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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________________ TO
____________________.
COMMISSION FILE NUMBER 0-24988
LABORATORY SPECIALISTS OF AMERICA, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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<CAPTION>
<S> <C>
OKLAHOMA 73-145065
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1101-A SOVEREIGN ROW
OKLAHOMA CITY, OKLAHOMA 73108-1827
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(405) 949-1722
(ISSUER'S TELEPHONE NUMBER)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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_____ No X .
-----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes____ No___
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 17, 1996, 3,313,405 shares of issuer's Common Stock, $.001 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one); Yes ____ No X
---
Total Sequentially Numbered Pages is 14
--
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LABORATORY SPECIALISTS OF AMERICA, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
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Page
----
PART I-FINANCIAL INFORMATION
<C> <S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
March 31, 1996, and December 31, 1995................. 3
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1995 and 1996............ 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1995 and 1996............ 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 9
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................... 13
ITEM 2. CHANGES IN SECURITIES................................. 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 13
ITEM 5. OTHER INFORMATION..................................... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 13
SIGNATURES......................................................................... 14
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PART I-FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
---------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
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<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................. $2,411,051 $ 884,795
Accounts receivable, net of allowances of $91,546
in 1995 and $353,546 in 1996............................. 1,096,477 1,984,499
Income tax refund receivable............................... 131,626 18,914
Inventories................................................ 87,542 148,877
Prepaid expenses and other................................. 115,491 157,113
---------- -----------
Total current assets..................................... 3,842,187 3,194,198
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $899,559 in 1995 and $952,203 in 1996...... 830,660 1,518,308
---------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $69,104 in 1,539,045 1,772,971
1995 and $79,387 in 1996.................................
Customer list, net of accumulated amortization of $77,783
in 1995, and $112,455 in 1996............................ 1,001,707 4,267,045
Deferred costs............................................. 105,437 42,943
---------- -----------
Total other assets....................................... 2,646,189 6,082,959
---------- -----------
Total assets............................................. $7,319,036 $10,795,465
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
3
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
---------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
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<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable.............................................. $ 446,223 $ 1,062,688
Accrued payroll............................................... 215,308 375,230
Accrued expenses.............................................. 51,838 401,146
Current portion of long-term debt............................. -- 286,186
---------- -----------
Total current liabilities................................... 713,369 2,125,250
---------- -----------
LONG-TERM DEBT, net of current portion.......................... 353,123 1,201,128
---------- -----------
DEFERRED INCOME TAXES........................................... 40,958 1,055,255
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares authorized,
3,298,405 shares issued and outstanding..................... 3,298 3,298
Paid in capital in excess of par, common stock................ 5,341,667 5,341,667
Retained earnings............................................. 866,621 1,068,867
---------- -----------
Total stockholders' equity.................................. 6,211,586 6,413,832
---------- -----------
Total liabilities and stockholders' equity.................. $7,319,036 $10,795,465
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
4
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
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<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
--------------- ---------------
<S> <C> <C>
(UNAUDITED)
REVENUES......................................... $1,657,932 $1,948,536
COST OF LABORATORY SERVICES...................... 732,348 840,161
---------- ----------
Gross profit................................... 925,584 1,108,375
---------- ----------
OPERATING EXPENSES:
Selling........................................ 117,956 148,269
General and administrative..................... 511,039 524,523
Depreciation and amortization.................. 54,245 91,336
---------- ----------
Total operating expenses..................... 683,240 764,128
---------- ----------
Income from operations....................... 242,344 344,247
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense............................... (7,522) (10,493)
Interest income................................ 31,801 9,971
Other income................................... 20,000 207
---------- ----------
Total other income (expense)................. 44,279 (315)
---------- ----------
Income before income taxes................... 286,623 343,932
INCOME TAX EXPENSE............................... 124,534 141,686
---------- ----------
Net income................................... $ 162,089 $ 202,246
========== ==========
DIVIDEND ON PREFERRED STOCK...................... 6,288 --
---------- ----------
Net income available to common stockholders.. $ 155,801 $ 202,246
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING.......................... 3,298,405 3,310,112
========== ==========
NET INCOME PER COMMON STOCK
AND COMMON STOCK EQUIVALENTS..................... $.05 $.06
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
----------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
--------------- ---------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 162,089 $ 202,246
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization.................................. 54,245 91,336
Provision for bad debts and other.............................. 9,000 12,000
Impact of changes in assets and liabilities, net of effect of
the NPLI acquisition:
Accounts receivable........................................ (305,780) (264,746)
Income tax refund receivable.............................. -- 160,989
Inventories................................................ (15,889) (5,541)
Prepaid expenses and other................................. 95,014 31,676
Accounts payable and accrued expenses....................... 100,344 (68,072)
---------- -----------
Net cash provided by operating activities...................... 99,023 159,888
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (58,563) (38,171)
Purchase of NPLI Stock, net of cash acquired....................... -- (1,022,597)
Acquisition costs.................................................. (3,953) (76,622)
---------- -----------
Net cash used in investing activities......................... (62,516) (1,137,390)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings.................................. -- (528,212)
Payments on long-term debt......................................... (17,884) (20,542)
---------- -----------
Net cash used in financing activities.......................... (17,884) (548,754)
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................................ 18,623 (1,526,256)
---------- -----------
CASH AND CASH EQUIVALENTS, beginning
of period.......................................................... 2,444,442 2,411,051
---------- -----------
CASH AND CASH EQUIVALENTS, end of period............................. $2,463,065 $ 884,795
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest........................... $ 7,522 $ 10,501
========== ===========
Cash paid during the period for taxes.............................. $ 36,500 $ 6,034
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
---------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995, AND MARCH 31,
1996, ARE UNAUDITED.)
