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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 2000 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 Common stock, $0.01 par value
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.
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
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: $50,291,000 (based on closing price as of March 1, 2001, of $5.8125). 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 only class of Registrant's common stock as of February 28, 2001: $.01 par value common - 10,725,349 net of 2,324,671 shares held as treasury stock.
LabOne, Inc.
Form 10-K for the fiscal year ended December 31, 2000
Table of Contents
PART I. |
ITEM 1. Business |
ITEM 2. Properties |
ITEM 3. Litigation |
PART II. |
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters |
ITEM 6. Selected Financial Data |
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
ITEM 8. Financial Statements and Supplementary Data |
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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 |
PART IV. |
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K |
Exhibit 10.9: LabOne Annual Incentive Plan |
Exhibit 10.16: Amendment to paragraph 2 of |
Exhibit 10.18: Employment Agreement between |
Exhibit 10.19: Consulting Agreement between |
Exhibit 10.20: Consulting Agreement between |
Exhibit 24: Power of Attorney |
Exhibit 99: Cautionary Statement under the Safe Harbor Provisions |
PART I
ITEM 1. BUSINESS
General
LabOne, Inc., a Missouri corporation, provides laboratory testing, investigative services and paramedical examinations for the insurance industry, laboratory testing services for the healthcare industry and substance abuse testing services for employers. LabOne, Inc., incorporates its wholly-owned subsidiaries Lab One Canada Inc., Systematic Business Services, Inc. (SBSI) and ExamOne World Wide, Inc. (ExamOne), hereinafter collectively referred to as either LabOne or the Company.
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.
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 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 provides underwriting support 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 subsidiaries, SBSI (acquired in 1998) and ExamOne, the Company provides specimen collection, paramedical examinations, telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services.
LabOne's laboratory 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 primarily 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®, a Laboratory Benefits Management program.
LabOne's substance abuse testing services are provided for employers who adhere to drug screening guidelines. 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.
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, bad debt expense, 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 as Exhibit 99 to this Form 10-K.
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 specimen collection, medical questionnaires and 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.
When an individual applies for insurance through an insurance agent, that agent typically contacts a paramedical company to arrange for collection of a blood or urine specimen. ExamOne's paramedical personnel perform paramedical examinations and collect specimens from individual insurance applicants using LabOne's custom-designed collection kits and containers. Insurance agents also collect oral fluid or urine specimens using LabOne's kits. These kits and containers are delivered to LabOne's laboratory via overnight delivery services or mail, bar-coded for identification and processed according to each insurance company's specifications.
LabOne handles paramedical examination paperwork and assists with administration and tracking of data for applicants as it moves through the information gathering process. The Company can obtain attending physician statements so underwriters can review the complete medical history of applicants. Inspection reports, either by telephone or performed in the field, provide additional applicant information quickly and cost-effectively. Motor vehicle reports can be ordered automatically based on insurance company specifications or on demand by the underwriter. The Company can bundle these various pieces of information and transmit the reports directly to the insurance company's underwriting department. 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'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 cocaine abuse in the United States and Canada, insurance companies test most 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.
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 bar-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® 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 by the physician. The Lab Card Program provides laboratory testing at reduced rates as compared to traditional laboratories. It uses a unique benefit design that shares the cost savings with the patient, creating an incentive for the patient to help direct laboratory work to LabOne. Under the Program, the patient incurs no out-of-pocket expense when the Lab Card is used, and the insurance company or self-insured group receives substantial savings on its laboratory charges.
LabOne has several exclusive arrangements with managed care organizations, including Coventry 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 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 2000, LabOne announced the introduction of the Intercept™ drug testing service, a laboratory-based service that identifies commonly-used illicit drugs in oral fluid samples. The Intercept™ 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. (See TRENDS Section for further discussion.)
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, | ||||||
2000 | 1999 | 1998 | ||||
Insurance | $109,349 | 65% | $77,687 | 65% | $69,149 | 68% |
Healthcare | 35,267 | 21% | 24,793 | 21% | 18,600 | 18% |
Substance Abuse | 24,535 | 14% | 17,187 | 14% | 14,478 | 14% |
$169,151 | $119,667 | $102,227 |
(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 initial testing and follow-up testing 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 database 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 assurance programs to ensure that accurate and reliable test results are released to clients. This is accomplished by incorporating both internal and external 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® 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.
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.
Even though only a small portion of LabOne's business encompasses fee-for-service Medicare/Medicaid, LabOne has appointed a Chief Compliance Officer and 13 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.
Congress recently enacted the Health Insurance Portability and Accountability Act of 1996. As a transmitter of health information, 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. Compliance with these regulations may be required as early as 2002.
Sales and Marketing
LabOne's client base consists of insurance companies, managed care organizations, third party administrators, occupational health clinics and employers primarily in the United States and Canada. The Company believes that its ability to provide prompt and accurate results on a cost-effective basis, and its responsiveness to customer needs have been important factors in servicing existing business.
All of the Company's sales representatives for the insurance market have significant business experience in the insurance industry or clinical laboratory-related fields. These representatives call on major clients several times each year, usually meeting with a medical director or vice president of underwriting. An important part of the Company's marketing effort is directed toward providing its existing clients and prospects with information pertaining to the actuarial benefits of, and trends in, laboratory testing. The Company's sales representatives and its senior management also attend and sponsor insurance industry underwriters' and medical directors' meetings.
The sales representatives for the healthcare industry are experienced in the healthcare benefit market or clinical laboratory-related fields, and each currently work in a specific geographic area. 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 underwriting services market in the United States and Canada is a $800 million to $1 billion industry. The Company serves approximately 12% of this market. The primary competition in the market includes Hooper Holmes, Inc. and Examination Management Services, Inc. In this market, LabOne has developed long term client relationships and a reputation for providing quality products and services tailored specifically to the insurance industry's needs at competitive prices. The insurance services market continues to be highly competitive with the primary focus of the competition being on pricing and the ability to provide more comprehensive underwriting information services in the market. The continued competition has resulted in a decrease in LabOne's average price per service provided. It is anticipated that prices may continue to decline in 2001. The Company continues to develop innovative data management services that differentiate its products from competitors. These services enable LabOne's clients to expedite the underwriting process, saving time and reducing underwriting costs.
The outpatient clinical laboratory testing market is a $20 billion industry which is highly fragmented and very competitive. The Company faces competition from numerous independent clinical laboratories and hospital- or physician-owned laboratories. Many of the Company's competitors are significantly larger and have substantially greater financial resources than LabOne. The Company is working to establish a solid client base through the use of Lab Card and the establishment of exclusive arrangements with 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 65 laboratories that are certified by the Substance Abuse and Mental Health Services Administration. The Company's major competitors are the major clinical chains, Laboratory Corporation of America and Quest Diagnostics, 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 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) | |||
2000 | 1999 | 1998 | |
Sales: | |||
United States | $ 161.1 | 112.5 | 95.7 |
Canada | 8.1 | 7.2 | 6.5 |
Operating Profit (Loss): | |||
United States | $ 3.9 | 7.9 | 11.1 |
Canada | (0.2) | 0.1 | 0.3 |
Identifiable Assets: | |||
United States | $ 126.4 | 116.3 | 95.2 |
Canada | 1.6 | 2.1 | 2.8 |
Technology Development
The technology development department evaluates new commercially available tests and technologies, or develops new assays, and compares them to competing products in order to select the most accurate laboratory procedures. Additionally, LabOne's scientists present findings to clients to aid them in choosing the best tests available to meet their requirements. Total technology development expenditures are not considered significant to the Company as a whole.
Employees
As of February 28, 2001, the Company had 1,366 employees, including 61 part-time employees, representing an increase of 204 employees from the same time in 2000. 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's principal operations are located on 54 acres in Lenexa, Kansas, approximately 15 miles from Kansas City, Missouri. Its 268,000 square foot, custom-designed facility houses the Company's laboratory, administrative and warehouse functions. The facility is owned by the Company and financed through $16.3 million in industrial revenue bonds issued by the City of Lenexa, Kansas. 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 has a five year lease expiring in 2004 for a facility used as office space in Voorhees, New Jersey and leases 14 locations in the eastern United States as regional paramedical offices. 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 2003. 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 2002.
ITEM 3. LITIGATION
In the normal course of business, LabOne had certain lawsuits pending at December 31, 2000. During 2000, LabOne became a co-defendant in several cases challenging the processes and science underlying the determination of substituted or adulterated specimens submitted for toxicology testing. The Company believes that it has properly applied regulatory guidelines required for such testing and that the resolution of these claims will have no material adverse impact on the Company's financial results.
The Comptroller of the State of Texas conducted an audit of LabOne for sales and use tax compliance for the years 1991 through 1997 and contended that LabOne's insurance laboratory services are taxable under the Texas tax code. The original assessment of $1.9 million was reduced to only include sales of services for applicants who were residents of Texas. LabOne paid the revised assessment of $521,000 under protest in 2000 and is petitioning the Court for recovery of these amounts, including an additional $47,000 filed and paid in protest during 2001 for the period 1998 through August 1999.
The Internal Revenue Service has performed a review of the reported tax paid by ExamOne World Wide of New Jersey, Inc., and has proposed an increase of the tax reported of $45,000 for the quarters beginning March 31, 1992 through December 31, 1994. LabOne is contesting the claim which has been returned to the Internal Revenue Service examination division for further consideration. No consideration of the potential outcome can be made at this time.
