-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PAx6phVxM9YNDpKbthRj7lWEV2O8JKKGOPH1jDxso40JCfjdh7sA2giUTPmoL5bD oMk+5X1FNmpWRxm9GdtSzA== 0000830158-98-000004.txt : 19980401 0000830158-98-000004.hdr.sgml : 19980401 ACCESSION NUMBER: 0000830158-98-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAFIELD CAPITAL CORP CENTRAL INDEX KEY: 0000830158 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 431039532 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16946 FILM NUMBER: 98581765 BUSINESS ADDRESS: STREET 1: 5000 W 95TH STREET STREET 2: SUITE 260 CITY: SHAWNEE MISSION STATE: KS ZIP: 66207 BUSINESS PHONE: 9136521000 MAIL ADDRESS: STREET 1: 5000 W 95TH STREET STREET 2: SUITE 260 CITY: SHAWNEE MISSION STATE: KS ZIP: 66207 FORMER COMPANY: FORMER CONFORMED NAME: BMA CORP /MO/ DATE OF NAME CHANGE: 19910520 FORMER COMPANY: FORMER CONFORMED NAME: SEAFIELD CAPTIAL CORP DATE OF NAME CHANGE: 19910520 FORMER COMPANY: FORMER CONFORMED NAME: BMA PROPERTIES INC DATE OF NAME CHANGE: 19880411 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------ EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ------SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 0-16946 ------- LAB HOLDINGS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Missouri 43-1039532 - -------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Incorporation of organization) or Identification Number) P. O. Box 7568 5000 W. 95th Street, Suite 260 Shawnee Mission, Kansas 66207 - ---------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (913) 648-3600 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- None Not Applicable - ------------------------------- --------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1 per share and common stock rights coupled therewith. - ----------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Approximate aggregate market value of voting stock held by non- affiliates of Registrant: $152,182,710 (based on closing price as of March 20, 1998) Number of shares outstanding of only class of Registrant's common stock as of March 20, 1998: $1 par value common - 6,489,103 Documents incorporated by reference: Portions of Registrant's Proxy Statement for use in connection with the 1998 Annual Meeting of Shareholders is incorporated by reference into Part III of this report, to the extent set forth therein, if such Proxy Statement is filed with the Securities and Exchange Commission on or before April 30, 1998. If such Proxy Statement is not filed by such date, the information required to be presented in Part III will be filed as an amendment to this report. The exhibits for this Form 10-K are listed in Item 14. PART I. ITEM 1. BUSINESS. Lab Holdings, Inc. was organized in Missouri as BMA Properties, Inc. in 1974 as a 100% owned subsidiary of Business Men's Assurance Company of America (which was incorporated in 1909). In 1988, BMA Properties, Inc. was renamed BMA Corporation, and on June 1, 1988, became the parent company. BMA Corporation changed its name to Seafield Capital Corporation (Seafield) in 1991. During 1997, Seafield changed its name to Lab Holdings, Inc. (Lab Holdings or Registrant). Registrant is a holding company whose primary subsidiary operates in the insurance and healthcare services areas. In the past, various operating subsidiaries of Registrant have provided risk-appraisal laboratory testing services to the insurance industry, clinical testing services to the healthcare industry, and comprehensive cancer treatment management. In addition, Lab Holdings had investments in early-stage healthcare technology companies and either directly or through subsidiaries, also held interests in energy investments, marketable securities and real estate. On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH Corporation (SLH). In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities to SLH. The SLH spin-off was effected as a taxable dividend by Lab Holdings. As a result of the SLH distribution, Lab Holdings' principal assets consisted of its stock holdings in LabOne, Inc. (LabOne) and Response Oncology, Inc. (Response). See Item 7 and Notes to Consolidated Financial Statements for additional information. Lab Holdings had a majority ownership position in Response. Response, previously 67%-owned by Lab Holdings, is a publicly-traded company (NASDAQ-ROIX). On February 26, 1997, Lab Holdings converted a $23.5 million Response note receivable and accrued interest into 3,020,536 shares of Response common stock. The conversion increased Lab Holdings' ownership of Response shares outstanding from 56% at December 31, 1996 to approximately 67%. On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. Response's operations are presented as a discontinued healthcare business in Lab Holdings' financial statements. The second quarter was the last period in which Response significantly impacted Lab Holdings' operating results. The distribution of Response stock was effected as a taxable dividend by Lab Holdings. See Item 7 and Notes to Consolidated Financial Statements for additional information. During 1997, Lab Holdings significantly reduced its corporate structure and overhead costs as the SLH and Response distributions were finalized. SLH provides administrative and accounting functions to Lab Holdings under a services agreement for an annual fee of $75,000. Effective June 1, 1997, Lab Holdings terminated its services agreement with LabOne. This agreement related to services and other matters among the parties and had been in effect since January 1, 1993. Lab Holdings did not have any employees as of December 31, 1997. * * * The following list shows the Registrant and each subsidiary corporation of which Registrant owned a majority interest at December 31, 1997, together with the ownership percentage and state or country of incorporation. See Item 7 and Notes to Consolidated Financial Statements for additional information. Lab Holdings, Inc. (Missouri) LabOne, Inc. (Delaware) 82% Lab One Canada Inc. (Canada) 100% Pyramid Diagnostic Services, Inc. (Delaware) (inactive) 74% * * * INSURANCE SERVICES The following businesses are considered to be in the insurance services segment: LabOne's insurance testing segment, Agency Premium Resource, Inc. (APR), and International Underwriting Services, Inc. (IUS). APR and IUS were sold during 1995. LABONE, INC. The Registrant's laboratory testing activities are conducted through LabOne, Inc. (LabOne), a subsidiary which was 82% owned by the Registrant and 18% publicly held at December 31, 1997. LabOne is a publicly-traded stock (NASDAQ-LABS). LabOne, together with its wholly-owned subsidiary, Lab One Canada Inc., hereinafter collectively referred to as LabOne, is the largest provider of laboratory services to the insurance industry in the United States and Canada (See Notes to Consolidated Financial Statements for financial information regarding foreign operations). LabOne provides high-quality laboratory services to self-insured groups, insurance companies, employers and physicians nationwide. LabOne provides risk-appraisal laboratory services to the insurance industry. The tests performed by LabOne are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. LabOne also provides testing services on specimens of individuals applying for individual and group medical and disability policies. LabOne's clinical testing services are provided to the healthcare industry to aid in the diagnosis and treatment of patients. Additionally, LabOne is certified by the Substance Abuse and Mental Health Services Administration (SAMHSA) to perform substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. See the Healthcare Segment for additional information regarding LabOne's clinical and substance abuse testing services. LabOne's Insurance Applicant Testing In order to establish the appropriate level of premium payments or to determine whether to issue a policy, an insurance company requires objective means of evaluating the insurance risk posed by policy applicants. Because decisions of this type are based on statistical probabilities of mortality and morbidity, an insurance company generally requires quantitative data reflecting the applicant's general health. Standardized laboratory testing, tailored to the needs of the insurance industry and reported in a uniform format, provides an insurance company with an efficient means of evaluating the mortality and morbidity risks posed by policy applicants. The use of standardized blood, urine and oral fluid testing has proven a cost- effective alternative to individualized physician examinations, which utilize varying testing procedures and reports. LabOne's insurance testing services consist of certain specimen profiles that provide insurance companies with specific information that may indicate liver or kidney disorders, diabetes, the risk of cardiovascular disease, bacterial or viral infections and other health risks. LabOne also offers tests to detect the presence of antibodies to human immunodeficiency virus (HIV). Standardized laboratory testing can also 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. 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. Cocaine use has been associated with increased risk of accidental death and cardiovascular disorders, and as a result of the increasing abuse in the United States and Canada, insurance companies are testing a greater number of policy applicants to detect its presence. Therapeutic drug testing also detects the presence of certain prescription drugs that are being used by an applicant to treat a life-threatening medical condition that may not be revealed by a physical examination. Insurance specimens are normally collected from individual insurance applicants by independent paramedical personnel using LabOne's custom- designed collection kits and containers. These kits and containers are delivered to LabOne's laboratory via overnight delivery services or mail, coded for identification and processed according to each client's specifications. Results are generally transmitted to the insurance company's underwriting department that same evening. LabOne provides a one-day service guarantee on oral fluid and urine HIV specimen results. LabOne offers LabOne NET, a combination network/software product that provides a connection for insurance underwriters for ordering, delivery and management of risk assessment information such as laboratory results, motor vehicle reports and other applicant information. Additionally, LabOne will handle paramedical examination paperwork and assist with administration of data for group insurance underwriting. The following table summarizes LabOne's revenues from services provided to the insurance and healthcare (clinical and substance abuse testing) markets: Year ended December 31, 1997 1996 1995 ------------ ------------ ------------ (Dollars in thousands) Insurance $ 61,998 79% $ 50,801 85% $ 52,544 92% Clinical 7,512 9% 3,942 7% 2,297 4% Substance abuse 9,416 12% 4,689 8% 2,188 4% ------ ------ ------ Total $ 78,926 $ 59,432 $ 57,029 ====== ====== ====== LabOne - Operations LabOne's operations are designed to facilitate the testing of a large number of specimens and to report the results to its clients, generally within 24 hours of receipt of specimens. LabOne 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 the clients' computer systems. This system offers LabOne's clients the ability to customize their testing and reflex requirements by several parameters to best meet their needs. As a result of the number of tests it has performed over the past several years, LabOne has compiled and maintains a large statistical 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 LabOne'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, LabOne'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. LabOne 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 LabOne in conducting its testing are commercially purchased and are readily available from multiple sources. LabOne - Regulatory Affairs/Quality Improvement The objective of the Regulatory Affairs/Quality Improvement department is to ensure that accurate and reliable test results are released to clients. This is accomplished by incorporating both internal and external quality assurance programs in each area of the laboratory. In addition, quality assurance 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(trademark) controls are used to challenge every aspect of service at LabOne from specimen arrival through final billing. Approximately 2,000 samples are prepared and submitted anonymously each month. These samples are especially designed to challenge 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 (CAP), the American Association of Bioanalysts and the Centers for Disease Control. LabOne is accredited by CAP. The Office of Inspector General (OIG) of the Department of Health and Human Services has developed a sample Model Compliance Plan. Laboratories are being advised to create a similar program to ensure compliance with anti-fraud and abuse laws and rules governing federally-financed reimbursement for lab testing services. Even though only a small portion of LabOne's business encompasses fee-for- service Medicare/Medicaid, a Chief Compliance Officer and nine Co- Compliance Officers have been appointed. LabOne is in the process of developing the LabOne Compliance Plan. LabOne is licensed under the Clinical Laboratory Improvement Amendments (CLIA) 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 SAMHSA to perform testing to detect drugs of abuse in federal employees and in workers governed by federal regulations. LabOne - Sales and Marketing LabOne's client base currently consists primarily of insurance companies in the United States and Canada. LabOne 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 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 LabOne'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. LabOne's sales representatives and its senior management also attend and sponsor insurance industry underwriters' and medical directors' meetings. LabOne - Competition LabOne believes that the insurance laboratory testing market is approximately a $100 million to $120 million industry. LabOne currently services over half the market. LabOne has maintained its market leadership through the development of long term client relationships, its reputation for providing quality products and services at competitive prices, and its battery of tests which are tailored specifically to an insurance company's needs. LabOne has two other main competitors, Osborn Laboratories, Inc. and Clinical Reference Laboratory. Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America. Concurrently, Prudential's Individual Insurance Group agreed to use LabOne as its exclusive provider of risk assessment testing services. At the time of the purchase, GIB served approximately 5% of the insurance laboratory testing market. The insurance testing industry continues to be highly competitive. The primary focus of the competition has been on pricing. This continued competition has resulted in a decrease in LabOne's average price per test. It is anticipated that prices may continue to decline in 1998. LabOne - 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 LabOne's domestic operations and its subsidiary, Lab One Canada, Inc. Year ended December 31, 1997 * 1996 1995 ---- ---- ---- (In millions) Sales: United States $72.4 $53.1 $50.8 Canada 6.6 6.4 6.2 Operating Profit: United States 2.0 2.4 1.9 Canada 0.6 0.7 0.3 Identifiable Assets: United States 56.8 62.1 64.4 Canada 3.2 2.7 5.7 * 1997 United States operating profit includes a one-time write-off of $6.6 million. (See Notes to Consolidated Financial Statements) LabOne - 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 LabOne's clients to aid them in choosing the best tests available to meet their requirements. Total technology development expenditures are not considered significant to LabOne as a whole. LabOne - Employees As of March 2, 1998, LabOne had 665 full-time employees, representing an increase of 99 employees from the same time in 1997. None of LabOne's employees are represented by a labor union. LabOne believes its relations with employees are good. AGENCY PREMIUM RESOURCE, INC. Agency Premium Resource, Inc. (APR) was an insurance premium finance company serving independent insurance agents. APR provided premium financing for the commercial customers of these independent insurance agents. On May 31, 1995, Lab Holdings sold APR. See Item 7 and Notes to Consolidated Financial Statements for additional information. INTERNATIONAL UNDERWRITING SERVICES, INC. International Underwriting Services, Inc. (IUS) offered turnkey policyholder and underwriting services. This subsidiary operated only within the life and health insurance industry and provided some or all of the following services to its customers: product design, underwriting of applicants, policy issuance, policy service, premium collection and payment of commissions. On July 17, 1995, Lab Holdings sold IUS. See Item 7 and Notes to Consolidated Financial Statements for additional information. HEALTHCARE SERVICES The following businesses are considered to be in the healthcare services segment: LabOne's clinical and substance abuse testing segments and Pyramid Diagnostic Services, Inc. LABONE, INC. LabOne's clinical testing services are provided to the healthcare industry to aid in the diagnosis and treatment of patients. LabOne operates only one highly automated and centralized laboratory, which LabOne believes has significant economic advantages over other conventional laboratory competitors. LabOne markets its clinical testing services to the payers of healthcare-insurance companies and self-insured groups. LabOne does this through exclusive arrangements with managed care organizations and through Lab Card(registered trademark), a Laboratory Benefits Management (LBM) program. The Lab Card Program provides laboratory testing at reduced rates as compared to traditional laboratories. It uses a unique benefit design that shares the cost savings with the patient, creating an incentive for the patient to help direct laboratory work to LabOne. Under the Program, the patient incurs no out-of-pocket expense when the Lab Card is used, and the insurance company or self-insured group receives substantial savings on its laboratory charges. LabOne is certified by the Substance Abuse and Mental Health Services Administration (SAMHSA) to perform substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. LabOne's rapid turnaround times and multiple testing options help clients reduce downtime for affected employees and meet mandated drug screening guidelines. LabOne's Clinical Patient Testing LabOne began offering laboratory testing services to the healthcare industry in 1994. Clinical 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, urinalysis, blood cell counts, PAP smears and AIDS-related tests. Clinical specimens are collected at the physician's office or other specified sites. LabOne's couriers pick up the specimens and deliver them to local airports for express transport to the Kansas laboratory. Specimens are coded for identification and processed. LabOne'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 LabOne's computer system along with all other completed results. LabOne has established the Lab Card Program, as well as alliances with major healthcare providers, as vehicles for delivering out-patient laboratory services. The Lab Card Program is marketed to healthcare payers (self-insured groups and insurance companies), allowing them to avoid price mark-ups and cost shifting. With the Program, companies save substantially on their outpatient laboratory testing, and patients pay no out-of-pocket fees when they use their Lab Card. The clinical laboratory testing market is a $40 billion industry which is highly fragmented and very competitive. LabOne faces competition from numerous independent clinical laboratories and hospital- or physician-owned laboratories. Many of LabOne's competitors are significantly larger and have substantially greater financial resources than LabOne. LabOne is working to establish a solid client base in this environment through the use of Lab Card and the establishment of exclusive arrangements with large groups and managed care entities to provide laboratory services. LabOne's business plan is to be the premier low-cost provider of high- quality laboratory services to self-insured employers and insurance companies in the healthcare market. LabOne feels that its superior quality and centralized, low-cost operating structure enable it to compete effectively in this market. The sales representatives for the clinical industry are experienced in the healthcare benefit market or clinical laboratory-related fields and currently work in the geographic areas which they represent. Marketing efforts are directed at insurance carriers, self-insured employers and trusts, third party administrators and other organizations nationwide. LabOne's Substance Abuse Testing Services LabOne markets substance abuse testing to Fortune 1000 companies, third party administrators and occupational health providers. Certification by SAMHSA enables LabOne to offer substance abuse testing services to federally regulated industries. There are presently 71 laboratories that are SAMHSA certified. 