1. NPLI ACQUISITION
----------------
On January 2, 1996, the Company acquired all of the issued and outstanding
capital stock (the "NPLI Stock") of National Psychopharmacology Laboratory,
Inc., a Tennessee corporation ("NPLI"), and purchased goodwill (the NPLI
Goodwill"), pursuant to a Stock Purchase Agreement dated January 1, 1996 (the
"Purchase Agreement"), and NPLI became a wholly-owned subsidiary of the Company
(the "NPLI Acquisition"). NPLI is engaged in forensic drug testing (urine drug
screening with chain of custody) and clinical testing and analysis.
Pursuant to the Purchase Agreement and in connection with the NPLI Acquisition,
(i) the Company agreed to pay $1,375,000 for the NPLI Stock ( the "NPLI Stock
Purchase Price") of which $1,075,000 was paid at closing to the shareholders of
NPLI (the "NPLI Shareholders"), and two unsecured promissory notes (the "NPLI
Promissory Notes"), valued at approximately $300,000, were issued and delivered
to the NPLI Shareholders, (ii) the Company agreed to pay $140,000 for the NPLI
Goodwill payable in 24 monthly installments commencing on February 1, 1996,
(iii) assumed net liabilities of NPLI of approximately $1,085,000, and (iv)
incurred deferred income taxes of approximately $1,000,000 as a result of NPLI's
tax basis being significantly less than the purchase price of the NPLI capital
stock. All of the above will result in a total purchase price of approximately
$3,600,000, substantially all of which will be recorded as intangible assets.
The aggregate principal amount of the NPLI Promissory Notes is subject to
adjustment (increase or decrease) in the event revenues from forensic testing
(employee urine drug screens that have a chain of custody) are greater or less
than a certain level during the 12 months ended on January 2, 1997, determined
in accordance with generally accepted accounting principles.
The forensic portion of NPLI's business was consildated into LSI's operation
effective February 1996. NPLI's remaining revenues and expenses, associated
with the clinical business, were deferred for reporting purposes, pending the
sale of NPLI's clinical business. The Company expects the sale of NPLI's
clinical business to be completed during 1996. A letter of intent was signed in
April with due diligence and a definitive agreement expected to follow. Giving
effect to the inclusion of NPLI's revenues and income, consolidated net income
after tax would have been $199,526 on revenues of $3,013,785, for the period
ended March 31, 1996. Earnings per common share would have remained unchanged
at $.06 per share. The Company will adjust the purchase price allocation based
upon amounts received from the expected disposition of the clinical business.
The consolidated financial statements included in this report have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all adjustments which are,
in the opinion of management, necessary for a fair presentation. These
financial statements have not been audited by an independent accountant. The
consolidated balance sheet at December 31, 1995, has been derived from the
audited balance sheet of the Company.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures are adequate to
make the information presented not misleading. However, these financial
statements should be read in
7
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conjunction with the audited financial statements and notes thereto included in
the annual report on Form 10-KSB filed by the Company with the Securities and
Exchange Commission on April 11, 1996. The financial data for the interim
periods presented may not necessarily reflect the results to be expected for the
full year.
