread shall equal 83,334 multiplied by the Highest Closing Price for Threshold #3 over the exercise price per share. The Highest Closing Price for a Threshold shall equal the highest closing price per share of the Common Stock during the period beginning on the first day that the shares subject to that Threshold become exercisable and ending on the fifth anniversary of the Original Issue Date. The foregoing notwithstanding, if the Highest Closing Price per share of the Common Stock of the Company does not exceed the exercise price per share during such period, the Threshold Spread for that Threshold shall equal zero. 9. Reservation of Warrant Shares; Authority; Validity. During the term of this Warrant, the Company shall at all times reserve and keep available from its authorized but unissued or treasury shares such number of shares of its Common Stock as shall be issuable upon exercise of the Warrant. The Company has all requisite corporate power and authority to execute, deliver, and perform its obligations under this Warrant. Upon the Company's execution of this Warrant, this Warrant shall have been duly authorized, executed, and delivered, and shall constitute legal, valid, and binding obligations of the Company, enforceable in accordance with its terms. 10. Listing or Qualification for Trading. The Company shall use its best efforts to cause the Warrant Shares, immediately upon official notice of issuance upon exercise of this Warrant, to be listed or admitted for trading on such principal securities exchange, interdealer quotation system or market within the United States of America, if any, on which other shares of Common Stock are then listed or quoted, and to maintain such listing or qualification for trading for so long as other shares of Common Stock are listed or quoted thereon. The Company is under no obligation to register or qualify this Warrant or the Warrant Shares under the Securities Act or any state securities laws. 11. Notices. Any notice or other document required or permitted to be given or delivered to the Registered Holder shall be delivered at, or sent by 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. 12. No Rights as Stockholder. This Warrant shall not entitle the Registered Holder to any voting or other rights as a stockholder of the Company. 13. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of PAGE 60 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. 14. Law Governing. This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of Missouri (excluding the choice of law provisions thereof). 15. 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 affect 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: ---------------------------------- Its: --------------------------------- Accepted and agreed to: ------------------------------------- Larry Glenn PAGE 61 NOTICE OF INTENTION TO EXERCISE WARRANT The undersigned hereby notifies LabOne, Inc. that he has elected to exercise his 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 such 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: -------------------- ------------------------------- Larry Glenn PAGE 62 EX-10 4 Exhibit 10.9 ------------ 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. PAGE 63 EX-10 5 Exhibit 10.10 ------------- AMENDED AND RESTATED INDEMNIFICATION AGREEMENT THIS AMENDED AND RESTATED INDEMNIFICATION AGREEMENT ("Agreement") is made as of the 12th day of November 1999, by and between LabOne, Inc., a Missouri Corporation (the "Company"), and ("Indemnitee"), a Director or Officer of the Company. WHEREAS, the shareholders of the Company approved the form of this Agreement on May 10, 1989, and the Board of Directors approved the amendment of certain provisions of this Agreement on November 12, 1999; and WHEREAS, it is essential to the Company to retain and attract as Directors and Officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability and coverages of Directors' and Officers' liability insurance have been severely limited; and WHEREAS, it is now and has always been the express policy of the Company to indemnify its Directors and Offices so as to provide them with the maximum possible protection permitted by law; and WHEREAS, Indemnitee does not regard the protection available under the Company's Article of Incorporation, Bylaws and Directors' and Officers' liability insurance, if any, as adequate in the present circumstances, and may not be willing to serve or to continue to serve as a Director or Officer without adequate protection, and the Company desires Indemnitee to serve in such capacity. NOW THEREFORE, the Company and Indemnitee do hereby agree as follows: 1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as Director 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 Indemnitee is duly elected or appointed, or until such time as Indemnitee resigns or is removed. The provisions of this Paragraph 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. 2 Definitions. As used in this Agreement: (a). The term "Proceeding" shall include 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, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director or Officer of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action taken by Indemnitee, or of any PAGE 64 inaction on Indemnitee's part, while acting as a Director of Officer of the Company or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not Indemnitee is acting or serving in any such capacity at the time any liability or Expense is incurred for which indemnification or reimbursement can be provided under this Agreement. Except for actions brought to establish rights of indemnification or advancement of expenses hereunder, a "Proceeding" shall not include any action, suit or proceeding brought or claim made by Indemnitee against the Company. (b) The term "Expense" shall include, without limitation, expenses of investigation, judicial or administrative proceedings or appeals, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements, and any expenses of establishing a right to indemnification or advancement of expenses under Paragraph 5 or 6 of this Agreement. (c) References to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed with respect to any employee benefit plan; and references to "serving