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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Date of Report: September 14, 2001 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 This amends and supplements the 8-K filed September 14, 2001.
Item 2. Acquisition of assets Pursuant to a Stock Purchase Agreement dated August 31, 2001 (attached as Exhibit 2 to LabOne's Form 8-K/A Current Report filed September 14, 2001), LabOne, Inc. (LabOne) purchased from ChoicePoint Services Inc. all of the outstanding capital stock of Osborn Group, Inc. (Osborn), a leading provider of laboratory testing and related insurance risk assessment services. Intellisys, Inc., a Georgia corporation, Applied BioConcepts Inc., a Kansas corporation, and Osborn Laboratories (Canada) Inc., a corporation organized under the Laws of Canada, are wholly owned subsidiaries of Osborn Group and were included in the purchase. The purchase price was $49 million, which was paid in cash and is subject to adjustment under certain circumstances. The consideration paid for Osborn was determined pursuant to arms length negotiations. As a result of the transaction, Osborn became a wholly owned subsidiary of LabOne. Pursuant to a Securities Purchase Agreement dated August 31, 2001 (attached as Exhibit 4.1 to LabOne's Form 8-K/A Current Report filed October 5, 2001), Welsh, Carson, Anderson & Stowe (WCAS) invested a total of $50 million in preferred stock and subordinated debt in LabOne to fund the acquisition of Osborn and related expenses of the transaction. The securities consisted of $14 million of Series B-1 convertible preferred stock, $21 million of Series B-2 preferred stock, and $15 million of subordinated debt. The Series B-1 convertible preferred stock has a conversion price of $8.32, a coupon of 8.0%, payable in kind, and is subject to certain limitations on its convertibility pending shareholder approval of the termination of such limitations. The initial series B-1 shares can be converted into 1,682,692 shares of LabOne common stock. The Series B-2 preferred stock has a coupon of 18%, payable in kind and upon receipt of shareholder approval, will automatically convert into Se
ries B-1 convertible preferred stock. If shareholder approval of the conversion is obtained prior to February 28, 2002, the Series B-2 coupon will become 8%, retroactive to the date of issuance. If fully convertible, the initial series B-2 shares, after conversion to series B-1 shares, can be converted into 2,524,038 shares of LabOne common stock. The subordinated debt has a cash coupon of 11%. In connection with the issuance of the Series B-1 convertible preferred stock, LabOne issued to WCAS 350,000 warrants with a nominal strike price. WCAS maintains a right of first refusal to invest an additional $30 million in LabOne to fund future acquisitions. LabOne will immediately seek board-recommended votes from its shareholders for the termination of the limitations on the shares of common stock which may be issued upon conversion of the Series B-1 convertible preferred stock ("Proposal 1") and for the automatic conversion of all outstanding shares of Series B-2 preferred stock into Series B-1 convertible preferred stock ("Proposal 2"). If shareholder approval of Proposal 1 is obtained, WCAS shall be entitled to directly nominate or elect three members and jointly nominate another member of LabOne's seven-member board of directors. Of the three WCAS board members, up to two may be directly elected by WCAS and the other(s) may be nominated by WCAS for election by the common shareholders. Upon shareholder approval of Proposals 1 and 2, WCAS will hold approximately 28% of the outstanding voting securities of LabOne on a fully diluted basis. LabOne is a leading provider of risk assessment services to the insurance industry, laboratory testing and other services for the healthcare industry and substance abuse testing services for employers. Its risk assessment services include high-quality laboratory testing, investigative services, teleunderwriting, underwriting case management, and paramedical examinations. These services provide critical data for the underwriting of insurance policies and claims processing. After the Osborn acquisition, LabOne will have a combined revenue base of $250 million and will annually perform laboratory testing for approximately 10 million individuals for its risk assessment, healthcare and substance abuse testing clients. Due to operational overlap, LabOne expects to generate $5 to $10 million of annual cost savings from the acquisition. Forward-Looking Statements This report on Form 8-K contains "forward-looking statements," including, but not limited to, assumptions, estimates and projections concerning cost savings and revenue and earnings growth. Forward-looking statements often can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "could," "intends," "plans," "estimates," "anticipates," variations thereof, or similar expressions. These statements are not guarantees of the future performance and the Company's future results of operations, financial condition and business operations may differ materially from those expressed in these forward-looking statements. 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 ability to achieve labor and other cost reductions, the ability to integrate the laboratory and other operations of the companies, the ability to retain customers of
Osborn, 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. Investors are cautioned not to put undue reliance on any forward-looking statement. Item 7. Financial Information and Exhibits (a) Financial Statements of Business Acquired Audited Osborn Balance Sheets as of December 31, 2000 and 1999 The above financial statements and notes are included in Exhibit 99.1 (b) Pro Forma Financial Information Unaudited Pro Forma Combined Financial Information Unaudited Pro Forma Combined Financial Information The unaudited pro forma combined financial information for LabOne gives effect to the Osborn acquisition applying the purchase method of accounting and the related WCAS financing. The unaudited pro forma combined balance sheet gives effect to the acquisition and related financing as if each had occurred on June 30, 2001, and reflects the allocation of the purchase price to the Osborn assets acquired and liabilities assumed. These pro forma combined financial statements should be read in conjunction with the audited historical consolidated financial statements and the related notes thereto of LabOne. The unaudited pro forma combined statements of operations combine the historical statements of operations of LabOne and Osborn as if the acquisition and the related WCAS financing had occurred at the beginning of the earliest period presented. LabOne's consolidated statement of operations for the fiscal year ended December 31, 2000 and the unaudited consolidated statement of operations for the six-month period ended June 30, 2001 have been combined with Osborn's consolidated statement of operations for the fiscal year ended December 31, 2000 and the unaudited consolidated statement of operations for the six-month period ended June 30, 2001. The unaudited pro forma combined information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually been reported if the acquisition had been consummated as of the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position of the combined companies.