2. EARNINGS PER COMMON SHARE
-------------------------
Earnings per common share were computed using the weighted average number of
common shares outstanding after adding the dilutive effect of the conversion of
stock options. Outstanding warrants are not included in the weighted average
shares outstanding for any period because their effect on the earnings per share
calculation is antidilutive.
3. GOODWILL AND CUSTOMER LIST
--------------------------
Goodwill and customer lists are being amortized on a straight-line basis over
twenty to forty years and fifteen years, respectively. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life of goodwill and customer lists may warrant
revision or that the remaining unamortized balance of goodwill or customer lists
may not be recoverable. When factors, such as operating losses, loss of
customers, loss or suspension for an extended period of laboratory
certification, or changes in the drug testing industry, if present, indicate
that goodwill or customer lists should be evaluated for possible impairment.
The Company uses an estimate of the related undiscounted cash flows over the
remaining life of the goodwill or customer lists in measuring whether the
goodwill and the customer lists are recoverable. Although management believes
that goodwill and the customer lists are currently recoverable over the
respective remaining amortization periods, it is possible, due to a change in
circumstances, that the carrying value of goodwill and the customer lists could
become impaired in the future. Such impairment could have a material effect on
the results of operations in a particular reporting period.
4. CONTINGENT LIABILITIES
----------------------
Incidental to its business, the Company from time to time is sued by individuals
who have tested positive for drugs of abuse or who allege that improper analysis
has been performed, generally arising from LSI's alleged failure to properly
administer drug urinalysis tests or NPLI's alleged improper analysis. LSI and
NPLI are currently defendants in several such lawsuits. Based upon prior
successful defense of similar-type lawsuits, the Company believes it has valid
defenses to each of such lawsuits, and intends to vigorously defend in such
actions. Although each of LSI and NPLI maintain insurance to protect itself
against such liability, and LSI and NPLI's insurance carriers have assumed the
defense of LSI and NPLI in connection with certain actions, the extent of such
insurance coverage is limited, both in terms of types of risks covered by the
policies and the amount of coverage. In the opinion of the Company's management
and it's legal counsel, these suits and claims should not result in judgments or
settlements which would have a material adverse effect on the Company's results
of operations or financial position. Although, neither LSI nor NPLI has
experienced any material liability related to such claims, there can be no
assurance that LSI or NPLI, and possibly LSAI, will not at some time in the
future experience significant liability in connection with such claims and such
liability may exceed the extent of such insurance coverage, both in terms of
risks covered by the policies and the amount of coverage, which could have a
material adverse effect upon the results of operations and financial condition
of the Company.
8
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5. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
-------------------------------------------------------------------
In conjunction with the acquisition of the capital stock of NPLI, liabilities
were assumed as follows:
Fair value of assets acquired $ 3,600,000
Cash paid at closing (1,075,000)
--------------
Liabilities and deferred
income taxes assumed $ 2,525,000
==============
A capital lease obligation of approximately $650,000 was incurred when LSI
entered into an agreement with a vendor to buy equipment and certain lab
supplies at a fixed price per drug screen performed. The minimum monthly amount
under the agreement is approximately $47,000, with approximately $13,000 per
month allocated to the principle and interest of the capital lease obligation,
with the remaining cost being allocated to the cost of laboratory supplies. The
agreement resulted in LSI recording approximately $650,000 in additional
equipment, with an equal amount of capital lease obligation recorded as long-
term debt obligation payable over five years.
All of the above transactions, except the cash paid at closing in connection
with the purchase of the NPLI stock and the monthly payment to the vendor, are
non-cash transactions and have been excluded from the accompanying statement of
cash flows.
6. SUBSEQUENT EVENTS
------------------
On April 3, 1996, LSAI issued 15,000 shares of common stock to a public
relations firm in exchange for public relations services to be performed over a
36-month period ending on March 31, 1998.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NPLI ACQUISITION. On January 2, 1996, the Company acquired all of the
issued and outstanding capital stock (the "NPLI Stock") of National
Psychopharmacology Laboratory, Inc., a Tennessee corporation ("NPLI"), and
purchased goodwill (the NPLI Goodwill"), pursuant to a Stock Purchase Agreement
dated January 1, 1996 (the "Purchase Agreement"), and NPLI became a wholly-owned
subsidiary of the Company (the "NPLI Acquisition"). NPLI is engaged in forensic
drug testing (urine drug screening with chain of custody) and clinical testing
and analysis.
