<PAGE>
As filed with the Securities and Exchange Commission on ____________ , 1997
Registration No. 33
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LABORATORY SPECIALISTS OF AMERICA, INC.
(Name of small business issuer in its charter)
OKLAHOMA 8734 73-1451065
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
101 PARK AVENUE, SUITE 810 JOHN SIMONELLI, CHIEF EXECUTIVE OFFICER
OKLAHOMA CITY, OKLAHOMA 73102 LABORATORY SPECIALISTS OF AMERICA, INC.
(405) 232-9800 101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-9800
(Address and telephone number, (Name, address and telephone number,
including area code, of registrant's of agent for service)
principal executive offices)
------------------------
Copies To:
MICHAEL E. DUNN, ESQ.
DUNN SWAN & CUNNINGHAM
2800 OKLAHOMA TOWER
210 PARK AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED
MAXIMUM
TITLE OF EACH CLASS AMOUNT PROPOSED AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE MAXIMUM OFFERING OFFERING REGISTRATION
REGISTERED REGISTERED PRICE PER UNIT(1) PRICE(1) FEE
- --------------------------------------------------------------------------------
Common Stock(2)........ 1,452,000 $ 2.00 $2,904,000 $ 880(2)
- --------------------------------------------------------------------------------
Units(3)............... 66,000 $ 7.32 $ 483,120 $ 147(3)
- --------------------------------------------------------------------------------
Common Stock(4)(5)..... 132,000 $ 3.60 $ 475,200 $ 144(4)
- --------------------------------------------------------------------------------
1994 Warrants(4)(5).... 66,000 $ .12 $ 7,920 $ 3(4)
- --------------------------------------------------------------------------------
Common Stock(6)........ 170,000 $2.375 $ 403,750 $ 123
- --------------------------------------------------------------------------------
Total............ $4,273,990 $1,295
- --------------------------------------------------------------------------------
(1) Based upon exercise price of the 1994 Warrants and Underwriters' Warrants
for purchase of underlying securities.
(2) The Common Stock underlying the 1994 Warrants, of which 1,440,000 shares of
the Common Stock are being carried forward from Registration Statement No.
33-82058-D and the previously paid registration fee associated with such
Common Stock is $1,886.90.
(3) The Units underlying the Underwriters' Warrants, of which 60,000 of the
Units are being carried forward from Registration Statement No. 33-82058-D
and the previously paid registration fee associated with such Units is
$151.45.
(4) Underlying the Units, of which 120,000 shares of the Common Stock, and
60,000 of the 1994 Warrants are being carried forward from Registration
Statement No. 33-82058-D and the previously paid registration fees
associated with such Common Stock and 1994 Warrants are $148.97 and $2.48.
(5) Pursuant to Rule 416, includes such indeterminate number of additional
securities as may be required for issuance on exercise of Representative's
Warrants as a result of adjustment in the number of securities issuable on
such exercise by reason of anti-dilution provisions of the Representative's
Warrants.
(6) Underlying the Managing Agent's warrants for purchase of common stock.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY
<PAGE>
ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THIS REGISTRATION STATEMENT CONTAINS A PROSPECTUS WHICH CONSTITUTES A
COMBINED PROSPECTUS RELATED TO REGISTRANT'S REGISTRATION STATEMENT NO. 33-82058-
D IN ACCORDANCE WITH RULE 429.
================================================================================
<PAGE>
********************************************************************************
|INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A |
|REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE |
|SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY |
|OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES|
|EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE |
|SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE |
|SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE |
|UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF |
|ANY SUCH STATE. |
********************************************************************************
SUBJECT TO COMPLETION, DATED JULY 7, 1997 PROSPECTUS
LABORATORY SPECIALISTS OF AMERICA, INC.
1,452,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THE 1994 WARRANTS
66,000 UNITS
(EACH CONSISTING OF TWO SHARES OF COMMON STOCK AND ONE 1994 WARRANT)
ISSUABLE UPON EXERCISE OF WARRANTS
NOTICE OF REDEMPTION OF 1994 WARRANTS
Laboratory Specialists of America, Inc. (the "Company" or "LSAI") hereby
notifies the holders (the "Warrant Holders") as of , 1997 (the "Record
Date") of the Company's election to redeem the outstanding 1994 Warrants (the
"Warrant Redemption") at $.01 each (the "Redemption Price") at 5:00 p.m.,
Central Standard Time, on , 1997, unless extended, in the sole
discretion of the Company, to a date not later than , 1997 (the "Redemption
Date"). Each 1994 Warrant is exercisable at any time on or before the Redemption
Date to purchase two shares of Common Stock, $.001 par value per share (the
"Common Stock") for $2.00 per share. The Company's right to redeem the 1994
Warrants is exercisable without restriction and is not subject to any conditions
other than the required notice which is made pursuant hereto. The Redemption
Price will be paid as soon as practicable following the Redemption Date with
respect to the unexercised 1994 Warrants.
(Continued on inside cover)
------------------------
SEE "RISK FACTORS," BEGINNING AT PAGE 10, FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK AND UNITS OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS (1)(2) COMPANY (2)(3)
- --------------------------------------------------------------------------------
Per Share $ 2.00 $.10 $ 1.90
- --------------------------------------------------------------------------------
Per Unit $ 7.32 -- $ 7.32
- --------------------------------------------------------------------------------
Total $3,387,120 $145,200 $3,241,120
================================================================================
(1) The Company will pay broker-dealers responsible for exercise of the 1994
Warrants a fee of up to but not in excess of five percent of the aggregate
exercise price of such 1994 Warrants, subject to certain conditions, and
the Company will agree to indemnify such broker-dealers against certain
liabilities under the Securities Act of 1933, as amended (the "1933 Act").
See "Plan of Distribution." Proceeds to Company assumes exercise of the
1994 Warrants in full at an exercise price of $2.00 per share and the
Underwriters' Warrants in full at an exercise price of $7.32 per Unit.
(2) Before deducting a non-accountable expense allowance equal to four percent
of the public offering price of the shares sold pursuant to exercise of the
1994 Warrants and a fee of up to $50,000, proportionately reduced in the
event less than 90 percent of the 1994 Warrants are exercised, and warrants
(the "Managing Agent Warrants") to purchase up to 170,000 shares of Common
Stock at an exercise price of $2.375 per share during period of up to three
years commencing on the Redemption Date, payable and issuable to Barber &
Bronson Incorporated (the "Managing Agent"). See "Exercise of 1994
Warrants--Managing Agent."
(3) Before deducting offering expenses payable by the Company estimated to be
$100,000. See "Use of Proceeds."
It is expected that delivery of the certificates representing the Common
Stock and the Units will be made as promptly as practicable following exercise
of the 1994 Warrants and/or Underwriters' Warrants, as the case may be, and
payment of the exercise price. See "Description of Securities--1994 Warrants"
and "--Underwriters' Warrants."