at the request of the Company" shall include any service as a Director, Officer, employee or agent of the Company which imposes duties on, or involves service by, such Director, Officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries. 3. Indemnification. The Company shall indemnify Indemnitee if Indemnitee was or is a party to or threatened to be made a party to or otherwise involved in any Proceeding by reason of the fact that Indemnitee is or was a Director or Officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses, judgments and fines actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if the Indemnitee's conduct was not finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct. The Company shall not be liable under this agreement to make any payment in connection with any claim made against Indemnitee (i) for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company in violation of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto, or (ii) for amounts paid in settlement of any Proceeding without the consent of the Company, which consent shall not be unreasonably withheld. 4. 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: (a) The Company shall be entitled to participate in the Proceeding at its own expense. PAGE 65 (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 Paragraph 5 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 Paragraph 5 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 Paragraph 5 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. 5. Advances of Expenses. (a) Except as provided in Paragraph 4 hereof, expenses incurred by the Indemnitee pursuant to Paragraph 3 in any Proceeding shall be paid by the Company in advance of the final disposition of the Proceeding upon the written request of the Indemnitee, if Indemnitee shall undertake to repay such amount to the extent that it shall ultimately be determined that Indemnitee is not entitled to indemnification. Except as expressly provided in Paragraph 4(b) hereof, no security shall be required by the Company in making Expense advances, and such advances shall be made without regard to the Indemnitee's PAGE 66 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. 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. 6. Right of Indemnitee to Indemnification Upon Application. (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. Any indemnification under Paragraph 3 shall be made no later than forty-five (45) days after receipt by the Company of the written request of Indemnitee. 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 45 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) The right to indemnification or advances, as provided by this Agreement, shall be enforceable by Indemnitee in any court of competent jurisdiction. 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. PAGE 67 7. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested Directors, The General and Business Corporation Law of Missouri, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. To the extent that a change in the Missouri General and Business Corporation Law (whether by statute or judicial 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. The Indemnification under this Agreement shall continue as to Indemnitee, even though Indemnitee may have ceased to be a Director or Officer, and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 8. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments or fines actually and reasonably incurred by him in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses, judgments or fines to which Indemnitee is entitled. 9 Payments Excess to Other Indemnification; Subrogation. Notwithstanding anything herein to the contrary, the Company shall not be obligated under this Agreement in connection with any Expense, judgment or fine for which payment is actually made to the Indemnitee under an insurance policy or any other indemnification provision or agreement, except in respect of any excess beyond the amount of such payment. The protection afforded to Indemnitee by this Agreement is intended to be excess to any and all other rights of indemnification to which Indemnitee is entitled. In this regard, the Company shall, to the extent of any payments made hereunder, be subrogated to all rights of Indemnitee to indemnification for Expenses, judgments or fines resulting from or arising out of the Proceedings for which an indemnification payment is made hereunder, pursuant to any other agreement to which Indemnitee is a party or pursuant to which Indemnitee has rights or otherwise. 10. 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 ("D&O Insurance Policies") which cover Indemnitee as an insured: INSURER AMOUNT ------- ------ The Federal Insurance Company (Chubb) $15,000,000 Royal Surplus Lines Insurance Company $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 PAGE 68 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 (or directors' and officers' liability insurance policies containing coverage in amounts and on terms and conditions no less favorable than 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 such directors' and officers' liability 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 subparagraph (b) of this Paragraph 10, 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. 11. 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 Paragraph, 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 without limitation 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. 12. 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 Paragraph 12 shall not apply to any dissolution of the Company in connection with a transaction as to which Paragraph 11 hereof applies. 13. Change in Other Rights. The Company will not adopt any amendment to the Articles 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 PAGE 69 the Company adopts any amendment to the Articles 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. 14. 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 Missouri law. 15. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify Indemnitee as to Expenses, judgments and fines with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 16. Amendments. No amendment, waiver, modification, termination or cancellation of this 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 Articles of Incorporation, Bylaws or by other agreements, including D&O Insurance policies. 