Pursuant to the Purchase Agreement and in connection with the NPLI Acquisition,
(i) the Company agreed to pay $1,375,000 for the NPLI Stock ( the "NPLI Stock
Purchase Price") of which $1,075,000 was paid at closing to the shareholders of
NPLI (the "NPLI Shareholders"), and two unsecured promissory notes (the "NPLI
Promissory Notes"), valued at approximately $300,000, were issued and delivered
to the NPLI Shareholders, (ii) the Company agreed to pay $140,000 for the NPLI
Goodwill payable in 24 monthly installments commencing on February 1, 1996,
(iii) assumed net liabilities of NPLI of approximately $1,085,000, and (iv)
incurred deferred income taxes of approximately $1,000,000 as a result of NPLI's
tax basis being significantly less than the purchase price of the NPLI capital
stock. All of the above will result in a total purchase price of approximately
$3,600,000, substantially all of which will be recorded as intangible assets.
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The aggregate principal amount of the NPLI Promissory Notes is subject to
adjustment (increase or decrease) in the event revenues from forensic testing
(employee urine drug screens that have a chain of custody) are greater or less
than a certain level during the 12 months ended on January 2, 1997, determined
in accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i) the
fiscal years ended December 31, 1994 and 1995, which are derived from the
audited financial statements of the Company and (ii) for the three months ended
March 31, 1995 and 1996, which are derived from the unaudited financial
statements of the Company which include, in the opinion of management of the
Company, all normal recurring adjustments which management of the Company
considers necessary for a fair statement of the results for such periods. The
results of operations for the periods presented are not necessarily indicative
of the Company's future operations.
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<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------ ------------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- -----------------------------
(UNAUDITED) (UNAUDITED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- -------- ---------- -------- ---------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $5,000,524 100.0% $6,925,716 100.0% $1,657,932 100.0% $1,948,536 100.0%
Cost of revenues.............. 2,291,345 45.8% 3,246,470 46.9% 732,348 44.2% 840,161 43.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit.................. 2,709,179 54.2% 3,679,246 53.1% 925,584 55.8% 1,108,375 56.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling..................... 432,920 8.7% 561,470 8.1% 117,956 7.1% 148,269 7.6%
General and administrative.. 1,681,722 33.6% 2,157,410 31.2% 511,039 30.8% 524,523 26.9%
Depreciation and
amortization............. 158,884 3.2% 232,535 3.3% 54,245 3.3% 91,336 4.7%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses...... 2,273,526 45.5% 2,951,415 42.6% 683,240 41.2% 764,128 39.2%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations........ $ 435,653 8.7% $ 727,831 10.5% $ 242,344 14.6% $ 344,247 17.7%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
During the three months ended March 31, 1996, LSI experienced a 3.5 percent
decrease in the price per specimen, compared to the three months ended March 31,
1995, principally due to increased price competition amongst providers of drug
testing services, price per specimen being the most important factor in
obtaining and maintaining clients. Management of LSI closely monitors its price
per specimen, the prices of its competitors and the costs of processing
specimens to remain competitive, as well as profitable. Although it
appears that the price decline per specimen has generally stabilized there can
be no assurance that price decline per specimen will not further decline during
1996. In the event price stabilization does not occur as anticipated, LSI will,
as it has in the past, take appropriate measures to downsize its drug testing
personnel and possibly further automate the testing process and employ
additional technology to continue profitability, although there can be no
assurance that such measures will assure profitability in the event of
substantial price reductions within the short term.
Comparison of Three-Month Periods Ended March 31, 1995 and 1996
Revenues increased to $1,948,536 in the three months ended March 31, 1996 (the
"1996 Interim Period"), from $1,657,932 in three months ended March 31, 1995
(the "1995 Interim Period"), an increase of 17.5 percent. The increase in
revenues was due to a 25 percent increase in the number of specimens
analyzed during the 1996 Interim Period as compared to the 1995 Interim Period,
although partially offset by a decrease of 3.5 percent in the average price per
specimen. The increase in number of specimens analyzed was attributable to the
NPLI Acquisition as well as obtaining new clients through LSI's normal sales and
marketing efforts. The decrease in the average price per specimen was
principally due to increased price competition among providers of drug testing
services, price per specimen being the most
10
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important factor in obtaining and maintaining clients. There can be no assurance
that price per specimen will not further decline in 1996. Although the number of
specimens analyzed increased significantly in the 1996 Interim Period, cost of
revenues only increased $107,813, from $732,348 in the 1995 Interim Period to
$840,161 in the 1996 Interim Period. Gross profit on revenues increased as a
percentage of revenues from 55.8 percent in the 1995 Interim Period to 56.9
percent in 1996 Interim Period.