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® under the symbol LABS. As of March 1, 2001, the outstanding shares were held by approximately 4,500 shareholders of record.
During 1999, the Company paid quarterly dividends of $0.20 per common share in the first two quarters and $0.18 per common share in the third and fourth quarters. The Company did not pay a dividend during 2000. The Board of Directors eliminated the quarterly dividend to retain cash flow to finance the Company's debt obligations and growth plans. Additionally, the Company's expanded line of credit with Commerce Bank, N.A. currently prohibits the payment of dividends under the terms of the line of credit. The Board of Directors will review the dividend policy on a periodic basis.
The following are the high and low prices of the stock for each quarter of 2000 and 1999 (split adjusted):
2000 | 1999 | |||
High | Low | High | Low | |
1st Quarter | $8.75 | 5.63 | 12.75 | 10.08 |
2nd Quarter | 7.88 | 4.00 | 11.33 | 7.88 |
3rd Quarter | 10.31 | 5.06 | 11.00 | 8.25 |
4th Quarter | 8.98 | 4.38 | 10.00 | 5.88 |
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial information and operating data regarding the Company. This information should be read in conjunction with Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Item 14. (a) (1) and (2), CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The balance sheet data as of December 31, 2000, 1999, 1998, 1997 and 1996, and the statement of operations data for each of the years in the five-year period ended December 31, 2000, 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)
2000 | 1999 | 1998 | 1997 | 1996 | |
Sales | $ 169,151 | 119,667 | 102,227 | 78,926 | 59,432 |
Earnings (loss) from continuing operations | (524) | 2,859 | 4,877 | (8,103) | (4,226) |
Loss from discontinued operations | | | | (2,342) | (770) |
Net earnings (loss) | $ (524) | 2,859 | 4,877 | (10,446) | (4,996) |
Diluted earnings (loss) from continuing operations per common share |
$ (0.05) | 0.27 | 0.50 | (0.83) | (0.43) |
Diluted loss from discontinued operations per common share |
| | | (0.24) | (0.08) |
Diluted earnings (loss) per common share | $ (0.05) | 0.27 | 0.50 | (1.07) | (0.51) |
Dividends per common share | $ | 0.76 | 0.80 | 0.80 | 0.80 |
Total assets | $ 127,979 | 118,443 | 98,007 | 74,482 | 196,783 |
Long term debt | 38,677 | 29,615 | 18,097 | | |
Stockholders' equity | 64,711 | 71,029 | 54,539 | 56,439 | 174,024 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
2000 Compared to 1999
Revenue for the year ended December 31, 2000 was $169.2 million as compared to $119.7 million in 1999. The increase of $49.5 million, or 41%, was due to increases in insurance services revenue of $31.7 million, healthcare revenue of $10.5 million and SAT revenue of $7.3 million. The insurance services segment revenue increased from $77.7 million in 1999 to $109.3 million due primarily to increases of $25.9 million in paramedical testing and an increase of $5.5 million in SBSI revenue. Insurance laboratory testing decreased 2% due to a 1% decrease in average revenue per applicant and a slight decrease in total applicants tested. Healthcare laboratory revenue increased from $24.8 million in 1999 to $35.3 million in 2000 primarily due to a 46% increase in testing volumes. SAT revenue increased from $17.2 million in 1999 to $24.5 million in 2000 primarily due to a 54% increase in testing volumes, partially offset by lower revenue per specimen.
Cost of sales increased $42.7 million, or 60%, for the year as compared to the prior year. This increase is primarily due to increases in paramedical collections, payroll and the cost of motor vehicle and physician statements due to the acquisition and subsequent growth of ExamOne and growth in the healthcare and SAT markets. Insurance segment cost of sales expenses increased to $72.7 million as compared to $41.9 million during 1999 due to the growth of ExamOne and SBSI. Healthcare cost of sales expenses were $23.6 million as compared to $17.1 million during 1999. SAT cost of sales expenses were $18.0 million as compared to $12.6 million during 1999. The increases in the healthcare and SAT segments are due primarily to increased testing volumes.
As a result of the above factors, gross profit increased $6.8 million, or 14%, from $48.1 million in 1999 to $54.9 million in 2000. Insurance gross profit increased $0.9 million, or 2%, to $36.7 million in 2000. Healthcare gross profit improved $4.0 million, from $7.7 million in 1999 to $11.7 million in 2000. SAT gross profit increased $1.9 million from $4.6 million last year to $6.5 million in 2000.
Selling, general and administrative (SGA) expenses increased $11.1 million, or 28%, in 2000 as compared to 1999 primarily due to increases in payroll and benefits, depreciation and amortization expenses. Payroll expenses increased $5.6 million or 30% for the year due to a 33% increase in SGA employees related to growth in the healthcare and SAT divisions and the addition of ExamOne. Depreciation expense increased $1.3 million as compared to last year primarily related to information systems. Amortization expense increased $1.0 million primarily due to a full year of merger goodwill and ExamOne purchase goodwill. Insurance overhead expenditures, including allocated overhead, increased to $26.6 million as compared to $20.3 million in 1999 primarily due to the addition of ExamOne. Healthcare overhead, including allocated overhead, was $14.5 million as compared to $12.2 million in 1999. SAT overhead, including allocated overhead, increased from $5.4 million to $6.9 million. These increases are due to the revenue growth in each segment. The allocation of corporate overhead to the healthcare and SAT segments increased to $7.2 million for the year, as compared to $6.4 million in 1999. Overhead allocated to the insurance segment was $13.3 million for the year.
Operating income decreased from $8.0 million in 1999 to $3.7 million in 2000. The insurance services segment, including overhead allocations, had operating income of $10.1 million as compared to $15.5 million in 1999. The healthcare segment, including overhead allocations, experienced an operating loss of $2.8 million for 2000 as compared to an operating loss of $4.5 million in 1999. The SAT segment, including overhead allocations, had an operating loss of $0.4 million in 2000 as compared to a loss of $0.8 million in 1999. Unallocated operating expenses for the year were $3.2 million related to amortization and corporate expenses. Unallocated operating expenses in 1999 were $2.2 million primarily due to merger expenses, partially offset by gains on the sale of the former laboratory and administrative facilities.
In the fourth quarter 2000, operating income was reduced $2.1 million due to the Company increasing its allowance for doubtful accounts and recognizing other additional expenses. During the quarter, one of the largest SAT clients became delinquent on its trade payments, resulting in the Company reaching an agreement to exchange the trade receivable for a short-term note receivable. As part of the agreement, the balance due from the client was reduced by $0.2 million (See TRENDS) . The Company increased its allowance for doubtful accounts by $0.8 million, due to the specific SAT client and an additional allowance for healthcare receivables. Other additional expenses include $0.7 million in one-time payroll charges, due primarily to severance expense and certain employees' bonus arrangements entered into and in connection with the expansion of ExamOne and SAT.
Non operating expense increased $1.3 million in 2000 as compared to 1999, primarily due to increased interest expense on the line of credit borrowings. Average income tax expense was 138% of pretax income in 2000 as compared to 48% in 1999. The increase is due to the combination of lower pretax earnings and full-year merger amortization expense which is not deductible for tax purposes.
The combined effect of the above factors resulted in a net loss of $0.5 million, or $0.05 per share as compared to net earnings of $2.9 million, or $0.27 per share, in 1999.
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, 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. 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 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.
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 expense during 2000 was $4.3 million. Amortization expense in the future, excluding any adjustments or future goodwill from additional acquisitions, is scheduled to be $4.2 million in 2001, $3.5 million in 2002, $2.2 million in 2003 and $1.7 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 underwriting services market continues to be highly competitive. The primary focus of the competition has been on pricing and on the integration of additional services such as paramedical services or connectivity. LabOne continues to maintain its market leadership by providing quality products and services at competitive prices. Prices may continue to decline during 2001 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 (ExamOne) and included in the insurance services division of LabOne. 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 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 through the Lab Card Program, aggressive marketing to the physician community and new managed care agreements. The Lab Card Program now has more than 3 million members. In 2000, the program added its largest client to date, Coventry Health Care (formerly Principal Life Insurance Company). The program continued to expand through new members as well as increased participation from existing members.
In addition to its Lab Card covered lives, the healthcare division signed exclusive managed care outpatient laboratory service contracts with Blue Cross and Blue Shield of Kansas City and Kaiser Permanente of Kansas City in early 2000. Including these organizations, LabOne services over 750,000 managed care lives. 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 ™ 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 markets this new service to employers nationwide.
A specific bad debt risk exposure exists in the SAT division. In February 2001, the Company entered into an agreement with one of its largest SAT clients whereby the Company exchanged its trade receivable from the SAT client for a short-term note receivable. In conjunction with the exchange, the Company obtained additional guarantees and more favorable terms under a related services agreement with the SAT client. At the exchange date, the book value of the trade receivable was $2.3 million before an allowance for doubtful accounts of $0.5 million. The note receivable is payable by the SAT client to the Company in weekly installments through June 2001. The SAT client has met its payment commitments through March 23, 2001. The remaining balance of the note receivable at March 23, 2001 was $1.5 million. For trade receivables generated after January 2001, the agreement requires the SAT client to pay its trade liability within 30 days of its receipt of the Company's monthly invoice. There may be an adverse and material financial effect on the Company in the event of default on this agreement by the SAT client.