LabOne, Inc. and Osborn Group, Inc. See accompanying notes to the unaudited pro forma combined financial statements.
LabOne, Inc. and Osborn Group, Inc. See accompanying notes to the unaudited pro forma combined financial statements.
LabOne, Inc. and Osborn Group, Inc. See accompanying notes to the unaudited pro forma combined financial statements. LabOne, Inc. and Osborn Group, Inc. Notes to Unaudited Pro Forma Combined Financial Information NOTE 1 The total costs of the acquisition are estimated as follows (in thousands): Based upon a valuation of tangible and intangible assets acquired and liabilities assumed, LabOne has allocated the total cost of the acquisition to the net assets of Osborn at June 30, 2001 as follows (in thousands): In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, since the purchase of Osborn occurred after June 30, 2001, the goodwill established in the purchase transaction will not be amortized but will be reviewed annually for impairment. NOTE 2 The unaudited pro forma combined balance sheet includes the adjustments necessary to give effect to the acquisition as if it had occurred on June 30, 2001 and to reflect the allocation of the proposed acquisition cost to the fair value of tangible and intangible assets acquired and liabilities assumed as noted above. Adjustments included in the unaudited pro forma consolidated balance sheet are summarized as follows (in thousands): (A) To reflect total proceeds of $50,000 less cash paid of $49,000 to ChoicePoint for the purchase of Osborn, acquisition costs paid of $811 and WCAS financing related fees of $1,113. Acquisition costs of $285 remain payable. (B) To reflect the establishment of goodwill of $49,862. (C) To reflect the WCAS financing, comprised of series A subordinated debt, series B-1 convertible preferred stock and series B-2 preferred stock, for a total value of $50,000. (D) To reflect the value of the warrants of $3,234 and the value of the beneficial conversion feature of the series B-1 convertible preferred stock of $1,565 as an offset to retained earnings. (E) To reflect the elimination of the Osborn equity accounts. (F) To reflect the termination expense assumed by LabOne for Osborn employees who would not be transitioning to LabOne's workforce. NOTE 3 The unaudited pro forma combined statements of operations include the adjustments to give effect to the acquisition as if it had occurred at the beginning of the earliest period presented. LabOne will complete consolidation of the Osborn laboratory operations into the Lenexa laboratory facility by the end of the fourth quarter 2001. Adjustments included in the unaudited pro forma combined statements of operations are summarized as follows (in thousands): (1) The following table contains the adjustments related to Cost of sales ("COS") for the periods: (2) The following table contains the adjustments related to Selling, general and administrative expenses ("SGA") for the periods: (3) To reflect the elimination of allocated interest expense from ChoicePoint to Osborn of $730 in 2000 and $365 in the six months ended June 30, 2001. (4) The provision for income taxes was adjusted by 40% of the total adjustments excluding the impact of amortization of goodwill and intangibles which was not deductible for tax purposes and eliminated for pro forma presentation. (5) Interest expense in 2000 of $1,673 for series A subordinated debt and $4,007 for series B-2 preferred stock was added to reflect the WCAS financing. Interest expense in the six months ended June 30, 2001 of $830 for series A subordinated debt and $1,900 for series B-2 preferred stock was added to reflect the WCAS financing. NOTE 4 Pro forma basic earnings per common share amounts for the periods are based upon the historical weighted average number of LabOne common shares outstanding adjusted for the effect of the issuance of 350,000 warrants to WCAS as if the warrants had been outstanding for the periods and earnings available to common shareholders has been reduced by the convertible preferred dividend. Diluted earnings per common share amounts have been further adjusted to reflect the convertibility of the B-1 preferred stock as if the preferred stock had been converted and outstanding for the periods and the dividends were not included. NOTE 5 If shareholder approval is granted for termination of the restrictions on convertibility of the B-1 convertible preferred stock into common stock and for automatic conversion of the B-2 preferred stock to B-1 convertible preferred stock, basic and diluted earnings per share would be as follows: (c) Exhibits 2.* Stock Purchase Agreement, dated August 31, 2001, between the Registrant and ChoicePoint Inc. and ChoicePoint Services Inc. -- attached as exhibit 2. to the Current Report on Form 8-K filed September 14, 2001. 4.1* Securities Purchase Agreement dated as of August 31, 2001 by and among LabOne, Inc., Welsh, Carson, Anderson and Stowe IX, L.P. and the other purchasers named on Schedule I to the Securities Purchase Agreement -- attached as exhibit 4.1 to the Current Report on Form 8-K filed October 5, 2001. 