Operating expenses increased from $683,240 in the 1995 Interim Period to
$764,128 in the 1996 Interim Period, an increase of 11.8 percent, but decreased
as a percentage of revenues from 41.2 percent to 39.2 percent. The increase in
operating expenses was attributable to the increases in general and
administrative expenses of $13,484, selling expense of $30,313 and depreciation
and amortization expense of $37,091 in the 1996 Interim Period, as compared to
the 1995 Interim Period. The increase in selling was due to the addition of one
sales representative added to assist in maintaining forensic clients acquired in
the NPLI Acquisition. Depreciation increased due to the addition of new
laboratory equipment at LSI in March of 1996, while amortization increased due
to the acquisition of NPLI and the amortization of the NPLI customer list.
Income from operations increased from $242,344 in the 1995 Interim Period to
$344,247 in the 1996 Interim Period, a 42 percent increase. Operating income
increased from 14.6 percent of revenues in the 1995 Interim Period to 17.7
percent of revenues in the 1996 Interim Period principally due to the increase
in specimens analyzed, while cost of revenues and operating expenses only
marginally increased.
Interest expense increased from $7,522 in the 1995 Interim Period to $10,493
in the 1996 Interim Period, a 39.5 percent increase. Interest income decreased
from $31,801 in the 1995 Interim Period to $9,971 in the 1996 Interim Period as
a result of the decrease in cash remaining for investment, from the public
offering proceeds, due to the acquisitions. Other income decreased from $20,000
in the 1995 Interim Period to $207 in the 1996 Interim Period, due to a the non-
reoccurring settlement on a lawsuit in which LSI was the plaintiff, in the 1995
Interim Period. Net income, after provision for income taxes, increased from
$155,801 in the 1995 Interim Period to $202,246 in the 1996 Interim Period, a
29.8 percent increase.
Quarterly Results of Operations
LSI and NPLI's operations are affected by seasonal trends to which drug
testing laboratories are generally subject. In LSI's experience, testing volume
tends to be higher in the second calendar quarter and lower in the winter
holiday season and the beginning of the first calendar quarter primarily due to
hiring patterns which affect pre-employment drug testing. Because the general
and administrative expenses associated with maintaining and adding to the
testing work force are relatively fixed over the short term, margins tend to
increase in periods of higher testing volume and decrease in periods of lower
testing volume. These effects are not always apparent because of the impact and
timing of the startup of new businesses and other factors such as the timing and
amount of price increases or decreases. Nevertheless, the results of operations
for a particular quarter may not be indicative of the results to be expected
during other quarters.
Income Taxes
Income taxes accrued for the three months ended March 31, 1996, were
based on an effective combined federal and state corporate income tax rate of
approximately 40 percent of pretax income.
11
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LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth from bank borrowings
and related party borrowings. Net cash provided by operating activities totaled
$159,888 in the three months ended March 31, 1996, and $99,023 in the three
months ended March 31, 1995. As of March 31, 1996, LSAI had working capital of
$1,068,948, compared to working capital of $3,128,818, at December 31, 1995. In
the event the Company's revenues increase as anticipated by management of the
Company, the Company's working capital requirements will also increase and such
requirements may exceed the net cash provided by operating activities and
require that cash be used in operating activities from sources other than
operations, including the available cash and cash equivalents (which were
$884,795 at March 31, 1996) and borrowings. The increase in cash used in
operations will principally be due to the timing differential between Company's
payment for materials and services to its suppliers and employee work force, and
the time at which the Company receives payment from its customers.
On December 27, 1995, LSI entered into a revolving line of credit loan
agreement with Hibernia National Bank (the "Bank"), which will mature on
December 27, 1996, under which LSI may draw up to $1,000,000 (the "Revolving
Loan"). As of March 31, 1996, there were no borrowings outstanding under the
Revolving Loan. It is anticipated that any advances on the Revolving Loan will
be based upon LSI's liquid assets including its accounts receivable. Amounts
drawn under the Revolving Loan bear interest at Citibank, N.A. rate. The
Revolving Loan is secured by the accounts receivable, intangible assets, and by
a mortgage on the building owned by LSI, and is guaranteed by LSAI. The loan
agreement contains various covenants, including certain financial ratios.
