Exhibit 99.2
LABONE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
| September 30, 2005 |
December 31, 2004 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,302 | $ | 24,070 | ||||
Accounts receivable, net of allowance for doubtful accounts of $5,722 in 2005 and $4,594 in 2004 |
84,380 | 73,027 | ||||||
Inventories |
7,723 | 7,473 | ||||||
Prepaid expenses and other current assets |
7,024 | 6,506 | ||||||
Deferred income taxes |
8,717 | 5,556 | ||||||
Total current assets |
123,146 | 116,632 | ||||||
Property, plant and equipment, net |
86,212 | 62,860 | ||||||
Goodwill |
140,495 | 138,163 | ||||||
Intangible assets, net |
18,038 | 20,860 | ||||||
Other long-term assets |
4,117 | 4,707 | ||||||
Total assets |
$ | 372,008 | $ | 343,222 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 23,804 | $ | 20,467 | ||||
Income taxes payable |
3,240 | — | ||||||
Accrued payroll and benefits |
13,314 | 17,131 | ||||||
Other accrued expenses |
4,128 | 3,381 | ||||||
Current portion of long-term debt |
1,849 | 1,925 | ||||||
Total current liabilities |
46,335 | 42,904 | ||||||
Deferred income taxes |
9,180 | 8,694 | ||||||
Long-term debt |
109,734 | 111,549 | ||||||
Other |
67 | 108 | ||||||
Total liabilities |
165,316 | 163,255 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity: |
||||||||
Common stock, $0.01 par value per share. Authorized 40,000,000 shares; issued 18,027,729 shares |
180 | 180 | ||||||
Additional paid-in capital |
89,984 | 87,027 | ||||||
Retained earnings |
123,070 | 102,974 | ||||||
Accumulated other comprehensive income (loss) |
155 | (94 | ) | |||||
Treasury stock of 526,963 shares in 2005 and 796,260 shares in 2004, at cost |
(6,697 | ) | (10,120 | ) | ||||
Total stockholders’ equity |
206,692 | 179,967 | ||||||
Total liabilities and stockholders’ equity |
$ | 372,008 | $ | 343,222 | ||||
See accompanying notes to consolidated financial statements.
LABONE, INC. AND SUBSIDIARIES Revenues Cost of sales: Cost of sales expenses Depreciation and amortization Total cost of sales Gross profit Selling, general and administrative: Selling, general and administrative expenses Depreciation and amortization Total selling, general and administrative Operating earnings Other income (expense): Interest income Interest expense Other, net Total other expense, net Earnings before income taxes Provision for income taxes Net earnings Earnings per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2005
2004
2005
2004
$
127,265
$
117,839
$
379,224
$
348,146
85,333
79,126
251,635
234,128
1,820
1,712
5,120
4,934
87,153
80,838
256,755
239,062
40,112
37,001
122,469
109,084
26,875
22,730
76,960
68,020
3,388
2,670
9,167
7,502
30,263
25,400
86,127
75,522
9,849
11,601
36,342
33,562
171
54
507
121
(1,399
)
(1,340
)
(3,951
)
(3,814
)
243
(29
)
163
(35
)
(985
)
(1,315
)
(3,281
)
(3,728
)
8,864
10,286
33,061
29,834
3,458
3,671
12,965
11,053
$
5,406
$
6,615
$
20,096
$
18,781
$
0.31
$
0.39
$
1.15
$
1.10
$
0.30
$
0.38
$
1.12
$
1.08
17,496
17,113
17,423
17,039
18,129
17,477
17,908
17,459
LABONE, INC. AND SUBSIDIARIES Balance as of December 31, 2004 Comprehensive income: Net earnings Adjustment from foreign currency translation Comprehensive income Stock options exercised (267,947 shares) Tax benefit from exercise of options Stock-based compensation Directors’ stock compensation (1,350 shares) Balance as of September 30, 2005 See accompanying notes to consolidated financial statements.
Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2005
(in thousands, except share data)
(unaudited)
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive loss
Treasury
stock
Comprehensive
income
Total
stockholders’
equity
$
180
$
87,027
$
102,974
$
(94
)
$
(10,120
)
$
179,967
—
—
20,096
—
—
$
20,096
20,096
—
—
—
249
—
249
249
$
20,345
—
609
—
—
3,406
4,015
—
2,204
—
—
—
2,204
—
109
—
—
—
109
—
35
—
—
17
52
$
180
$
89,984
$
123,070
$
155
$
(6,697
)
$
206,692
LABONE, INC. AND SUBSIDIARIES Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash Depreciation and amortization Provision for loss on accounts receivable Income tax benefit from exercise of stock options Deferred income taxes Stock-based compensation Directors’ stock compensation Loss on sale of property, plant and equipment Change in assets and liabilities, net of effects Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Income taxes payable Accrued payroll and benefits Other accrued expenses Other Net cash provided by operations Cash flows from investing activities: Capital expenditures Acquisition of businesses Proceeds from sale of property, plant and equipment Acquisition of patents Net cash used in investing activities Cash flows from financing activities: Net payments on line of credit Net proceeds from issuance of convertible debentures Debt issue costs Payments on other long-term debt Proceeds from exercise of stock options Net cash provided by financing activities Effect of foreign currency translation on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended
September 30,
2005
2004
$
20,096
$
18,781
provided by operating activities:
14,836
13,396
8,384
6,833
2,204
1,558
(2,671
)
220
109
—
52
50
136
63
of acquisitions:
(19,737
)
(19,068
)
(249
)
464
(518
)
(1,240
)
3,337
9,178
3,240
—
(3,816
)
5,425
747
1,762
35
(131
)
26,185
37,291
(34,808
)
(16,162
)
(2,440
)
(60,110
)
75
36
(5
)
(40
)
(37,178
)
(76,276
)
—
(46,253
)
—
100,144
—
(845
)
(1,951
)
(2,011
)
4,015
3,875
2,064
54,910
161
16
(8,768
)
15,941
24,070
4,651
$
15,302
$
20,592
LABONE, INC. AND SUBSIDIARIES Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes Interest Supplemental schedule of non-cash investing and financing activities: Details of acquisitions: Fair value of assets acquired Liabilities assumed Cash paid for acquisitions
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2005
2004
$
9,051
$
8,955
2,668
2,195
$
2,440
$
60,928
—
(818
)
$
2,440
$
60,110
Description of Business LabOne, Inc. (“LabOne” or the “Company”) is a diagnostic services provider. The services and information LabOne and its subsidiaries provide include: risk assessment information services for the insurance industry; diagnostic healthcare testing; and substance abuse testing services and related employee qualification products. The financial information furnished herein as of September 30, 2005, and for the periods ended September 30, 2005 and 2004, is unaudited; however, in the opinion of management, it reflects all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state the Company’s financial position, the results of its operations and its cash flows. The balance sheet information as of December 31, 2004 has been derived from the audited consolidated financial statements as of that date. The financial statements have been prepared in conformity with generally accepted accounting principles in the United States appropriate in the circumstances, and included in the financial statements are certain amounts based on management’s estimates and judgments. The financial
information herein is not necessarily representative of a full year’s operations
because levels of sales, capital additions and other factors fluctuate throughout
the year. These same considerations apply to all year-to-year comparisons. Certain
information and note disclosures normally included in the Company’s annual
financial statements have been condensed or omitted. These condensed, consolidated
financial statements should be read in conjunction with the accompanying consolidated financial
statements and notes thereto as of December 31, 2004 and 2003, and for
each of the years in the three-year period ended December 31, 2004. (2) Earnings Per Share Basic earnings per
share is computed using net earnings divided by the weighted average number of common
shares outstanding. Diluted earnings per share includes the effects of outstanding stock
options and the dilutive effect of the convertible debentures. The par value of the debentures
would be settled in cash. Subject to adjustment under certain circumstances as described in the
terms of the convertible debentures, the conversion obligation is generally based upon the product
of the conversion rate then in effect (25.4463 as of September 30, 2005) and the closing price of LabOne common stock over the measurement period. Should the debentures become convertible under the terms of the conversion rights with a stock price of $51.09 over the measurement period,
the conversion obligation would be approximately $1,300 (25.4463 x $51.09), and the settlement upon conversion would consist of $1,000 cash and 5.87 shares ($300/$51.09) of common stock, per $1,000 principal amount of debentures converted, assuming none of the adjustment provisions in the debenture applied to such calculation. The following table reconciles the weighted average common shares used in the basic earnings per share calculation and the weighted average common shares and common share equivalents used in the diluted earnings per share calculation: Weighted average common shares for basic earnings per share Dilutive effect of employee stock options Dilutive effect of convertible debentures Weighted average common shares for dilutive earnings per share
Three Months
Ended
September 30,
Nine Months
Ended
September 30,
2005
2004
2005
2004
(in thousands)
17,496
17,113
17,423
17,039
454
364
421
420
179
—
64
—
18,129
17,477
17,908
17,459
(3) Stock-based Compensation The Company applies the intrinsic-value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, as amended by SFAS No. 148, the Company has elected to continue to apply the intrinsic-value based method of accounting described above and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net earnings if the fair-value based method had been applied to all outstanding and unvested options in each period. Net earnings, as reported Deduct total stock-based employee compensation expense determined under fair-value based method for all stock options, net of tax Pro forma net earnings Basic earnings per share: As reported Pro forma Diluted earnings per share: As reported Pro forma (4) Business Segment Information The Company operates principally in two lines of business: risk assessment services and clinical. Risk assessment services is segregated into insurance laboratory, paramedical services and other insurance services. Clinical is segregated into healthcare services and substance abuse testing. During the third quarter, the Company announced that it had entered into an agreement with Quest Diagnostics to be acquired. Costs related to the acquisition incurred during the quarter and year are identified in the table below.