4.2* Certificate of Designation for Series B-1 Preferred Stock-- attached as exhibit 4.2 to the Current Report on Form 8-K filed October 5, 2001. 4.3* Warrant Agreement dated as of August 31, 2001 by and among LabOne, Inc., Welsh, Carson, Anderson and Stowe IX, L.P. and the other purchasers named on Schedule I to the Securities Purchase Agreement-- attached as exhibit 4.3 to the Current Report on Form 8-K filed October 5, 2001. 4.4* Certificate of Designation for Series B-2 Preferred Stock-- attached as exhibit 4.4 to the Current Report on Form 8-K filed October 5, 2001. 4.5* Form of Series A Senior Subordinated Note-- attached as exhibit 4.5 to the Current Report on Form 8-K filed October 5, 2001. 4.6* Amendment No. 1 to Rights Agreement dated August 31, 2001 between LabOne, Inc. and American Stock Transfer & Trust Company-- attached as exhibit 4.6 to the Current Report on Form 8-K filed October 5, 2001. 4.7* Registration Rights Agreement dated August 31, 2001 among LabOne, Inc., Welsh, Carson, Anderson and Stowe IX, L.P. and the other purchasers named on Schedule I to the Securities Purchase Agreement-- attached as exhibit 4.7 to the Current Report on Form 8-K filed October 5, 2001. 99.* Transition Services Agreement between LabOne, Inc. and ChoicePoint Services Inc. dated August 31, 2001 -- attached as exhibit 99. to the Current Report on Form 8-K filed September 14, 2001. 99.1 Financial statements of Osborn Group, Inc. for the years ended December 31, 2000, 1999 and 1998 with Report of Independent Auditors. * Incorporated by reference pursuant to Rule 12b-23 Signatures
Amendment No. 3
Audited Osborn Statements of Income for the years ended December 31, 2000, 1999 and 1998
Audited Osborn Statements of Parents Investment and Comprehensive Income for the years ended December 31, 2000, 1999 and 1998
Audited Osborn Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998
Audited Osborn Notes to Financial Statements
Unaudited Pro Forma Combined Balance Sheet as of June 30, 2001
Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2000
Unaudited Pro Forma Combined Statement of Operations for the Six Months Ended June 30, 2001
Notes to Unaudited Pro Forma Combined Financial Information
Unaudited Pro Forma Combined Balance Sheet
As of June 30, 2001
(in thousands)
Pro Forma
Historical
Adjustments
Pro Forma
LabOne
Osborn
Note 2
Combined
ASSETS
Current assets:
Cash and cash equivalents
$ 3,062
285
(924)
(A)
$ 2,423
Accounts receivable - trade, net of allowance
for doubtful accounts of $3,04438,805
38,805
Inventories
4,294
1,517
5,811
Prepaid expenses and other current assets
3,682
53
3,735
Deferred income taxes
2,057
2,057
Total current assets
51,900
1,855
(924)
52,831
Property, plant and equipment
92,775
10,900
103,675
Less accumulated depreciation
47,176
9,198
56,374
Net property, plant and equipment
45,599
1,702
47,301
Other assets:
Intangible assets, net of accumulated amortization
34,149
49,862
(B)
84,011
Bond issue costs, net of accumulated amortization of $49
143
143
Deposits and other assets
93
93
Total assets
$ 131,884
3,557
48,938
$ 184,379
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 15,506
627
$ 16,133
Accrued payroll and benefits
5,410
296
456
(F)
6,162
Other accrued expenses
1,244
1,886
285
(A)
3,415
Income taxes payable
270
270
Other current liabilities
262
58
320
Notes payable
50
50
Current portion of long-term debt
1,876
1,876
Total current liabilities
24,618
2,867
741
28,226
Corporate borrowings
39,691
39,691
Other long-term debt
36,000
(C)
36,000
Deferred income taxes - noncurrent
1,229
1,229
Stockholders' equity:
Preferred stock
Series B-1 convertible preferred stock
14,000
(C)
14,000
Common stock
131
23
(23)
(E)
131
Additional paid-in capital
31,188
667
3,019
(D) (E)
34,874
Equity adjustment from foreign currency translation
(830)
(830)
Retained earnings
70,236
(4,799)
(D)
65,437
100,725
690
12,197
113,612
Less treasury stock of 2,271,710 shares
34,379
34,379
Total stockholders' equity
66,346
690
12,197
79,233
Total liabilities and stockholders' equity
$ 131,884
3,557
48,938
$ 184,379
Unaudited Pro Forma Combined Statement of Operations
For the year ended December 31, 2000
(in thousands, except share and per share amounts)
Pro Forma
Historical
Adjustments
Pro Forma
LabOne
Osborn
Note 3
Combined
Sales
$ 169,151
42,356
$ 211,507
Cost of sales expenses
114,274
32,142
(12,215)
(1)
134,201
Gross profit
54,877
10,214
12,215
77,306
Selling, general and administrative
51,134
7,324
(4,561)
(2)
53,897
Earnings from operations
3,743
2,890
16,776
23,409
Interest expense
(2,512)
(730)
(4,950)
(3)(5)
(8,192)
Interest income and other
140
26
166
Earnings before income taxes
1,371
2,186
11,826
15,383
Income tax expense
1,895
1,377
4,040
(4)
7,312
Net earnings
$ (524)
809
7,786
$ 8,071
Convertible preferred dividends
1,159
Earnings available to common shareholders
$ 6,912
Basic and diluted earnings per common share
$ (0.05)
$ 0.62
(See Notes 4 and 5)
Basic weighted average common shares outstanding
10,868,666
10,868,666
WCAS warrants
349,495
349,495