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
The units (each consisting of two shares of Common Stock and one 1994
Warrant (the "Units")) of the Company are offered to the holders (the "Selling
Shareholders") of certain warrants exercisable for the purchase of the Units
(the "Underwriters' Warrants"), and, thereafter, the resale of the Common Stock
and 1994 Warrants by the Selling Shareholders. The Company will receive the
proceeds from exercise of the 1994 Warrants and the Underwriters' Warrants, but
will not receive any proceeds from the resale of the Common Stock and 1994
Warrants by the Selling Shareholders. The Common Stock and 1994 Warrant
comprising the Units will be separately transferrable immediately upon issuance
and will trade only as separate securities. Each Underwriters' Warrant may be
exercised at any time on or before October 11, 1999, to purchase one Unit for
$7.32. As a result of the Warrant Redemption, each of the Selling Shareholders
may only exercise the Underwriters' Warrants with respect to the 1994 Warrants
comprising the Units for $.12 per 1994 Warrant and continue to have the right to
exercise the Underwriters' Warrants with respect to the two shares of Common
Stock comprising the Units for $7.20. "Description of Securities--1994
Warrants" and "--Underwriters' Warrants."
The Common Stock and 1994 Warrants are quoted on Nasdaq SmallCap Market
under the symbols LABZ and LABZW, respectively. On July 7, 1997, the closing
sale prices of the Common Stock and 1994 Warrants were $3.38 and $1.44,
respectively.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus and the
documents incorporated herein by reference constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Certain, but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategies that involve risks and uncertainties. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievements of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. See "Risk Factors."
As a result of the foregoing and other factors, no assurance can be given as to
future results, levels of activity and achievements and neither the Company nor
any other person assumes responsibility for the accuracy and completeness of
these statements.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........... 3
Risk Factors................. 10
The Company.................. 13
Use of Proceeds.............. 16
Selling Shareholders......... 17
Price Range of Common Stock
and Warrant; Dividends... 17
Capitalization............... 18
Selected Financial
Information.............. 18
Unaudited Pro Form
Consolidated Financial
Information of the
Company.................. 20
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations............. 27
Warrant Redemption........... 32
Exercise of 1994 Warrants.... 33
Business..................... 37
Management................... 45
Certain Transactions......... 51
Security Ownership of Certain
Beneficial Owners and
Management................ 52
Description of Securities.... 53
Shares Eligible for Future
Sale...................... 58
Plan of Distribution......... 59
Legal Matters................ 60
Experts...................... 60
Additional Information....... 60
Index to Financial
Statements................ F-1
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. In connection with the further expansion of its forensic
drug testing business, the Company acquired the capital stock of National
Psychopharmacology Laboratory, Inc. on January 2, 1996 ( the "NPLI Acquisition")
and (ii) certain forensic drug testing assets of Pathology Laboratories Limited
("PLL") on January 31, 1997 (the "PLL Asset Purchase"). See "The Company--
Background--NPLI Acquisition" and "--PLL Asset Purchase." Unless the context
otherwise requires, all references in this Prospectus to the Company are to
Laboratory Specialists of America, Inc., an Oklahoma corporation ("LSAI"), and
its wholly-owned subsidiaries, Laboratory Specialists, Inc., a Louisiana
corporation ("LSI") and National Psychopharmacology Laboratory, Inc., a
Tennessee corporation ("NPLI"). Furthermore, except as otherwise indicated, the
information contained in this Prospectus assumes that (i) 103,333 shares of
Common Stock are issued to the former shareholders of NPLI in connection with
the NPLI Acquisition (see "The Company--Background--NPLI Acquisition" and
"Business--Litigation") and (ii) the 1994 Warrants and the Underwriters'
Warrants are not exercised, in whole or in part. Prospective investors should
carefully consider the information set forth in "Risk Factors." All references
in this Prospectus to fiscal years are to the Company's fiscal year ended
December 31 of each year.
THE COMPANY
The Company through LSI, its wholly-owned subsidiary, owns and operates an
independent drug testing laboratory providing drug testing services to corporate
and institutional customers seeking to detect, both on a pre- and post-
employment basis, and deter the use of illegal drugs. LSI's laboratory is
certified by the Substance Abuse and Mental Health Services Administration
("SAMHSA"), a federal agency and regulatory successor to the National Institute
on Drug Abuse ("NIDA"), to conduct drug testing using procedures required for
legal defensibility of test results. See "Risk Factors--Certification" and
"Business--Certification and Government Regulation." The drug testing
procedures provide accurate and reliable testing and a secure chain-of-custody
for each specimen from its collection to the reporting of the test results. The
test results are reported to the customer for its use in screening of
prospective employees and, to an increasing extent, testing of employees in
order to maintain safety standards especially with respect to safety-sensitive
jobs such as trucking, aviation, public transportation, railroads and pipelines.
LSI tests for drugs of abuse, including cocaine, methamphetamine, heroin, PCP,
marijuana and alcohol, primarily by urinalysis. In conjunction with the drug
testing services, LSI offers a range of services which are customized to assist
customers in implementing cost-effective drug testing programs. See "Business."
The market for drug testing services has grown rapidly in recent years as
a result of heightened public awareness of the national drug abuse problem.
Concerns about drug abuse have generated a broad base of government and private
sector initiatives, including federal regulations mandating drug testing under
certain circumstances and a significant increase in the number of companies that
have instituted drug testing programs. Certain regulations of the Department of
Transportation, which became effective in 1995, increased the number of workers
required to be tested for drug abuse in safety-sensitive jobs, including
trucking, public transportation, aviation, railroads and pipelines. Under these
regulations, it is estimated that approximately 7.5 million workers are required
to be tested each year, and it is estimated that the annual market for drug
testing is approximately $625 million for drug testing of the approximately 20
million U.S. work force.
The Company has and intends to continue its growth in part through the
acquisition of additional established drug testing companies and the assets of
companies engaged in the drug testing business. The Company expects to utilize,
in part, the proceeds of this offering to further implement this acquisition
strategy. See "The Company--Background" and "Business--Growth Strategy."
The Company's principal executive offices are located at 101 Park Avenue,
Suite 810, Oklahoma City, Oklahoma 73102 and its telephone number is (405) 232-
9800. The executive offices and laboratory of LSI and the executive offices of
NPLI are located at 1111 Newton Street, Gretna, Louisiana 70053, which is near
New Orleans, and their telephone numbers are (504) 361-8989 and (800) 433-3823.
3
<PAGE>
WARRANT REDEMPTION
Pursuant to this Prospectus, the Company is notifying the holders (the
"Warrant Holders") of the outstanding 1994 Warrants and the holders (the
"Selling Shareholders") of warrants (the "Underwriters' Warrants") as of ,
1997 (the "Record Date"), of the election of the Company to redeem (the
"Warrant Redemption") the 1994 Warrants at 5:00 p.m. Central Standard Time, on
, 1997 (the "Redemption Date"). Each 1994 Warrant is exercisable for the
purchase of two shares of Common Stock, $.001 par value per share, for $2.00 per
share on or before the Redemption Date. The Redemption Date may be extended by
the Company such number of times as determined in the sole discretion of the
Company to a date not later than , 1997. See "Warrant
Redemption."