In addition, there is a general bad debt risk exposure in the SAT and healthcare divisions. The Company has estimated the exposure based on historical information and expected collection rates, and has reserved an appropriate allowance for doubtful accounts.
The Company's new facility was financed through the City of Lenexa, Kansas, with industrial revenue bonds. In conjunction with the bonds, LabOne received 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 exceeds $4 million.
LIQUIDITY AND CAPITAL RESOURCES
LabOne's working capital position increased from $19.4 million at December 31, 1999, to $24.6 million at December 31, 2000. This increase is primarily due to cash provided by operations and line of credit borrowings exceeding capital additions and debt payments. Net cash provided by operations decreased from $12.0 million in 1999 to $4.4 million in 2000 due primarily to the reduction in net earnings (loss) and an increase in accounts receivable. The increase is partially attributable to revenue growth and a SAT client who became delinquent (See TRENDS). Accounts receivable grew from $26.3 million as of December 31, 1999 to $33.9 million as of December 31, 2000, due primarily to an increase in revenue growth from all three segments. Total cash and investments at December 31, 2000, were $1.6 million, as compared to $3.0 million at December 31, 1999. Management expects to be able to fund operations from a combination of cash flow from operations and 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 $8.0 million. During the first quarter 2000, the Board of Directors eliminated the quarterly dividend to retain cash flow to finance the Company's growth plans and for other corporate purposes.
During 2000, the Company spent $9.1 million for capital investments, as compared to $12.8 million in 1999 and $28.5 million in 1998. Capital expenditures for 2000 were primarily related to expansion of all three business segments, including $3.9 million for information systems improvements and $2.0 million in additional laboratory equipment. 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. Of the amount spent in 1998, approximately $21.6 million was for construction of the Company's new facility, and $3.0 million net cash was used in the purchase of SBSI. Future capital asset expenditures, excluding strategic expansions, are expected to be approximately $6 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 $24.4 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 6.1% as of March 1, 2001. The bonds mature over the next nine years in increments of $1.85 million per year plus interest. The second principal payment of $1.85 million was paid in September 2000. Interest on the Company's line of credit is currently based on the 30-day LIBOR rate plus 125 basis points and including bank fees is approximately 6.7% as of March 1, 2001.
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. During 2000, the Company repurchased 841,000 shares at a cost of approximately $5.9 million. The Company increased its available line of credit from $15 million to $25 million to accommodate stock repurchases.
During the fourth quarter, the Company adjusted its allowance for doubtful accounts and recognized other additional expenses. These adjustments resulted in the Company not meeting all of the financial covenants on its line of credit and letter of credit. The Company obtained waivers on both deficiencies. The financial impact resulting from paying additional bank fees is considered immaterial.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A foreign currency risk exposure exists due to billing Canadian subsidiary revenue in Canadian dollars and the direct laboratory expenses associated with this revenue being incurred in US dollars. This exposure is not considered to be material. Any future material Canadian currency fluctuations against the US$ 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 $16 million in industrial revenue bonds and $23 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 6.1% as of March 1, 2001. The interest expense on the line of credit is based on the 30-day LIBOR rate plus 1.25% and is currently approximately 6.7%. Any future increase in interest rates would result in additional interest expense which could be material and could result in a decision to enter into a long-term interest rate swap transaction.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement was amended in June 2000 with Statement of Financial Accounting Standards No. 138 ("SFAS 138"), Accounting for Certain Derivative Instruments and Certain Hedging Activities". This statement establishes accounting and reporting standards for derivative financial instruments and for hedging activities. LabOne does not currently have any derivative instruments or hedging activities. The adoption of SFAS 133, as amended, did not have a material impact on the Company.
In March 2000, the FASB issued Interpretation No 44 "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" (FIN 44"). FIN 44 clarifies the definition of " employee" for purposes of applying APB Opinion No. 25 "Accounting for Stock Issued to Employees", the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting effects of modifications to the terms of a previously fixed stock option or award, the accounting for an exchange of stock compensation awards in a business combination and other issues. FIN 44 was effective July 1, 2000. The implementation of FIN 44 did not have a material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB101"), which clarifies certain conditions to be met in order to recognize revenue. The implementation of SAB 101 did not have a material effect on the Company's financial statements.
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 Class B Directors," "Security Ownership of Management," "Security Ownership of Certain Beneficial Owners," "Executive Compensation" and "Certain Relationships and Related Transactions" 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 10, 2001, is incorporated into Items 10, 11, 12 and 13 above by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) and (2) -- The following consolidated financial statements and schedule are attached as a separate section of this report entitled "Consolidated Financial Statements and Schedule":
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, December 31, 2000 and 1999
Consolidated Statements of Operations, Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity,
Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows, Years Ended
December 31, 2000, 1999 and 1998
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
None.
(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). | |
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 and Rights of Series A Preferred Stock, dated February 11, 2000 - attached as Exhibit 3.2 to Annual Report on Form 10-K of LabOne , Inc., a Missouri corporation, for the year ended December 31, 1999. | |
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 of LabOne, Inc., a Delaware corporation, for the quarter ended September 30, 1998 (File No. 0-15975). | |
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). | |
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., issued to Larry Glenn, dated November 5, 1999 - attached as Exhibit 4.8 to the Annual Report on Form 10-K of LabOne, Inc., a Missouri corporation, for the year ended December 31, 1999. | |
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). ** | |
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. ** | 50 |
10.10* | Form of Amended and Restated Indemnification Agreement between the Registrant and its directors - attached as Exhibit 10.10 to the Annual Report on Form 10-K of LabOne, Inc., a Missouri corporation, for the year ended December 31, 1999. | |
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* | 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). ** | |
10.13* | 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* | Employment Agreement between LabOne, Inc. and John W. McCarty - attached as Exhibit 10 to the Quarterly Report on Form 10-Q of LabOne, Inc., a Missouri corporation, for the quarter ended March 31, 2000. ** | |
10.15* | 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). ** | |
10.16 | Amendment to paragraph 2 of Stock Plan for Non-Employee Directors. ** | 51 |
10.17* | LabOne, Inc. 2000 Stock Purchase Loan Program - attached as Exhibit 10 to the Quarterly Report on Form 10-Q of LabOne, Inc., a Missouri corporation, for the quarter ended September 30, 2000. ** | |
10.18 | Employment Agreement between LabOne, Inc. and W. Thomas Grant II, dated February 11, 2000. ** | 52 |
10.19 | Consulting Agreement between LabOne, Inc. and James R. Seward, dated January 6, 2000. ** | 63 |
10.20 | Consulting Agreement between LabOne, Inc. and Robert D. Thompson, dated January 24, 2000. ** | 66 |
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. | 69 |
99 | Cautionary Statement under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. | 70 |
* 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
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/ John W. McCarty John W. McCarty |
By | /s/ Kurt E. Gruenbacher Kurt E. Gruenbacher |
Title: | Executive V.P. and Chief Financial Officer | Title: | V.P. Finance, Chief Accounting Officer, Treasurer and Assistant Secretary |
Date: | April 5, 2001 | Date: | April 5, 2001 |
By: | /s/ W. Thomas Grant II W. Thomas Grant II |
By: | /s/ John W. McCarty John W. McCarty |
Title: | Chairman of the Board, President and Chief Executive Officer |
Title: | Executive V.P. and Chief Financial Officer |
By: | /s/ Kurt E. Gruenbacher Kurt E. Gruenbacher |
By: | */s/ Joseph H. Brewer Joseph H. Brewer |
Title: | V.P. Finance, Chief Accounting Officer, Treasurer and Assistant Secretary |
Title: | Director |
By: | */s/ Peter C. Brown Peter C. Brown |
By: | */s/ William D. Grant William D. Grant |
Title: | Director | Title: | Director |
By: | */s/ Richard S. Schweiker Richard S. Schweiker |
By: | */s/ James R. Seward James R. Seward |
Title: | Director | Title: | Director |
By: | */s/ Janet M. Stallmeyer Janet M. Stallmeyer |
By: | */s/ Chester B. Vanatta Chester B. Vanatta |
Title: | Director | Title: | Director |
By: | */s/ John E. Walker John E. Walker |