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 LabOne. 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. Substance abuse marketing efforts are primarily directed at Fortune 1000 companies, occupational health clinics and third party administrators. LabOne's strategy is to offer quality service at competitive prices. The sales force focuses on the ability of LabOne to offer multiple reporting methods, next flight out options, dedicated client service representatives and rapid reporting of results. LabOne competes in the substance abuse testing market nationwide. LabOne's major competitors are the three major clinical chains, Laboratory Corporation of America, Quest Diagnostics and Smith Kline Beecham Laboratories, who collectively constitute approximately two- thirds of the substance abuse testing market. PYRAMID DIAGNOSTIC SERVICES, INC. The Registrant acquired a 52% ownership position in Pyramid Diagnostic Services, Inc. (Pyramid) in 1992. The original $4 million purchase price included newly-issued shares, thereby providing expansion financing to Pyramid. Pyramid ultimately expanded to nine pharmacies which distributed radiopharmaceuticals and related services to nuclear medicine departments, clinics and hospitals. During 1993, Registrant acquired an additional 18% ownership position for $332,000. In 1994, Registrant's ownership increased by 5% (ownership totaled 74%) with a $l million investment. Pyramid entered bankruptcy proceedings in early October 1995 as a result of an adverse $6 million judgment entered in a lawsuit against Pyramid. Pyramid's bankruptcy proceedings have not been finalized. The impact on Registrant's results of operations was the September 1995 write-off of Registrant's investment in Pyramid by recording a pre-tax expense of approximately $3.3 million and a corresponding tax benefit of $2.1 million resulting in an after-tax $1.2 million charge to earnings. See Item 7 and Notes to Consolidated Financial Statements for additional information. OTHER BUSINESSES BMA RESOURCES, INC. BMA Resources, Inc. (Resources) was a component of the SLH distribution on March 3, 1997. See Item 7 and Notes to Consolidated Financial Statements for additional information. Resources held the Registrant's energy investments at December 31, 1996. No new energy investments were being made, and it had been the Registrant's intent to maximize cash flow from Resources to be deployed in healthcare and insurance services. The investments included oil and gas working interests (all of which had been sold by June 1996), oil and gas partnerships and a stock investment in an unconsolidated affiliate. The oil and gas primarily consisted of partnership interests in Texas gulf coast oil and gas wells and leasehold interests. Resources has an approximate 31% equity interest in Syntroleum Corporation (Syntroleum(registered trademark)). Syntroleum is the developer and owner of a proprietary process (Syntroleum Process) designed for use in the conversion of natural gas into synthetic liquid hydrocarbons (gas to liquids or GTL). TENENBAUM & ASSOCIATES, INC. Tenenbaum & Associates, Inc. (TAI) was a component of the SLH distribution on March 3, 1997. See Item 7 and Notes to Consolidated Financial Statements for additional information. TAI was a full service real estate, personal property and sales and use tax consulting firm providing tax consulting services on a contingency basis. TAI's core business was commercial real estate. On May 31, 1995, TAI sold certain assets to Ernst & Young U.S. LP. TAI retained its accounts receivable as of May 31, 1995. The agreement provides for Ernst & Young to continue the work-in-process on current accounts (where formal or informal tax valuation protests have been filed but not yet resolved). Ernst & Young will earn a fee for collecting the current accounts and will participate in net cash collected on certain accounts after third party costs and Ernst & Young's fees. During June 1995, TAI distributed its remaining assets to shareholders and filed for dissolution. REAL ESTATE Scout Development Corporation (Scout) was a component of the SLH distribution on March 3, 1997. See Item 7 and Notes to Consolidated Financial Statements for additional information. Scout held the Registrant's real estate investments at December 31, 1996 which consisted of: approximately 1,160 acres of partially developed and undeveloped land in six locations, three residential development projects, a multi-story parking garage and a community shopping center. Real estate assets were located in the following states: Florida, Kansas, Nevada, New Mexico, Texas, and Wyoming, all of which were listed for sale. In 1992, the Registrant's board of directors approved a plan to discontinue real estate operations. As a result of this decision, a $6 million after-tax loss provision for estimated write-downs and costs through final disposition was included in the discontinued real estate's 1992 loss. Additional after-tax losses of $2.9 million, $6.6 million, and $1.5 million were recorded in 1994, 1995, and 1996, respectively. These losses resulted from changes in estimated net realizable value based upon management's analysis of recent sales transactions and other current market conditions. See Item 7 and Notes to Consolidated Financial Statements for additional information concerning discontinued real estate operations. The location and use of each majority owned property was as follows at December 31, 1996: Houston, TX - 370 acres and 37 lots; Ft. Worth, TX - - 761 acres; Olathe, KS - 16 acres; Juno Beach, FL - 6 units; and Santa Fe, NM - 25 units. In addition, the Registrant had a 49.9% investment in a joint venture that owns a shopping center and 14 acres of undeveloped land in Gillette, Wyoming. Only two properties, one of which was 100% owned and the 49.9% joint venture referenced above, were categorized as commercial properties. Registrant's net asset value of these two projects at December 31, 1996 was $2.8 million. The 100% owned commercial property consisted of an 850-space parking garage located in downtown Reno, Nevada. The building contains a total of 144,500 square feet of leasable parking space. Parking revenue totaled approximately $595,000 or $700 per space or $4.12 per square foot in 1996. In addition, 8,258 square feet located on the ground floor of the garage is leased to a retail tenant under a 15- year lease. Revenue from the retail lease during 1996 was $133,800 or $16.20 per square foot. In addition to basic rent, the retail tenant is responsible for its prorata share of real estate taxes and insurance. During 1996, $5,400 was collected from the retail tenant for taxes and insurance. The joint venture commercial property consisted of a retail shopping center containing approximately 163,000 square feet of net leaseable area. At the end of 1996, the center was 88% occupied. Rental revenue totaled $733,000 for 1996. The average annual gross rental per occupied square foot was $5.62. In addition to rental revenue, tenants are responsible for their share of common area maintenance (CAM). During 1996, CAM collections from tenants totaled $83,000. Information regarding real estate debt is summarized in Note 15 of the Notes to Consolidated Financial Statements. The detailed information is as follows: Balance at Property Description Rate Maturity 12-31-96 - --------------------------------------------------------------------- (In thousands) Gillette, WY shopping center IRB 2.9%-4.55% 2016 $ 6,170 Olathe, KS vacant land Mortgage 8.625% 1997 1,194 ------ Total $ 7,364 ====== In management's opinion, the real estate properties were adequately covered by insurance with coverages for real and personal property, commercial general liability, commercial crime, garagekeepers legal liability, earthquake, flood, windstorm and hail. On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH. In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities, including two wholly-owned subsidiaries, Scout and Resources, to SLH. Additionally, SLH assumed liabilities relating to the transfer assets as well as certain contingent Lab Holdings liabilities, including Lab Holdings' liability for disputed income taxes which the Internal Revenue Service claims to be owed by Lab Holdings for its 1986-1990 tax years and which the State of California claims to be owed for the 1987-1989 years. See Item 3 and Notes to Consolidated Financial Statements for additional information. On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. Response's operations are presented as a discontinued healthcare business in Lab Holdings' financial statements. The second quarter was the last period in which Response significantly impacted Lab Holdings' operating results. The second quarter discontinued healthcare operations reflected a non-cash tax expense partially offset by Lab Holdings' share of Response's earnings. The distribution of Response stock was effected as a taxable dividend by Lab Holdings in which Lab Holdings utilized tax loss carryforwards to offset the resulting $3.8 million tax liability in the financial statements. See Notes to Consolidated Financial Statements for additional information. As a result of the distributions, Lab Holdings' principal asset consists of its stock holding in LabOne. See Notes to Consolidated Financial Statements for additional information. ITEM 2. PROPERTIES. Properties of Registrant On March 3, 1997, Registrant distributed to its shareholders the stock of SLH. In connection with this distribution, Registrant transferred the office lease and the real estate subsidiary and other assets and liabilities to SLH, subject to SLH agreeing to make necessary office space available to the Registrant to the extent necessary to permit the Registrant to conduct its operations. See Items 1 and 7 and Notes to Consolidated Financial Statements for additional information regarding the SLH distribution. Registrant had a long-term lease for 13,674 square feet of office space at 2600 Grand Boulevard in the Crown Center complex in Kansas City, Missouri. This lease, which began April 1, 1992, is for a ten year term with a right to cancel after seven years. Registrant's previously owned real estate subsidiary held diversified types of properties for sale or investment purposes in various geographical locations. In certain cases, projects were developed on a joint venture basis with one or more joint venture partners. Title to property in such cases was held jointly with such partners or in the name of the venture. Rights and obligations with respect to such properties were governed by the terms of the joint venture agreement. Registrant's former real estate operations are described in greater detail in Items 1 and 7 and Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. Under the Distribution Agreement and Assignment, SLH assumed the rights and obligations of Lab Holdings with respect to the following legal matter. In 1986, a lawsuit was initiated in the Circuit Court of Jackson County, Missouri by Lab Holdings' former insurance subsidiary (i.e., Business Men's Assurance Company of America) against Skidmore, Owings & Merrill ("SOM") which is an architectural and engineering firm, and a construction firm to recover costs incurred to remove and replace the facade on the former home office building. Because the removal and replacement costs had been incurred prior to the sale of the insurance subsidiary, Lab Holdings negotiated with the buyer for an assignment of the cause of action from the insurance subsidiary. In September 1993, the Missouri Court of Appeals reversed a $5.7 million judgment granted in 1992 in favor of Lab Holdings; the Court of Appeals remanded the case to the trial court for a jury trial limited to the question of whether or not the applicable statute of limitations barred the claim. The Appeals Court also set aside $1.7 million of the judgment originally granted in 1992. In July 1996, this case was retried to a judge. On January 21, 1997, the judge entered a judgment in favor of Lab Holdings. The amount of that judgment, together with interest is approximately $5.6 million. Although the judgment has been appealed, counsel for the Company expects that it will be difficult for the defendants to cause the judgment to be reversed. The final outcome is not expected for at least another year. Settlement arrangements with other defendants have resulted in payments to plaintiff which have substantially offset legal fees and costs to date of approximately $502,000. Future legal fees and costs can not reliably be estimated. Pursuant to the Distribution Agreement, this matter was assigned to SLH Corporation. In the opinion of management, after consultation with legal counsel and based upon current available information, this lawsuit is not expected to have a material adverse impact on the consolidated financial position or results of operations of Lab Holdings. Pursuant to the Distribution Agreement, SLH assumed from Lab Holdings all of the contingent tax liabilities described below and acquired all rights to refunds, plus any interest related to these tax years. SLH also assumed all contingent liabilities and refunds related to any issues raised for the years 1986-1990 whose resolution may extend to tax years beyond the 1990 tax year. Lab Holdings received notices of proposed adjustments (Revenue Agent's Reports) from the Internal Revenue Service (IRS) with respect to 1986- 1990 federal income taxes. These notices claimed total federal income taxes due for the entire five year period in the approximate net amount of $13,867,000, exclusive of interest thereon. Lab Holdings filed protests regarding the 1986-1990 notices of proposed adjustments. In 1997, Lab Holdings received a formal agreement to the issues and the final tax computation from the IRS. The agreement provides for a tax refund to SLH of approximately $5.5 million net of interest costs. The agreement was approved by Congress' Joint Committee on Taxation in January 1998. In December 1996, the California state auditor sent Lab Holdings an audit report covering the 1987-1989 taxable years. The State of California has determined to include, as a "unitary taxpayer," all majority owned non-life insurance subsidiaries and joint ventures of Lab Holdings. During 1997, the California Franchise Tax Board sent a notice of taxes and interest due for the 1987-1989 years of approximately $1.8 million, which was paid. Pursuant to the Distribution Agreement, SLH Corporation assumed all potential tax liabilities and interest thereon regarding the California audit for the 1987-1989 tax years. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF REGISTRANT. Following is a list of all executive officers of Registrant as of March 1, 1998, together with certain related information. There are no arrangements or understandings among any such persons and any other persons pursuant to which any was selected as an officer. All such persons serve at the discretion of the board of directors. Served as Executive Officer with Name Age Position with Registrant Registrant Since - ---------------------------------------------------------------------- S.K. Fitzwater 51 Vice President, Chief Financial 1990 and Accounting Officer and Secretary (see note 1 below) P.A. Jacobs 56 President and Chief Executive 1980 Officer (see note 2 below) W.T. Grant II 47 Chairman, President and Chief 1980 Executive Officer of LabOne, Inc. (see note 3 below) Except as noted below, each executive officer of Registrant has held the executive position noted with Registrant as his principal occupation for the last five years. 1. Steven K. Fitzwater became Chief Financial Officer in September 1997. He has been Vice President and Chief Accounting Officer since August 1990. On April 1, 1993, he assumed the additional duties of Secretary of the Registrant. 2. P. Anthony Jacobs became Chief Executive Officer in September 1997. He has been President and Chief Operating Officer since May 1993. Prior to May 1993, he had been Executive Vice President and Chief Operating Officer since 1990. 3. LabOne, Inc. is 82% owned by the Registrant. Effective February 13, 1998, Registrant's board of directors designated W. T. Grant II as an Executive Officer of Registrant because LabOne was determined to constitute a principal business unit of Registrant and Mr. Grant became the Chairman, President and Chief Executive Officer of LabOne in October 1995. Mr. Grant is not a corporate officer of Lab Holdings. He was Chairman of the Board and Chief Executive Officer of Lab Holdings from May 1993 to September 1997. He had been President and Chief Executive Officer of Lab Holdings since 1986. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Registrant's common stock is traded in the national over-the-counter market and is listed in the NASDAQ National Market System maintained by the National Association of Securities Dealers. As of February 24, 1998, the outstanding shares were held by 1,806 stockholders of record. High and low sales prices for each quarter of 1997 and 1996 are included in the table of quarterly financial data in Note 16 of the Notes to Consolidated Financial Statements. Also set forth in the table are quarterly dividends paid per share. Registrant's payment of future dividends will be at the discretion of its board of directors and can be expected to be dependent upon a number of factors, including future earnings, financial condition, cash needs and general business conditions. The dividend-paying capabilities of subsidiaries may be restricted as to their transfer to the parent company. ITEM 6. SELECTED FINANCIAL DATA December 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------- (In thousands except share and per share amounts) REVENUES $ 78,926 61,878 75,246 86,027 92,171 =============================================== OPERATING EARNINGS (LOSS) Earnings (loss) from continuing operations $ (7,855) (4,226) (1,826) (276) 5,412 Earnings (loss) from discontinued healthcare business (2,342) 682 1,078 (1,596) 206 Loss from discontinued real estate operations -- (1,452) (6,600) (2,904) -- ----------------------------------------------- Net earnings (loss)$ (10,197) (4,996) (7,348) (4,776) 5,618 =============================================== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK Earnings (loss) from continuing operations $ (1.21) (.65) (.28) (.03) .81 Earnings (loss) from discontinued healthcare business (.36) .10 .17 (.25) .03 Loss from discontinued real estate operations -- (.22) (1.03) (.46) -- ----------------------------------------------- Net earnings (loss)$ (1.57) (.77) (1.14) (.74) .84 =============================================== Cash dividends $ 1.20 1.20 1.20 1.20 1.20 Book value $ 8.74 26.84 28.96 31.50 33.52 Average shares outstanding 6,488,643 6,433,989 6,714,079 during the year 6,477,878 6,374,837 Shares outstanding 6,489,103 6,461,061 6,733,245 end of year 6,483,934 6,378,261 Total assets $ 74,786 196,783 198,018 234,196 259,575 Long-term debt $ -- -- -- 8 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Introductory remarks about results of operations The principal assets of Lab Holdings, Inc. (Lab Holdings or Registrant) consist of a majority ownership of LabOne, Inc. (LabOne) and approximately $5 million in cash and short term investments. Lab Holdings had investments in real estate, energy businesses and miscellaneous assets. On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH Corporation (SLH). In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities to SLH. The SLH spin-off was accounted for as a dividend. Lab Holdings had a majority ownership position in Response Oncology, Inc. (Response). Response, previously 67%-owned by Lab Holdings, is a publicly-traded company (NASDAQ-ROIX). On February 26, 1997, Lab Holdings converted a $23.5 million Response note receivable and accrued interest into 3,020,536 shares of Response common stock. The conversion increased Lab Holdings' ownership of Response shares outstanding from 56% at December 31, 1996 to approximately 67%. On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. Response's operations are presented as a discontinued healthcare business in Lab Holdings' financial statements. The second quarter was the last period in which Response significantly impacted Lab Holdings' operating results. The second quarter discontinued healthcare operations reflected a non-cash tax expense partially offset by Lab Holdings' share of Response's earnings. The distribution of Response stock was effected as a taxable dividend by Lab Holdings in which Lab Holdings utilized tax loss carryforwards to offset the resulting $3.8 million tax liability in the financial statements. Prior to October 20, 1997, Lab Holdings was named Seafield Capital Corporation (Seafield). Seafield changed its name to Lab Holdings for better identification with its primary asset, the 82% ownership of LabOne. 