The 1994 Warrants may only be exercised by a Warrant Holder in the event
the Registration Statement of which this Prospectus in a part is effective with
the United States Securities and Exchange Commission and the Common Stock is
qualified for sale in the state of residence of the Warrant Holder. See "Risk
Factors--Securities Laws Restrictions on Exercise of Warrants," "Exercise of
1994 Warrants--Acceptance of 1994 Warrants; Delivery of Common Stock" and
"Description of Securities--1994 Warrants." Subject to the foregoing, the 1994
Warrants are exercisable at any time by the Warrant Holders prior to the
Redemption Date by delivery of (i) the warrant certificate evidencing the 1994
Warrants, with the "Subscription Form" on the reverse side of the certificate
duly filled in and executed, and (ii) payment of the Exercise Price of the
shares of Common Stock (and any applicable transfer taxes) specified in the
Subscription Form, in cash, or by certified or official bank check, payable to
the order of the Company, to Liberty Bank and Trust Company of Oklahoma City,
N.A. (the "Warrant Agent") at 100 Broadway, Oklahoma City, Oklahoma 73102,
Attention: Stock Transfer Department or to Liberty Bank and Trust Company of
Oklahoma City, N.A., Post Office Box 25848, Oklahoma City, Oklahoma 73125,
Attention Stock Transfer Department.
The Selling Shareholders may exercise the Underwriters' Warrants for
purchase of the Units or only with respect to the 1994 Warrants comprising in
part the Units by presentation and surrender of the Underwriters' Warrants and
the Purchase Form annexed thereto duly executed and accompanied by payment, in
cash, certified or official bank check payable to the order of the Company in
the amount of the exercise price of the Units or the 1994 Warrants specified in
the Purchase Form, as the case may be, at the Company's office at 101 Park
Avenue, Suite 810, Oklahoma City, Oklahoma 73102.
THE OFFERING
Securities offered......... 1,452,000 shares of Common Stock offered to the
holders of 1994 Warrants (the "Warrant Holders")
in connection with the exercise of the 1994
Warrants, including the 1994 Warrants comprising
in part the Units. Each 1994 Warrant entitles the
Warrant Holder to purchase two shares of Common
Stock at an exercise price of $2.00 per share.
The 1994 Warrants are exercisable at any time on
or before the Redemption Date. Those 1994
Warrants not exercised on or before the Redemption
Date will be redeemed by the Company for $.01
each. See "Description of Securities--1994
Warrants."
66,000 Units (each consisting of two shares of
Common Stock and one 1994 Warrant) offered to the
holders (the "Selling Shareholders"), and in
connection with the exercise of, the
Underwriters' Warrants and the resale by the
Selling Shareholders of the Common Stock and 1994
Warrants comprising the Units. Each share of
Common Stock and the 1994 Warrant comprising each
Unit will be separately tradable upon issuance.
Each Underwriters' Warrant entitles the Selling
Shareholder
4
<PAGE>
(or the holder) to purchase one Unit at $7.32 at
any time each on or before October 11, 1999.
Furthermore, each Underwriters' Warrant, in
connection with the Warrant Redemption, entitles
the Selling Shareholder (or holder) to exercise the
Underwriters' Warrant only with respect to the 1994
Warrant comprising the Unit at $.12 per 1994
Warrant on or before the Redemption Date. See
"Description of Securities--Underwriters'
Warrants."
Offering exercise price:
Common Stock........... $2.00 per share of Common Stock. See "Description
of Securities--1994 Warrant."
Per Unit............... $7.32 per Unit, each comprised of two shares of
Common Stock and one 1994 Warrant, or $3.60 per
share of Common Stock and $.12 per 1994 Warrant
comprising each Unit, pursuant to exercise of the
Underwriters' Warrants. See "Description of
Securities--Underwriters' Warrants."
Common Stock outstanding... 3,416,738 shares of Common Stock as of the date of
this Prospectus; 5,000,738 after completion of
this offering, assuming exercise of the 1994
Warrants and Underwriters' Warrants in full. In
the event only the 1994 Warrants are exercised in
full (including the 1994 Warrants comprising in
part the Units) 4,868,738 shares of Common Stock
will be outstanding immediately after the
Redemption Date.
Net proceeds Indeterminable $2,986,320 (after deduction of commissions and
other estimated expenses of this offering of
$400,800) estimated net proceeds in the event the
1994 Warrants and the Underwriters' Warrants are
exercised in full. In the event only the 1994
Warrants are exercised in full (including the 1994
Warrants comprising the Units), the estimated net
proceeds will be $2,511,120. There is no
assurance that any portion of the 1994 Warrants
and/or the Underwriters' Warrants will be
exercised; therefore, the net proceeds to the
Company are not determinable as of the date of
this Prospectus.
Use of proceeds............ The acquisition of established drug testing
companies, marketing development and advertising,
and working capital. See "Use of Proceeds."
Consequences to
Non-Exercising Warrant
Holders................... The 1994 Warrants not exercised or that are not
exercisable because of securities laws
restrictions or limitations (see "--Acceptance of
1994 Warrants," below, and "Risk
Factors--Securities Laws Restrictions on Exercise
of 1994 Warrants" and "Exercise of 1994
Warrants--Acceptance of 1994 Warrants; Delivery of
Common Stock") prior to the Redemption Date will
be
5
<PAGE>
redeemed by the Company at $.01 per 1994 Warrant.
See "Exercise of 1994 Warrants--Advantages and
Disadvantages of 1994 Warrant Exercise."
How to Exercise Warrants... Each Warrant Holder electing to exercise the 1994
Warrants should either (i) fill out the
"Subscription Form" on the back of the 1994
Warrant certificate and forward it along with cash
or a certified or official bank check in the
amount of the proper exercise price and any other
required documents to the Warrant Agent, or (ii)
request a broker or bank to effect the
transaction. Warrant Holders owning 1994 Warrants
registered in the name of a broker, dealer, bank,
trust company or nominee should instruct such
broker, dealer, bank, trust company or nominee to
tender the 1994 Warrants. See "Exercise of 1994
Warrants--How to Exercise."
How to Exercise
Underwriters' Warrants.... Each holder of an Underwriters' Warrant electing
to exercise an Underwriters' Warrant, either for
purchase of the Units or only the 1994 Warrants in
part comprising the Units, should fill out the
"Purchase Form" annexed to the Underwriters'
Warrant and forward it along with cash or a
certified or official bank check payable to the
Company in the amount of the proper exercise price
to the Company's office. See "Description of
Securities--Underwriters' Warrants."