Three Months
Ended
September 30,
Nine Months
Ended
September 30,
2005
2004
2005
2004
(in thousands)
$
5,406
$
6,615
$
20,096
$
18,781
(536
)
(528
)
(1,600
)
(1,302
)
$
4,870
$
6,087
$
18,496
$
17,479
$
0.31
$
0.39
$
1.15
$
1.10
$
0.28
$
0.36
$
1.06
$
1.03
$
0.30
$
0.38
$
1.12
$
1.08
$
0.27
$
0.35
$
1.03
$
1.00
Following is a summary of segment information: Revenues: Risk assessment services: Insurance laboratory Paramedical services Other insurance services Total risk assessment services Clinical: Healthcare services Substance abuse testing Total clinical Total Operating earnings: Risk assessment services: Insurance laboratory Paramedical services Other insurance services Risk assessment sales group Total risk assessment services Clinical: Healthcare services Substance abuse testing Total clinical General corporate expenses Acquisition related costs Total other expenses, net Earnings before income taxes Provision for income taxes Net earnings (5) Business Acquisitions During the first nine months of 2005, the Company made acquisition related payments of $2.4 million primarily for the elimination of an earn-out agreement and contingent payments under prior purchase agreements. (6) Commitments and Contingencies The Company is a party to various claims or lawsuits related to services performed in the ordinary course of the Company’s activities. The Company’s management and legal counsel anticipate potential claims resulting from such matters that would not be covered by insurance and have appropriately provided for these claims in the consolidated financial statements. The Company believes that the ultimate resolution of these matters will not materially affect the consolidated financial statements of the Company. (7) Recently Issued Accounting Standards In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a
Three Months Ended
September 30,
Nine Months Ended
September 30,
2005
2004
2005
2004
(in thousands)
$
19,546
$
20,708
$
61,304
$
65,231
27,883
26,129
83,252
75,799
18,105
17,809
55,415
53,171
65,534
64,646
199,971
194,201
49,228
42,241
142,769
124,275
12,503
10,952
36,484
29,670
61,731
53,193
179,253
153,945
$
127,265
$
117,839
$
379,224
$
348,146
$
7,421
$
8,543
$
24,350
$
26,876
2,893
3,203
8,550
8,533
1,938
2,475
6,640
7,900
(1,502
)
(1,752
)
(4,740
)
(4,884
)
10,750
12,469
34,800
38,425
9,235
7,591
29,932
19,888
1,819
1,976
5,558
5,105
11,054
9,567
35,490
24,993
(9,912
)
(10,435
)
(31,905
)
(29,856
)
(2,043
)
—
(2,043
)
—
(985
)
(1,315
)
(3,281
)
(3,728
)
8,864
10,286
33,061
29,834
3,458
3,671
12,965
11,053
$
5,406
$
6,615
$
20,096
$
18,781
fair-value-based method and the recording of such expense in the consolidated statements of operations. Due to the Securities and Exchange Commission’s delay of the effective date of this pronouncement, the Company plans to adopt the accounting provisions of SFAS 123R for the first quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In September, 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board (the “EITF”) reached a conclusion on EITF Issue No. 04-8 “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” Contingently convertible debt instruments (“Co-Cos”) are subject to the if-converted method under SFAS No. 128, “Earnings Per Share” (SFAS No. 128), regardless of whether a stock price-related conversion contingency included in the instrument has been met. Under prior interpretations of SFAS No. 128, issuers of Co-Cos exclude the potential common shares underlying the Co-Cos from the calculation of diluted earnings per share until the market price or other contingency is met. The effective date of EITF 04-8 is for periods ending
after December 15, 2004. The Company accounts for the debentures in accordance with the EITF. Subsequent Event—Acquisition of LabOne Inc., and Subsidiaries by Quest Diagnostics On August
8, 2005, the Company entered into a definitive agreement (the “merger
agreement”) with Quest Diagnostics Incorporated (“Quest Diagnostics”),
which provided for Quest Diagnostics to acquire all of the outstanding shares
of the Company’s common stock and assume the Company’s existing debt.
On November 1, 2005, Quest Diagnostics acquired all of the outstanding
common shares of LabOne for $43.90 per share in an all-cash transaction
valued at approximately $947 million, including approximately $138 million
of assumed debt of LabOne. As a result of the change in control, as defined in the indenture to the Company’s debentures, at any time from November 1, 2005 until December 1, 2005 the holders of the debentures have the right to have the debentures repurchased by the Company for 100% of the principal amount of the debentures, plus accrued and unpaid interest thereon through November 30, 2005, or the right to have the debentures converted into the amount the respective holder would have received if the holder had converted the debentures prior to November 1, 2005, plus an additional premium. As provided in the indenture, the conversion rate has increased so that each $1,000 principal amount of the debentures is convertible into cash in the amount of approximately $1,280.88 if converted by December 1, 2005. In addition,
pursuant to the merger agreement, LabOne’s outstanding stock options
became fully vested and exercisable, and were cancelled in exchange for the
right to receive an amount, for each share subject to the stock option, equal
to the excess of $43.90 per share over the exercise price per share of such
option. The Company incurred $2.0 million in direct transaction costs associated with the merger agreement as of September 30, 2005. Such costs have been included in selling, general and administrative expenses in the consolidated statement of operations for the nine months ended September 30, 2005.