By: | */s/ R. Dennis Wright R. Dennis Wright |
Title: | Director | Title: | Director |
* By: | /s/ Gregg R. Sadler Gregg R. Sadler |
||
Attorney-in-fact |
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, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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
February 9, 2001
LabOne, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2000, and 1999
Assets | 2000 | 1999 |
Current assets: | ||
Cash and cash equivalents | $ 1,571,734 | 2,983,644 |
Accounts receivable, net of allowance for doubtful accounts of $4,406,612 in 2000 and $1,981,285 in 1999 |
33,916,445 | 26,331,960 |
Income taxes receivable | 2,065,750 | 1,643,520 |
Inventories | 3,276,794 | 3,186,853 |
Prepaid expenses and other current assets | 3,948,390 | 1,772,884 |
Deferred income taxes (note 4) | 2,740,824 | 1,328,027 |
Total current assets | 47,519,937 | 37,246,888 |
Property, plant, and equipment: | ||
Land | 2,380,654 | 2,380,654 |
Building | 28,905,915 | 28,441,638 |
Laboratory equipment | 22,732,874 | 20,387,176 |
Data processing equipment and software | 24,034,241 | 19,932,302 |
Office and transportation equipment | 10,046,536 | 8,224,223 |
Leasehold improvements | 492,472 | 240,244 |
Construction in progress | 652,307 | 1,304,649 |
89,244,999 | 80,910,886 | |
Less accumulated depreciation and amortization | 43,936,028 | 38,106,948 |
Net property, plant, and equipment | 45,308,971 | 42,803,938 |
Other assets: | ||
Intangible assets, net of accumulated amortization (note 2) |
34,728,754 | 37,868,921 |
Bond issue costs, net of accumulated amortization of $40,758 in 2000 and $23,291 in 1999 |
151,389 | 168,856 |
Deferred income taxes (note 4) | | 93,326 |
Deposits and miscellaneous | 270,124 | 260,795 |
Total assets | $ 127,979,175 | 118,442,724 |
Liabilities and Stockholders' Equity | 2000 | 1999 |
Current liabilities: | ||
Accounts payable | $ 14,516,703 | 11,852,403 |
Accrued payroll and benefits | 4,457,136 | 2,793,721 |
Other accrued expenses | 1,714,033 | 727,241 |
Other current liabilities | 279,228 | 551,146 |
Notes payable | 81,250 | |
Current portion of long-term debt (note 3) | 1,878,845 | 1,873,577 |
Total current liabilities | 22,927,195 | 17,798,088 |
Deferred income taxes (note 4) | 1,663,669 | |
Long-term payable (note 2) | 1,274,415 | 1,360,000 |
Long-term debt (note 3) | 37,402,934 | 28,255,139 |
Total liabilities | 63,268,213 | 47,413,227 |
Stockholders' equity (note 2): | ||
Preferred stock, $0.01 par value per share; 3,000,000 shares authorized, none issued |
| |
Common stock, $0.01 par value per share; 40,000,000 shares authorized, 13,050,020 shares issued (notes 1 and 6) |
130,500 | 130,500 |
Additional paid-in capital | 31,609,884 | 32,035,445 |
Accumulated other comprehensive income | (832,280) | (750,115) |
Retained earnings | 69,234,884 | 69,758,872 |
100,142,988 | 101,174,702 | |
Less treasury stock of 2,324,671 shares in 2000 and 1,516,527 shares in 1999, at cost |
35,432,026 | 30,145,205 |
Total stockholders' equity | 64,710,962 | 71,029,497 |
Total liabilities and stockholders' equity | $ 127,979,175 | 118,442,724 |
See accompanying notes to consolidated financial statements. |
LabOne, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31, 2000, 1999, and 1998
2000 | 1999 | 1998 | |
Sales | $ 169,150,790 | 119,666,534 | 102,227,216 |
Cost of sales | 114,274,324 | 71,543,532 | 56,719,603 |
Gross profit | 54,876,466 | 48,123,002 | 45,507,613 |
Selling, general, and administrative expenses | 51,134,170 | 40,942,628 | 34,100,884 |
Provision for loss on disposal of assets | | (864,340) | |
Earnings from operations | 3,742,296 | 8,044,714 | 11,406,729 |
Other income (expenses): | |||
Investment income | 188,823 | 370,262 | 861,359 |
Interest expense | (2,511,738) | (1,410,009) | (70,335) |
Other, net | (48,575) | (24,118) | (42,118) |
Total other income (expense), net | (2,371,490) | (1,063,865) | 748,906 |
Earnings before income taxes | 1,370,806 | 6,980,849 | 12,155,635 |
Income taxes (benefit) (note 4): | |||
Current | 1,554,929 | 849,758 | 5,823,543 |
Deferred | 339,865 | 2,505,940 | (203,496) |
Total income taxes | 1,894,794 | 3,355,698 | 5,620,047 |
Earnings (loss) before minority interest | (523,988) | 3,625,151 | 6,535,588 |
Minority interest (note 2) | | (766,375) | (1,658,308) |
Net earnings (loss) | $ (523,988) | 2,858,776 | 4,877,280 |
Basic and diluted earnings (loss) per share | $ (0.05) | 0.27 | 0.50 |
See accompanying notes to consolidated financial statements. |
LabOne, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
December 31, 2000, 1999, and 1998
Common stock |
Additional paid-in capital |
Accumulated other comprehensive income- foreign currency translation |
Retained earnings |
Treasury stock |
Compre- hensive income |
Total stockholders' equity |
|
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 ($.80 per share) | | | | (7,786,924) | | (7,786,924) | |
Issuance of 168,885 shares of treasury stock related to acquisiton |
| 1,148,733 | | | | 1,148,733 | |
Balance at December 31, 1998 | 7,500,000 | 2,920,357 | (683,270) | 74,945,615 | (30,143,604) | 54,539,098 | |
Comprehensive income: | |||||||
Net earnings | | | | 2,858,776 | | 2,858,776 | 2,858,776 |
Adjustment from foreign currency translation | | | (66,845) | | | (66,845) | (66,845) |
Comprehensive income | 2,791,931 | ||||||
Cash dividends ($.76 per share) | | | | (8,045,519) | | (8,045,519) | |
Director's stock compensation | | (20,317) | | | | (20,317) | |
Stock split and change in par value | (7,369,500) | 7,369,500 | | | | | |
Merger transaction | | 21,765,905 | | | | 21,765,905 | |
Repurchase of 182 shares for treasury stock | | | | | (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 | |
Comprehensive income: | |||||||
Net loss | | | | (523,988) | | (523,988) | (523,988) |
Adjustment from foreign currency translation | | | (82,165) | | | (82,165) | (82,165) |
Comprehensive income | (606,153) | ||||||
Director's stock compensation | | (288,033) | | | 462,895 | 174,862 | |
Sale of treasury stock (10,000 shares) | | (137,528) | | | 198,777 | 61,249 | |
Repurchase of 841,431 shares for treasury stock | | | | | (5,948,493) | (5,948,493) | |
Balance at December 31, 2000 | $ 130,500 | 31,609,884 | (832,280) | 69,234,884 | (35,432,026) | 64,710,962 | |
See accompanying notes to consolidated financial statements. |
LabOne, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
December 31, 2000, 1999, and 1998
2000 | 1999 | 1998 | |
Cash provided by (used for) operations: | |||
Net earnings (loss) | $ (523,988) | 2,858,776 | 4,877,280 |
Adjustments to reconcile net earnings to net cash provided by operations, net of acquisitions: |
|||
Depreciation and intangibles amortization | 10,866,556 | 8,518,958 | 6,191,577 |
Amortization of investment premiums | | | (36,767) |
Deferred income taxes | 339,865 | 3,040,662 | (315,215) |
(Gain) loss on disposal of property, plant, and equipment |
5,259 | (650,926) | (18,606) |
Provision for loss on accounts receivable | 3,128,091 | 2,877,949 | 1,502,571 |
Earnings applicable to minority interests | | 766,375 | 1,658,308 |
Directors' stock compensation | 174,862 | (20,317) | 62,620 |
Changes in: | |||
Short-term investments | | | 1,443,254 |
Accounts receivable | (10,712,576) | (8,160,453) | (6,774,958) |
Income tax receivable | (422,230) | (1,243,744) | 1,111,284 |
Inventories | (89,941) | (1,363,041) | 404,990 |
Prepaid expenses and other current assets | (2,175,506) | 979,848 | (269,709) |
Deposits and miscellaneous | (9,329) | 6,280 | (1,710,496) |
Accounts payable | 2,664,300 | 5,499,704 | 892,401 |
Income taxes payable | | (45,249) | |
Accrued payroll and benefits | 1,663,415 | (1,354,872) | (619,281) |
Other accrued expenses | (211,666) | 69,998 | 186,919 |
Other current liabilities | (271,918) | 196,948 | (28,793) |
Net cash provided by operations | $ 4,425,194 | 11,976,896 | 8,557,379 |
Cash provided by (used for) investment activities: | |||
Purchase of investments held-to-maturity | $ | | (5,461,090) |
Proceeds from maturities of investments held-to-maturity |
| | 6,701,893 |
Property, plant, and equipment additions, net | (9,018,527) | (10,744,497) | (25,489,014) |
Acquisition of businesses (note 2) | | (2,058,460) | (2,967,883) |
Acquisition of minority interest (note 2) | | (12,640,443) | |
Net cash used for investment activities | $ (9,018,527) | (25,443,400) | (27,216,094) |
Cash provided by (used for) financing activities: | |||
Issuance of treasury stock | $ 61,249 | | |
Purchase of treasury stock | (5,948,493) | (1,601) | |
Proceeds from bond issue or line of credit | 11,000,000 | 12,000,000 | 19,900,000 |
Bond issue costs | | | (192,147) |
Cash dividends to minority interest | | (935,730) | |
Payments on long-term debt | (1,856,028) | (1,864,006) | (1,937) |
Cash dividends | | (8,045,519) | (7,786,924) |
Net cash provided by financing activities | $ 3,256,728 | 1,153,144 | 11,918,992 |
Effect of foreign currency translation on cash | (75,305) | 73,668 | (165,965) |
Net decrease in cash and cash equivalents | (1,411,910) | (12,239,692) | (6,905,688) |
Cash and cash equivalents at beginning of year | 2,983,644 | 15,223,336 | 22,129,024 |
Cash and cash equivalents at end of year | $ 1,571,734 | 2,983,644 | 15,223,336 |
Supplemental disclosures of cash flow information: | |||
Cash paid during the year for: | |||
Income taxes | $ 2,440,516 | 2,279,366 | 5,450,841 |
Interest paid | $ 2,439,378 | 1,377,621 | 240,586 |
Supplemental schedule of noncash investing and financing activities: |
|||
Details of acquisitions: | |||
Fair value of assets acquired - acquisition | $ | 5,796,621 | 6,223,162 |
Fair value of assets acquired - merger | | 34,259,789 | |
Liabilities assumed | | (2,078,342) | (645,198) |
Stock issued | | (19,278,214) | (2,000,000) |
Liabilities issued | | (1,440,000) | |
Fair value of stock options and warrants | | (2,341,132) | |
Cash paid | | 14,918,722 | 3,577,964 |
Less cash acquired | | 219,819 | 610,081 |
Net cash paid for acquisition | $ | 14,698,903 | 2,967,883 |
See accompanying notes to consolidated financial statements. |
LabOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(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, Inc. (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
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.