Total basic weighted average shares
10,868,666
349,495
11,218,161
Effect of dilutive securities--B-1 conversion
1,821,945
1,821,945
Diluted weighted average common shares outstanding
10,868,666
2,171,440
13,040,106
Unaudited Pro Forma Combined Statement of Operations
For the six months ended June 30, 2001
(in thousands, except share and per share amounts)
Pro Forma
Historical
Adjustments
Pro Forma
LabOne
Osborn
Note 3
Combined
Sales
$ 106,060
18,084
$ 124,144
Cost of sales expenses
74,579
14,919
(5,667)
(1)
83,831
Gross profit
31,481
3,165
5,667
40,313
Selling, general and administrative
28,186
3,200
(1,341)
(2)
30,045
Earnings from operations
3,295
(35)
7,008
10,268
Interest expense
(1,212)
(365)
(2,365)
(3)(5)
(3,942)
Interest income and other
148
148
Earnings before income taxes
2,231
(400)
4,643
6,474
Income tax expense
1,230
201
1,512
(4)
2,943
Net earnings
$ 1,001
(601)
3,131
$ 3,531
Convertible preferred dividends
563
Earnings available to common shareholders
$ 2,968
Basic and diluted earnings per common share
$ 0.09
$ 0.27
(See Notes 4 and 5)
Basic weighted average common shares outstanding
10,737,004
10,737,004
WCAS warrants
349,563
349,563
Total basic weighted average shares
10,737,004
349,563
11,086,567
Effect of dilutive securities--stock options
5,200
5,200
Effect of dilutive securities--B-1 conversion
1,750,374
1,750,374
Diluted weighted average common shares outstanding
10,742,204
2,099,937
12,842,141
Cash payment to ChoicePoint Inc.
$ 49,000
Financing costs, primarily financial advisory, legal and accounting fees
1,096
$ 50,096
Tangible assets acquired
$ 3,557
Goodwill
49,862
Liabilities assumed
(2,867)
Osborn employee termination expenses assumed
(456)
$ 50,096
Year ended
December 31, 2000 Six month ended
June 30, 2001
Reductions of direct labor and benefits
$ (8,403)
$ (4,378)
Transfer from COS to Selling, general and admin.
(1,241)
Elimination of occupancy costs
(822)
(414)
Reduction of depreciation and amortization
(1,749)
(875)
Total Cost of sales adjustments
$(12,215)
$ (5,667)
Year ended
December 31, 2000 Six month ended
June 30, 2001
Reductions of direct labor and benefits
$ (721)
$ (376)
Transfer from COS to SGA
1,241
Elimination of shared services charge from ChoicePoint
(3,153)
Elimination of occupancy costs
(11)
(6)
Reduction of depreciation and amortization
(1,917)
(959)
Total Selling, general and admin. adjustments
$ (4,561)
$ (1,341)
Year ended
December 31, 2000 Six month ended
June 30, 2001
Pro forma net earnings
$ 8,071
$ 3,531
add back interest expense on B-2 after tax
2,404
1,141
Revised pro forma net earnings
10,475
4,672
less: Convertible preferred dividends -- B-1
1,159
563
less: Convertible preferred dividends --Converted B-2
1,738
845
Revised basic earnings available to common shareholders
$ 7,578
$ 3,264
Basic shares (including WCAS warrant effect)
11,218,161
11,086,567
Basic earnings per share
$ 0.68
$ 0.29
Effect of dilutive securities--B-1 conversion
1,821,945
1,750,374
Effect of dilutive securities--B-2 conversion
2,732,917
2,625,561
Total diluted common shares after shareholder approval
15,773,023
15,462,502
Diluted earnings per common share
$ 0.66
$ 0.30
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LabOne, Inc.
Date: November 13, 2001 |
By /s/ John W. McCarty |
|
|
Date: November 13, 2001 |
By /s/ Joseph C. Benage |
Exhibit 99.1
Osborn Group
Financial Statements
as of December 31, 2000 and 1999
Together With Auditors' Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ChoicePoint Inc.:
We have audited the accompanying balance sheets of the OSBORN GROUP (an operating unit of ChoicePoint Inc.) as of December 31, 2000 and 1999 and the related statements of income, parent's investment and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, audits the financial statements referred to above present fairly, in all material respects, the financial position of the Osborn Group as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
August 31, 2001
OSBORN GROUP
2000 | 1999 | |
ASSETS | ||
CURRENT ASSETS: | ||
Cash and cash equivalents | $ 2,359 | $ 1,910 |
Accounts receivable, net of allowance for doubtful accounts of $482 in 2000 and $513 in 1999 |
5,031 | 11,762 |
Inventories | 1,902 | 1,656 |
Deferred income taxes | 235 | 285 |
Other current assets | 164 | 134 |
Total current assets | 9,691 | 15,747 |
PROPERTY AND EQUIPMENT, net | 12,716 | 13,527 |
GOODWILL, net | 40,739 | 41,944 |
OTHER, net | 4,850 | 6,438 |
Total assets | $ 67,996 | $ 77,656 |
LIABILITIES AND PARENT'S INVESTMENT | ||
CURRENT LIABILITIES: | ||
Accounts payable | $ 615 | $ 988 |
Accrued salaries and bonuses | 697 | 881 |
Income taxes payable | 1,085 | 2,033 |
Other current liabilities | 1,649 | 2,325 |
Total current liabilities | 4,046 | 6,227 |
DEFERRED INCOME TAXES | 1,662 | 2,215 |
POSTRETIREMENT BENEFIT OBLIGATIONS | 604 | 554 |
Total liabilities | 6,312 | 8,996 |
COMMITMENTS AND CONTINGENCIES (Note 6) | ||
PARENT'S INVESTMENT | 61,684 | 68,660 |
Total liabilities and parent's investment | $ 67,996 | $ 77,656 |
The accompanying notes are an integral part of these balance sheets.