FUTURE OPERATIONS AND LIQUIDITY
On October 11, 1994, the Company completed a public offering of common stock
and warrants, which resulted in net proceeds to the Company of approximately
$3,260,000. The proceeds from the Offering have been invested in short-term
investments pending expenditure for the acquisition of companies engaged in the
providing of drug testing services. From such proceeds, LSAI has expended
approximately $790,000 in connection with the NDAC Asset Purchase and, in
connection with the NPLI Acquisition which was consummated on January 2, 1996,
the balance of the proceeds of the Offering was expended.
In connection with the Peterson Share Exchange, LSI issued to MBf USA, its
former parent, the MBf Promissory Note (in the principal amount of $353,123,
providing for interest at seven percent per annum). The MBf Promissory Note is
secured by substantially all of the assets of LSI. Furthermore, in connection
with the LSI Acquisition, LSAI issued to Arthur R. Peterson, Jr. 300,000 shares
of Series I Preferred Stock, $1.00 stated value. On July 10, 1995, the Series I
Preferred Stock was redeemed in full for $300,000. There can be no assurance
that cash flows from operations of LSI will be sufficient to service LSI's
obligations under the MBf Promissory Note. LSAI's cash flows currently are
entirely dependent upon the operations of LSI, and such dependency may continue
indefinitely, even if LSAI expands its operations through acquisitions of
additional drug testing companies.
As of the date hereof the Company does not currently have any significant
capital commitments. The Company anticipates that existing cash balances, and
funds to be generated from future operations will be sufficient to fund
operations, and budgeted capital expenditures of the Company through 1997.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL. The carrying
value and recoverability of unamortized goodwill and customer lists will be
periodically reviewed by management of the Company. If the facts and
circumstances suggest that the goodwill or customer lists may be impaired, the
carrying value of goodwill or customer lists will be adjusted which will result
in an immediate charge against income during the period of the adjustment and/or
the length of the remaining
12
<PAGE>
amortization period may be shortened which will result in an increase in the
amount of goodwill or customer list amortization during the period of adjustment
and each period thereafter until fully amortized. Once adjusted, there can be
no assurance that there will not be further adjustments for impairment and
recoverability in future periods. In the event management of the Company
determines that goodwill or the customer list has become impaired, the
adjustment for impairment and recoverability will most likely occur during a
period of operations in which the Company has sustained losses or has only
marginal profitability from operations, and the impairment and/or increased
amortization amount will either increase such losses from operations or further
reduce profitability.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LSAI does not have any pending litigation. In the ordinary course of its
business, LSI and NPLI from time to time are sued by individuals who have tested
positive for drugs of abuse or who allege that improper clinical analysis has
been performed by NPLI. To date, LSI and NPLI have not experienced any
material liability related to these claims, although there can be no assurance
that LSI or NPLI will not at some time in the future experience significant
liability in connection with such claims. Based upon the prior successful
defense of similar-type litigation, LSI and NPLI believe they have valid
defenses to the plaintiff's claims in all pending litigation, and LSI and NPLI
intend to vigorously defend themselves in such litigation. LSI and NPLI are not
currently a defendant party in any other legal proceedings other than routine
litigation that is incidental to the business of LSI and NPLI, and management of
LSI and NPLI believe the outcome of such legal proceedings will not have a
material adverse effect upon the results of operations or financial condition of
LSI and NPLI. Furthermore, management of LSI and NPLI believe that the
liability coverage is adequate with respect to the pending litigation and, in
general, for business of LSI and NPLI.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Not applicable.
(b) Reports on Form 8-K
Not applicable.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LABORATORY SPECIALISTS OF
AMERICA, INC.
(Registrant)
Date: May 17, 1996 By: /s/ Arthur R. Peterson, Jr.
-------------------------------
Arthur R. Peterson, Jr.
Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES FOR THE
QUARTER ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 884,795
<SECURITIES> 0
<RECEIVABLES> 2,338,045
<ALLOWANCES> 353,546
<INVENTORY> 148,877
<CURRENT-ASSETS> 3,194,198
<PP&E> 2,470,511
<DEPRECIATION> 952,203
<TOTAL-ASSETS> 10,795,465
<CURRENT-LIABILITIES> 2,125,250
<BONDS> 1,201,128
0
0
<COMMON> 3,298
<OTHER-SE> 6,410,534
<TOTAL-LIABILITY-AND-EQUITY> 10,795,465
<SALES> 0
<TOTAL-REVENUES> 1,948,536
<CGS> 0
<TOTAL-COSTS> 840,161
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 10,493
<INCOME-PRETAX> 343,932
<INCOME-TAX> 141,686
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 202,246
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