Acceptance of 1994 Warrants
and Underwriters'
Warrants.............. The Company will accept any and all 1994 Warrants
and Underwriters' Warrants duly exercised, subject
to certain conditions. In certain cases, the sale
of shares of Common Stock pursuant to exercise of
the 1994 Warrants could violate the securities
laws of certain states or other jurisdictions.
The Company has undertaken registration or
qualification of the Common Stock and the Units
(including the Common Stock and 1994 Warrants
comprising the Units) for sale in California,
Colorado, Florida, Georgia, Kentucky, Illinois,
Louisiana, New Hampshire, New York, Ohio,
Oklahoma, Tennessee, Texas, Virginia, Washington
and Wisconsin; however, there is no assurance that
such registration or qualification will become
effective in any such states. In addition, the
Company may undertake registration of the Common
Stock and Units in additional states as determined
in the sole discretion of the Company. Those
Warrant Holders residing in states in which the
Common Stock has not been registered or otherwise
qualified for sale in such state, will not be
permitted to exercise their 1994 Warrants. Prior
to tendering of the 1994 Warrants for exercise,
the Warrant Holder should either contact the
Company or the Warrant Agent to determine whether
the Common
6
<PAGE>
Stock has been registered or qualified in the state
of such Warrant Holder's residence. The Company has
used and will continue to use its best efforts to
cause the sale of the Common Stock and Units to be
lawful. See "Exercise of 1994 Warrants--Acceptance
of 1994 Warrants; Delivery of Common Stock."
The Company is not required to accept the
exercise of the 1994 Warrants, if, in the opinion
of counsel, the sale of the Common Stock upon such
exercise would be unlawful. In such cases, the
1994 Warrants will not be accepted for exercise,
and the Warrant Holder will be required to sell
the 1994 Warrants in the open market, or hold
until expiration or, if applicable, redemption by
the Company. See "Risk Factors--Securities Laws
Restrictions on Exercise of 1994 Warrants,"
"Exercise of 1994 Warrants--Acceptance of 1994
Warrants; Delivery of Common Stock" and
"Description of Securities--1994 Warrants."
Delivery of Securities..... The Company will deliver the certificates for the
shares of Common Stock issuable upon exercise of
the 1994 Warrants, and the shares of Common Stock
and 1994 Warrants comprising the Units and
issuable upon exercise of the Underwriters'
Warrants, as promptly as practicable after
exercise. See "Exercise of 1994
Warrants--Acceptance of 1994 Warrants; Delivery of
Common Stock" and "Description of Securities--
Underwriters' Warrants."
Warrant Agent.............. Liberty Bank and Trust Company of Oklahoma City,
N.A. The Warrant Agent may be contacted at the
address and telephone number set forth on the back
cover of this Prospectus.
Additional Information..... The Company may be contacted at the address and
telephone number set forth on the back cover of
this Prospectus.
Nasdaq SmallCap Market
System symbols:
Common Stock............ LABZ
1994 Warrants........... LABZW
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary financial and operating information
of the Company for the three months ended March 31, 1996 and 1997, and for the
fiscal years ended December 31, 1996 and 1995. See "Selected Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The following information should be read in
conjunction with the consolidated financial statements and the related notes
thereto of the Company, and other information relating to the Company presented
elsewhere in this Prospectus. The results of operations during fiscal years and
periods presented are not necessarily indicative of the Company's future
operations. In the opinion of management of the Company, the unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such information.
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------ ----------------------
1997 1996 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................... $ 2,587,222 $1,948,536 $8,726,799 $6,925,716
Cost of revenues.............. 1,186,084 840,161 3,816,114 3,246,470
Gross profit.................. 1,401,138 1,108,375 4,910,685 3,679,246
Operating expenses............ 968,594 764,128 3,673,201 2,951,415
Other income (expense)........ (24,920) (315) (21,808) 421,134
Income from continuing
operations before income
taxes....................... 407,624 343,932 1,215,676 1,148,965
Income tax expense............ 173,621 141,686 527,171 474,405
Income from continuing
operations.................. 234,003 202,246 688,505 674,560
Loss from operations of
discontinued clinical
business, net of tax
benefit..................... -- -- (500,636) --
Loss on disposal of clinical
business, net of tax
benefit..................... -- -- (773,580) --
Dividends on preferred stock.. -- -- -- 13,344
Net income (loss) available
to common stockholders...... 234,003 202,246 (585,711) 661,216
Primary earnings per share:
Weighted average number
of common stock and
common stock equivalents.. 3,315,656 3,310,112 3,316,198 3,301,582
outstanding
Continuing operations..... .07 .06 .21 .20
Discontinued operation.... -- -- (.39) --
Total................. .07 .06 (.18) .20
Fully diluted earnings per
share:
Weighted average number of
common stock and common
stock equivalents
outstanding............. 3,891,723 4,025,117 3,954,787 3,843,391
Continuing operations..... .06 .05 .17 .17
Discontinued operation.... -- -- (.32) --
Total................. .06 .05 (.15) .17
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA(1):
Current assets........................... $ 3,209,457 $3,194,480 $3,842,187
Working capital.......................... (224,496) 1,002,712 3,128,818
Total assets............................. 12,143,307 9,394,808 7,319,036
Short-term debt.......................... 2,348,913 1,312,650 --
Long-term debt, net of current portion... 2,518,000 1,245,690 353,123
Stockholders' equity..................... 5,884,254 5,650,250 6,211,586
</TABLE>
- ------------------------
(1) Gives no effect to exercise of the 1994 Warrants and the Underwriters'
Warrants.
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents selected unaudited pro forma information for
the Company on the assumption that the PLL Asset Purchase occurred on January 1,
1996, with respect to the statement of operations data presented for the fiscal
year ended December 31, 1996, and as of December 31, 1996, with respect to
balance sheet data presented. The information presented below is derived from,
and should be read in conjunction with, the audited
8
<PAGE>
financial statements of the Company as of and for the fiscal year ended December
31, 1996, and the audited statement of net assets and the related statements of
divisional operations as and for the year ended December 31, 1996, of the
Forensic Drug Testing Division of Pathology Laboratories, Ltd. presented
elsewhere in this Prospectus. The pro forma information presented is for
illustrative purposes only and is not necessarily indicative of the results of
operations that would have been achieved if the transactions included in the pro
forma adjustments had been consummated in accordance with the assumptions set
forth in the notes to the unaudited pro forma consolidated balance sheet and
statement of income of the Company, nor is it necessarily indicative of future
operating results. See "Unaudited Pro Forma Consolidated Financial Information
of the Company."