OSBORN GROUP
2000 | 1999 | 1998 | |
REVENUE | $ 42,356 | $ 47,461 | $ 40,689 |
COSTS AND EXPENSES: | |||
Cost of services | 32,142 | 33,327 | 29,872 |
Selling, general, and administrative | 6,924 | 6,985 | 6,584 |
Unusual items | 400 | | |
Total costs and expenses | 39,466 | 40,312 | 36,456 |
OPERATING INCOME | 2,890 | 7,149 | 4,233 |
OTHER INCOME | 26 | 107 | 22 |
INTEREST EXPENSE | (730) | (1,222) | (1,028) |
INCOME BEFORE INCOME TAXES | 2,186 | 6,034 | 3,227 |
PROVISION FOR INCOME TAXES | 1,377 | 2,892 | 1,777 |
NET INCOME | $ 809 | $ 3,142 | $ 1,450 |
The accompanying notes are an integral part of these statements.
OSBORN GROUP
2000 | 1999 | 1998 | |
PARENT'S INVESTMENT: | |||
Parent's investment, beginning of year | $ 68,660 | $ 65,579 | $ 66,636 |
Net income | 809 | 3,142 | 1,450 |
Foreign currency translation adjustments, net of taxes of $42, $(44), and $33 in 2000, 1999, and 1998, respectively |
(75) | 79 | (58) |
Net transactions with parent | (7,961) | (231) | (2,449) |
Tax benefit of stock options exercised | 251 | 91 | 0 |
Parent's investment, end of year | $ 61,684 | $ 68,660 | $ 65,579 |
COMPREHENSIVE INCOME: | |||
Net income | $ 809 | $ 3,142 | $ 1,450 |
Foreign currency translation adjustments, net of taxes of $42, $(44), and $33 in 2000, 1999, and 1998, respectively |
(75) | 79 | (58) |
Total comprehensive income | $ 734 | $ 3,221 | $ 1,392 |
The accompanying notes are an integral part of these statements.
OSBORN GROUP
2000 | 1999 | 1998 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |||
Net income | $ 809 | $ 3,142 | $ 1,450 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|||
Depreciation and amortization | 4,753 | 4,844 | 4,151 |
Tax benefit of stock options exercised | 251 | 91 | |
Deferred income taxes | (503) | 257 | 676 |
Changes in assets and liabilities: | |||
Accounts receivable | 6,731 | (5,735) | 499 |
Inventories | (246) | 146 | 429 |
Accounts payable | (373) | 398 | (180) |
Accrued salaries and bonuses | (184) | 100 | 88 |
Other current liabilities | (676) | 1,005 | 674 |
Income tax payable | (948) | (426) | 633 |
Other | (54) | 166 | 32 |
Net cash provided by operating activities | 9,560 | 3,988 | 8,452 |
CASH FLOWS FROM INVESTING ACTIVITIES: | |||
Additions to property and equipment, net | (864) | (973) | (2,514) |
Additions to other assets, net | (286) | (2,027) | (2,105) |
Net cash used by investing activities | (1,150) | (3,000) | (4,619) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |||
Transactions with parent, net | (7,961) | (231) | (2,449) |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 449 | 757 | 1,384 |
CASH AND CASH EQUIVALENTS, beginning of year | 1,910 | 1,153 | (231) |
CASH AND CASH EQUIVALENTS, end of year | $ 2,359 | $ 1,910 | $ 1,153 |
The accompanying notes are an integral part of these statements.
OSBORN GROUP
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Osborn Group ("Osborn" or the "Company") consists of ChoicePoint Inc.'s ("ChoicePoint"), Osborn Laboratories (Canada) Inc., Osborn Group Inc., Applied BioConcepts Inc., and Intellisys, Inc. Osborn's major offerings include laboratory-testing services, document management, imaging, fraud detection, specimen delivery services, and related technology solutions to the life and health insurance market in the United States and Canada.
The financial statements of Osborn include the assets, liabilities, revenue, and expenses of the businesses conducted by Osborn Laboratories (Canada) Inc., Osborn Group Inc., Applied BioConcepts Inc., and Intellisys, Inc. operating units. The separate financial statements of the Company have been prepared on a basis that management believes to be reasonable and appropriate and include the historical balance sheet, results of operations, and cash flow, including allocated portions of ChoicePoint's centralized functions, as described below. All significant transactions within the Company have been eliminated.