1997 Compared to 1996 Insurance Services Segment: The following business is considered to be in the insurance services segment: LabOne's risk-appraisal laboratory testing for the life insurance industry. LabOne, an 82% owned subsidiary of Lab Holdings, is a publicly-traded company (NASDAQ-LABS). LabOne changed its name from Home Office Reference Laboratory, Inc. in February 1994. LabOne's clinical testing services are provided to the healthcare industry to aid in the diagnosis and treatment of patients. LabOne provides substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. See Healthcare Services Segment discussion below for clinical and substance abuse (SAT) laboratory testing services. LabOne provides risk-appraisal laboratory services to the insurance industry. The tests performed by LabOne 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. Testing services are also provided on specimens of individuals applying for individual and group medical and disability policies. Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America. Concurrently, Prudential's individual insurance group agreed to use LabOne as its exclusive provider of risk assessment testing services. At the time of the purchase, GIB served approximately 5% of the insurance laboratory testing market. LabOne's total revenue for the year ended December 31, 1997 was $78.9 million as compared to $59.4 million in 1996. The increase of $19.5 million, or 33%, is due to increases in insurance segment revenue of $11.2 million, SAT revenue of $4.7 million and clinical laboratory revenue of $3.6 million. The insurance segment increased 22% due to an increase in the total number of insurance applicants tested and an increase in kit revenue, partially offset by a 1% decrease in the average revenue per applicant. The increase in insurance segment revenue is primarily due to an increase in market share and changes to testing thresholds. LabOne's total cost of sales increased $9.3 million (28%) for the year as compared to the prior year. This increase is due primarily to increases in payroll, laboratory supplies and kit expenses due to the larger specimen volume for all three business segments. LabOne's total selling, general and administrative expenses increased $4.1 million (17%) in 1997 as compared to 1996 due primarily to increases in payroll expenses, travel and amortization expenses. These increases are due to growth in each segment. In 1997, LabOne recorded a one-time write-down of $6.6 million on the value of the laboratory and administrative buildings in anticipation of their sale. See notes to financial statements for additional information. LabOne's operating income decreased from $3.1 million in 1996 to $2.6 million in 1997, primarily due to the $6.6 million write down which offset the increase in the insurance segment operating income of $5.9 million. LabOne's other income decreased $700,000 in 1997 as compared to 1996, due to lower investment income. Healthcare Services Segment: The following businesses are included in the healthcare services segment: LabOne's clinical and substance abuse (SAT) testing services. LabOne's SAT revenue increased from $4.7 million in 1996 to $9.4 million in 1997 due to a doubling in testing volumes. Clinical laboratory revenue increased from $3.9 million in 1996 to $7.5 million in 1997 due to increased testing volumes and higher revenue per patient. LabOne's total cost of sales increased $9.3 million (28%) for the year as compared to the prior year primarily reflecting increases in payroll, laboratory supplies and kit expenses due to the larger specimen volume for all three business segments. Direct and allocated clinical cost of sales expenses were $8.3 million as compared to $6.5 million during 1996. Direct and allocated SAT cost of sales expenses were $7 million as compared to $3.7 million during 1996. These increases are due to increased testing volumes. Clinical overhead expenditures were $7.5 million as compared to $5.4 million in 1996. SAT overhead increased from $2.2 million in 1996 to $3.3 million in 1997. These increases are due to the growth in each segment. LabOne's clinical testing segment had an operating loss of $8.3 million for 1997 as compared to a loss of $8 million in 1996, due to a $600,000 increase in corporate overhead allocation over 1996. The SAT segment improved from an operating loss of $1.2 million in 1996 to a loss of $934,000 in 1997, including a $900,000 increase in corporate overhead allocation over last year. Other Segment: Lab Holdings' oil and gas investments were distributed to SLH on March 3, 1997. In 1996, revenues of $2.4 million and expenses of $2.8 million were recorded. During 1997, Lab Holdings significantly reduced its corporate structure and overhead costs as the SLH and Response distributions were finalized. The increase in general and administrative expenses to $34.8 million in 1997 from $29.8 million in 1996 reflects both LabOne's increased costs associated with increased testing volumes discussed above and costs related to Lab Holdings' corporate structure reductions including position eliminations and related severance. SLH provides administrative and accounting functions to Lab Holdings under a services agreement for an annual fee of $75,000. Investment Income - Net: Other investments contributing earnings include venture capital and liquidity investments. The return on short-term investments is included in the investment income line in the consolidated statements of operations. Investment income decreased slightly to $4.7 million in 1997 from $5 million in 1996 primarily reflecting LabOne's decrease in investment income. Miscellaneous Items: Other Income/(Expense) increased to income of $77,000 in 1997 from expense of $456,000 in 1996. The 1996 expense primarily reflects Lab Holdings' equity share of Syntroleum's losses partially offset by other miscellaneous gains. Taxes: Tax expense increased approximately $4 million in 1997 reflecting write-off of approximately $5 million of the deferred income tax assets related to assets spun-off in the SLH distribution and the write-off of unused deferred income tax assets not utilized in the Response distribution. Consolidated Results: The combined effect of the above factors resulted in a 1997 loss from continuing operations of $7.9 million, as compared with a $4.2 million loss in 1996. 1996 Compared to 1995 Insurance Services Segment: The following business is considered to be in the insurance services segment in 1996: LabOne's risk-appraisal laboratory testing for the life and health insurance industries. Additionally, during 1995's first six months, the underwriting and policy administration services and insurance premium finance services businesses were also included in the insurance services segment. LabOne insurance segment revenue decreased in 1996 to $50.8 million from $52.5 million in 1995, primarily due to a 6% reduction in revenue per applicant, partially offset by an increase in insurance kit revenue. The total number of applicants tested for the year was relatively the same as in 1995. LabOne total cost of sales increased $2.8 million (9%) for the year as compared to the prior year. This increase is due primarily to increases in inbound freight expense, kit expense and outside laboratory services. These were partially offset by a decrease in rent expense due to the closing of certain LabOne Service Center (LSC) locations in 1995. LabOne total selling, general and administrative expenses decreased $1.3 million (5%) in 1996 as compared to the prior year due primarily to decreases in depreciation, travel, insurance and legal expenses. LabOne total operating income increased from $2.2 million in 1995 to $3.1 million in 1996. The increase is primarily attributable to a $200,000 increase in the insurance segment operating income and a $700,000 decrease in the healthcare segment operating loss. LabOne non-operating income decreased $800,000 primarily due to a decrease in investment income. Healthcare Services Segment: The following businesses are included in 1996's healthcare services segment: the clinical and substance abuse laboratory testing services and a comprehensive cancer management company. During 1995's first nine months, the radiopharmaceuticals and related nuclear medicine services were also included in the healthcare services segment. LabOne's healthcare (clinical and substance abuse testing) segment revenues increased $4.1 million during 1996. Healthcare revenue increased from $4.5 million in 1995 to $8.6 million in 1996 due to continued expansion efforts. LabOne's total cost of sales increased $2.8 million (9%) during 1996 as compared to the prior year. This increase is due primarily to increases in inbound freight expense, kit expense and outside laboratory services. These were partially offset by a decrease in rent expense due to the closing of certain LabOne Service Center (LSC) locations in 1995. Healthcare cost of sales expenditures for the year were $10.2 million as compared to $8.6 million in 1995. LabOne healthcare overhead expenditures increased from $5.8 million in 1995 to $7.6 million in 1996, primarily due to an increase in allocated overhead and growth in healthcare segment payroll. LabOne total operating income increased from $2.2 million in 1995 to $3.1 million in 1996. The increase is primarily attributable to a $200,000 increase in the insurance segment operating income and a $700,000 decrease in the healthcare segment operating loss. Another healthcare subsidiary, Pyramid Diagnostic Services, Inc. (Pyramid), incurred a loss of $768,000 for the first nine months of 1995. Pyramid entered bankruptcy proceedings in early October 1995 as a result of an adverse $6 million judgment entered in a lawsuit against Pyramid. Pyramid's bankruptcy proceedings have not been finalized. The impact on Lab Holdings' results of operations was the September 1995 write-off of Lab Holdings' investment in Pyramid by recording a pre-tax expense of approximately $3.3 million and a corresponding tax benefit of $2.1 million resulting in an after-tax $1.2 million charge to earnings. Included with the Pyramid write-off was $2.3 million of goodwill. Lab Holdings consolidated Pyramid's nine months 1995 revenues of $7.6 million while expenses consolidated in 1995 were $7.7 million. See Notes to Consolidated Financial Statements for additional information. Other Segment: Lab Holdings' oil and gas subsidiary contributed revenues of $2.4 million in 1996 as compared to $2 million in 1995. Variances in the oil and gas prices nationally impact operating results. The other segment's revenues and expenses in 1995 included the operating results of a real estate, personal property, sales and use taxes consulting subsidiary--Tenenbaum and Associates, Inc. (TAI). On May 31, 1995, TAI sold certain assets to Ernst & Young U.S. LP. TAI retained its accounts receivable as of May 31, 1995. The agreement provides for Ernst & Young to continue the work-in-process on current accounts (where formal or informal protests have been filed but not yet resolved). Ernst & Young will earn a fee for collecting the current accounts and will participate in net cash collected on certain accounts after third party costs and Ernst & Young's fees. During June 1995, TAI distributed its remaining assets to shareholders and filed for dissolution. Consolidated revenues in 1995 for TAI were $5.3 million while TAI expenses consolidated in 1995 were $4.1 million. Investment Income - Net: Other investments contributing earnings include venture capital and liquidity investments. The return on short-term investments is included in the investment income line in the consolidated statements of operations. Investment income totaled $5 million in 1996 and $4.1 million in 1995. Investment income was higher in 1996 reflecting both realized and unrealized holding gains/losses recorded on trading securities and improved venture capital operating results. See Notes to Consolidated Financial Statements for additional investment information. Interest Expense: Interest expense increased to $1 million in 1996 from $107,000 in 1995. During 1996, Lab Holdings incurred $1 million of interest expense associated with a preliminary state tax audit. Other Income/(Loss): The major components of other income/(loss) in 1995 included $1.1 million of losses on subsidiary dispositions and a $3.4 million provision for Pyramid's bankruptcy. The 1996 expense of $456,000 primarily reflects Lab Holdings' equity share of Syntroleum's losses partially offset by other miscellaneous gains. Taxes: The consolidated effective tax rate in 1996 was impacted primarily by the accrual of state income taxes, net of federal income tax benefit, resulting from a California franchise tax audit for the 1987-1989 years. Other items affecting the tax rate were non-deductible goodwill and a net increase in deferred income tax valuation allowances. Consolidated Results: The combined effect of the above factors resulted in a 1996 net loss from continuing operations of $4.2 million compared with a $1.8 million net loss from continuing operations in 1995. Discontinued Operations: Healthcare Business: On February 26, 1997, Lab Holdings converted its Response note receivable and accrued interest into Response common stock. The conversion increased Lab Holdings' ownership of Response shares outstanding from 56% at December 31, 1996 to approximately 67%. On July 25, 1997, Lab Holdings distributed to its shareholders all the shares of common stock of Response owned by Lab Holdings. Response's operations are presented as a discontinued healthcare business in Lab Holdings' financial statements. The distribution of Response stock was effected as a taxable dividend by Lab Holdings in which Lab Holdings utilized tax loss carryforwards to offset the resulting $3.8 million tax liability in the financial statements. The $2.3 million loss from discontinued healthcare operations in 1997 reflects a $3.8 million non-cash tax expense net of Lab Holdings' share of Response's earnings. The second quarter of 1997 was the last period in which Response significantly impacted Lab Holdings' financial results. For the seven months ended July 31, 1997, Response's revenues were $50 million, costs and expenses were $46.3 million and net earnings were $2.1 million. During 1996, Response's revenues were $67.3 million, costs and expenses were $66.3 million and net earnings were $907,000. During 1995, Response's revenues were $44.3 million, costs and expenses were $42.3 million and net earnings were $2.3 million. Real Estate: The real estate assets were distributed pursuant to the SLH Distribution Agreement. Real estate operations are presented as discontinued operations in Lab Holdings' financial statements. Net real estate assets distributed on March 3, 1997 were $23 million. Real estate revenues were $3.6 million in 1997's first two months prior to distribution, compared with $16.3 million in 1996 and $11.5 million in 1995. The real estate sales revenues in 1997 include the sale of 2 residential units in Florida and New Mexico ($1.2 million); 547 acres of land in Texas ($2.3 million); and 7 residential lots in Texas ($38,000). The real estate sales revenues in 1996 include the sale of 40 residential units in New Mexico and Florida ($14.8 million), 20 acres of land in Oklahoma ($275,000). and 1.5 acres of land in Kansas ($580,000). The real estate sales revenues in 1995 include the sale of 29 residential units or lots in Florida, Missouri, New Mexico and Texas ($7.9 million) and 302 acres of land in Kansas and Texas ($2.6 million). Cost of the real estate sales in 1997 prior to distribution totaled $3.5 million, compared with a cost of $15.3 million in 1996 and approximately $10.9 million in 1995, reflecting the mix of real estate sold during each period as discussed above in the revenue analysis. Real estate operating expenses totaled $2.7 million in 1996, as compared with $3.2 million in 1995. The decrease is attributable to a reduction in expenses associated with the substantial completion of the residential projects. In 1992, Lab Holdings' board of directors approved a plan to discontinue real estate operations. As a result of this decision, a $6 million after-tax loss provision for estimated write-downs and costs through final disposition was included in the discontinued real estate's 1992 loss. Additional after-tax losses of $2.9 million, $6.6 million, and $1.5 million were recorded in 1994, 1995, and 1996, respectively. These losses resulted from changes in estimated net realizable value based upon management's analysis of recent sales transactions and other current market conditions. See Item 1 and Notes to Consolidated Financial Statements for additional information concerning discontinued real estate operations. At December 31, 1996, real estate holdings included residential land, undeveloped land, single-family housing and commercial structures located in the following states: Florida, Kansas, Nevada, New Mexico, Texas and Wyoming, all of which are listed for sale. The total acreage consisted of approximately 1,160 acres and approximately 68 lots or units for sale. Listed below is the status of the discontinued real estate operations as of December 31, 1996: Land: North Ft. Worth, TX 297 acres sold, 547 acres listed for sale Ft. Worth, TX 214 acres listed for sale Houston, TX 1 acre sold, 30 lots sold, 370 acres and 37 lots listed for sale Olathe, KS 5.5 acres sold, 16 acres listed for sale Tulsa, OK 12 acres sold Land Lease: Honolulu, HI sold San Diego, CA sold Nashville, TN sold Commercial: Reno, NV listed for sale Denver, CO sold Gillette, WY listed for sale Residential: Juno Beach, FL last 2 units listed for sale Juno Beach, FL last unit and 3 marina slips listed for sale Santa Fe, NM last 25 units listed for sale with 6 of the 25 units under contract Mazatlan, Mexico final sales remittance received in 1995 The net real estate asset amounts were influenced from period to period by several factors including seasonal sales cycles for projects in Florida and New Mexico, a decision at the end of 1993 to accelerate the build-out of the New Mexico project and construction on the final three houses in Florida. Publicly-Traded Subsidiaries Lab Holdings has an investment in one majority-owned entity that is publicly-traded, LabOne. At December 31, 1997, based on the market price of publicly-traded shares of this subsidiary, pretax unrealized gains of approximately $138 million on this investment was not reflected in either Lab Holdings' book value or stockholders' equity. LIQUIDITY AND CAPITAL RESOURCES On December 31, 1997, at the holding company level, Lab Holdings had available for operations approximately $5.3 million in cash and short- term investments. Primarily as a result of the distribution of SLH in March 1997 and corporate structure cost reductions, Lab Holdings' working capital decreased $17.7 million during 1997 to $6.3 million at December 31, 1997. On a consolidated basis, Lab Holdings had $24.8 million in cash and short-term investments at December 31, 1997. Current assets totaled approximately $50.3 million while current liabilities totaled $8.6 million. Changes in most balance sheet line items resulted primarily from the SLH and Response stock distributions. Net cash provided by operations totaled $8.5 million in 1997 compared with $35.6 million in 1996. During 1997, the loss from continuing operations included non-cash items of $6.3 million for depreciation and amortization and a $6.6 million provision by LabOne for loss on anticipated disposal of assets. The 1997 funds provided additionally reflect a decrease in trading portfolios of $2.6 million, a $3 million increase in account receivable and a net change in income taxes and other of $3.5 million. During 1996, the loss from continuing operations included a non-cash item of $8.8 million for deprecation and amortization. The 1996 funds provided additionally reflect a decrease in trading portfolios of $19.3 million, a $1.5 million decrease in account receivable and a net change in income taxes and other of $9.6 million. Net cash used by investing activities totaled $12.3 million in 1997 primarily representing LabOne's net additions to property, plant and equipment and intangibles on its purchase of the assets and customer list of GIB Laboratories, Inc. and purchases supporting expanded laboratory capacity. Net cash used by investing activities in 1996 totaled $19.1 million reflecting Response's