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 accounting principles generally accepted in the United States of America 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, 2000 and 1999 approximates their carrying values.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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:
2000 | 1999 | 1998 | |
Weighted average common shares (basic) | 10,868,666 | 10,443,728 | 9,733,655 |
Employee stock options | | 7,704 | |
Weighted average common shares and common share equivalents (diluted) |
10,868,666 | 10,451,432 | 9,733,655 |
(2) Merger, Acquisitions, and Intangible Assets
The cost and accumulated amortization of intangible assets at December 31, 2000 and 1999 are as follows:
2000 | 1999 | |
Excess of cost over fair value of net assets acquired | $ 59,496,203 | 58,383,330 |
Accumulated amortization | 24,767,449 | 20,514,409 |
Intangible assets, net of accumulated amortization | $ 34,728,754 | 37,868,921 |
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 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 $24,383,000 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 $3,489,000 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 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, 2000 and 1999 assumes the acquisitions occurred as of January 1, 1998:
2000 | 1999 | 1998 | |
Sales | $169,150,790 | 128,581,000 | 118,278,000 |
Net earnings (loss) | (523,988) | 2,598,000 | 4,198,000 |
Earnings per share - basic and diluted | (0.05) | 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.
(3) Long-Term Debt
Long-term debt consists of the following as of December 31, 2000 and 1999:
2000 | 1999 | |
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 (6.64% at December 31, 2000), secured by the Company's facility and an irrevocable bank letter of credit | $ 16,300,000 | 18,150,000 |
Line of credit, variable interest rate (6.56% at December 31, 2000), principal due March 10, 2002 |
23,000,000 | 12,000,000 |
Various capital leases, principal and interest payable monthly through May 2003, interest ranging from 7% to 12%, collateralized by office equipment | 60,567 | 66,595 |
Total long-term debt | 39,360,567 | 30,216,595 |
Less: | ||
Current portion | 1,878,845 | 1,873,577 |
Unamortized discount | 78,788 | 87,879 |
Long-term debt, net | $ 37,402,934 | 28,255,139 |
Aggregate maturities of long-term debt as of December 31, 2000 are as follows:
Bonds | Line of | Capital | ||
payable | credit | leases | Total | |
2001 | $ 1,850,000 | | 28,845 | 1,878,845 |
2002 | 1,850,000 | 23,000,000 | 19,661 | 24,869,661 |
2003 | 1,850,000 | | 6,923 | 1,856,923 |
2004 | 1,800,000 | | 4,548 | 1,804,548 |
2005 | 1,800,000 | | 590 | 1,800,590 |
Thereafter | 7,150,000 | | | 7,150,000 |
$ 16,300,000 | 23,000,000 | 60,567 | 39,360,567 |
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 December 31, 2000 was approximately 6.56%. The principal of the line of credit is due on March 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. Certain financial ratios were not met during the year, however, a waiver from such ratios was obtained by the Company subsequent to year-end.
(4) Income Taxes
The components of current and deferred income taxes (benefit) are as follows for the years ended December 31:
2000 | 1999 | 1998 | |
Current: | |||
Federal | $ 1,974,434 | 652,087 | 4,602,389 |
State | (328,696) | 82,612 | 1,104,033 |
Foreign | (90,809) | 115,059 | 117,121 |
Total current | 1,554,929 | 849,758 | 5,823,543 |
Deferred: | |||
Federal | (30,722) | 2,490,548 | (164,999) |
State | 289,848 | (12,669) | 25,177 |
Foreign | 80,739 | 28,061 | (63,674) |
Total deferred | 339,865 | 2,505,940 | (203,496) |
$ 1,894,794 | 3,355,698 | 5,620,047 |
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):
2000 | 1999 | 1998 | |
Application of statutory income tax rate | $ 466,074 | 2,373,488 | 4,132,916 |
Goodwill amortization | 1,078,477 | 803,920 | 576,618 |
Changes in valuation allowance and recomputation of deferred tax assets |
130,603 | | |
Foreign taxes, net | (3,182) | 61,379 | 7,598 |
State income taxes, net | (25,639) | 46,162 | 631,076 |
Other, net | 248,461 | 70,749 | 271,839 |
$ 1,894,794 | 3,355,698 | 5,620,047 |
The tax effects of temporary differences that create significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below:
2000 | 1999 | |
Deferred current income tax assets (liabilities): | ||
Accrued vacation | $ 470,666 | 361,914 |
Accrued expenses not deducted for tax | 507,036 | 109,648 |
Bad debts | 1,720,071 | 763,403 |
Inventory adjustment | | 33,391 |
Other items | 43,051 | 59,671 |
Total deferred current income tax assets, net | 2,740,824 | 1,328,027 |
Deferred noncurrent tax assets (liabilities): | ||
Capital loss and net operating loss carryforward | 147,485 | 934,658 |
Depreciation and amortization | (445,411) | (168,796) |
Capitalized software | (524,457) | |
Goodwill | (370,241) | |
Acquired subsidiary cash to accrual adjustment | (64,381) | (92,767) |
Other items | (259,179) | 16,143 |
Kansas High Performance Incentive Program credit carryforward, net |
4,764,182 | 3,363,000 |
3,247,998 | 4,052,238 | |
Valuation allowance | (4,911,667) | (3,958,912) |
Total deferred noncurrent tax assets (liabilities), net | (1,663,669) | 93,326 |
Total deferred income tax, net | $ 1,077,155 | 1,421,353 |
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 for potential use in 1999 and subsequent years were approximately $4,060,000. LabOne used HPIP credits of approximately $71,000 and $170,000 in 2000 and 1999, respectively. 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 qualified credits already earned.
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. However, LabOne was able to use all of the federal net operating loss deduction in 2000. The usage of this net operating loss reduced income taxes by $272,000.
(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 net of forfeitures to the plan were $2,351,000, $2,056,000, and $1,803,000 for the years ended December 31, 2000, 1999, and 1998, 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 net of forfeitures for the years ended December 31, 2000, 1999, and 1998 were $913,000, $830,000, and $663,000, 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.
In connection with the merger transaction, stock options held by premerger LabOne employees were converted on a 1-for-1 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, 2000, 1999, and 1998 and changes during the years then ended is presented below:
2000 | 1999 | 1998 | ||||
Fixed options | Number of shares |
Weighted average exercise price |
Number of shares |
Weighted average exercise price |
Number of shares |
Weighted average exercise price |
Outstanding at beginning of year | 1,953,299 | $13.85 | 1,837,927 | $14.30 | 1,614,068 | $14.30 |
Granted | 299,500 | 6.57 | 315,060 | 11.48 | 330,859 | 15.02 |
Exercised | | | (27,000) | 10.31 | (40,300) | 10.64 |
Forfeited | (282,222) | 12.98 | (172,688) | 15.71 | (66,700) | 17.87 |
Outstanding at end of year | 1,970,577 | 12.87 | 1,953,299 | 13.85 | 1,837,927 | 14.38 |
Options exercisable at year-end | 1,242,090 | $13.89 | 1,138,489 | $13.87 | 968,683 | $13.44 |
The following table summarizes information about stock options at December 31, 2000:
Options outstanding | Options exercisable | |||||
Range of exercise prices |
Number out- standing |
Weighted average remaining contractual life (years) |
Weighted average exercise price |
Number exer- cisable |
Weighted average exercise price |
|
$ 5.75 - 6.94 | 294,500 | 9.20 | $ 6.57 | 25,000 | $ 6.13 | |
9.38 - 9.97 | 299,849 | 4.05 | 9.77 | 197,049 | 9.85 | |
11.13 - 11.63 | 301,696 | 3.16 | 11.44 | 301,696 | 11.44 | |
12.17 - 14.38 | 310,397 | 6.55 | 13.39 | 173,237 | 13.77 | |
14.75 - 15.81 | 280,385 | 7.31 | 15.18 | 173,231 | 15.17 | |
15.88 - 17.81 | 394,491 | 6.05 | 17.07 | 290,218 | 17.04 | |
18.50 - 23.88 | 89,259 | 4.02 | 21.28 | 81,659 | 21.44 | |
5.75 - 23.88 | 1,970,577 | 5.94 | 12.87 | 1,242,090 | 13.89 |
The weighted average per share fair value of stock options granted during 2000, 1999, and 1998 was $3.65, $2.46, and $3.54, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:
2000 | 1999 | 1998 | |||
Expected dividend yield | | % | 7.0 | 4.8 | |
Risk-free interest rate | 6.6 | % | 5.8 | 5.0 | |
Expected volatility factor | 46.4 | % | 43.0 | 33.9 | |
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 (loss) per share would have been reduced (increased) by approximately the following: $659,000, or $.06 per share, in 2000; $633,000, or $.06 per share, in 1999; and $515,000, or $.05 per share, in 1998.