Allocation of Shared Services
Under ChoicePoint's centralized cash management system, short-term advances from ChoicePoint and excess cash sent to ChoicePoint are included in parent's investment in the accompanying balance sheets. Osborn was charged corporate costs in the amount of $3.2 million, $2.5 million, and $2.1 million in 2000, 1999, and 1998, respectively. These allocations were based on an estimated proportion of ChoicePoint corporate expenses related to Osborn primarily utilizing such factors as revenues, number of employees, and other applicable factors. In the opinion of management, the corporate charges have been made on a reasonable basis and provide a reasonable estimate of the costs attributable to Osborn. These amounts have been included in selling, general, and administrative expenses in the accompanying statements of income. The Company was also charged corporate interest expense based on the relationship of its net assets to total ChoicePoint net assets, excluding corpor ate debt, in the amount of $730,000, $1.2 million, and $1 million in 2000, 1999, and 1998, respectively, which is included in interest expense in the accompanying statements of income.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers short-term cash investments with original maturities of three months or less to be cash equivalents.
Inventories
Inventories consist of completed specimen collection kits, laboratory supplies, and various materials used in the assembly of specimen collection kits for sale to customers. Inventories are valued at lower of cost (on a first-in, first-out basis) or market and consisted of the following at December 31, 2000 and 1999 (in thousands):
2000 | 1999 | |
Raw materials and supplies | 831 | 753 |
Lab supplies | 670 | 777 |
Finished goods | 401 | 126 |
$ 1,902 | $ 1,656 |
Income Taxes
The Company has been included in the consolidated federal income tax returns of ChoicePoint. The provision for income taxes in the accompanying financial statements reflects the federal, state, and foreign income taxes calculated on the Company's separate income.
The Company records deferred income taxes using enacted tax laws and rates for the years in which taxes are expected to be paid. Deferred income tax assets and liabilities are recorded based on the differences between the financial reporting and income tax basis of assets and liabilities.
Property and Equipment
Property and equipment at December 31, 2000 and 1999 consisted of the following (in thousands):
2000 | 1999 | |
Land, buildings, and improvements | $ 12,958 | $ 12,891 |
Furniture and equipment | 14,988 | 14,213 |
Less accumulated depreciation | (15,230) | (13,577) |
$ 12,716 | $ 13,527 |
Property and equipment are recorded at cost. Minor property and equipment additions and repair and maintenance costs are charged to expense as incurred.
The cost of property and equipment is depreciated primarily on the straight-line basis over estimated useful lives of 30 to 40 years for buildings; useful lives, not to exceed lease terms, for leasehold improvements; 3 to 8 years for data processing equipment; and 8 to 10 years for furniture.
Goodwill and Other Assets
Goodwill is amortized on a straight-line basis over 40 years. As of December 31, 2000 and 1999, accumulated amortization was $7.4 million and $6.2 million, respectively.
Other assets at December 31, 2000 and 1999 consisted of the following (in thousands):
2000 | 1999 | |
Other acquisition intangibles, net | $ 2,019 | $ 2,541 |
System development and other deferred costs, net | 2,831 | 3,897 |
$ 4,850 | $ 6,438 |
Other acquisition intangibles include software, technology, and patents and are being amortized on a straight-line basis over ten years. As of December 31, 2000 and 1999, accumulated amortization was $3.2 million and $2.7 million, respectively.
As of December 31, 2000 and 1999, approximately $7.1 million and $6.7 million, respectively, of costs of software developed for internal use had been capitalized and are included in system development and other deferred costs. The amounts capitalized consist of certain direct costs, including independent contractor and payroll costs. System development and other deferred costs are being amortized on a straight-line basis primarily over three to five years. As of December 31, 2000 and 1999, accumulated amortization was $4.2 million and $2.9 million, respectively.
Impairment of Goodwill and Long-Lived Assets
The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of goodwill or other long-lived assets may warrant revision or may not be recoverable. When factors indicate that goodwill or other assets should be evaluated for possible impairment, the Company uses an estimate of the future undiscounted net cash flows of the related business or other assets over the remaining life of the goodwill or other assets in measuring whether the goodwill or other assets are recoverable. If the carrying amount exceeds undiscounted cash flows, an impairment loss would be recognized for the difference between the carrying amount and its estimated fair value.
Depreciation and Amortization Expense
Depreciation and amortization expense for the years ended December 31, 2000, 1999, and 1998 consisted of the following (in thousands):
2000 | 1999 | 1998 | |
Property and equipment | $ 1,675 | $ 2,008 | $ 2,219 |
Goodwill | 1,205 | 1,205 | 1,205 |
Other acquisition intangibles | 522 | 650 | 125 |
System development and other deferred costs | 1,351 | 981 | 602 |
$ 4,753 | $ 4,844 | $ 4,151 |
Revenue and Expense Recognition
The Company recognizes revenue when an agreement exists, prices are determinable, services and products are delivered, and collectibility is reasonably assured.
Certain costs that are passed on by the Company to its customers ("pass-through revenue") are excluded from revenues and recorded as a reduction of cost of services in the financial statements. Pass-through revenues were $340,000 in 2000 and $0 in 1999 and 1998, respectively.
Research and Development Expenses
Research and development costs are charged to expense when incurred. Research and development costs were approximately $340,000, $490,000, and $410,000 in 2000, 1999, and 1998, respectively.