usage of $32.1 million for its acquisition of physician practices, $9.1 million provided by the discontinued real estate operations and a net decrease in long-term investments of $7.6 million. Net cash used by financing activities totaled $27.4 million in 1997 primarily due to the $19.6 million cash portion of the SLH dividend to Lab Holdings shareholders and regular cash dividends of $7.8 million. The 1996 net cash used by financing activities was $8.1 million primarily reflecting Lab Holdings regular cash dividends to its shareholders. Lab Holdings is currently a holding company. Sources of cash are investment income and sales and subsidiary dividends. There are currently no restrictions that would limit LabOne's ability to make future dividend payments. The primary uses of cash for Lab Holdings are investments, operating expenses and dividends to shareholders. Prior to the Distribution, Lab Holdings had received notices of proposed adjustments (the Revenue Agent's Reports) from the Internal Revenue Service (IRS) with respect to its 1986-1990 federal income taxes. These notices claimed total federal income taxes due for the entire five year period in the approximate net amount of $13,867,000, plus interest. However, Lab Holdings also had claims against the IRS for refunds relating to a $27 million loss claimed for 1990 on a sale of a real estate partnership interest which the IRS claimed had not occurred in 1990. In connection with the Distribution, SLH assumed from Lab Holdings all its contingent tax liabilities to the IRS and acquired all of its related rights to refunds as well as any interest thereon related to the Lab Holdings' 1986-1990 tax years. During 1997, all of the claims and disputes between Lab Holdings and the IRS for the 1986-1990 years were settled, entitling SLH to a net refund of $5.5 million. SLH also assumed Lab Holdings' rights and liabilities with respect to an audit being conducted by the State of California for Lab Holdings' 1987-1989 taxable years which SLH settled in 1998. Pursuant to the Distribution Agreement, SLH assumed from Lab Holdings all of the contingent tax liabilities described above and acquired all rights to refunds, plus any interest related to these tax years. Lab Holdings financial statements were not impacted pursuant to rights transferred to SLH by the Distribution Agreement. SLH also assumed all contingent liabilities and refunds related to any issues raised for the years 1986-1990 whose resolution may extend to tax years beyond the 1990 tax year. LabOne paid regular quarterly dividends in 1997, 1996 and 1995. As an 82% owner, Lab Holdings has received $7.7 million of cash as dividends from LabOne in 1997. LabOne's working capital position declined from $38.8 million at December 31, 1996, to $35.4 million at December 31, 1997. This decrease is the result of dividends paid, capital additions and the purchase of GIB assets exceeding LabOne's net cash provided by operations. During 1997, LabOne invested $11.4 million in additional property, plant and equipment and the purchase of certain assets and customer lists of GIB Laboratories, Inc., as compared to $3.2 million in 1996 and $2.9 million in 1995. Of the amount spent in 1997, approximately $4.8 million was for the GIB purchase, and approximately $2.8 million was for land acquisition and initial development costs to construct LabOne's new facility. The new facility project is expected to cost approximately $27.5 million and is expected to be primarily financed with an Industrial Revenue Bond (IRB)approved by the City of Lenexa (Kansas) in August 1997. The IRB is expected to be in place during the second quarter 1998. LabOne's other capital asset purchases are expected to be consistent with prior years. LabOne had no short-term borrowings during 1997 and expects to be able to fund operations and future dividend payments from a combination of cash flow from operations and cash reserves. Proceeds from the IRB will be used to finance the construction of LabOne's new facility. Interest on the bond will be based on a taxable seven day variable rate which would have been less than seven percent as of March 2, 1998. LabOne expects to repay the bond over 11 years at $2.5 million per year plus interest. LabOne's total cash and investments at December 31, 1997, were $19.5 million, as compared to $31.9 million at December 31, 1996. In April 1996, Response obtained an unsecured $10 million loan from Lab Holdings bearing interest at the rate of prime plus 1%, which after August 1, 1996, became convertible at the election of Lab Holdings into shares of Response's common stock. Proceeds of the loan were used to finance a practice management affiliation. The loan was exchanged for 909,090 shares of common stock during August 1996. In October 1996, Response procured a $23.5 million credit facility from Lab Holdings to finance acquisitions and for working capital. On February 26, 1997, the $23.5 million loan and accrued interest of $664,000 was converted into 3,020,536 shares of Response's common stock at a rate of $8 per share. On July 25, 1997, Lab Holdings distributed to its shareholders, as a dividend, all 8,077,392 shares of common stock of Response owned by Lab Holdings. During 1997, treasury stock issued for exercised options totaled 5,169 shares. TRENDS The following analysis of certain existing trends that have been identified as potentially affecting the future financial results. Due to the potential for a rapid rate of change in any number of factors associated with the insurance and healthcare laboratory testing industries, it is difficult to quantify with any degree of certainty LabOne's future volumes, sales or net earnings. The insurance laboratory testing industry continues to be highly competitive. The primary focus of the competition has been on pricing. LabOne continues to maintain its market leadership by providing quality products and services at competitive prices. LabOne management expects that prices may continue to decline during 1998 due to competitive pressures. This trend may have a material impact on earnings from operations. Currently, there are approximately 13.5 million individual life insurance policies sold in the United States annually. However, laboratory services are provided on only approximately 5 million of these policy applicants. During 1996, the FDA approved an oral fluid Western blot test as a confirmation for the oral fluid HIV-1 antibody test. The noninvasive nature of oral specimen collection allows for lower cost collection, making testing much more affordable on smaller face value insurance policies. Due to the lower collection expense associated with oral fluid collection devices, the potential exists for an expansion of the testing market. The total number of insurance applicants tested by LabOne increased 22% in 1997 from the prior year. Approximately one-half of the increase represented oral fluid HIV tested applicants. Oral fluid tested applicants are expected to further increase in 1998. Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America. Concurrently, Prudential's Individual Insurance Group agreed to use LabOne as its exclusive provider of risk assessment testing services. At the time of the purchase, GIB served approximately 5% of the insurance laboratory testing market. In the clinical division, BlueCross BlueShield of Tennessee has selected LabOne to provide routine outpatient laboratory testing services for BlueCare members throughout Tennessee effective February 1, 1998. BlueCare is BlueCross BlueShield of Tennessee's plan for Tenncare participants. Approximately 350,000 BlueCare members are covered by the program. (LabOne originally announced that the BlueCare program covered approximately 425,000 lives.) To date, LabOne's Laboratory Benefit Management programs, including BlueCare and the Lab Card Program, have more than 1.8 million lives enrolled with more than 300,000 additional lives awaiting implementation. LabOne is actively addressing Year 2000 computer concerns. The company has established an oversight committee which includes management from all parts of LabOne and meets periodically to review progress. LabOne expects to complete all internal Year 2000 objectives by the end of 1998 and is assessing the Year 2000 preparation and contingency plans of its clients and vendors. Total expenses related to this project are not expected to be material. Lab Holdings does not expect compliant problems. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," is effective for fiscal years beginning after December 15, 1997. This standard requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for fiscal years beginning after December 15, 1997. Retroactive application will be required. The Company does not expect this statement to have a significant effect on segment disclosures. No other recently issued accounting standards presently exist which will require adoption in future periods. 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 OF THE REGISTRANT. See Cross Reference Sheet, "Documents Incorporated by Reference." ITEM 11. EXECUTIVE COMPENSATION. See Cross Reference Sheet, "Documents Incorporated by Reference." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See Cross Reference Sheet, "Documents Incorporated by Reference." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See Cross Reference Sheet, "Documents Incorporated by Reference." Cross Reference Sheet To Documents Incorporated By Reference Item 10. Directors and Executive Proxy Statement relating to Officers of the Company Annual Meeting of Shareholders to be held May 13, 1998, under the caption "Election of Directors - Nominees and Directors whose terms expire in 1999 and 2000." Item 11. Executive Compensation Proxy Statement relating to Annual Meeting of Shareholders to be held May 13, 1998, under the captions "Election of Directors - Compensation of Executive Officers." Item 12. Security Ownership of Proxy Statement relating to Certain Beneficial Annual Meeting of Shareholders Owners and Management to be held May 13, 1998, under the captions "Election of Directors - Security Ownership of Management and Security Ownership of Certain Beneficial Owners." Item 13. Certain Relationships Proxy Statement relating to and Related Annual Meeting of Shareholders Transactions to be held May 13, 1998, under the caption "Election of Directors - Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements Independent Auditors' Report Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) Financial Statement Schedule II. Valuation and Qualifying Accounts and Reserves - Years ended December 31, 1997, 1996 and 1995 All other schedules are omitted because they are not applicable or the information is given in the financial statements or notes thereto. Portions of Registrant's Proxy Statement for use in connection with the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III of this report, if such Proxy Statement is filed with the Securities and Exchange Commission on or before April 30, 1998. If such Proxy Statement is not filed by such date, the information required to be presented in Part III will be filed as an amendment to this report. (3) Exhibits required by Item 601 of Regulation S-K (see Index to Exhibits in paragraph (c) infra.) (b) Reports on Form 8-K. None. (c) Index to Exhibits (Exhibits follow the Schedules); 2.1 Distribution Agreement, dated December 20, 1996, between the Registrant and SLH Corporation (filed as Exhibit 2(a) to SLH Corporation's Form 10/A (Amendment No. 1) filed February 4, 1997 (File No. 0-21911) and incorporated herein by reference). 2.2 Blanket Assignment, Bill of Sale, Deed and Assumption Agreement, dated as of February 28, 1997, between the Registrant and SLH Corporation (filed as Exhibit 2(b) to SLH Corporation's Form 10/A (Amendment No. 1) filed February 4, 1997 (File No. 0-21911) and incorporated herein by reference). 3.1 Registrant's Articles of Incorporation, as amended (filed as Exhibit 3.1 to Amendment No. 1 to Registrant's Registration Statement on Form S-4, filed April 8, 1988 (File No. 33-20298) and incorporated herein by reference). 3.2 Amendment to Registrant's Articles of Incorporation, effective May 15, 1991, (filed as Exhibit 3(b) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-16946) and incorporated herein by reference). 3.3 Registrant's Bylaws, as amended (filed as Exhibit 3(c) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-16946) and incorporated herein by reference). 4.1 Form of Rights Agreement dated April 5, 1988, between Registrant and Morgan Shareholder Services Trust Company, as Rights Agent (filed as Exhibit 4.1 to Amendment No. 1 to Registrant's Registration Statement on Form S-4, filed April 8, 1988 (File No. 33-20298) and incorporated herein by reference). 4.2 Form of Certificate of Serial Designation of Series A Preferred Stock (filed as Exhibit 4.2 to Amendment No. 1 to Registrant's Registration Statement on Form S-4, filed April 8, 1988, (File No. 33-20298) and incorporated herein by reference). 4.3 Amendment No. 1 to the Rights Agreement, dated November 14, 1988, between Registrant and Morgan Shareholder Services Trust Company, as Rights Agent (filed as Exhibit 1 to the Registrant's current report on Form 8-K filed November 18, 1988 (File No. 0-16946) and incorporated herein by reference). 4.4 Amendment No. 2 to the Rights Agreement, dated May 15, 1991, between Registrant and First Chicago Trust Company of New York, as Rights Agent (filed as Exhibit 4(d) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-16946) and incorporated herein by reference). 4.5 Notice and Agreement Respecting Removal of Rights Agent and Appointment of Successor Rights Agent (filed as Exhibit 4(e) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-16946) and incorporated herein by reference). 10.1* Registrant's 1997 Directors' Stock Option Plan effective September 17, 1997.*** 10.2* Form of Option Agreement with directors under the Directors' Stock Option Plan.*** 10.3 Form of Indemnification Agreement between Registrant and its directors and corporate/executive officers (filed as Exhibit 10(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 0-16946) and incorporated herein by reference). 10.4 Services Agreement, dated January 1, 1993, among Registrant and LabOne, Inc., relating to services and other matters among the parties (filed as Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16946) and incorporated herein by reference). 10.5 Long-Term Incentive Plan of LabOne, Inc., approved May 16, 1991 with amendments adopted May 21, 1993 and November 9, 1993 (filed as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 0-16946) and incorporated herein by reference).** 10.6 Amendment to LabOne's Long Term Incentive Plan, effective February 10, 1995 (filed as Exhibit 10.31 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-16946) and incorporated herein by reference).** 10.7 Amendment to LabOne's Long Term Incentive Plan, effective May 9, 1997 (filed as Exhibit 10.5 to LabOne, Inc. Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-15975) and incorporated herein by reference).** 10.8 LabOne's Stock Plan for non-employee directors (filed as Exhibit 10.23 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0- 16946) and incorporated herein by reference).**/*** 10.9 LabOne's Annual Incentive Plan (filed as Exhibit 10.6 to LabOne, Inc. Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-15975) and incorporated herein by reference).** 10.10 Facilities Sharing and Interim Services Agreement, dated as of February 28, 1997, between the Registrant and SLH Corporation (filed as Exhibit 10(a) to SLH Corporation's Registration Statement on Form 10/A (Amendment No. 1) filed February 4,1997 (File No. 0-21911) and incorporated herein by reference). 10.11 Tax Sharing Agreement, dated as of February 28, 1997, between the Registrant and SLH Corporation (filed as Exhibit 10(b) to SLH Corporation's Registration Statement on Form 10/A (Amendment No. 1) filed February 4, 1997 (File No. 0-21911) and incorporated herein by reference). 10.12* Sublease and Services Agreement, dated as of June 1, 1997, between Registrant and SLH Corporation. 11 Statement regarding computation of per share earnings - see Note l of Notes to Consolidated Financial Statements, "Earnings Per Share." 13 Annual Report to Shareholders for the year ended December 31, 1997 - To be furnished. 21 Subsidiaries of Registrant (reference is made to Item 1 hereof). 27 Financial Data Schedule - as filed electronically by the Registrant in conjunction with this 1997 Form 10-K. 99.1 Proxy Statement for 1998 Annual Shareholders meeting - To be furnished. 99.2 SLH Corporation Registration Statement on Form 10 (filed as SLH Corporation's Registration Statement on Form 10/A (Amendment No. 2) on February 12, 1997 (file No. 0-21911) and incorporated herein by reference). * These documents may be obtained by stockholders of Registrant upon written request to: Lab Holdings, Inc., P.0. Box 7568, Shawnee Mission, KS 66207. ** Management Compensatory Plan *** Non-Management Director Compensatory Plan (d) Not Applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAB HOLDINGS, INC. By: /s/ P. Anthony Jacobs ----------------------------- P. Anthony Jacobs Title: President, Chief Executive Officer and Director Date: March 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons who serve Registrant in the capacities and on the dates indicated. By: /s/ John H. Robinson, Jr. By: /s/ Lan C. Bentsen ----------------------------- ----------------------------- John H. Robinson, Jr. Lan C. Bentsen Title: Chairman of the Board Title: Director and Director Date: March 20, 1998 Date: March 20, 1998 By: /s/ Steven K. Fitzwater ----------------------------- Steven K. Fitzwater Title: Vice President, Chief Financial and Accounting Officer, Secretary and Director Date: March 20, 1998 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Lab Holdings, Inc.: We have audited the consolidated financial statements of Lab Holdings, Inc. and subsidiaries as listed in Item 14(a)(1). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lab Holdings, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Kansas City, Missouri February 20, 1998 LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets - --------------------------------------------------------------------- December 31, 1997 1996 - --------------------------------------------------------------------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 22,129 53,328 Short-term investments 2,648 6,836 Accounts and notes receivable 12,608 10,585 Current income taxes 1,400 (724) Inventories 2,203 1,360 Real estate available for sale 3,515 -- Prepaid expenses and other current assets 2,459 2,239 Deferred income taxes 3,386 2,161 --------------------- Total current assets 50,348 75,785 Property, plant and equipment 10,441 17,371 Investments: Securities -- 4,019 Oil and gas -- 1,040 Intangible assets 13,058 12,427 Deferred income taxes 858 5,520 Other assets 81 1,723 Net assets of discontinued healthcare business -- 48,432 Net assets of discontinued real estate operations -- 30,466 --------------------- $ 74,786 196,783 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,367 3,736 Accrued payroll and benefits 4,530 4,053 Other accrued expenses 423 2,162 Other current liabilities 303 589 --------------------- Total current liabilities 8,623 10,540 Accrued payroll and benefits -- 236 Other accrued expenses -- 250 Other liabilities -- 414 --------------------- Total liabilities 8,623 11,440 --------------------- Minority interests 9,476 11,319 --------------------- Stockholders' equity: Preferred stock of $1 par value. Authorized 3,000,000 shares; none issued -- -- Common stock of $1 par value. Authorized 24,000,000 shares; issued 7,500,000 shares 7,500 7,500 Paid-in capital 1,772 1,748 Equity adjustment from foreign currency translation (544) (439) Retained earnings 78,103 195,329 --------------------- 86,831 204,138 Less cost of 1,010,897 shares of treasury stock (1996-1,016,066 shares) 30,144 30,114 --------------------- Total stockholders' equity 56,687 174,024 --------------------- Commitments and contingencies --------------------- $ 74,786 196,783 ===================== See accompanying notes to consolidated financial statements. LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Operations - --------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------- (In thousands except per share amounts) REVENUES Insurance services $ 61,998 50,801 55,862 Healthcare services 16,928 8,631 12,112 Other -- 2,446 7,272 ---------------------------------- Total revenues 78,926 61,878 75,246 COSTS AND EXPENSES Insurance services 26,666 22,625 23,598 Healthcare services 15,351 10,092 16,104 Other -- 2,771 6,357 Provision for loss on disposal of assets 6,553 -- -- Selling, general and administrative 34,765 29,767 36,702 ---------------------------------- Earnings (loss) from operations (4,409) (3,377) (7,515) Investment income - net 4,671 5,004 4,119 Interest expense (11) (1,044) (107) Other income (expense) 77 (456) (4,367) ---------------------------------- Earnings (loss) before income taxes 328 127 (7,870) ---------------------------------- Taxes on income (benefits): Current (429) 3,131 (1,429) Deferred 8,207 670 (5,134) ---------------------------------- Total 7,778 3,801 (6,563) ---------------------------------- Earnings (loss) before minority interests (7,450) (3,674) (1,307) Minority interests 405 552 519 ---------------------------------- Loss from continuing operations (7,855) (4,226) (1,826) Earnings (loss) from discontinued healthcare business (2,342) 682 1,078 Loss from discontinued real estate operations -- (1,452) (6,600) ---------------------------------- NET LOSS $ (10,197) (4,996) (7,348) ================================== Basic and diluted loss per share of common stock: Loss from continuing operations $ (1.21) (.65) (.28) Earnings (loss) from discontinued healthcare business (.36) .10 .17 Loss from discontinued real estate operations -- (.22) (1.03) ---------------------------------- NET LOSS $ (1.57) (.77) (1.14) ================================== See accompanying notes to consolidated financial statements. LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity - --------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------- (In thousands) Common stock: Balance, beginning and end of year $ 7,500 7,500 7,500 ---------------------------------- Paid-in capital: Balance, beginning of year 1,748 1,747 1,002 Exercise of stock options 24 1 745 ---------------------------------- Balance, end of year 1,772 1,748 1,747 ---------------------------------- Foreign currency translation: Balance, beginning of year (439) (447) (561) Net change during year (105) 8 114 ---------------------------------- Balance, end of year (544) (439) (447) ---------------------------------- Retained earnings: Balance, beginning of year 195,329 208,098 223,169 Net loss (10,197) (4,996) (7,348) Dividends* and distributions (107,029) (7,773) (7,723) ---------------------------------- Balance, end of year 78,103 195,329 208,098 ---------------------------------- Less treasury stock: Balance, beginning of year 30,114 29,814 30,177 Net issuance pursuant to stock option plans (1997-5,169; 1996-22,873; 1995-82,800) 30 300 (363) ---------------------------------- Balance, end of year 30,144 30,114 29,814 ---------------------------------- STOCKHOLDERS' EQUITY $ 56,687 174,024 187,084 ================================== *Cash dividends per share amounted to $1.20 in 1997, 1996 and 1995. See accompanying notes to consolidated financial statements. LAB HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows - ---------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Loss from continuing operations $ (7,855) (4,226) (1,826) Adjustments to reconcile loss from continuing operations to net cash provided by continuing operations: Depreciation and amortization 6,277 8,760 10,192 Earnings applicable to minority interests 405 552 519 Provision for loss on disposal of assets 6,553 -- -- Change in trading portfolio, net 2,645 19,318 (6,339) Change in accounts receivable (2,980) 1,458 4,437 Change in accounts payable (18) 134 (451) Income taxes and other, net 3,491 9,558 (4,110) ----------------------------- Net cash provided by continuing operations 8,518 35,554 2,422 Net cash used by discontinued healthcare business (1,006) (32,140) -- Net cash provided by discontinued real estate operations 581 9,107 1,196 ----------------------------- Total cash provided by operations 8,093 12,521 3,618 ----------------------------- INVESTING ACTIVITIES Sales of investments available for sale 1,350 4 83 Purchases of investments held to maturity (15,894) (15,753) (65,569) Maturities of investments held to maturity 18,155 23,395 69,459 Additions to property, plant and equipment, net (6,683) (3,252) (3,040) Acquisition of assets (4,816) -- -- Oil and gas investments -- (351) (391) Net increase (decrease) in notes receivable -- 183 (2,507) Proceeds from sale of subsidiaries, net -- -- 12,054 Proceeds of securitization -- -- 1,500 Other, net (3,948) (302) (3,017) ----------------------------- Net cash provided (used) by investing activities (11,836) 3,924 8,572 ----------------------------- FINANCING ACTIVITIES Payments under line of credit agreements, net -- -- (2,759) Payment of capital lease -- -- (2) Regular quarterly dividends paid (7,787) (7,773) (7,723) Cash portion of SLH dividend (19,590) -- -- Net issuance of treasury stock pursuant to stock option plans (7) (299) 1,108 ----------------------------- Net cash used by financing activities (27,384) (8,072) (9,376) ----------------------------- Effect of foreign currency translation (72) 12 21 ----------------------------- Net decrease in cash and cash equivalents (31,199) 8,385 2,835 Cash and cash equivalents at beginning of year 53,328 44,943 42,108 ----------------------------- Cash and cash equivalents at end of year $ 22,129 53,328 44,943 ============================= Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest $ 934 25 124 ============================= Income taxes, net $ 2,676 (3,487) (1,693) ============================= See accompanying notes to consolidated financial statements. LAB HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Lab Holdings, Inc. (formerly Seafield Capital Corporation) and all majority-owned subsidiaries and joint ventures. Investments in affiliated companies of 20% to 50% in which Lab Holdings, Inc. (Lab Holdings) does not have a controlling interest are accounted for by the equity method. All significant intercompany transactions have been eliminated in consolidation. Certain 1996 and 1995 amounts have been reclassified for comparative purposes with no effect on net earnings. At December 31, 1997, Lab Holdings' principal asset consists of its 82% ownership of LabOne, Inc. (LabOne), a publicly-traded company. In April 1996, Lab Holdings loaned $10 million to its subsidiary, Response Oncology, Inc., which was converted into 909,090 shares of Response common stock at the election of Lab Holdings in August 1996. In October 1996, Lab Holdings provided to Response a $23.5 million credit facility to finance acquisitions and for working capital. This credit facility was converted into Response common stock in February 1997, increasing Lab Holdings' ownership to approximately 67%. In July 1997, Lab Holdings' Board of Directors declared a dividend to Lab Holdings' shareholders of all shares of common stock of Response owned by Lab Holdings. For each shareholder of record on July 11, 1997, 1.2447625 shares of Response common stock were distributed on July 25, 1997 for each share of Lab Holdings common stock outstanding. The distribution of all shares of Response stock to Lab Holdings' shareholders was effected as a dividend. The Lab Holdings shareholders paid no consideration for any shares of Response stock received in the distribution. Lab Holdings' investment in Response and Response's earnings are shown as a discontinued business in the accompanying financial statements. See Notes 2 and 15 for additional information. On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH Corporation (SLH). For each shareholder of record on February 24, 1997, one share of SLH common stock was distributed for each four shares of Lab Holdings common stock owned. In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities, including two wholly-owned subsidiaries, Scout Development Corporation (Scout) and BMA Resources, Inc. (Resources), to SLH. The spinoff was accounted for as a dividend. Under the Distribution Agreement and Assignment, SLH assumed rights and obligations of Lab Holdings with respect to a 1986 lawsuit initiated by Lab Holdings' former insurance subsidiary to recover costs incurred to remove and replace the facade on the former home office building. Pursuant to the Distribution Agreement and Assignment, SLH also assumed from Lab Holdings all contingent tax liabilities and rights to refunds and interest relating to any tax issues raised for the years 1986-1990. Management believes that final resolution of these matters will not have any impact on the financial position or results of operations of Lab Holdings. In 1992, Lab Holdings' board of directors approved a plan for the discontinuance of real estate. The real estate operations are presented as discontinued in the accompanying consolidated financial statements. See Note 15 for additional information. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposits in banks, money market investments and overnight investments that are stated at cost, which approximates market value. Certain highly liquid short-term investments previously designated as trading securities have been reclassified to cash equivalents to more accurately reflect the nature of the investments and to conform with the current year presentation. INVESTMENT SECURITIES Investment securities consist of equity securities, debt securities and debt obligations of the United States government and state and political subdivisions. Short-term investments are securities with maturities of less than one year. The classification of debt and equity securities as trading, available for sale or held to maturity is made at the time of purchase. Trading securities are stated at fair value and unrealized holding gains and losses are included in operations. Marketable equity securities and all debt securities which are classified as available for sale are stated at market value, with unrealized gains and losses, if any, excluded from operations and reported in a separate component of stockholders' equity. Securities which Lab Holdings has the intent and ability to hold to maturity are stated at amortized cost. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of all asset and liability financial instruments (for which it is practical to estimate fair values) approximate their carrying amounts at December 31, 1997 and 1996. Fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. The company calculates the fair value of financial instruments using appropriate market information and valuation methodologies. See note 8 for additional information regarding investments for which it is not practical to estimate fair values. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost with depreciation provided over the useful lives. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts. Any resulting gains or losses are included in the results of operations. See Note 4 for additional information on depreciation. OIL AND GAS INVESTMENTS Lab Holdings' oil and gas investments were accounted for using the full cost method. All costs incurred in acquisition and development were capitalized. Depletion was computed on the units of production method based on all proved reserves. All general operating costs were expensed as incurred. The oil and gas investments were included in the net assets distributed to SLH. INTANGIBLE ASSETS Goodwill is recorded at acquisition as the excess of cost over fair value of net assets acquired and is being amortized on a straight-line basis over appropriate periods up to twenty years. On a periodic basis, Lab Holdings estimates the fair value of the business to which goodwill relates in order to ensure that the carrying value of goodwill has not been impaired. IMPAIRMENT OF LONG-LIVED ASSETS When facts and circumstances indicate potential impairment, Lab Holdings evaluates the recoverability of carrying values of long-lived assets 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, has been classified as real estate available for sale. An impairment loss of approximately $6.6 million related to the anticipated sale was recorded. DISPOSITIONS In July 1997, Lab Holdings' Board of Directors declared a dividend to Lab Holdings' shareholders of all shares of common stock of Response owned by Lab Holdings. The distribution of all shares of Response stock to Lab Holdings' shareholders was effected as a dividend. The Lab Holdings shareholders paid no consideration for any shares of Response stock received in the distribution. See Notes 2 and 15 for additional information. On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH. The distribution of all shares of SLH stock to Lab Holdings' shareholders was effected as a dividend. The Lab Holdings shareholders paid no consideration for any shares of SLH stock received in the distribution. In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities, including two wholly-owned subsidiaries, Scout and Resources, to SLH. Lab Holdings sold its 80.1% owned insurance premium finance subsidiary, Agency Premium Resource, Inc., during the second quarter of 1995. The sale generated an after-tax gain of $1.5 million. Lab Holdings completed an asset sale by its 79% owned real estate, personal property and sales and use tax consulting subsidiary, Tenenbaum and Associates, Inc., during the second quarter of 1995. This subsidiary then distributed its assets to shareholders and filed for dissolution. The effect of the sale, distribution and dissolution was an after-tax gain of $500,000. Lab Holdings sold its 80% owned underwriting and policy administration services subsidiary, International Underwriting Services, Inc., during the third quarter of 1995. The sale generated an after-tax gain of $1 million. Lab Holdings's 74% owned radiopharmaceuticals subsidiary, Pyramid Diagnostic Services, Inc. (Pyramid), entered voluntary bankruptcy in the fourth quarter of 1995 as a result of an adverse judgment in a lawsuit. Lab Holdings fully reserved its investment in this subsidiary and recorded an after-tax loss of $1.2 million. Lab Holdings expects the Pyramid bankruptcy to be finalized in 1998 with no further financial consequences to Lab Holdings. FEDERAL 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. OTHER INCOME/(EXPENSE) The components of "Other income/(expense)" on the Consolidated Statements of Operations are as follows: Year ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------- (In thousands) Loss on dispositions of subsidiaries $ -- -- (1,068) Provision for subsidiary bankruptcy -- -- (3,382) Other 77 (456) 83 --------------------------- $ 77 (456) (4,367) =========================== EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which revised the calculation and presentation provisions of Accounting Principles Board Opinion 15 and related interpretations. SFAS No. 128 became effective for the year ended December 31, 1997. Basic earnings per share is computed using the weighted average number of common shares and diluted earnings per share is computed using the weighted average number of common shares and dilutive stock options. The adoption of this standard did not have any significant impact on the Company's reported earnings per share. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," is effective for fiscal years beginning after December 15, 1997. This standard requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for fiscal years beginning after December 15, 1997. Retroactive application will be required. The Company does not expect this statement to have a significant effect on segment disclosures. No other recently issued accounting standards presently exist which will require adoption in future periods. NOTE 2 - DISPOSITIONS On March 3, 1997, Lab Holdings distributed to its shareholders all of the outstanding shares of common stock of its wholly-owned subsidiary, SLH Corporation, on the basis of one share of common stock of SLH for each four shares of Lab Holdings common stock held. In connection with this distribution and pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab Holdings transferred its real estate and energy businesses and miscellaneous assets and liabilities, including two wholly-owned subsidiaries, Scout and Resources, to SLH. The net assets distributed to SLH totaled approximately $47.9 million on the date of distribution and approximately $36 million at December 31, 1996. The spinoff was accounted for as a 1997 dividend. In April 1996, Lab Holdings loaned $10 million to Response which was converted into 909,090 shares of Response common stock at the election of Lab Holdings in August 1996. In October 1996, Lab Holdings provided to Response a $23.5 million credit facility to finance acquisitions and for working capital. This credit facility was converted into Response common stock in February 1997, increasing Lab Holdings' ownership to approximately 67%. In July 1997, Lab Holdings' Board of Directors declared a dividend to Lab Holdings' shareholders of all shares of common stock of Response owned by Lab Holdings. For each shareholder of record on July 11, 1997, 1.2447625 shares of Response common stock were distributed on July 25, 1997 for each share of Lab Holdings common stock outstanding. The distribution of all shares of Response stock to Lab Holdings' shareholders was effected as a dividend. The Lab Holdings shareholders paid no consideration for any shares of Response stock received in the distribution. As a result of the distributions, Lab Holdings' principal asset consists of its stock holdings in LabOne. NOTE 3 - COMMITMENTS AND CONTINGENCIES In October 1997, LabOne purchased approximately 54 acres of land at Renner Ridge Corporate Park in Lenexa, Kansas. LabOne is planning to construct a 262,000 square foot facility to house all of its corporate, laboratory and warehouse operations. Construction is expected to be completed in the early part of 1999. This project is expected to cost approximately $27.5 million and is expected to be primarily financed with an industrial revenue bond. Under the Distribution Agreement and Assignment, SLH assumed the rights and obligations of Lab Holdings with respect to the following legal matter. In 1986, a lawsuit was initiated in the Circuit Court of Jackson County, Missouri by Lab Holdings' former insurance subsidiary (i.e., Business Men's Assurance Company of America) against Skidmore, Owings & Merrill ("SOM") which is an architectural and engineering firm, and a construction firm to recover costs incurred to remove and replace the facade on the former home office building. Because the removal and replacement costs had been incurred prior to the sale of the insurance subsidiary, Lab Holdings negotiated with the buyer for an assignment of the cause of action from the insurance subsidiary. In September 1993, the Missouri Court of Appeals reversed a $5.7 million judgment granted in 1992 in favor of Lab Holdings; the Court of Appeals remanded the case to the trial court for a jury trial limited to the question of whether or not the applicable statute of limitations barred the claim. The Appeals Court also set aside $1.7 million of the judgment originally granted in 1992. In July 1996, this case was retried to a judge. On January 21, 1997, the judge entered a judgment in favor of Lab Holdings. The amount of that judgment, together with interest is approximately $5.6 million. Although the judgment has been appealed, counsel for the Company expects that it will be difficult for the defendants to cause the judgment to be reversed. The final outcome is not expected for at least another year. Settlement arrangements with other defendants have resulted in payments to plaintiff which have substantially offset legal fees and costs to date of approximately $502,000. Future legal fees and costs can not reliably be estimated. Pursuant to the Distribution Agreement, this matter was assigned to SLH Corporation. In the opinion of management, after consultation with legal counsel and based upon current available information, this lawsuit is not expected to have a material adverse impact on the consolidated financial position or results of operations of Lab Holdings. Pursuant to the Distribution Agreement, SLH assumed from Lab Holdings all of the contingent tax liabilities described below and acquired all rights to refunds, plus any interest related to these tax years. SLH also assumed all contingent liabilities and refunds related to any issues raised for the years 1986-1990 whose resolution may extend to tax years beyond the 1990 tax year. Lab Holdings received notices of proposed adjustments (Revenue Agent's Reports) from the Internal Revenue Service (IRS) with respect to 1986- 1990 federal income taxes. These notices claimed total federal income taxes due for the entire five year period in the approximate net amount of $13,867,000, exclusive of interest thereon. Lab Holdings filed protests regarding the 1986-1990 notices of proposed adjustments. In 1997, Lab Holdings received a formal agreement to the issues and the final tax computation from the IRS. The agreement provides for a tax refund to SLH of approximately $5.5 million net of interest costs. The agreement was approved by Congress' Joint Committee on Taxation in January 1998. In December 