17. Notice. 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. 10101 Renner Blvd. Lenexa, Kansas 66219 Attention: Secretary or to such other address as either shall designate in writing. 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 19. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri. PAGE 70 20. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns. IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. LABONE, INC. By: ----------------------------- W. Thomas Grant II, President INDEMNITEE: -------------------------------- Address of Indemnitee: PAGE 71 Exhibit 10.10 ------------- Exhibit A LABONE, INC. NOTICE OF COMMENCEMENT OF PROCEEDING 1. This notification is provided pursuant to the Amended and Restated Indemnification Agreement, dated as of November 12, 1999 (the "Indemnification Agreement"), between LabOne, Inc., a Missouri 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: -------------------------------- Date: ------------------ PAGE 72 Exhibit 10.10 ------------- Exhibit B LABONE, INC. REQUEST FOR ADVANCEMENT OF EXPENSES 1. This Request is submitted pursuant to the Amended and Restated Indemnification Agreement, dated as of November 12, 1999 (the "Indemnification Agreement"), between LabOne, Inc., a Missouri 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: -------------------------------- Date: ------------------- PAGE 73 Exhibit 10.10 ------------- Exhibit C LABONE, INC. INDEMNIFICATION CLAIM 1. This Indemnification Claim is submitted pursuant to the Amended and Restated Indemnification Agreement, dated as of November 12, 1999 (the "Indemnification Agreement"), between LabOne, Inc., a Missouri 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: -------------------------------- Date: ------------------- PAGE 74 EX-24 6 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, 1999. Dated: February 11, 2000 /s/ Joseph H. Brewer MD ------------------------------ Joseph H. Brewer, MD, Director /s/ Peter C. Brown ------------------------------ Peter C. Brown 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/ Janet M. Stallmeyer ------------------------------ Janet M. Stallmeyer, Director /s/ Chester B. Vanatta ------------------------------ Chester B. Vanatta, Director /s/ John E. Walker ------------------------------ John E. Walker, Director /s/ R. Dennis Wright ------------------------------ R. Dennis Wright, Director PAGE 75 EX-27 7
5 This schedule contains summary financial information extracted from the 1999 Annual Report on Form 10-K for LabOne, Inc. and is qualified in its entirety by reference to such financial statements. 0000830158 LABONE, INC. YEAR DEC-31-1999 DEC-31-1999 2,983,644 0 28,313,245 1,981,285 3,186,853 37,246,888 80,910,886 38,106,948 118,442,724 17,798,088 28,255,139 0 0 130,500 70,898,997 118,442,724 0 119,666,534 0 71,543,532 0 2,877,949 1,410,009 6,980,849 3,355,698 2,858,776 0 0 0 2,858,776 0.27 0.27
EX-99 8 Exhibit 99 ---------- Cautionary Statement Regarding Forward-Looking Statements LabOne has made forward-looking statements in the accompanying Form 10-K, and in the other documents that we refer to in the 10-K. Forward-looking statements are statements that are not historical in nature and can often be identified by the use of forward-looking terminology, such as "believes", "expects," "may," "should," "could," "intends," "plans," 'estimates" or "anticipates," variations of these words or similar expressions. Examples of forward-looking statements include: pro forma financial statements and projections relating to revenues, income or loss, earnings or loss per share, financial condition, 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 the assumptions underlying these statements. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Future results of operations, financial condition, business and stock values of LabOne may be materially different from those described in these forward-looking statements. Shareholders of LabOne are cautioned not to put undue reliance on any forward-looking statement. Among the factors that could cause actual results to be materially different from those described in the forward-looking statements are the following: Amortization of Goodwill. Amortization of goodwill at the annual rate of approximately $4.1 million in 2000 and 2001, $3.4 million in 2002, $2.1 million in 2003 and thereafter at the rate of approximately $1.6 million until 2019 will not decrease cash generated from operations but could depress the market price of LabOne's stock if the stock price is influenced by investors that focus primarily on net earnings rather than on earnings before interest, taxes, depreciation and amortization. Growth Strategy. LabOne' growth strategy includes acquiring ongoing businesses and entering into strategic alliances. We cannot guarantee that we will continue growing, through this growth strategy or otherwise. We may not be able to acquire attractive businesses on reasonable terms. We may have difficulty integrating an acquired business with our existing operations or in retaining key personnel of the acquired business to work for us. Issuance of equity securities in acquisitions could be dilutive to our existing shareholders. These risks, together with the inability to use pooling of interests accounting for future acquisitions, could result in negative rather than positive results. Possible Elimination of Pooling. The Financial Accounting Standards Board has announced that it plans to eliminate pooling of interests accounting for acquisitions initiated after it issues a final standard on this subject, which it expects to do in late 2000. If this proposal is adopted, future acquisitions would have to be accounted for using the purchase method of PAGE 76 accounting. Purchase accounting creates an intangible goodwill asset to the extent that the cost of the acquisition exceeds the fair value of the assets acquired. This goodwill must then be amortized over periods up to 40 years, thereby reducing earnings by the amount of the periodic charge. The FASB has indicated that it may shorten the period of such amortization, and this would increase the