Pro forma net earnings reflect only options granted in 2000, 1999, and 1998. 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 2000 and 1999, warrants to purchase 125,000 shares per year 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 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 goodwill.
Following is a summary of line of business information as of and for the years ended December 31, 2000, 1999, and 1998 (in thousands):
2000 | 1999 | 1998 | |
Sales: | |||
Insurance services | $ 109,349 | 77,687 | 69,149 |
Healthcare services | 35,267 | 24,793 | 18,600 |
Substance abuse testing | 24,535 | 17,187 | 14,478 |
Total sales | $ 169,151 | 119,667 | 102,227 |
Operating income (loss): | |||
Insurance services | $ 10,114 | 15,465 | 18,607 |
Healthcare services | (2,824) | (4,472) | (6,188) |
Substance abuse testing | (384) | (771) | 204 |
General corporate expenses | (3,163) | (2,178) | (1,217) |
Investment income | 189 | 370 | 861 |
Other expense, net | (2,561) | (1,433) | (112) |
Earnings before income taxes | 1,371 | 6,981 | 12,155 |
Income tax expense | (1,895) | (3,356) | (5,620) |
Minority interests | | (766) | (1,658) |
Net earnings (loss) | $ (524) | 2,859 | 4,877 |
Identifiable assets: | |||
Insurance services | $ 57,681 | 57,434 | 34,597 |
Healthcare services | 17,757 | 12,001 | 5,493 |
Substance abuse testing | 18,271 | 11,588 | 6,449 |
General corporate assets | 34,270 | 37,420 | 51,468 |
Total assets | $ 127,979 | 118,443 | 98,007 |
Capital expenditures: | |||
Insurance services | $ 1,512 | 7,334 | 2,090 |
Healthcare services | 1,887 | 927 | 501 |
Substance abuse testing | 1,404 | 1,389 | 424 |
General corporate | 4,668 | 5,016 | 22,474 |
Depreciation and amortization: | |||
Insurance services | $ 4,990 | 3,948 | 3,112 |
Healthcare services | 1,433 | 1,019 | 797 |
Substance abuse testing | 1,464 | 1,146 | 810 |
General corporate | 2,980 | 2,406 | 1,473 |
(8) Quarterly Financial Data (Unaudited)
A summary of unaudited quarterly results of operations for 2000 and 1999 is as follows (in thousands except per share data):
Three months ended | ||||||
March 31 | June 30 | September 30 | December 31 | |||
2000: | ||||||
Sales | $ 40,581 | 39,161 | 43,627 | 45,782 | ||
Gross profit | 13,998 | 13,380 | 13,944 | 13,555 | ||
Earnings (loss) before income taxes | 1,157 | 1,090 | 1,196 | (2,072) | ||
Net earnings (loss) | 418 | 364 | 357 | (1,663) | ||
Basic and diluted earnings (loss) per share | 0.04 | 0.03 | 0.03 | (0.16) | ||
Dividends per share | | | | | ||
1999: | ||||||
Sales | $ 27,328 | 28,572 | 28,814 | 34,952 | ||
Gross profit | 11,677 | 11,568 | 11,712 | 13,166 | ||
Earnings before income taxes | 2,341 | 2,021 | 1,345 | 1,273 | ||
Net earnings | 1,000 | 793 | 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 |
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 amounts do not necessarily add to the annual amount as a result of rounding quarterly amounts.
In the fourth quarter 2000, net earnings decreased due to adjustments in the Company's allowance for doubtful accounts and nonrecurring labor charges.
(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 $521,000. In 2000, the Company paid this revised assessment plus an additional $47,000 during 2001 for the years 1998 through August 1999. All amounts paid are under appeal as the Company argues 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.
The Internal Revenue Service has performed a review of the reported tax paid by ExamOne World Wide of New Jersey, Inc., and has proposed an increase of the tax reported of $45,000 for the quarters beginning March 31, 1992 through December 31, 1994. LabOne is contesting the claim which has been returned to the Internal Revenue Service examination division for further consideration. No determination of the potential outcome can be made at this time.
Leases
LabOne has several noncancelable operating leases, primarily for land and buildings, and other commitments that expire through 2004, including a lease for office space from an entity owned by an employee. Rental expense for these operating leases during 2000, 1999, and 1998 amounted to $868,000, $513,000, and $539,000, respectively.
Future minimum lease payments and other commitments under these agreements as of December 31, 2000 are:
Year | Amount |
2001 | $ 1,022,000 |
2002 | 850,000 |
2003 | 640,000 |
2004 | 359,000 |
2005 | 40,000 |
$ 2,911,000 |
Leases are expected to be secured or replaced in the ordinary course of business as they expire.
Schedule I | ||||
LabOne, Inc. and Subsidiaries | ||||
Valuation and Qualifying Accounts | ||||
Years ended December 31, 2000, 1999, and 1998 | ||||
Description | Balance at beginning of year |
Additions- charged to selling, general, and administrative expenses |
Deductions- uncollectible accounts |
Balance at end of year |
Allowance for doubtful accounts: | ||||
Year ended December 31, 2000 | $ 1,981,285 | 3,128,091 | 702,764 | 4,406,612 |
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 |
See accompanying independent auditors' report. |
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.
EXHIBIT 10.16
Amendment to Paragraph 2 of Stock Plan for Non-Employee Directors,
Effective February 11, 2001
The plan shall be administered, construed and interpreted by a committee (the "Committee") which shall consist of not less than two members of the board of Directors of LabOne who are not eligible to receive grants under Section 4 of the Plan; provided, however, that if only one member of the Board of Directors is eligible to receive grants under Section 3 of the Plan, the committee shall consist of one member.
Exhibit 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), made as of February 11, 2000, by and between LabOne, Inc., a Missouri corporation (hereinafter referred to as "LabOne") and W. Thomas Grant, II, a resident of the State of Kansas (hereinafter referred to as "Officer");
W I T N E S S E T H:
WHEREAS, LabOne desires Officer to continue to manage the operations, financial affairs and strategic direction of LabOne, serving as its Chairman of the Board, President and Chief Executive Officer; and
WHEREAS, it is the intention and desire of the parties to enter into a formal agreement whereby two principal purposes will be served, to wit:
A. LabOne will have the benefit of the substantial expertise of Officer for at least the period covered by this Agreement; and
B. Officer will manage and be responsible for the operations, financial affairs and strategic direction of LabOne during the term hereinafter defined and will be motivated by the compensation as set forth herein;
NOW, THEREFORE, in consideration of the continuation of employment of officer with LabOne for the term of this Agreement and of the mutual promises, covenants, representations and warranties contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
SECTION 1.
EMPLOYMENT AND TERM
1.1. Employment. LabOne hereby employs Officer and Officer hereby accepts such employment and agrees to perform the duties described in Section 2 of this Agreement.
1.2. Term.
(a) Base Term. The term of employment shall commence on February 11, 2000 and shall continue for a period of two years therefrom (the "Base Term"), or until terminated as otherwise provided herein.
(b) Termination Subsequent to Change in Control. Notwithstanding any other provision of this Agreement to the contrary, in the event that (i) a change of control of LabOne shall occur at any time during which Officer is in the full-time employment of LabOne or its successor and (ii) within one (1) year after such a change in control, Officer's employment with LabOne or its successor is terminated by LabOne or its successor for any reason other than permanent disability, death or normal retirement, or is voluntarily terminated by Officer for any reason at his sole discretion, LabOne will promptly pay to officer as termination compensation the lump sum amount described below.
The lump sum compensation payable shall be equal to three (3) times the average annual compensation includable in Officer's gross income for the most recent five (5) taxable years ending before the date of the change in control. If Officer has been an employee of LabOne for less than 5 years, Officer's lump sum payment shall be equal to 3 times the average annual compensation includable in Officer's gross income based on the portion of the 5 year period during which officer performed services for LabOne . To the extent that any amount required to be paid hereunder would constitute an "excess parachute payment" within the meaning of Section 28OG(b) of the Internal Revenue Code of 1986, that excess amount need not be paid.
For purposes of this Section 1.2(b), a "change of control" shall be deemed to have taken place if there shall have occurred (i) the sale or other disposition resulting in the transfer of legal or beneficial ownership of, or the right to vote, more than fifty percent (50%) of the outstanding capital stock of LabOne to one or more third-party purchasers, except in connection with an underwritten public offering of the common stock of LabOne, (ii) a merger or consolidation of LabOne with or into any entity, or (iii) a sale or other transfer of substantially all of the assets of LabOne to any person or entity.