Unusual Items
During 2000, the Company eliminated approximately 30 positions and recorded and paid termination benefits of $400,000. This amount was recorded as an unusual item in the accompanying statement of income.
Concentrations of Revenue and Accounts Receivables
Substantially all of the Company's revenues are realized through the insurance industry. In 2000, 1999, and 1998, two companies accounted for approximately 14%, 14%, and 10%, respectively, and 11%, 10%, and 8%, respectively, of revenues. At December 31, 1999, approximately 32% of the Company's receivables were due from one customer.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated at the year-end rate of exchange, and income statement items are translated at the average rates prevailing during the year. The resulting translation adjustment is recorded as a component of the parent's investment. Foreign currency transaction gains and losses are not material.
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 138 that amended the accounting and reporting of derivatives under SFAS No. 133, " Accounting for Derivative Instruments and Hedging Activities," to exclude, among other things, contracts for normal purchases and sales. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Adoption of SFAS No. 133 on January 1, 2001 did not have a material effect on the Company.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." This standard prescribes the accounting principles for business combinations and requires that all business combinations be accounted for using the purchase method of accounting. This standard is effective for all business combinations initiated after June 30, 2001. This standard is not expected to have a material impact on the Company's financial position or results of operations.
SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets." This standard prescribes the accounting practices for acquired goodwill and other intangible assets. Under this standard, goodwill will no longer be amortized to earnings, but instead will be reviewed periodically (at least annually) for impairment. During 2000, the Company recorded goodwill amortization expense totaling $1.2 million. The Company will continue to amortize goodwill acquired prior to June 30, 2001 until the adoption date; however, goodwill related to acquisitions subsequent to June 30, 2001 will not be amortized. The Company will adopt this standard on January 1, 2002. The Company has not determined the impact this standard will have on its financial position or results of operations.
3. INCOME TAXES
The Company records deferred income taxes using enacted tax laws and rates for the years in which the taxes are expected to be paid. Deferred income tax assets and liabilities are recorded based on the differences between the financial reporting and income tax bases of assets and liabilities. The provision for income taxes for the years ended December 31, 2000, 1999, and 1998 consists of the following (in thousands):
2000 | 1999 | 1998 | |
Current: | |||
Federal | $ 1,370 | $ 1,792 | $ 663 |
Foreign | 193 | 424 | 282 |
State | 317 | 419 | 156 |
1,880 | 2,635 | 1,101 | |
Deferred: | |||
Federal | (461) | 235 | 578 |
Foreign | 64 | (31) | (23) |
State | (106) | 53 | 121 |
(503) | 257 | 676 | |
Total | $ 1,377 | $ 2,892 | $ 1,777 |
The provision for income taxes for the years ended December 31, 2000, 1999, and 1998 is reconciled with the federal statutory amount as follows (in thousands):
2000 | 1999 | 1998 | |
Provisions for income taxes computed at the federal statutory rate of 34% |
$ 743 | $ 2,052 | $ 1,097 |
State and local taxes, net of federal tax benefit | 138 | 315 | 192 |
Foreign | 61 | 93 | 61 |
Goodwill amortization | 410 | 410 | 410 |
Other | 25 | 22 | 17 |
Provision for income taxes | $ 1,377 | $ 2,892 | $ 1,777 |
Components of the Company's deferred income tax assets and liabilities at December 31, 2000 and 1999 are as follows (in thousands):
2000 | 1999 | |
Deferred income tax assets: | ||
Postretirement benefits | $ 235 | $ 216 |
Allowance for bad debts | 187 | 199 |
Reserves and accrued expenses | 48 | 85 |
Other | 27 | 18 |
497 | 518 | |
Deferred income tax liabilities: | ||
Depreciation | (795) | (987) |
Deferred expenses | (1,129) | (1,461) |
(1,924) | (2,448) | |
Net deferred income tax liabilities | $ (1,427) | $ (1,930) |
4. EMPLOYEE STOCK OPTIONS
The Company participates in the ChoicePoint 1997 Omnibus Stock Incentive Plan (the "Omnibus Plan"), which was approved for ChoicePoint and its subsidiaries and ratified by the shareholders in 1999. The Omnibus Plan authorizes grants of stock options, stock appreciation rights, restricted stock, deferred shares, performance shares, and performance units for an aggregate of 12 million shares of ChoicePoint common stock. The Omnibus Plan requires options be granted at fair market value. As of December 31, 2000, employees of the Company held options to purchase 294,684 shares of ChoicePoint's common stock at exercise prices ranging from $4.82 to $25.38 per share, of which 100,488 were exercisable.