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
-----------------
FOR THE
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
STATEMENT OF INCOME DATA:
Revenues................................................... $11,286,799
Cost of laboratory services................................ 4,942,514
Gross profit............................................... 6,344,285
Operating expenses......................................... 4,351,534
Other expense.............................................. 170,558
Income from continuing operations before income taxes 1,822,193
Income tax expense......................................... 728,877
Income from continuing operations.......................... 1,093,316
Loss from operations of discontinued clinical business,
net of tax benefit....................................... (500,636)
Loss on disposal of clinical business, net of tax benefit.. (773,580)
Net loss................................................... (180,900)
Primary earnings per share:
Weighted average number of common stock and
common stock equivalents outstanding................. 3,316,198
Continuing operations.................................. .33
Discontinued operation................................. (.38)
Total.............................................. (.05)
Fully diluted earnings per share:
Weighted average number of common stock and common
stock equivalents outstanding........................ 3,954,787
Continuing operations.............................. .28
Discontinued operation............................. (.32)
Total.......................................... (.04)
PRO FORMA
COMBINED
-----------------
DECEMBER 31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA(1):
Current assets............................................. $ 3,194,480
Working capital............................................ 102,712
Total assets............................................... 11,994,808
Short-term debt............................................ 1,312,650
Long-term debt, net of current portion..................... 2,945,690
Stockholders' equity....................................... 5,650,250
</TABLE>
- ------------------------
(1) Gives no effect to exercise of the 1994 Warrants and the Underwriters'
Warrants.
9
<PAGE>
RISK FACTORS
The purchase of the shares of Common Stock and Units offered hereby involves
a high degree of risk. In addition to the other information set forth elsewhere
in this Prospectus, the following factors relating to the Company and the
Offering should be considered when evaluating an investment in the Units and
Common Stock offered hereby.
SECURITIES LAWS RESTRICTIONS ON EXERCISE OF 1994 WARRANTS. The sale of the
Common Stock by the Company upon exercise of 1994 Warrants could violate the
securities laws of certain states or other jurisdictions. The Company will use
its best efforts to cause the Registration Statement of which this Prospectus is
a part to be declared effective under the laws of various states or qualify the
Common Stock for sale under available registration exemptions as may be required
to cause the sale of the Common Stock upon exercise of 1994 Warrants to be
lawful. However, the Company is not required to accept the exercise of the 1994
Warrants if, in the opinion of counsel, the sale of the Common Stock upon such
exercise would be unlawful. In such cases, the 1994 Warrants will not be
accepted for exercise, and the Warrant Holder will be required to sell the 1994
Warrants in the open market, if such market is available, or hold the 1994
Warrants until redemption by the Company for $.01 per 1994 Warrant. See
"Exercise of 1994 Warrants--Acceptance of 1994 Warrants; Delivery of Common
Stock."
MANAGEMENT DISCRETION OVER APPLICATION OF PROCEEDS. The Company will
allocate the net proceeds of this offering to general corporate purposes,
including acquisitions and working capital. See "Business--Growth Strategy."
The application of such proceeds will be at the sole discretion of management of
the Company. Individual shareholders will have no control over decisions
regarding the application or use of the net proceeds of this offering. See "Use
of Proceeds."
NON-SPECIFIC ACQUISITION STRATEGY. As part of its business strategy, the
Company has and intends to continue its growth principally through the
acquisition of additional complementary drug testing laboratories and assets,
and intermediate drug testing service providers. These acquisitions, if any,
could be completed through the issuance of Common Stock or Preferred Stock of
LSAI, utilization of available cash equivalents, proceeds of this offering (if
any), borrowings or other sources of equity capital. The non-specific nature of
the acquisitions makes an estimation of amount to be allocated to acquisitions
from these sources not determinable or subject to estimation at the date of this
Prospectus. The Company's growth strategy has and will continue to require
expanded customer services and support, increased personnel, expanded
operational and financial systems and implementation of control procedures.
There can be no assurance that the Company will be able to manage expanded
operations effectively. Furthermore, failure to implement financial and other
systems and to add control procedures could have a material adverse impact on
the Company's results of operations and financial condition. Although the
Company, since December 1994, has completed three acquisitions in expansion of
the Company's drug testing operations (see "The Company--Background"), as of the
date of this Prospectus, the Company has not entered into any agreements or
commitments regarding any additional acquisitions, and there can be no assurance
that additional acquisitions will be consummated. The Company's shareholders
will, in all likelihood, not be afforded the opportunity to approve the terms of
any such acquisitions because the Board of Directors will, in most cases, have
the authority to consummate an acquisition without shareholder approval.
Shareholders will also not have an opportunity to review the financial
statements of an acquisition candidate, except where shareholder approval is
required.
The Company's acquisitions could involve a number of risks including the
diversion of management's attention to the assimilation of the acquired
companies, adverse short-term effects on the Company's results of operations,
the amortization of acquired intangible assets, the possibility that the
acquired company or assets will not contribute to the Company's business,
profitability and cash flows as expected, as well as the acquisition of
operations other than legally defensible ("forensic") drug testing which may be
discontinued or disposed of at a loss. See "Business--Growth Strategy."
COMPETITION. Drug testing laboratories compete primarily on the basis of
price per specimen, technical superiority, and customer service. Price per
specimen is an important factor in obtaining and maintaining customers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations." The Company believes LSI competes favorably
in each of these categories. LSI competes with a variety and number of
companies offering forensic drug testing services including national laboratory
chains, independent national drug testing laboratories and numerous regional and
local laboratories, many of which have greater financial resources than the
Company. In addition, some potential customers of LSI operate their own drug
testing facilities,
10
<PAGE>
or may develop such facilities in the future. Further, LSI competes in certain
areas of the market with companies that offer hand-held devices and on-site
equipment that can be used to screen for the presence of drugs, although without
forensic results. See "Business--Competition."
CERTIFICATION. LSI's laboratory is certified by the Substance Abuse and
Mental Health Services Administration ("SAMHSA"), a federal agency and
regulatory successor to the National Institute on Drug Abuse ('NIDA"), the
College of American Pathologist ("CAP"), as well as eight state and local
jurisdictions. SAMHSA is a federal regulatory agency charged with the
responsibility and authority to license laboratories performing drug testing
services for the federal government and its agencies and federally regulated
industries, such as the Department of Transportation, Department of Defense,
etc. SAMHSA inspects, monitors and certifies laboratories that perform drug
testing services under specific mandated guidelines. In order to obtain
certification a laboratory must apply for certification, meet certain minimum
facility requirements and then successfully complete a series of proficiency
tests, which takes approximately 12 months to complete. CAP is a private
organization which primarily focuses on the safety of working conditions in
laboratories.
Certification by SAMHSA is essential to LSI's business, because some of its
customers are required to use SAMHSA certified laboratories, and many of its
customers look to such certification as an indication of reliability and
accuracy of tests. In order to remain certified, LSI is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements to which LSI is subject could result in suspension or
loss of certification. Such suspension or loss of certification could have a
material adverse effect on LSI and LSAI. NIDA suspended LSI's certification
from January 24 to April 26, 1990, citing LSI's alleged failure to conform to
NIDA regulations concerning certain operating procedures and failure to
segregate the processing of specimens from those specimens that were not being
processed in accordance with NIDA regulations. Laboratory remodeling was
necessary to effect the required division of specimen processing. Upon LSI's
compliance with NIDA regulations and reinspection by NIDA, the suspension was
lifted. Many of LSI's competitors are also certified by one or more certifying
bodies in addition to SAMHSA and CAP. See "Business--Certification and
Government Regulation."