1996, the California state auditor sent Lab Holdings an audit report covering the 1987-1989 taxable years. The State of California has determined to include, as a "unitary taxpayer," all majority owned non-life insurance subsidiaries and joint ventures of Lab Holdings. During 1997, the California Franchise Tax Board sent a notice of taxes and interest due for the 1987-1989 years of approximately $1.8 million, which was paid. Pursuant to the Distribution Agreement, SLH Corporation assumed all potential tax liabilities and interest thereon regarding the California audit for the 1987-1989 tax years. NOTE 4 - PROPERTY, PLANT AND EQUIPMENT AND ACCOUNTS AND NOTES RECEIVABLE A summary of property, plant and equipment is as follows: Rate of December 31, Depreciation 1997 1996 ------------------------------------ (In thousands) Property, plant and equipment 3% - 33% $ 43,956 55,318 Less accumulated depreciation 33,515 37,947 ----------------- $ 10,441 17,371 ================= A summary of accounts and notes receivable is as follows: December 31, 1997 1996 ----------------- (In thousands) Accounts receivable $ 13,626 11,346 Note receivable -- 261 Allowance for doubtful accounts (1,018) (1,022) ----------------- $ 12,608 10,585 ================= The interest rate on the note receivable was 6.7% in 1996. NOTE 5 - SEGMENT DATA The following table shows segment information from continuing operations: Year ended December 31, 1997 1996 1995 - --------------------------------------------------------------------- (In thousands) REVENUES: Insurance $ 61,998 50,801 55,862 Healthcare 16,928 8,631 12,112 Other -- 2,446 7,272 ---------------------------------- Total revenues $ 78,926 61,878 75,246 ================================== OPERATING EARNINGS (LOSS): Insurance $ 17,035 11,138 10,987 Healthcare (9,238) (9,203) (11,663) Other -- (431) (3,858) General corporate expenses (5,774) (4,725) (7,037) Investment income 4,671 5,004 4,119 Other income (expense) (6,355) (612) (311) Interest expense (11) (1,044) (107) ---------------------------------- Earnings (loss) before income taxes and minority interests 328 127 (7,870) Income taxes (7,778) (3,801) 6,563 Minority interests (405) (552) (519) ---------------------------------- Loss from continuing operations $ (7,855) (4,226) (1,826) ================================== IDENTIFIABLE ASSETS: Insurance $ 32,848 34,543 36,716 Healthcare 8,507 7,345 6,598 Net assets of discontinued healthcare business -- 48,432 15,362 Net assets of discontinued real estate operations -- 30,466 42,215 Other 33,431 75,997 97,127 ---------------------------------- Total identifiable assets $ 74,786 196,783 198,018 ================================== Operating earnings (loss) are revenues less expenses other than corporate and interest expense, net of intersegment transactions. Depreciation and amortization amounts for 1997, 1996 and 1995 were $4,329,000, $6,982,000 and $6,854,000, respectively. Goodwill amortization for 1997, 1996 and 1995 was $1,948,000, $1,778,000 and $3,338,000, respectively. Capital expenditures and depreciation and amortization expense for the significant segments are as follows: 1997 1996 1995 ---------------------------------- (In thousands) Capital Expenditures: Insurance $ 3,308 2,558 1,356 Healthcare 1,415 668 1,783 General corporate 2,553 -- -- Depreciation and amortization: Insurance $ 4,658 3,977 4,821 Healthcare 1,585 1,510 2,772 NOTE 6 - INCENTIVE STOCK OPTION PLAN Lab Holdings has a Directors' Stock Option Plan which provides for the granting of non-qualified stock options for not more than 90,000 shares of the Company's common stock. The plan entitles each director to purchase 15,000 shares at the fair market value at the date of grant. All options have ten year terms and become exercisable as follows: one-third on the first, second and third year anniversary dates of the grant. During 1997, options for 60,000 shares were granted. During 1997, Lab Holdings terminated three Stock Option Plans which had provided for Qualified and Nonqualified Stock Options, Stock Appreciation Rights (SAR's) and restricted stock awards to key employees and directors. The plans entitled the grantee to purchase shares at prices ranging from 75% to 110% of the fair market value at date of grant during terms up to ten years. All options were awarded at 100% of fair market value. SAR's entitled the holder to elect to receive the appreciated value in cash. Restricted stock awards were rights to receive or retain shares in payment of compensation earned or to be earned. Additionally, Lab Holdings maintained a Stock Purchase Plan under which each participant's contribution was matched at a rate of 50%. Lab Holdings common stock was purchased on the open market each month. Of the 100,000 shares registered under this plan, 62,904 shares were eligible for issuance at December 31, 1996. During 1997, 3,121 shares were issued and this plan was terminated. The Company accounts for stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations (APB 25). 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. Effective December 31, 1995, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," (FAS 123) which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternately, FAS 123 allows entities to continue to apply the provisions of APB 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair- value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of FAS 123. A summary of the status of the Company's stock option plan as of December 31, 1997, 1996 and 1995 and changes during the years then ended is presented below: Weighted Options Number of Average Exercisable Shares Exercise Price at Year-end - --------------------------------------------------------------------- Outstanding December 31, 1994 575,263 23.055 552,422 Exercised 392,263 23.509 -------- Outstanding December 31, 1995 183,000 28.368 173,665 Exercised 112,915 26.539 Terminated or forfeited 1,500 29.250 -------- Outstanding December 31, 1996 68,585 31.359 68,585 Granted 60,000 26.500 Exercised (68,585) 32.817 -------- Outstanding December 31, 1997 60,000 26.500 -- ======== The following table summarizes information about stock options at December 31, 1997. Options outstanding Options Exercisable ------------------------------- --------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (yrs) Price Exercisable Price - -------- ------------------------------------ --------------------- $26.50 60,000 10.00 $26.50 -- -- The difference between the per share exercise price and the cost per share of the treasury stock issued for stock options exercised increased paid-in capital by $24,000 in 1997 and $1,000 in 1996. The weighted-average per share fair value of stock options granted during 1997 was $6.08 on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 4.5%, risk-free interest rate of 5.5%, expected volatility factor of 33.7% and an expected life of four years. Since the Company and its subsidiary, LabOne, apply APB 25 in accounting for their plans, no compensation cost has been recognized for stock options in the financial statements. Had the Company and LabOne recorded compensation cost based on the fair value at the grant date for the stock options under SFAS 123, the Company's pro forma net loss would have been $10,599,000, $5,157,000 and $7,407,000 in 1997, 1996 and 1995, respectively. Pro forma basic and diluted earnings per share would have been $1.63, $.79 and $1.15 in 1997, 1996 and 1995, respectively. Pro forma net earnings reflect only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net earnings amounts presented above because compensation costs are reflected over the options' vesting period of five years for the 1997, 1996 and 1995 options. Compensation cost for options granted prior to January 1, 1995 is not considered. NOTE 7 - LEASE COMMITMENTS Included with the assets and liabilities transferred to SLH in the Distribution were several operating leases for office space and equipment. LabOne has several noncancelable operating leases, primarily for land and buildings, and other commitments that expire through 2000. Rental expense for these operating leases during 1997, 1996 and 1995 amounted to $529,000, $1,175,000 and $1,323,000, respectively. Because of the relocation of LabOne's facilities, the warehouse lease, with scheduled lease payments of $125,000 in 1998, has been renewed through February 1999 and is not expected to be renewed thereafter. Future minimum lease payments and other commitments under these agreements as of December 31, 1997 are as follows: Year Amount ------------------------- (In thousands) 1998 $ 425 1999 222 2000 120 NOTE 8 - INVESTMENT SECURITIES A summary of investment securities information relating to quoted market values and holding gains and losses at December 31, 1997 and 1996 is in the following table. Amount at Which Amortized Market Shown in Cost Value Balance Holding Holding Sheet Gains Losses - ---------------------------------------------------------------------- (In thousands) December 31, 1997 - ----------------- Held to Maturity - ---------------- Obligations of states and political subdivisions $ 502 501 502 -- 1 Canadian government notes 703 703 703 -- -- ------------------------------------------------------ $ 1,205 1,204 1,205 -- 1 ====================================================== At December 31, 1997, all debt securities will mature within one year. December 31, 1996 - ----------------- Available for Sale - ------------------ Preferred stock $ 3,515 3,515 3,515 -- -- ====================================================== Held to Maturity - ---------------- Obligations of states and political subdivisions $ 2,506 2,500 2,506 -- (6) Canadian government notes 746 746 746 -- -- ------------------------------------------------------ $ 3,252 3,246 3,252 -- (6) ====================================================== Information about proceeds from sales of available for sale securities and the gross realized gains and losses on those sales is summarized in the following table. Cost is determined by specific identification for computing realized gains and losses. Year ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------- (In thousands) Proceeds $ 4,365 3 83 ================================== Gross realized gains $ 3,015 -- 34 ================================== Gross realized losses -- (1) (3) $ ================================== Trading securities primarily include United States treasury securities and common stock and totaled approximately $1.4 million and $4 million at December 31, 1997 and 1996, respectively. The changes in net unrealized holding gains and losses on trading securities that have been included in operations are losses of $213,000, $7,000 and $485,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Included in the preferred stock available for sale at December 31, 1996 was an investment in Oclassen Pharmaceuticals, Inc. with a carrying value of $2.5 million. Oclassen was a privately owned pharmaceutical manufacturer which entered into an agreement and plan of merger with a wholly-owned subsidiary of Watson Pharmaceuticals, Inc. (Watson), a publicly traded company. The merger was approved by stockholders on February 26, 1997 and resulted in Lab Holdings owning approximately 184,000 shares of Watson. Lab Holdings sold 100,000 shares of Watson on February 28, 1997 resulting in a gain of $3 million. The remaining 84,000 shares were transferred to SLH as part of the Distribution. The other preferred stock investment at December 31, 1996 was Norian Corporation, a privately owned developer of proprietary bone substitute technology with a carrying value of $1,015,000. There was no public market for this investment and it also was transferred to SLH as part of the Distribution. At December 31, 1997, based on the market price of publicly traded shares of LabOne, the Company's 82% owned subsidiary, pretax unrealized gains of approximately $138 million ($21.27 per share) on this investment were not reflected in either Lab Holdings' book value or stockholders' equity. NOTE 9 - INCOME TAXES Lab Holdings and those subsidiaries that are eligible file a consolidated U.S. federal income tax return. During 1995, Lab Holdings generated approximately $6.6 million, in current capital losses that exceeded capital gains. In 1997, Lab Holdings utilized approximately $5 million of these losses after netting current year capital gains and losses. The remaining losses expire in the year 2001. When it becomes more likely than not that a deferred tax asset will not be realized, a valuation allowance is accrued against that deferred tax asset. The components of the provision (benefit) for income taxes on income from continuing operations are as follows: Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------- (In thousands) Current: Federal $ (1,372) 1,722 (1,785) State 637 1,150 186 Foreign 306 259 170 ---------------------------------- (429) 3,131 (1,429) ---------------------------------- Deferred: Federal 7,718 104 (4,203) State 486 434 (1,025) Foreign 3 132 94 ---------------------------------- 8,207 670 (5,134) ---------------------------------- $ 7,778 3,801 (6,563) ================================== The reconciliation of income tax attributable to continuing operations computed at the federal statutory tax rate (34%) to income tax expense (benefit) is as follows: Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------- (In thousands) Computed expected tax expense(benefit) $ 111 43 (2,676) State income taxes, net of federal benefit and state valuation allowance changes 741 1,045 (564) Goodwill amortization 664 604 1,118 Tax exempt interest and dividends (19) (45) (137) Tax benefits not available for subsidiary losses -- 276 309 Losses on sale of subsidiaries -- -- (4,239) Deferred tax on unremitted earnings of foreign subsidiaries -- -- 175 Foreign taxes on repatriation of foreign source income -- 219 -- Other, net (324) (171) (518) Increase in federal valuation allowance, and write-off of deferred tax assets 6,533 1,716 -- Utilization of federal net operating loss -- -- (115) Foreign tax in excess of U.S. rate 72 114 84 ---------------------------------- Actual income tax expense (benefit) $ 7,778 3,801 (6,563) ================================== The significant components of deferred income tax assets and liabilities are as follows: December 31, 1997 1996 - --------------------------------------------------------------------- (In thousands) Current deferred income tax assets (liabilities): Valuation allowances on investments and real estate $ 2,654 14 Allowance on accounts receivable 380 402 Excess book expense accruals 341 513 State income tax deficiency -- 248 Interest accrual on state income tax -- 382 Other 11 516 State net operating loss carryforwards -- 1,017 --------------------- Gross current deferred income tax assets 3,386 3,092 Current valuation allowance -- (931) --------------------- Net current deferred income tax assets 3,386 2,161 --------------------- Non-current deferred income tax assets (liabilities): Valuation allowances -- 2,114 Excess book (tax) expense accruals -- 408 Excess book (tax)partnership expenses -- 192 Excess book (tax) oil and gas expenses -- 519 Excess book (tax) depreciation and amortization 386 238 Alternative minimum tax credit 577 293 Other (81) (7) Federal capital loss carryforwards 431 2,953 Federal net operating loss carryforwards 524 1,050 State net operating loss carryforwards & capital losses 1,399 254 --------------------- Gross non-current deferred income tax assets 3,236 8,014 Valuation allowance for non-current deferred income tax assets (2,378) (2,494) --------------------- Net non-current deferred income tax assets (liabilities) 858 5,520 --------------------- Net deferred income tax assets (liabilities) $ 4,244 7,681 ===================== The valuation allowance as of January 1, 1996 was approximately $1,178,000. The valuation allowance increased during 1996 by $2,247,000 and decreased during 1997 by approximately $1,047,000. NOTE 10 - INTANGIBLE ASSETS The cost and accumulated amortization of intangible assets are as follows: December 31, 1997 1996 - ---------------------------------------------------------------------- (In thousands) Goodwill - excess of cost over fair value of net assets acquired $ 27,070 24,246 Less accumulated amortization 14,229 12,558 -------------------- 12,841 11,688 -------------------- Laboratory patent, antibodies, antigens, and nicotine screens 8,000 8,000 Less accumulated amortization 7,783 7,261 -------------------- 217 739 -------------------- Intangible assets, net of accumulated amortization $ 13,058 12,427 ==================== Effective January 30, 1997, LabOne acquired certain assets, including customer lists, of GIB Laboratories, Inc., a subsidiary of Prudential Insurance Company of America, for $4.8 million. Concurrently, Prudential's Individual Insurance Group agreed to use LabOne as its exclusive provider of risk assessment testing services. The excess costs over fair value of GIB Laboratories, Inc. assets acquired was $4.1 million. Any excess of the cost over the fair value of the net assets purchased is being amortized on a straight line basis over 15 to 20 years. The laboratory patent process is being amortized over 184 months from date of acquisition. NOTE 11 - FOREIGN OPERATIONS The following summarizes financial information for LabOne's wholly- owned Canadian subsidiary, Lab One Canada Inc.: Year ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------- (in thousands) Revenues $6,565 6,380 6,224 Operating earnings 645 719 289 Total assets 3,193 2,668 5,747 NOTE 12- EARNINGS PER SHARE There were no adjustments to the loss available to common stockholders used in the computation of basic and diluted loss per share for all years presented. The weighted average common shares outstanding were used to calculate both the basic and diluted loss per share because of the Company's loss from continuing operations for all years presented. The computation of diluted loss per share did not assume the exercise of employee stock options because to include the common share equivalents would have been antidilutive. Common share equivalents would have been 1,459, 10,939 and 57,291 for 1997, 1996 and 1995, respectively. NOTE 13- RELATED PARTY TRANSACTIONS The Company has entered into an agreement with SLH whereby SLH will provide accounting and administrative services and record storage space for Lab Holdings. Under this agreement, Lab Holdings will pay $75,000 annually for these services and storage space. During 1997, Lab Holdings purchased certain common stock investments for its trading portfolio for a total purchase price of approximately $1.2 million. At the same time, SLH sold an identical number of shares of these securities. These sales were accomplished through stock brokers at market rates. NOTE 14 - BENEFIT PLANS Effective December 31, 1996, Lab Holdings terminated its 401(k) savings plan and its money purchase pension plan. Lab Holdings and participating subsidiaries made matching contributions to the 401(k) savings plan of $43,000 for 1996 and $109,000 for 1995. Matching contributions to the money purchase pension plan by Lab Holdings and participating subsidiaries were $100,000 for 1996 and $143,000 for 1995. In 1997, Lab Holdings terminated its stock purchase plan. Matching contributions for this plan amounted to $32,000, $44,000 and $39,000 for the years ended December 31, 1997, 1996 and 1995, respectively. LabOne maintains a profit sharing plan qualifying under Section 401(k) of the Internal Revenue Code. LabOne also has a defined contribution plan. LabOne contributed $1,980,000, $1,769,000 and $1,675,000 to the plans for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 15- DISCONTINUED OPERATIONS Operations of Discontinued Healthcare Business In July 1997, Lab Holdings' Board of Directors declared a dividend to Lab Holdings' shareholders of all shares of common stock of Response owned by Lab Holdings. Therefore, the activities of Response have been presented as discontinued operations. A summary of the discontinued healthcare business follows: Seven Months Ended Year Ended December 31, July 31, 1997 1996 1995 - --------------------------------------------------------------------- (In thousands) Revenues $ 50,007 67,353 44,298 ===================================== Earnings before income tax $ 1,579 931 1,078 Income tax 3,921 249 -- ------------------------------------- Net earnings (loss) $ (2,342) 682 1,078 ===================================== Net Assets of the Discontinued Healthcare Business A summary of the net assets of the discontinued healthcare business follows: December 31, 1996 - --------------------------------------------------------------------- (In thousands) Assets Current assets $ 31,718 Management service agreements 101,963 Other non-current assets 13,306 ------- Total assets 146,987 ------- Liabilities Current liabilities 