In the event of termination of employment under the circumstances described above, LabOne shall pay to Officer the installments of his base salary through the date of termination of employment, any annual incentive bonus for the previous year if such has been approved but not paid and the lump sum amount as termination compensation described above, and any remaining term of this Agreement shall be cancelled. Such payments to Officer and the arrangements provided for by any stock option or other agreement between LabOne and Officer in effect at the time and by any other applicable plan of LabOne will constitute the entire obligation of LabOne to Officer with respect to such termination, and will also constitute full settlement of any claim under law or in equity that Officer might otherwise assert against LabOne or any of its employees on account of such termination.
(c) Annual Extension. Commencing on February 11, 2001 (the "Extension Date") and on each succeeding anniversary of such Extension Date, unless LabOne notifies Officer in accordance with the immediately following sentence that Officer's employment under this Agreement will not be extended, this Agreement and Officer's employment under this Agreement shall automatically and without further action be extended for one (1) year from such Extension Date or anniversary thereof on the same terms and conditions as are set forth herein. If LabOne elects not to extend Officer's employment under this Agreement as provided in the preceding sentence, it shall do so by notifying officer in writing at least sixty (60) days prior to the Extension Date or the applicable anniversary thereof. If La bOne elects not to extend Officer's employment under this Agreement as provided above, such election shall be treated as a termination of officer without cause within the meaning of Section 9.1(e) of this Agreement and LabOne shall pay to officer, in addition to any other sums which may be due to Officer, the lump sum severance payment provided for in Section 9.1(e).
SECTION 2.
DUTIES
2.1. General Duties. Officer shall serve LabOne in the capacities of Chairman of the Board of Directors, President and Chief Executive Officer. Officer shall be responsible for performing the duties generally required of such positions and such other duties in relation to LabOne consistent with Officer's positions as shall from time to time be assigned to Officer by the Board of Directors.
2.2. Full Time. During the term hereof, Officer agrees to devote his full time, attention and skill to the performance of his duties.
2.3. Best Efforts. Officer agrees that he will at all times faithfully, industriously and to the best of his ability, experience and talents, perform all of the duties that may be required of and from him as described above.
2.4. Indemnification and D & O Insurance. LabOne shall provide to Officer coverage under LabOne's director and officer liability insurance and indemnification By-laws, as fully and to the same extent as the same are provided to similar executive officers of LabOne.
SECTION 3.
BASE SALARY
3.1. Annual Base Salary. LabOne shall pay officer, and Officer shall accept from LabOne in full payment for Officer's full time services hereunder, compensation at the rate of Two Hundred Forty-Nine Thousand ($249,000) per annum, payable monthly in periodic equal installments during the year. Such salary shall be reviewed from time to time, but not less often than annually, by the Board of Directors of LabOne and will be subject to such increases, but not decreases, as the Board of Directors of LabOne may determine, having due regard for the efforts of Officer and the results, both financial and otherwise, of LabOne's operations during Officer's tenure.
3.2. Reimbursement of Expenses. LabOne shall reimburse Officer for such reasonable out-of-pocket expenses as are incurred by Officer in order to render the services contemplated hereunder.
3.3. Tax Withholdings. LabOne shall deduct from the compensation payable to Officer all federal, state, and local income tax, social security, FICA, FUTA and other withholdings as required by law.
SECTION 4.
BONUSES AND FRINGE BENEFITS
4.1. Annual Incentive Bonus. During the term hereof, Officer shall be eligible to receive an annual incentive bonus based upon the performance of LabOne in relation to predetermined financial goals established by the Compensation Committee of the Board of Directors of LabOne. Bonuses for less than a full year of service may be granted at the discretion of the Compensation Committee.
4.2. Other Fringe Benefits. Officer shall be entitled to an annual vacation consistent with LabOne's vacation policies for similar executive officers and to participate in such fringe benefit programs as LabOne may make available from time to time to similar executive officers, which shall include reasonable hospital and major medical insurance coverage, long term disability and life insurance in amounts and on terms no less favorable than those provided to similar executive officers of LabOne.
SECTION 5.
NON-COMPETITION
5.1. Restrictive Covenants. In consideration for Officer's employment with LabOne and in further consideration for the compensation provided to officer in Sections 3 and 4 hereof, Officer agrees that during the term of his employment pursuant to this Agreement, and for a period of two (2) years after the termination for any reason of his employment pursuant to this Agreement, he will not, without the prior written consent of LabOne, directly or indirectly, individually or in concert with others, or through the medium of any other corporation, partnership, syndicate, association, joint venture, or other entity or as an employee, officer, director, agent, consultant or affiliate, compete with LabOne, within the hereinafter described region in (i) the urine or blood chemistry testing or analysis business for the insurance industry, or (ii) the urine or blood chemistry container or other supply business for the insurance industry, or (iii) the clinical laboratory testing or substance abuse testing businesses, or (iv) any other business engaged in by LabOne as of the date of the termination of Officer's employment with LabOne, and Officer will not solicit or accept any such business described in any of subparts (i) through (iv) above and which competes with LabOne from any customer who is served by LabOne as of the date of the termination of Officer's employment pursuant hereto, or cause or induce any present or future employee of LabOne to leave the employ of LabOne to accept employment with Officer or with any such entity or person. The region referred to above shall consist of any territory in which LabOne or any of its representatives or agents, as of the date of the termination of Officer's employment pursuant hereto, provides, sells, offers for sale or solicits the sale of urine or blood chemistry testing or analysis, or urine or blood chemistry containers or other supplies related thereto, or clinical laboratory or substance abuse testing, or other services or products. LabOne and Officer agree that in the event that any provision of this Section 5.1 is void or constitutes an unreasonable restriction against Officer, such provision shall not be rendered void, but shall apply with respect to such time or territory or to such other extent as may constitute a reasonable restriction under the circumstances. The foregoing provisions shall not prohibit Officer from owning not more than 3% of the total shares of all classes of stock outstanding of any publicly held company.
5.2. Injunctive Relief. LabOne shall be entitled to appropriate injunctive relief in any court of competent jurisdiction to enforce its rights under Sections 5, 6, 7 and 8 of this Agreement, in addition to any other rights and remedies available to LabOne at law or in equity, it being agreed that any violation of Sections 5, 6, 7 or 8 of this Agreement by Officer is reasonably likely to cause irreparable damage to LabOne which will be difficult or impossible to value in monetary damages.
5.3. Charitable Activities. Nothing in this Section 5 shall be construed as preventing Officer from engaging in charitable, professional, religious or civic activities such as serving on a school board, or as a member of or officer of a professional organization, provided such activity or organization does not compete directly with LabOne.
SECTION 6.
CONFIDENTIAL INFORMATION
6.1. Confidentiality. During the term of and at any time after the termination of this Agreement, Officer will hold in trust and confidence and will not divulge, disclose or convey to any person, firm, corporation or other entity and will keep secret and confidential all trade secrets, proprietary information and confidential information heretofore or hereafter acquired by him concerning LabOne or its subsidiaries, and will not use for himself or others the same in any manner, except to the extent that such information should become no longer a trade secret, proprietary or confidential. Such trade secrets, proprietary information and confidential information shall be deemed to include, but shall not be limited to, information, whether written or not:
(a) of a technical nature, such as but not limited to, technology, inventions, discoveries, improvements, processes, formulae, ideas, know-how, methods, compositions, computer software programs or research projects, including the identity of research organizations and researchers,
(b) of a business nature, such as but not limited to information concerning costs, profits, supplies, suppliers, marketing, sales or lists of customers, and pertaining to future developments, such as but not limited to information concerning research and development or future marketing methods.
(c) The restrictions contained above shall not apply to:
(i) information which at the time of disclosure by LabOne to Officer is in the public domain; or
(ii) information which at the time of disclosure by LabOne to Officer constituted confidential information hereunder, but which thereafter becomes part of the public domain by publication or otherwise through no fault of Officer.
SECTION 7.
DEVELOPMENTS
7.1. Developments. Officer will promptly disclose to LabOne (in form satisfactory to LabOne) all information, technology, inventions, discoveries, improvements, processes, formulae, ideas, know-how, methods, compositions, research projects, computer software programs and developments, whether or not patentable or copyrightable (collectively "Information"), that Officer by himself or in conjunction with any other person or entity conceives, makes, develops or acquires during the term of this Agreement, and that:
(a) are or relate or pertain to the assets, properties, or existing or contemplated business or research activities of LabOne, or
(b) are suggested by, arise out of or result from, directly or indirectly, Officer's association with LabOne, or
(c) arise out of or result, directly or indirectly, in part or fully, from the use of LabOne 's time, labor, materials facilities or other resources (collectively "Developments").
Any Information fitting within any of the descriptions contained in subsections (a), (b) or (c) of this Section 7.1 that is disclosed to any other person, firm or other entity by Officer or used in any manner by Officer within one (1) year following the termination of this Agreement shall be presumed to have been conceived, made, developed or acquired during the term of this Agreement and, thus, to constitute a Development.