DEFICIT WORKING CAPITAL. At March 31, 1997, the Company had a deficit
working capital of $224,496. Management believes that the deficit working
capital will be eliminated by payment of certain short-term debt by delivery of
shares of Common Stock of the Company and operating activities in the near term;
however, there is no such assurance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." To the extent that the Company receives net proceeds of this
offering, such net proceeds may reduce or eliminate the deficit working capital.
FLUCTUATIONS IN OPERATING RESULTS. The Company's operations are affected by
decreases in the price per specimen tested principally due to increased price
competition amongst provides of drug testing services, the price per specimen
being an important factor in obtaining and maintaining customers. During the
three months ended March 31, 1997, and the year ended December 31, 1996, the
price per specimen decreased 4.8 percent and 4.7 percent, respectively, compared
to the three months ended March 31, 1996, and the year ended December 31, 1995.
There can be no assurance that the price decline per specimen will not further
decline during 1997 and thereafter. In general, the Company's operations are
affected by general economic conditions, as well as seasonal trends, to which
drug testing laboratories are subject. Recessionary periods generally result in
fewer new employee hires, and, therefore, may lead to fewer pre-employment drug
tests for customers. Budget cuts at the federal, state or local government
level may reduce business from LSI's institutional and governmental customers.
Because expenses associated with maintaining LSI's testing work force are
relatively fixed over the short term, LSI's margins tend to increase in periods
of higher testing volume and decrease in periods of lower testing volume. These
effects are not always readily predictable because of the effect and timing of
the startup of new business and other factors, such as timing and amount of
general and administrative expense increases and price increases of laboratory
supplies, most of which are not within the control of the Company. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent in
part on its key management and technical personnel. Although LSAI and LSI have
employment contracts with certain of their key employees, each such contract may
be terminated by the employee and the loss of one or more could have a material
adverse effect on the Company. The Company believes that its future success
will depend in part upon the continued ability to
11
<PAGE>
attract, retaia and motivate additional highly skilled personnel. See
"Business--Employees" and "Management--Directors and Executive Officers" and
"--Employment Arrangements."
JUDICIAL DECISIONS AND GOVERNMENT POLICY. State and federal courts have
generally permitted the use of drug testing under certain circumstances and
using certain kinds of procedures, generally those imposed by SAMHSA
regulations. However, challenges to drug testing programs are raised from time
to time by employees, unions and other groups in litigation on constitutional,
privacy and other grounds. In addition, laws in a number of states regulate the
circumstances under which employers may test employees and the procedures under
which such tests must be conducted. Although the Company believes that, to
date, no such legislation or law has had a material adverse impact upon its
business, new court and administrative decisions, legislation or policies, that
restrict the use of drug testing could have a material effect on the Company.
See "Business--Certification and Government Regulation."
HAZARDOUS MATERIALS. Certain testing procedures employed by LSI require the
use of hazardous materials. Failure to comply with current or future federal,
state or local environmental laws or regulations could have a material adverse
effect on the Company. See "Business--Environmental Matters."
COMMON STOCK ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following completion of this offering could
adversely affect the market price of the Common Stock. At the date of this
Prospectus, 1,886,405 shares of LSAI's outstanding Common Stock are "restricted
securities," which may in the future be sold in compliance with Rule 144 as
promulgated by the Commission pursuant to the 1933 Act. Rule 144 generally
provides that beneficial owners of shares who have held such shares for one year
may sell within a three-month period a number of shares not exceeding one
percent of the total outstanding shares or the average trading volume of the
shares during the four calendar weeks preceding such sale. John Simonelli and
Larry E. Howell, executive officers and directors of the Company, pursuant to an
agreement with the Oklahoma Department of Securities, agreed not to transfer,
assign or otherwise dispose of each of their 200,000 shares of Common Stock
during the period ending September 27, 1997. Future sales of substantial
amounts of Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. See "Shares Eligible for
Future Sale."
UNITS ISSUABLE PURSUANT TO UNDERWRITERS' WARRANTS. The Underwriters'
Warrants are exercisable any time on or before October 11, 1999, for the
purchase of 66,000 Units (132,000 shares of Common Stock) at $7.20 per Unit
($3.60 per share of Common Stock) following the Redemption Date. In addition,
in connection with the Warrant Redemption, the Company has agreed to issue to
Barber & Bronson Incorporated (the "Managing Agent") up to 170,000 warrants (the
"Managing Agent Warrants") exercisable for the purchase of up to 170,000 shares
of Common Stock at $2.375 during a period of up to three years following the
Redemption Date. During the term of the Underwriters' Warrants and the Managing
Agent Warrants, the holders are given the opportunity to profit from a rise in
the market price of the Common Stock, and the exercise of the such warrants may
dilute the net book value per share of Common Stock at the time of exercise.
The existence of the Underwriters' Warrants and Managing Agent Warrants may
adversely affect the terms on which the Company may obtain additional equity
financing in the future. Furthermore, the holders are likely to exercise their
such warrants at a time when the Company would otherwise be able to obtain
capital on terms more favorable than could be obtained through the exercise of
such warrants. See "Exercise of 1994 Warrants--Managing Agent" and "Description
of Securities--Underwriters' Warrants."
LACK OF DIVIDENDS. The Company does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain profits, if any, to fund growth and expansion in the future. See "Price
Range of Common Stock and Warrants; Dividends."
ANTI-TAKEOVER PROVISIONS. Provisions of LSAI's Certificate of Incorporation
and the Oklahoma General Corporation Act may make it difficult to effect a
change in control of LSAI and replace incumbent management, and such provisions
could limit the price investors might be willing to pay in the future for shares
of Common Stock. See "Description of Securities--Anti-Takeover Provisions."
The Certificate of Incorporation authorizes the issuance of Preferred Stock in
classes or series, and the Board of Directors to set and determine voting,
redemption and conversion rights and other rights related to such class or
series of Preferred Stock, which in some circumstances, the Preferred Stock
could be issued and have the effect of preventing a merger, tender offer or
other takeover attempt which the Company's Board of Directors opposes. See
"Description of Securities--Anti-Takeover Provisions--Preferred Stock" and
"Description of Securities--Preferred Stock." Following this offering or at
some
12
<PAGE>
time in the future, the Company may become subject to the anti-takeover
provisions of the Oklahoma General Corporation Act, which in such case and in
some circumstances may discourage a person from making a control share
acquisition (generally an acquisition of voting stock having more than 20
percent of all voting power in the election of directors) without shareholder
approval. See "Description of Securities--Anti-Takeover Provisions--Oklahoma
Anti-Takeover Statutes."