Pro Forma Information
ChoicePoint has elected to continue to account for its stock-based compensation plan under APB Opinion No. 25 and disclose pro forma effects on net income as provided by SFAS No. 123. Accordingly, the Company does not recognize compensation cost in connection with its participation in ChoicePoint's stock option plans. If ChoicePoint had elected to recognize compensation cost for these plans based on the fair value at grant date as prescribed by SFAS No. 123, Osborn's net income for the years ended December 31, 2000, 1999, and 1998 would have been reduced to the pro forma amounts indicated in the following table (in thousands):
2000 |
1999 |
1998 |
||||
Reported | Pro Forma | Reported | Pro Forma | Reported | Pro Forma | |
Net income | $ 809 | $ 503 | $ 3,142 | $ 2,796 | $ 1,450 | $ 1,142 |
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for the three years in the period ended December 31, 2000:
2000 | 1999 | 1998 | |
Dividend yield | 0.0% | 0.0% | 0.0% |
Expected volatility | 32.0% | 30.0% | 32.0% |
Risk-free interest rate | 6.6% | 6.7% | 5.6% |
Expected life in years | 5.6 | 4.7 | 4.5 |
Weighted average fair value of options granted | $10.53 | $7.11 | $5.21 |
5. EMPLOYEE BENEFITS
401(k) Profit-Sharing Plan
The Company participates in the ChoicePoint 401(k) profit-sharing plan, under which eligible company employees may contribute up to 16% of their compensation. ChoicePoint intends to make matching contributions in the form of ChoicePoint common stock equal to a minimum of 25% of employee contributions up to the first 6% of an employee's contributions. The match made on eligible employee contributions for 2000, 1999, and 1998 was 55% in each year. Employee contributions will be invested in one of the available investment funds, as selected by the employee. Matching contributions will be invested in the ChoicePoint stock fund. ChoicePoint may make additional contributions based on achievement of targeted performance levels. The Company's expense for the 401(k) profit-sharing plans was $237,000 in 2000, $258,000 in 1999, and $211,000 in 1998.
Postretirement Benefits
The Company provides certain health care and life insurance benefits for eligible retired employees. Health care benefits are provided through a trust, while life insurance benefits are provided through an insurance company. The Company accrues the cost of providing postretirement benefits for medical and life insurance coverage over the active service period of each employee.
The following table presents a reconciliation of the changes in the plan's benefit obligations and fair value of assets at December 31, 2000 and 1999 (in thousands):
2000 | 1999 | |
Change in benefit obligation: | ||
Obligation at beginning of year | $ 455 | $ 350 |
Service cost | 40 | 78 |
Interest cost | 36 | 31 |
Benefit payments | (8) | (4) |
Obligation at end of year | $ 523 | $ 455 |
Change in plan assets: | ||
Fair value of plan assets at beginning of year | $ 0 | $ 0 |
Employer contributions | 8 | 4 |
Benefit payments | (8) | (4) |
Fair value of plan assets at end of year | $ 0 | $ 0 |
Funded status: | ||
Funded status at end of year and net amount recognized | $ (523) | $ (455) |
Unrecognized prior service cost | (61) | (87) |
Unrecognized gain | (20) | (12) |
Net amount recognized | $ (604) | $ (554) |
Net periodic postretirement benefit expense for the years ended December 31, 2000, 1999, and 1998 includes the following components (in thousands):
2000 | 1999 | 1998 | |
Service cost | $ 40 | $ 78 | $ 59 |
Interest cost on accumulated benefit obligation | 36 | 31 | 27 |
Amortization of prior service cost | (26) | (24) | (13) |
Net periodic postretirement benefit expense | $ 50 | $ 85 | $ 73 |
The following are weighted average assumptions used in the computation of postretirement benefit expense and the related obligation for the years ended December 31, 2000, 1999, and 1998:
2000 | 1999 | 1998 | |
Discount rate used to determine accumulated postretirement benefit obligation at December 31 |
8.00% | 8.00% | 6.75% |
Initial health care cost trend rate | 8.50 | 9.00 | 9.50 |
Ultimate health care cost trend rate | 6.00 | 6.00 | 6.00 |
Year ultimate health care cost trend rate reached | 2005 | 2005 | 2005 |
If the health care cost trend rate were increased 1% for all future years, the accumulated postretirement benefit obligation as of December 31, 2000 would have increased 10.3%. The effect of such a change on the aggregate of service and interest cost for 2000 would have been an increase of 9.5%. If the health care cost trend rate were decreased 1% for all future years, the accumulated postretirement benefit obligation as of December 31, 2000 would have decreased 8.1%. The effect of such a change on the aggregate of service and interest cost for 2000 would have been a decrease of 7.6%.
The Company continues to evaluate ways in which it can better manage these benefits and control its costs. Any changes in the plan, revisions to assumptions, or changes in the Medicare program that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and future annual expense.
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company's operating leases involve principally office space and office equipment. Rental expense was $652,000 in 2000, $568,000 in 1999, and $480,000 in 1998.
Future minimum payment obligations for noncancelable operating leases exceeding one year, net of subleases, are as follows as of December 31, 2000 (in thousands):
2001 | $ 462 |
2002 | 115 |
2003 | 88 |
2004 | 78 |
2005 | |
Thereafter | |
$ 743 |
In September 1997, the Company entered into a five-year supply contract with a vendor for certain reagents. The contract requires Osborn to purchase 90 million tests or $5.8 million of products during the contract term. As of December 31, 2000, the remaining commitment under this contract was approximately $1.5 million.
Litigation
A limited number of lawsuits seeking damages are brought against the Company each year. The Company provides for estimated legal fees and settlements relating to pending lawsuits. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position, liquidity, or results of operations. The Company regards all such lawsuits as occurring in the ordinary course of business.
7. SUBSEQUENT EVENTS
On August 31, 2001, certain assets of the Company were sold to LabOne, Inc. for $49 million in cash.