16,674 Notes payable 39,611 Deferred tax liability 25,127 Other non-current liabilities 498 Minority interests 16,645 ------- Total liabilities 98,555 ------- Net Assets $ 48,432 ======= Operations of Discontinued Real Estate Segment In 1992, Lab Holdings' board of directors approved a plan to discontinue real estate operations. On March 3, 1997, Lab Holdings transferred its real estate assets to its wholly-owned subsidiary, SLH Corporation, in connection with the distribution of all of the outstanding shares of SLH to Lab Holdings shareholders. A summary of discontinued real estate operations follows: Year Ended December 31, 1996 1995 - --------------------------------------------------------------------- (In thousands) Revenues $ 16,365 11,486 ==================== Loss (2,200) (10,000) Income tax benefits (748) (3,400) -------------------- Net loss $ (1,452) (6,600) ==================== Net Assets of Discontinued Real Estate Segment A summary of the net assets of the discontinued real estate operations follows: December 31, 1996 - ---------------------------------------------------------------------- (In thousands) Assets Current assets $ 264 Real estate - current 1,223 Real estate - non-current 24,202 Other non-current assets 6,645 ------- Total assets 32,334 ------- Liabilities Current liabilities 1,868 ------- Net Assets $ 30,466 ======= Included in current liabilities is a note payable of $1.2 million. The Company was also obligated under recourse debt (with an unpaid balance of $6,170,000 at December 31, 1996) of an affiliate accounted for on the equity method. NOTE 16- QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized 1997 quarterly financial data is as follows: Mar. 31, Jun. 30, Sep. 30, Dec. 31, Quarter Ended 1997 1997 1997 1997 - ---------------------------------------------------------------------- (In thousands except per share amounts) Revenues $ 17,740 20,308 19,728 21,150 ======================================== Earnings (loss) from continuing operations $ (2,821) (4,286) 1,333 (2,081) Earnings (loss) from discontinued healthcare business 604 (2,946) -- -- ---------------------------------------- Net earnings (loss) $ (2,217) (7,232) 1,333 (2,081) ======================================== Basic and diluted earnings (loss) per share: Earnings (loss) from continuing operations $ (.43) (.66) .21 (.32) Earnings (loss) from discontinued healthcare business .09 (.45) -- -- ---------------------------------------- Net earnings (loss) $ (.34) (1.11) .21 (.32) ======================================== Cash dividends paid per share $ .30 .30 .30 .30 ======================================== Stock prices: High $ 42 1/8 35 3/4 35 3/4 26 1/2 Low $ 32 1/2 31 3/4 23 20 Summarized 1996 quarterly financial data is as follows: Mar. 31, Jun. 30, Sep. 30, Dec. 31, Quarter Ended 1996 1996 1996 1996 - ---------------------------------------------------------------------- (In thousands except per share amounts) Revenues $ 13,294 15,837 15,406 17,341 ======================================== Earnings (loss) from continuing operations $ (321) (163) 284 (4,026) Earnings (loss) from discontinued healthcare business 207 349 413 (287) Loss from discontinued real estate operations -- -- -- (1,452) ---------------------------------------- Net earnings (loss) $ (114) 186 697 (5,765) ======================================== Basic and diluted earnings (loss) per share: Earnings (loss) from continuing operations $ (.05) (.02) .04 (.62) Earnings (loss) from discontinued healthcare business .03 .05 .07 (.05) Loss from discontinued real estate operations -- -- -- (.22) ---------------------------------------- Net earnings (loss) $ (.02) .03 .11 (.89) ======================================== Cash dividends paid per share $ .30 .30 .30 .30 ======================================== Stock prices: High $ 38 39 1/2 37 3/4 39 1/2 Low $ 33 1/2 36 33 1/2 33 7/8 The 1996 fourth quarter loss includes a $750,000 accrual for estimated state income tax and $1 million of estimated interest expense as a result of a California franchise tax audit of prior years. Also included in the 1996 fourth quarter loss is a net increase in deferred income tax valuation allowances of $1.7 million. Stock prices shown above have not been adjusted to reflect effects of the SLH and Response distributions. See Note 15 for a description of discontinued operations which affected the results of operations for the quarters shown above. Quarterly earnings (loss) per share amounts may not add to the annual earnings (loss) per share amounts due to the effect of common stock equivalents and the timing of treasury stock purchases and net earnings (loss). LAB HOLDINGS, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts and Reserves - ------------------------------------------------------------------- Additions ----------------- Charged Charged Balance at to Costs to Other Balance at Beginning and Accounts- End of Description of Year Expenses Describe Deductions* Year - ---------------------------------------------------------------------- (In thousands) Year ended December 31, 1997 Accounts and notes receivable - allowance for doubtful accounts $ 1,022 571 -- 575 1,018 Year ended December 31, 1996 Accounts and notes receivable - allowance for doubtful accounts $ 1,234 717 -- 929 1,022 Year ended December 31, 1995 Accounts and notes receivable - allowance for doubtful accounts $ 702 830 -- 298 1,234 * Uncollectible accounts written-off EX-10.1 2 Exhibit 10.1 LAB HOLDINGS, INC. 1997 DIRECTORS' STOCK OPTION PLAN 1. PURPOSE The Lab Holdings, Inc. 1997 Directors' Stock Option Plan is designed to enable Directors of the Company to acquire or increase their ownership of the $1.00 par value common stock of the Company on reasonable terms. The opportunity so provided is intended to foster in participants a strong incentive to exert maximum effort for the continued success and growth of the Company and its Subsidiaries and the enhancement of shareholders' interests. 2. DEFINITIONS When used herein, the following terms shall have the meaning set forth below: 2.1 "Board" means the Board of Directors of Lab Holdings, Inc. 2.2 "Book Value" of property referred to in subsection 7.3 hereof means book value as determined in accordance with generally accepted accounting principles. 2.3 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.4 "Company" means Lab Holdings, Inc. 2.5 "Director" means a member of the Board. 2.6 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.7 "Fair Market Value" means (i) with respect to the Company's Shares, the closing sales price of the Shares, as reported on the National Market System of the Nasdaq Stock Market, or, if not so reported, the closing sales price as reported by any other appropriate reporting system of general circulation, on the date for which the value is to be determined, or if there is no closing sales price on such date, then on the last date for which transactions in Shares were so reported prior to the date on which the value is to be determined; and (ii) with respect to property referred to in subsection 7.3 hereof, the value of such property as determined by independent, third party appraisal. 2.8 "Grantee" means a person to whom an Option is granted. 2.9 "Non-Qualified Stock Option" or "NQSO" means an Option awarded under the Plan which by its terms and conditions does not meet the terms and conditions established by Code 422A. 2.10 "Option" means the right to purchase, at a price, for a term, under conditions, and for cash or other considerations fixed by the Plan, a number of Shares specified by the Plan. An Option can only be an NQSO. 2.11 "Plan" means the Company's 1997 Directors' Stock Option Plan. 2.12 "Pre-Owned Shares" means Shares owned by a Grantee at the time of the exercise of an Option, and if they are Shares which the Grantee acquired through the exercise of an Option under the Plan, such Shares have been owned for more than six months prior to the Option exercise. 2.13 "Resigning Directors" means those directors whose resignations as such are effective on the date upon which a definitive Proxy Statement is filed with the Securities and Exchange Commission respecting a Special Meeting of Company shareholders, called for the purpose of considering and voting upon a proposal to amend the Company's Articles of Incorporation to change the Company's name to Lab Holdings, Inc. 2.14 "Securities Act" means the Securities Act of 1933, as amended. 2.15 "Shares" means shares of the Company's $1.00 par value common stock or, if by reason of the adjustment provisions hereof any rights under an Option granted under the Plan pertain to any other security, such other security. 2.16 "Subsidiary" means any business, whether or not incorporated, in which the Company, at the time an Option is granted or in other cases at the time of reference, owns directly or indirectly not less than 50% of the equity interest. 2.17 "Successor" means the legal representative of the estate of a deceased Grantee or the person or persons who shall acquire the right to exercise an Option, by assignment, bequest or inheritance or by reason of the death of the Grantee, as provided in accordance with subsection 6.7 hereof. 2.18 "Tax Date" means the date on which the amount of tax to be withheld with respect to an Option is determined. 2.19 "Term" means the period during which a particular Option may be exercised. 2.20 "Unit" means (i) the lowest number of Shares required to be purchased to permit the issuance with such Shares of a whole security of another type, if any, issuable pursuant to subsection 7.2 hereof upon exercise of an Option and (ii) such other whole security. 3. ELIGIBILITY Each person who is a Director on the Effective Date of the Plan under Section 9 hereof, other than Resigning Directors, and each person who becomes a Director thereafter during the term of the Plan shall be entitled (subject to any limitations imposed by Section 4 hereof) to participate in the Plan. A Director is entitled to participate whether or not he is also an officer of the Company and whether elected by shareholders or appointed to fill a vacancy created by the resignation of a Director or the expansion of the Board. 4. SHARES SUBJECT TO PLAN The Company hereby reserves 90,000 Shares for issuance in connection with Options under the Plan, subject to adjustment under Section 7 hereof. The Shares so issued may be unreserved Shares held in the treasury, however acquired, or Shares which are authorized but unissued. Any Shares subject to issuance upon exercise of Options but which are not issued because of a surrender, lapse, expiration or termination of any such Option prior to issuance of the Shares shall once again be available for issuance in satisfaction of other Options. Shares withheld pursuant to a tax withholding election permitted under Section 13 hereof, and any Shares owned by a Grantee which are used in the exercise of an Option under subsection 8.3 hereof shall be deemed issued under the Plan. 5. GRANT OF OPTIONS Each person who is a Director as of the Effective Date of the Plan under Section 9 hereof shall, as of the Effective Date, receive a grant of Options respecting 15,000 Shares, and each Director who first becomes a Director after the Effective Date shall, on the date he first becomes a Director, receive a grant of Options respecting 15,000 Shares, in all cases without further action by the Board or otherwise. Such Options shall be in the form set forth as Exhibit A hereto. No person shall receive more than one grant respecting 15,000 Shares. 6. TERMS AND CONDITIONS OF OPTIONS All Options under the Plan shall be granted subject to the following terms and conditions: 6.1 The purchase price of each Share subject to an Option shall be 100% of the Fair Market Value of the Shares on the effective grant date of such Option. 6.2 Options shall expire on the tenth anniversary of the effective date of grant. 6.3 Options shall be vested (i.e., exercisable) as follows: As to 5,000 shares, on and after the twelve month anniversary of the date of grant; as to another 5,000 shares, on and after the twenty- four month anniversary of the date of grant; and as to the final 5,000 shares, on and after the thirty-six month anniversary of the date of grant. 6.4 Notwithstanding subsection 6.3 hereof, in the event of the death of an Option holder during his term as a Director, all outstanding unvested Options held by him shall become immediately exercisable. 6.5 After the termination of an Option holder's term as a Director for any reason, the Option shall be exercisable only as to those Shares and other securities, if any, which were subject to the exercise of such Option on the date of termination (including those shares and other securities, if any, subject to the exercise as a consequence of subsection 6.4 hereof). 6.6 Options, whether vested or not, shall expire to the extent unexercised on the date which is 90 days after the date a Director's term as a Director shall terminate; provided however, that in the event of the death of a Director during such person's term as a Director or during the 90- day period following expiration of such term, such Options shall expire to the extent unexercised by such person's Successor on that date which is 12 months after the date of death. 6.7 Each Grantee may name, from time to time, any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit or rights under the Plan is to be paid or transferred in case of his death before he receives any or all of such benefit or exercises such rights. Each designation will revoke all prior designations by the same Grantee, and will be effective only when filed by the Grantee in writing during his lifetime with the Company's Secretary. In the absence of any such designation, benefits or rights remaining unpaid or unexercised at the Grantee's death shall be paid to or shall be exercisable by his estate, subject to the terms hereof. 6.8 Notwithstanding subsection 6.3 hereof, all outstanding unvested Options shall become exercisable immediately if any of the following events occur: 6.8.1 Any "person" (as defined in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities, provided that this provision shall not apply to the direct, indirect or beneficial ownership of Shares by descendants of W. T. Grant or their spouses, or 6.8.2 At any time there shall cease to be a majority of the Board comprised as follows: individuals (other than Resigning Directors) who on the Effective Date of this Plan under Section 9 hereof constitute the Board, and any new Director(s) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors on the Effective Date of this Plan or whose election or nomination for election was previously so approved, or 6.8.3 The requisite percentage of the Company's shareholders shall approve a plan of complete liquidation and dissolution of the Company. 6.9 Notwithstanding anything in subsection 6.3 hereof, all outstanding unvested Options held by a Grantee shall become exercisable immediately upon the approval by the requisite percentage(s) of shareholders of all constituent companies to a merger or consolidation involving the Company if, but only if, by the terms of the agreement of merger or consolidation or other contemporaneous related document said Grantee's term as a Director of the Company is not to continue after consummation of the merger or consolidation or is specifically limited in time to a period which does not extend at least until the thirty-six month anniversary of the date of grant. 6.10 In the event of the dissolution or liquidation of the Company, each outstanding Option shall terminate to the extent that it shall not have been exercised prior to the effective time of such event. 7. ADJUSTMENTS IN EVENT OF CHANGES IN CAPITALIZATION 7.1 In the event that a dividend shall be declared upon the Shares of the Company payable in Shares, the number of Shares then subject to any Option outstanding under the Plan and the number of Shares reserved for Options pursuant to the Plan but not yet subject to Options shall be adjusted by adding to each such Share the number of Shares which would be distributable in respect thereof if such Shares had been outstanding on the date fixed for determining the shareholders of the Company entitled to receive such Share dividend. 7.2 In the event that a dividend shall be declared upon the Shares of the Company payable in an equity security of the Company other than the Shares, each Option outstanding under the Plan and the number and type of securities issuable under the Plan shall be changed so that thereafter there shall be issuable upon the exercise of Options then outstanding or thereafter granted, in addition to Shares, such number of such other equity security that would have been distributable in respect of Shares subject to outstanding Options or issuable under the Plan had such Shares been outstanding on the date fixed for determining the shareholders of the Company entitled to receive such equity security dividend. 7.3 In the event that a dividend shall be declared upon Shares (or other securities that, with the Shares, comprise a Unit) of the Company payable in cash or other property (other than Shares or other equity securities of the Company) and the aggregate amount of the cash or Book Value of the property payable to shareholders pursuant to such dividend exceeds 10% of the Company's total assets on a consolidated basis, the Option exercise price for each Share (or Unit, if applicable) subject to an Option shall be reduced on the date following the payment date of such dividend by the aggregate amount of cash and the Fair Market Value of any other property payable with respect to each outstanding Share pursuant to such dividend. 7.4 In the event that the outstanding Shares shall be changed into or exchanged for a different number or kind of shares or other securities of the Company or of another entity, whether through reorganization, recapitalization, split-up, combination of shares, merger, consolidation or otherwise, then there shall be substituted for each Share subject to any outstanding Option and for each Share reserved for Options pursuant to the Plan but not yet subject to Options the number and kind of shares or other securities into which each outstanding Share shall have been so changed or for which each such share shall have been exchanged. 7.5 In the case of any substitution or adjustment as provided for in subsections 7.1, 7.2 or 7.4 hereof, the Option price set forth in each outstanding Option for each Share covered thereby prior to such substitution or adjustment will be the Option price for all Shares or other securities which shall have been substituted for such Share or to which such Share shall have been adjusted pursuant to such subsections. 7.6 In the case of any adjustment provided for in subsection 7.2 hereof, the Option may thereafter only be exercisable as to Units and the Option exercise price for each Unit will be the aggregate of the Option exercise price for the Shares included within the Unit. 7.7 No adjustment or substitution provided for in this Section 7 shall require the Company to sell or issue a fraction of a Share or other equity security, and the total substitution or adjustment with respect to each outstanding Option shall be limited accordingly. Upon any adjustment made pursuant to this Section, the Company will, upon request, deliver to the Option holder or to such person's Successor a certificate of its Chief Financial Officer setting forth, with respect to such Option, the Option price thereafter in effect and the number and kind of Shares or other securities thereafter purchasable thereunder. 8. EXERCISE OF RIGHTS UNDER OPTIONS 8.1 A person entitled to exercise an Option may do so by delivery of a written notice to that effect specifying the number of Shares with respect to which the Option is being exercised and any other information the Company may prescribe. 8.2 The notice of exercise shall be accompanied by payment in full of the purchase price for any Shares to be purchased, with such payment being made in cash or cash equivalents or in Pre-Owned Shares having a Fair Market Value at that time equivalent to the purchase price of the Shares or Units to be purchased, or a combination thereof. 8.3 In lieu of delivery of a stock certificate or certificates evidencing Shares tendered by the Grantee in payment of the purchase price in exercising an Option, the Grantee may furnish a notarized statement executed by the Grantee, in such form as prescribed by the Company, as payment for all or a portion of the purchase price for Shares or Units to be purchased. The statement shall recite the number of Shares or Units being purchased by the Grantee pursuant to the Option and the number of Pre-Owned Shares owned by the Grantee which otherwise could be freely delivered as payment of the purchase price by the Grantee based on their Fair Market Value at that time. The Grantee will then be issued a certificate(s) for (a) new Shares equal to the number of Shares acquired by the Grantee hereunder upon exercise of the Option, less the number of Pre-Owned Shares owned by the Grantee and described in the notarized statement, and (b) if applicable, other securities comprising the Units as to which the exercise relates. 