THE COMPANY
Laboratory Specialists of America, Inc. (the "Company" or "LSAI"), through
its wholly-owned subsidiary Laboratory Specialists, Inc. ("LSI"), owns and
operates a laboratory providing drug testing services to corporate and
institutional customers seeking to detect and deter the use of illegal drugs.
The drug testing market currently is in an expansion mode in part due to the
adoptions of additional Department of Transportation regulations, which became
effective in 1995, that substantially expanded the regulations mandating random
drug testing of workers, especially in safety-sensitive jobs, such as trucking,
aviation, railroads and pipelines. Under these amended regulations, 50 percent
of transportation workers (mass-transit workers and interstate truckers and bus
drivers) are required to be tested annually. It is expected that 7.5 million
workers will be required to undergo drug testing each year, up from 3.5 million
workers in years prior to 1995. In addition, testing is on the rise generally
as more companies test job applicants and employees. Since 1987, the number of
companies with drug testing programs has more than tripled. Government data
indicates that drug abuse costs American business $100 billion annually in lost
productivity, increased accidents, absenteeism, medical claims and employee
theft.
In the 1970s, drug testing was limited largely to criminal justice agencies
and drug treatment programs. In the 1980s, however, increased awareness of the
drug abuse problem and its consequences led to increased drug testing in the
workplace. Since a 1986 Executive Order by President Reagan, there has been a
broad base of governmental and private sector initiatives, including federal
regulations mandating drug testing in certain circumstances. There has been a
significant increase in the number of companies which have instituted drug
testing programs. It is estimated that approximately 20 million U.S. workers
will be tested for drug use in 1997.
LSI is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), to conduct drug testing using legally
defensible (forensic) procedures required for legal defensibility of test
results. The essential elements of these procedures are a secure chain-of-
custody for each specimen from its collection to the reporting of test results
and accurate and reliable testing in which a second independent test is
performed to confirm each positive test result. The drug testing services
offered by LSI also include assisting customers with the development of drug
testing programs, training customer personnel, managing specimen collection,
arranging for transportation of specimens to LSI's laboratory, identifying
trends in local and national drug use, interpreting test results and providing
expert testimony concerning challenged test results. All of these services are
customized to the individual needs of the customers to assist in the
implementation and cost-effective maintenance of test programs.
More than 70,000 urine specimens are currently analyzed by LSI monthly for
corporate and institutional employers. LSI's customers use drug testing
principally as a part of their hiring decisions in order to reduce costs
associated with drug abuse in the workplace. In addition, an increasing number
of customers test employees in safety-sensitive positions on a periodic or
random basis and test other employees upon reasonable suspicion of drug abuse.
LSAI was incorporated in Oklahoma on March 24, 1994, and its executive
offices are located at 101 Park Avenue, Suite 810, Oklahoma City, Oklahoma 73102
with a telephone number of (405) 232-9800. LSI's executive offices and
laboratory are located at 1111 Newton Street, Gretna, Louisiana 70053, which is
near New Orleans, and its telephone numbers are (504) 361-8989 and (800) 433-
3823.
BACKGROUND
LSI was organized in 1978. In 1989, Arthur R. Peterson, Jr. exchanged all
of the outstanding common stock of LSI in part for shares of common stock of
American Drug Screens, Inc. ("ADS") and LSI became a wholly-owned subsidiary of
ADS. At that time ADS was a publicly-held company which owned and operated a
laboratory which provided drug testing services, and the principals of ADS were
John Simonelli and Larry E. Howell, who are
13
<PAGE>
currently officers and directors of LSAI. On February 27, 1992, ADS approved a
transaction whereby American Health Products Corporation ("AHP"), a wholly-owned
subsidiary of MBf International Limited, a publicly held Malaysian conglomerate
corporation, acquired control of ADS and immediately following the transaction,
AHP held 56 percent of the outstanding common stock of ADS. AHP is currently, as
well as at the time of such transaction, engaged in the sale and distribution of
disposable medical products, principally sales of latex examination gloves
manufactured in Malaysia by a division of MBf International Limited, and, until
consummation of the Peterson Share Exchange, was engaged in the providing of
drug testing services through LSI. The transaction was accounted for under the
purchase method of accounting. The excess purchase price over the fair value of
the net assets acquired was accounted for as goodwill of which $1,125,703 was
allocated to LSI. Thereafter, the financial statements of LSI reflected expenses
associated with the amortization of the goodwill which is being amortized over a
40 year period. ADS subsequently changed its name to MBf USA, Inc. ("MBf USA").
PETERSON SHARE EXCHANGE. In April 1994, LSI issued 706,244 shares of LSI
Preferred Stock to MBf USA with a stated value of $1.00 per share, and pursuant
to a Stock Exchange Agreement, MBf USA transferred to Arthur R. Peterson, Jr.
all of the outstanding common stock of LSI in exchange for 1,300,000 shares of
the common stock of MBf USA (having a market value of $1,178,125), and,
effective February 23, 1994, LSI issued the MBf Promissory Note in the principal
amount of $353,123 to MBf USA, which resulted in LSI ceasing to be a wholly-
owned subsidiary of MBf USA (the "Peterson Share Exchange"). The MBf Promissory
Note bears interest at the rate of seven percent per annum and becomes due and
payable on February 23, 1999. The acquisition of the LSI common stock by Mr.
Peterson was accounted for under the purchase method of accounting. The
purchase price exceeded the fair market value of the net tangible assets of LSI
by approximately $1,565,000 and represented a material payment for goodwill, an
intangible asset, which is being amortized at over 40 years. See "Management's
Discussion and Analysis of Financial Position and Results of Operations--
Liquidity and Capital Resources" and "Certain Transactions."
LSI ACQUISITION. Pursuant to an Exchange Agreement dated June 30, 1994,
Arthur R. Peterson, Jr. exchanged the outstanding common stock of LSI for
1,000,000 shares of Common Stock and 300,000 shares of Series I Preferred Stock
of LSAI and MBf USA exchanged the LSI Preferred Stock for 239,405 shares of
Common Stock of LSAI (the "LSI Acquisition"). As a result of the LSI
Acquisition, LSI became a wholly-owned subsidiary of LSAI on July 8, 1994. The
LSI Acquisition was accounted for as a reverse acquisition of LSAI by LSI.
Therefore, the results of operations and other historical information of the
Company prior to June 30, 1994, presented in this Prospectus are those of LSI.
On July 10, 1995, the Series I Preferred Stock was redeemed by LSAI in full and
ceased to be issued and outstanding. See "Certain Transactions." Upon
consummation of the LSI Acquisition, Mr. Peterson became a director and an
officer of LSAI.
PRIVATE PLACEMENT AND PRIOR OPERATIONS OF LSAI. Prior to the LSI
Acquisition, the operations of LSAI were limited to completion of a private
placement of 150,000 shares of its Common Stock for net proceeds of
approximately $145,000 and the operations associated with the LSI Acquisition.