7.2. Assignment to LabOne. Officer hereby assigns, transfers and conveys to LabOne all of his right, title and interest in and to any and all such Developments, which Developments shall become and remain the sole and exclusive property of LabOne. At any time and from time to time, upon the request of LabOne, Officer will execute and deliver any and all instruments, documents and papers, give evidence and do any and all other acts which, in the reasonable opinion of counsel for Lab One, are or may be necessary or desirable to document such transfer, or to enable LabOne to file and process applications for and to acquire, maintain and enforce any and all patents, trademarks, registrations or copyrights with respect to any such Developments, or to obtain any extension, validation, re-issue, continuance or renewal of any such patent, trademark or copyright. LabOne will be responsible for the preparation of any such instruments, documents and papers and for the implementation of any such proceedings and will reimburse Officer for all reasonable expenses incurred by him in compliance with the provisions of this paragraph.
SECTION 8.
PROPERTY OF LABONE
8.1. All correspondence, notes, recordings, documents and other materials and reproductions thereof pertaining to any aspect of the business of Lab One shall be the property of and shall be delivered to and retained by LabOne upon termination of this Agreement.
SECTION 9.
TERMINATION
9.1. Termination. Officer's employment pursuant to this Agreement shall terminate upon the occurrence of any of the following events:
(a) Death. In the event that Officer dies during the term of this Agreement, LabOne shall pay to his executors or administrators an amount equal to the installments of his base salary payable for the month in which he dies and any annual incentive bonus for the previous year if such has been approved but not paid, and such payments, together with the arrangements provided for by any stock option or other agreement between LabOne and Officer in effect at the time and by any other applicable plan of LabOne will constitute the entire obligation of LabOne to Officer and will also constitute full settlement of any claim under law or in equity that Officer's executors, heirs or assigns or any other person claiming under or through him might otherwise assert against LabOne or any of its employees on account of his death.
(b) Disability. In the event that Officer continues unable to fully perform his duties and responsibilities hereunder by reason of illness, injury or mental or physical disability or incapacity for ninety (90) consecutive days, during which time he shall continue to be compensated for monthly installments of base salary and any annual incentive bonus for the previous year if such has been approved but not paid, Officer's employment pursuant to this Agreement may be terminated by LabOne, and such payments, together with the arrangements provided for by any stock option or other agreement between LabOne and Officer in effect at the time and by any other applicable plan of LabOne will constitute the entire obligation of LabOne to Officer and will also constitute full settlement of any claim under law or in equity that Officer might otherwise assert against LabOne or any of its employees on account of such termination. Officer agrees, in the event of any dispute under this Section 9.1, to submit to a physical examination by a reputable licensed physician selected by LabOne and to accept LabOne's decision based on the results thereof.
(c) Voluntary Termination. Officer's employment may be voluntarily terminated upon Officer giving sixty (60) days' prior written notice to LabOne. In the event Officer voluntarily terminates his employment, LabOne shall pay to Officer an amount equal to his base salary payable through the date of termination of employment and any annual incentive bonus for the previous year if such has been approved but not paid, and such payments, together with the arrangements provided for by any stock option or other agreement between LabOne and Officer in effect at the time and by any other applicable plan of LabOne will constitute the entire obligation of LabOne to Officer and will also constitute full settlement of any claim under law or in equity that Officer might otherwise assert against LabOne or any of its employees on account of his termination.
(d) Termination for Cause. Officer's employment may be terminated by LabOne at any time for cause. In the event that Officer is terminated by LabOne for cause, LabOne shall pay to officer his base salary which may have accrued to the date of termination and any annual incentive bonus for the previous year if such has been approved but not paid, and such payments, together with the arrangements provided for by any stock option or other agreement between LabOne and officer in effect at the time and by any other applicable plan of LabOne will constitute the entire obligation of LabOne to Officer and will also constitute full settlement of any claim under law or in equity that Officer might otherwise assert against LabOne or any of its employees on account of his termination. Only the following actions, failures or events by or affecting Officer shall constitute "cause" for termination of Officer by LabOne (i) willful and continued failure by Officer to substantially perform his duties provided herein after a written demand for substantial performance is delivered to Officer by the Board of Directors of LabOne, which demand identifies with reasonable specificity the manner in which Officer has not substantially performed his duties, and Officer fails to comply with such demand within a reasonable time; (ii) the engagement by Officer in gross misconduct or gross negligence materially injurious to LabOne; or (iii) Officer's conviction of having committed a felony. Notwithstanding the foregoing, Officer shall not be deemed to have been terminated by LabOne for cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors of LabOne finding that, in the good faith opinion of the Board of Directors, LabOne has cause for the termination of employment of Officer as set forth in any of clauses (i) through (iii) above and specifying the particulars thereof in reasonable detail. The findings of the Board of Directors shall not be binding on the arbitrators or other finders of fact in connection with any litigation or dispute arising out of this Agreement.
(e) Termination Without Cause. In the event that LabOne terminates Officer's employment for reasons other than death, disability, or cause as listed in subsection (d)above, then in addition to any other sums to which Officer may be entitled under this Agreement, LabOne shall pay to Officer, on or before the last day of employment, a lump sum severance payment equal to (i) the installments of base salary due for the balance of the then current term of this Agreement, plus (ii) one hundred percent (100%) of the annual base salary payable to Officer by LabOne immediately prior to the termination of employment, which payments, together with the arrangements provided for by any stock option or other agreement between LabOne and Officer in effect at the time and by any other applicable plan of Lab One will constitute the entire obligation of LabOne to Officer and will also constitute full settlement of any claim under law or in equity that Officer might otherwise assert against LabOne or any of its employees on account of his termination.
SECTION 10.
SURVIVAL
10.1. Notwithstanding the termination of Officer's employment pursuant to the provisions of Section 9 hereof, or the expiration of the term of this Agreement, Officer's obligations under Sections 5, 6, 7 and 8 hereof, the provisions for injunctive relief against Officer in Sections 5.2 and 12.2 hereof and the provisions for arbitration in Section 12.1 hereof shall continue in full force and effect. Any right, power or obligation imposed or conferred upon LabOne or the Board of Directors of LabOne by the terms of this Agreement shall inure to the benefit of and be binding upon any person or entity into which LabOne is consolidated or merged and the Board of Directors or other governing body of any such corporation or other entity.
SECTION 11.
ASSISTANCE IN LITIGATION
11.1. Officer shall, upon reasonable notice, furnish such information and assistance to LabOne as may reasonably be required by LabOne in connection with any litigation in which LabOne or any of its subsidiaries or affiliates is or may become a party.
SECTION 12.
ARBITRATION
12.1 Methods. Except as provided in Section 12.2. below, any difference, controversy, claim or dispute between the parties arising out of this Agreement, or the breach thereof, shall be settled by binding arbitration before a panel of three arbitrators selected as follows: each party shall select one neutral arbitrator from the American Arbitration Association's approved list of arbitrators. The two arbitrators so selected by the parties shall select a third neutral arbitrator and the three so selected shall settle the dispute under the duly promulgated Commercial Arbitration Rules of the American Arbitration Association or its successor. The arbitration shall be conducted in Lenexa, Kansas. The award of the arbitrators may be entered as a judgment in any Court in the State of Kansas or in any court having jurisdiction thereof.
12.2. Injunctive Relief. Notwithstanding Section 12.1 above, LabOne shall be entitled to seek judicial injunctive relief to enforce its rights under Sections 5, 6, 7 and 8 of this Agreement as provided in Section 5.2 hereof.
SECTION 13.
MISCELLANEOUS
13.1. Assignment by Officer. This is a personal Agreement on the part of Officer and may not be sold, assigned, transferred or conveyed by Officer. This Agreement may not be sold, assigned, transferred or conveyed by LabOne except in connection with a merger, consolidation or sale of all or substantially all of the assets of LabOne and then only to the successor to LabOne's operations.
13.2. Entire Agreement. This Agreement contains the entire agreement among the parties hereto and there are no representations, inducements, promises, agreements, arrangements, or undertakings, oral or written, among the parties as to the subject matter covered.
13.3. Severability. Should any part of this Agreement be declared invalid for any reason, such invalidity shall not affect the validity of any remaining portion hereof and such remaining portion shall continue in full force and effect as if this Agreement had been originally executed without including the invalid part.
13.4. Governing Law. This Agreement and its performance shall be interpreted and construed in accordance with the laws of the State of Kansas.
13.5. Titles. Titles and captions in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof.
13.6. Amendments. No changes, alterations, modifications, additions, or qualifications to the terms of this Agreement shall be made or be binding unless made in writing and executed by the parties in the same manner as the Agreement.
13.7. No Waiver. Failure by either party to enforce any right granted by this Agreement shall not constitute a waiver of such right and waiver of any provision of this Agreement shall not constitute a waiver of any other provision.
13.8. Notices. Any notice, instrument or communication required or permitted under this Agreement shall be deemed to have been effectively given and made if in writing and when served by personal delivery to the party for whom it is intended, or three business days after being deposited, postage prepaid, registered or certified mail, return receipt requested, in the United States mail, addressed to the party for whom it is intended at the following addresses, or at such other addresses as the party to be notified may have designated in writing to the other:
Officer: W.
Thomas Grant, II
Shawnee Mission, KS 66208
LabOne: LabOn
e, Inc.
10101 Renner Boulevard
Lenexa, KS 66219
13.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written.
LABONE, INC.
By:
/s/ Gregg R. Sadler
Gregg R. Sadler,
Executive Vice President
/s/ W. Thomas Grant, II
W. Thomas Grant, II