8.4 No Shares or other securities shall be issued upon exercise of an Option until full payment has been made therefor. 8.5 Upon exercise of an Option but before a distribution of Shares or other securities in satisfaction thereof, the Grantee may request in writing that the Shares or other securities to be issued in satisfaction of the Option exercise be issued in the name of the Grantee and another person as joint tenants with right of survivorship or as tenants in common. 8.6 All notices or requests to the Company provided for herein shall be delivered to the Secretary of the Company. 9. EFFECTIVE DATE OF THE PLAN AND DURATION 9.1 The Plan shall become effective on the date upon which the Company files a definitive Proxy Statement with the Securities and Exchange Commission respecting a Special Meeting of Company shareholders, called for the purpose of considering and voting upon a proposal to amend the Company's Articles of Incorporation to change the Company's name to Lab Holdings, Inc. 9.2 The Plan shall remain in effect until all Options have been exercised in accordance herewith, but no Options may be granted under the Plan after September 15, 2007. The provisions of any Option may be amended at any time prior to the end of its Term in accordance with the Plan. 10. SHAREHOLDER STATUS No person shall have any rights as a shareholder by virtue of the grant of an Option under the Plan, except with respect to Shares or other securities actually issued to that person. 11. POSTPONEMENT OR NON-EXERCISE The Company shall not be required to issue any certificate or certificates for Shares or other securities upon the exercise of an Option granted under the Plan prior to (i) the obtaining of any approval from any governmental agency which the Company shall, in its sole discretion, determine to be necessary or advisable, (ii) the taking of any action in order to comply with restrictions or regulations incident to the maintenance of a public market for its Shares or other securities, if any; and (iii) the completion of any registration or other qualification of such Shares or other securities, if any, under any state or Federal law or rulings or regulations of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable. The Company shall not be obligated by virtue of the terms and conditions of any Option or any provisions of the Plan to recognize the exercise of an Option or to sell or issue Shares or other securities in violation of the Securities Act or the law of any government having jurisdiction thereof. Any postponement or delay by the Company in recognizing the exercise of any Option or in issuing any Shares or other securities hereunder shall not extend the Term of an Option and neither the Company nor its directors or officers shall have any obligation or liability to the Grantee of an Option, to a Successor or to any other person with respect to any Shares or other securities, including those as to which an Option shall lapse because of such postponement. 12. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN The Board may terminate, suspend or modify the Plan at any time and in any manner, provided, however, that to the extent shareholder approval is required by regulations issued under the Securities Act or the Exchange Act, in order to create or preserve Company or Grantee benefits or rights under or with respect to Options, the Board shall not, without authorization of the shareholders, effect any change (other than through adjustment for changes in capitalization or as otherwise herein provided) which: (i) increases the aggregate number of Shares for which Options may be granted under the Plan or increases the maximum number of Shares for which Options may be granted to any one Grantee; (ii) lowers the minimum Option exercise price; (iii) lengthens the maximum period during which an Option may be exercised; (iv) materially modifies the requirements as to eligibility to participate in the Plan; (v) extends the period of time during which Options may be granted; or (vi) materially increases the benefit accruing to Grantees. Notwithstanding the foregoing, (i) the Board may amend the Plan, without shareholder authorization, to comply with Section 16(b) of the Exchange Act or regulations issued thereunder, to effect registration of the Plan or securities issuable thereunder under the Securities Act or the securities laws of any state, or to obtain any required regulatory approval and (ii) if amendments to the Code or to the Securities Act or Exchange Act, or regulations issued thereunder, are adopted after the Effective Date of the Plan under Section 9 hereof, which amendments permit termination, suspension or modification of the Plan, including but not limited to the changes referred to above, without shareholder approval, no authorization by the Company's shareholders of any Board action hereunder shall be required. No termination, suspension or modification of the Plan shall adversely affect any right acquired by any Grantee or any Successor under an Option granted before the date of such termination, suspension or modification unless such Grantee or Successor shall consent, but it shall be conclusively presumed that any adjustment for changes in capitalization as provided for herein does not adversely affect any such right. 13. TAXES 13.1 The Company may pay, withhold or require a Grantee to remit to it amounts sufficient to satisfy the Company's federal, state, local or other tax withholding obligations attributable to any Option exercise, after giving notice to the Grantee, and the Company may defer issuance of Shares or other securities in connection with an Option exercise if any such tax, charge or assessment may be pending, until indemnified to its satisfaction. 13.2 In connection with the exercise of an Option, a Grantee may make an irrevocable election to have Shares or Units otherwise issuable withheld, or tender back to the Company Shares received, or deliver to the Company previously-acquired Shares, having a Fair Market Value at the time sufficient to satisfy all or part of the Company's total federal, state, local and other tax withholding obligations associated with the transaction. 14. APPLICATION OF PROCEEDS The proceeds received by the Company from the issuance of Shares or Units under the Plan shall be used for general corporate purposes of the Company and its Subsidiaries. 15. OTHER ACTIONS Nothing in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association or other entity, or to grant options to, or assume options of, any person in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of all or any part of the business and assets of any person, firm, corporation, association or other entity. 16. GENDER AND NUMBER Except when otherwise indicated by the context, words in the masculine gender when used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. 17. REQUIREMENTS OF LAW, GOVERNING LAW The granting of Options and the issuance of Shares or Units shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges and self-regulating entities as may be required. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Missouri. EX-10.2 3 Exhibit 10.2 EXHIBIT A DIRECTOR STOCK OPTION AGREEMENT This Stock Option Agreement (the "Agreement"), made this ____ day of _______, ____, by and between Lab Holdings, Inc. ("LHI") and ____________ ______________________ (the "Grantee") evidences the grant, by LHI, of a Stock Option (the "Option") to the Grantee effective on __________, ____, (the "Date of Grant") and the Grantee's acceptance of the Option in accordance with the provisions of the Lab Holdings, Inc. 1997 Directors' Stock Option Plan (the "Plan"). LHI and the Grantee agree as follows: 1. Shares Optioned and Option Price. The Grantee shall have an option to purchase ________ shares of LHI common stock, par value $1.00 per share, for $_________ per share, subject to the terms and conditions of this Agreement and of the Plan, the provisions of which are hereby incorporated herein by reference. The shares subject to the Option are not, nor are they intended to be, Incentive Stock Option (ISO) shares as described in section 422 of the Internal Revenue Code of 1986, as amended. 2. Vesting. Except as otherwise provided in section 3 below or in the Plan, this Option shall be deemed vested with respect to the number of shares described in section 1 as follows: (a) the right to purchase one-third of the number of shares described in section 1 shall first be vested on the first anniversary of the Date of Grant, (b) the right to purchase one-half of the remaining number of unvested shares shall first be vested on the second anniversary of the Date of Grant, and (c) the right to purchase the balance of the unvested shares shall first be vested on the third anniversary of the Date of Grant. Notwithstanding the foregoing provisions of this section 2, if the Grantee's term as a Director of LHI terminates on account of his death, the Option shall be deemed vested as to all shares described in section 1 hereof as of the date of death. 3. Exercise Period. Except as otherwise provided in the Plan, the Option may be exercised from time to time with respect to all or any number of the then vested but unexercised shares on any regular business day of LHI at its then executive offices, until the earliest to occur of the following dates: (a) the tenth anniversary of the Date of Grant; (b) subject to subsection (c) next below, the date which is ninety (90) days after the date the Grantee's term as a Director of LHI terminates, except that such date shall be the date which is twelve (12) months after the Grantee's death, if death occurs while the Grantee is a Director of LHI or within ninety (90) days thereafter; provided, however, that if the Option is exercised after the Grantee's term as a Director has terminated for any reason, it may be exercised only to the extent vested on the date such term as a Director terminated. 4. Exercise. (a) During the period that the Option is exercisable, it may be exercised in full or in part by the Grantee or his guardian, assignee or legal representative, and, in the event of the Grantee's death, by the person or persons to whom the Option was transferred by assignment, will or the laws of descent and distribution, by delivering or mailing written notice of the exercise to the Secretary of LHI. The written notice shall be signed by the person entitled to exercise the Option and shall specify the address and Social Security number of such person. If any person other than the Grantee purports to be entitled to exercise all or any portion of the Option, the written notice shall be accompanied by proof, satisfactory to the Secretary of LHI, of that entitlement. (b) Subject to the provisions of subsection (c) hereof, the written notice shall be accompanied by full payment of the exercise price for the shares as to which the Option is exercised either (i) in cash or cash equivalents, (ii) in shares of LHI common stock evidenced by certificates either endorsed or with stock powers attached transferring ownership to LHI, with an aggregate Fair Market Value (as defined in the Plan) equal to said exercise price on the date the written notice is received by the Secretary, or (iii) in any combination of cash or cash equivalents and such shares; provided that any shares of LHI common stock tendered in payment of all or any part of the exercise price must, if they are shares acquired by the Grantee through an exercise of the Option, have been owned for more than six (6) months prior to the subject Option exercise. (c) In lieu of payment of the exercise price by way of delivery of certificate(s) evidencing shares of LHI common stock, the Grantee may furnish a notarized statement reciting the number of shares being purchased under the Option and the number of LHI shares owned by the Grantee which could be freely delivered as payment; provided that if the certificate refers to any shares acquired through an exercise of the Option, then such shares must have been owned for more than six (6) months prior to the subject Option exercise in order to be considered eligible to be freely delivered as payment. If the Grantee furnishes such a statement in payment of the exercise price, he will be issued a certificate for new shares representing the number of shares as to which the Option is exercised, less the number of shares described in the notarized statement as constituting payment under the Option. (d) In the event the Grantee pays the Option exercise price by delivery of a notarized statement of ownership, as described in subsection (c) next above, the number of shares remaining subject to the Option shall be reduced not only by the number of new shares issued upon exercise of the Option but also by the number of previously owned shares listed on the notarized statement of ownership and deemed to be surrendered as payment of the exercise price. (e) The written notice of exercise will be effective and the Option shall be deemed exercised to the extent specified in the notice on the date that the written notice (together with required accompaniments respecting payment of the exercise price) is received by the Secretary of LHI at its then executive offices during regular business hours. 5. Transfer of Shares; Tax Withholding. As soon as practicable after receipt of an effective written notice of exercise and full payment of the exercise price as provided in section 4 above, the Secretary of LHI shall cause ownership of the appropriate number of shares of LHI common stock to be transferred to the person or persons exercising the Option by having a certificate or certificates for such number of shares registered in the name of such person or persons and shall have each certificate delivered to the appropriate person. Each such certificate shall bear a legend describing the restrictions imposed by securities laws, as described in section 7 below, to the extent applicable. Notwithstanding the foregoing, if LHI or a Subsidiary requires reimbursement of any tax required by law to be withheld with respect to shares of LHI common stock, the Secretary shall not transfer ownership of shares until the required payment is made; provided that in lieu of payment in cash of the taxes required by law to be withheld, the Grantee may pay such taxes by surrendering his right to exercise a portion of the Option equal in value to the amount of said taxes; the Grantee would then receive a certificate for the number of shares otherwise issuable pursuant to the Grantee's exercise of the Option, reduced by a number of shares with an aggregate Fair Market Value equal to the amount of said taxes, which latter number of shares would be deemed purchased pursuant to the exercise of the Option and, thus, no longer available under the Plan. 6. Binding Effect. The terms of this Option shall be binding upon the executors, administrators, heirs, successors, and assigns of the Grantee. 7. Requirements of Law. This Option may not be exercised if the issuance of shares of LHI common stock upon such exercise would constitute a violation of any applicable federal or state securities or other law or valid regulation. The Grantee, as a condition to his exercise of this Option, shall represent to LHI that the shares of LHI common stock to be acquired by exercise of this Option are being acquired for investment and not with a present view to distribution or resale, unless counsel for LHI is then of the opinion that such a representation is not required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. IN WITNESS WHEREOF, LHI, by its duly authorized officer, and the Grantee have signed this Agreement as of the date first above written. LAB HOLDINGS, INC. By:___________________________ ______________________________ Grantee The Grantee acknowledges receipt of copies of the Plan and the Prospectus, dated ________________________, respecting the Plan. The Grantee represents that (s)he is familiar with the terms and provisions of the Plan and such Prospectus. The Grantee hereby accepts this Option subject to all the terms and provisions of the Plan, including but not limited to Section 6 ("Terms and Conditions") and Section 7 ("Adjustments in Event of Changes in Capitalization") thereof. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board of Directors respecting any questions arising under the Plan. Date: ________________ Grantee EX-10.12 4 Exhibit 10.12 SUBLEASE AND SERVICES AGREEMENT This Sublease and Services Agreement (the "Agreement") is made as of the 1st day of June, 1997, between Seafield Capital Corporation, a Missouri corporation ("Seafield") and SLH Corporation, a Kansas corporation ("SLH"). WHEREAS, the parties hereto determined that it is desirable to terminate that certain Facilities Sharing and Interim Services Agreement dated as of February 28, 1997, by and between Seafield and SLH (the "Interim Services Agreement"), effective as of May 31, 1997; WHEREAS, in connection with the termination of the Interim Services Agreement, Seafield no longer has any employees; and WHEREAS, certain accounting and administrative requirements of Seafield can more cost effectively be performed by personnel of SLH than by outside third parties; and WHEREAS, employees of SLH have adequate time available to perform the required accounting and administrative functions for Seafield; and WHEREAS, Seafield desires to sublease a small space from SLH for the storage of Seafield records; and WHEREAS, SLH has available the amount of space desired by Seafield, which space SLH does not require for its own purposes; NOW, THEREFORE, in consideration of the premises and mutual covenants herein made, the parties hereto agree as follows: 1. Termination of Interim Services Agreement. SLH and Seafield hereby agree that the Interim Services Agreement shall be terminated and shall have no further force or effect, effective as of May 31, 1997. 2. Sublease. SLH does hereby sublease to Seafield a space approximately 12 feet by 12 feet in size within the premises being leased by SLH, constituting Suite 260 in the office building at 5000 West 95th Street, Shawnee Mission, Kansas 66207. The subject space shall be separate from the space utilized by, and shall not itself by utilized by, SLH during the term of this sublease, but the parties understand that the space being sublet to Seafield is not secured and can be accessed by personnel from SLH. The term of the sublease respecting said space shall be identical to the term of SLH's lease of Suite 260, including any extensions or renewals thereof. 3. Services. SLH hereby agrees to perform all of those accounting and administrative services requested by Seafield which are of a nature that would have been performed by Seafield employees if Seafield were to have those employees it had prior to the effective date of this Agreement. Seafield recognizes that SLH employees must also perform accounting and administrative functions for SLH and SLH shall be entitled to use reasonable discretion in determining the allocation of time by SLH employees when services are requested by Seafield and at the same time required by SLH. 4. Consideration. In consideration of the space sublet to Seafield hereunder and in consideration of the services to be provided by SLH hereunder, Seafield shall pay to SLH the sum of Seventy-Five Thousand Dollars ($75,000.00) annually. 5. Term. The effective date of this Agreement shall be June 1, 1997. The term of the sublease arrangement shall be as set forth in Section 1 hereof. The term of the remainder of this Agreement shall be one year; provided that the term shall automatically renew for additional one year periods unless either party shall notify the other not less than sixty (60) days prior to the end of the then-current term. 6. Miscellaneous. This Agreement shall be governed by the internal laws of the State of Kansas. The Agreement may not be amended except by writing signed by both parties. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first above written. SEAFIELD CAPITAL CORPORATION By: Name: Title: SLH CORPORATION By: Name: Title: EX-27 5
5 This schedule contains summary financial information extracted from the form 10-K for the period ended December 31, 1997 and is qualified in its entirety by reference to such 10-K. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 22,129 2,648 13,626 1,018 2,203 50,348 43,956 33,515 74,786 8,623 0 0 0 7,500 49,187 74,786 0 78,926 0 83,335 0 571 11 328 7,778 (7,855) (2,342) 0 0 (10,197) (1.57) (1.57)
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