periodic charge against earnings. Purchase accounting and shortened amortization periods may make fewer acquisition opportunities feasible for us due to their possible dilutive effect on future earnings. Debt Service Obligations. Our debt service obligations are subject to the normal risks of debt financing and could impair our ability to pursue acquisition and growth strategies that would otherwise be available and could impact our future operating results if we borrow funds to complete acquisitions in the future. Need for Growth in Clinical Testing. LabOne's clinical testing business may not become profitable unless we increase the number of clinical tests we perform. LabOne is incurring substantial costs in expanding its business to provide clinical testing services to the healthcare industry. The expenses associated with this business, particularly labor costs for our testing work force, are relatively fixed over the short term. The primary means of increasing our profit margin is to increase the volume of tests we perform. Although we have been successful to date in marketing our clinical testing services, we cannot guarantee that the revenues in this business will continue to grow at historical rates. If revenues do not continue to grow, our clinical testing business will not become profitable. Changes in Testing Ordered by Life Insurance Companies. Our only currently profitable business is providing risk-appraisal laboratory testing services to the life insurance industry. The level of demand for such services is influenced by a number of factors, including the number of life insurance applications written, the policy amount thresholds at which insurance companies order testing, the type and costs of tests requested, testing innovations approved by the Food and Drug Administration, the extent to which insurance companies may create in-house testing facilities, and the development in the future of suitable on-site rapid assay testing products that eliminate the need for centralized testing. Many of these factors are beyond our control. Any adverse changes in life insurance industry demand for testing services could significantly reduce our profits. Increased Competition in Life Insurance Testing Business. We have competed in the life insurance testing business by offering more complete and higher quality services than our competitors at competitive prices. Many of our competitors are attempting to charge lower prices than we are. If they continue to lower prices and our customers refuse to pay higher prices for better service, our profits will be reduced. Cost Reduction Efforts in the Healthcare Industry. Managed-care organizations, third-party payers, Medicate, Medicaid and insurance companies PAGE 77 have increased efforts to control the cost and utilization of health care services, including laboratory testing. Continued cost-cutting efforts may further erode the volume of testing and profit margins in the industry and adversely affect our clinical laboratory operations. Our Testing Services Create a Risk of Legal Liability. Our clients rely on the accuracy of our testing to make significant insurance, treatment and hiring and firing decisions. We could be required to pay substantial damages if the number of reports containing false positive or false negative results increased. In addition, federal and state laws regulate the disclosure of specimen testing results. If we do not adequately protect the confidentiality of test subjects, we could incur significant liability. We have insurance to cover these types of claims, but we cannot guarantee that this coverage is adequate. Uninsured claims could adversely affect our profits and financial condition. Disruption in Express Delivery Service Could Harm our Business. We generally rely on express couriers to transport specimens to our laboratory quickly and safely. A disruption in these couriers' business resulting from a labor dispute or other event could harm our business. Competitive On-Site Rapid Assay Tests Could Hinder our Growth. We serve customers through laboratory-based testing facilities. Although there are some on-site rapid assay testing products in the marketplace, rapid assays have not achieved broad market acceptance due to the high cost of such assays, difficulties in maintaining the confidentiality of tests, liability concerns, less accurate testing results and the absence of a broad testing menu. If more competitive assays become available, such products could be substituted for laboratory based testing and have an adverse impact on our financial condition and results of operations. Other factors that could cause actual results to be materially different from those described in the forward-looking statements include the following: materially adverse changes in general economic conditions or in the markets served by us; our ability to successfully market our services to new customers in new markets; the volume, pricing and mix of laboratory tests that we perform; our ability to complete and integrate appropriate acquisitions, strategic alliances and joint ventures; acquisition costs, restructuring and other charges associated with acquisitions; changes in our management personnel; our ability to obtain and maintain certifications required by our customers; future changes in laws and regulations, including regulations affecting government reimbursement for clinical laboratory testing, and regulations governing anti-fraud and abuse, drug testing, and environmental and occupational safety; PAGE 78 supply interruptions or cost increases for the insurance testing kits, testing agents and other laboratory supplies that we need; and damage or interruption of telecommunications or other critical services at our single testing facility owing to natural disasters or other causes that are not covered by our business interruption insurance. Other factors not identified in this document could also cause actual results to vary materially from those described in the forward-looking statements. All forward-looking statements made in the accompanying Form 10-K are made as of the date of the document. We may not publicly update or correct any of these forward-looking statements in the future. PAGE 79 -----END PRIVACY-ENHANCED MESSAGE-----