See "Risk Factors--Future Operating Results" and "Management's Discussion and
Analysis of Financial Position and Results of Operations--Liquidity and Capital
Resources."
INITIAL PUBLIC OFFERING. On October 11, 1994, the Company completed its
offering of 1,320,000 shares of Common Stock and 660,000 1994 Warrants in units
of two shares of Common Stock and one 1994 Warrant at a price of $5.49 per unit,
which represented a 10 percent discount of the public offering price of $6.10
per unit (the "IPO Offering"). The proceeds after offering expenses to the
Company were $3,261,660. As a portion of underwriting compensation, the Company
issued to Barron Chase Securities, Inc. and its designees the Underwriters'
Warrants. The Company has registered (pursuant to Registration Statement of
which this Prospectus is a part thereof) and will use its best efforts to
continue to maintain registration of the shares of Common Stock underlying the
1994 Warrants and the Units underlying the Underwriters' Warrants under the
Securities Act of 1933, as amended (the "1933 Act"), at its expense, during the
respective exercise periods of the 1994 Warrants and the Underwriters' Warrants.
NDAC ASSET PURCHASE. On December 1, 1994, the Company acquired from
National Drug Assessment Corporation ("NDAC") certain intangible assets pursuant
to an Asset Purchase Agreement, dated November 30, 1994, ("NDAC Asset
Purchase"). The assets purchased included the customer list of NDAC and all
contracts, contract rights and agreements, correspondence with the customers for
which NDAC provided drug testing services (the "Customer List"), all urine
specimens with respect to which testing was in process and had not been
completed, all
14
<PAGE>
rights to business conducted by NDAC related to drug testing, and all rights in
the name "National Drug Assessment" or "National Drug Assessment Corporation"
and all trade names, trade marks and service marks, and registrations thereof
and applications for registration thereof, logos, designs and intellectual
rights related to or utilized in the marketing of drug testing services provided
by NDAC (the "NDAC Purchased Assets").
In connection with the acquisition of the NDAC Purchased Assets, the Company
(i) paid $750,000 and issued and delivered 189,000 shares of Common Stock, (ii)
assumed the obligations of NDAC under an office lease agreement, and (iii)
reimbursed NDAC $82,731 for certain costs and expenses incurred by NDAC. The
$1,070,940 purchase price of the NDAC Purchased Assets was allocated entirely to
the Customer List, which was recorded as an intangible asset on December 1,
1994, which is being amortized over 15 years.
NPLI ACQUISITION. On January 2, 1996, LSAI 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 "NPLI Purchase Agreement"), and NPLI became a wholly-owned subsidiary of
the Company. NPLI was engaged in forensic drug testing and clinical testing and
analysis.
Pursuant to the Purchase Agreement, the Company agreed to pay (i) $1,513,000
for the NPLI Stock (the "NPLI Stock Purchase Price") of which $800,000 was paid
at closing to the shareholders of NPLI (the "NPLI Shareholders"), two unsecured
promissory notes (the "Promissory Notes"), in the aggregate principal amount of
$638,000, were issued and delivered to the NPLI Shareholders, and NPLI conveyed
to the NPLI shareholders an office building and NPLI's leasehold interest in the
real property on which the office building is located and affixed at an agreed
market value of $75,000, and (ii) $140,000 for the NPLI Goodwill payable in 24
monthly installments commencing on February 1, 1996.
Pursuant to the NPLI Purchase Agreement, the aggregate principal amount of
the Promissory Notes was reduced to $510,000 effective January 2, 1996, further
reduced by principal payments, and eliminated based upon the revenues from
forensic testing (employee urine drug screens that have a chain of custody)
being less than $1,000,000 during the 12 months ending on January 2, 1997 (the
"Testing Revenues Adjustment"). The Company is required to issue and deliver
153,282 shares of Common Stock ("Contingent Shares") to the former NPLI
shareholders in connection with the Testing Revenues Adjustment of the
outstanding principal amounts of the Promissory Notes. The Company has not
issued and delivered the Contingent Shares to the NPLI Shareholders based upon
certain representations made by the NPLI Shareholders which management believes
to have been misleading and false at closing of the NPLI Acquisition. See
"Business--Litigation."
Furthermore, pursuant to the NPLI Purchase Agreement, (i) the Company paid
certain NPLI shareholder loans in the aggregate amount of $275,000, (ii) entered
into a certain First Amendment of Lease Agreement with DJ Associates, a general
partnership of which the NPLI Shareholders are the general partners, and
pursuant to which the Company and NPLI leased certain office and laboratory
facilities for a term of six months and agreed to pay monthly rent of $3,000,
and (iii) entered into a certain Registration Rights Agreement with each of the
NPLI Shareholders, pursuant to which the Company, at its expense, agreed to
include the Contingent Shares, if issued and delivered pursuant to the Purchase
Agreement, in a registration statement filed by the Company for the registration
of its common stock under the 1933 Act, subject to certain conditions.
The Company consolidated and assimilated the forensic drug testing
operations of NPLI with those of LSI during the first quarter of 1996. The
Company discontinued the clinical testing and analysis operations of NPLI during
the fourth quarter of 1996 after several attempts to dispose of the clinical
testing and analysis operations.
PLL ASSET PURCHASE. On January 31, 1997, LSAI acquired from Pathology
Laboratories, Ltd., a Mississippi corporation ("PLL"), certain forensic drug
testing assets (the "PLL Asset Purchase") pursuant to an Asset Purchase
Agreement dated January 31, 1997 (the "PLL Purchase Agreement"). The assets
purchased included the customer list of PLL and all contracts, contract rights
and agreements, correspondence with the customers for which PLL has provided
forensic drug testing services, and all assets owned by PLL used in connection
with the PLL office in Greenville, South Carolina.
Pursuant to the Purchase Agreement, LSAI (i) paid $1,600,000 at closing and
(ii) assumed the obligations of PLL under a certain Lease between Edith Schlien
and PLL, dated September 16, 1996, covering approximately 2,500 square feet of
office space located in Greenville, South Carolina, which requires monthly base
rental payments of
15
<PAGE>
$2,083 and which expires on September 16, 1999. Furthermore, LSAI agreed to make
four additional installment payments to PLL within 60 days following the end of
each three month period during the 12 months ending January 31, 1998, as
follows: (i) the first installment payment being equal to 75 percent of Forensic
Testing Revenues (as defined below) during the first three month period ending
April 30, 1997, in excess of $400,000; (ii) the second installment payment being
equal to 75 percent of Forensic Testing Revenues during the six month period
ending July 31, 1997, in excess of the aggregate sum of the prior installment
payment and $800,000, (iii) the third installment payment being equal to 85
percent of Forensic Testing Revenues during the nine month period ending October
30, 1997, in excess of the aggregate sum of the prior installment payments and
$1,200,000, and (iv) the fourth installment being equal to Forensic Testing
Revenues during the 12 month period ended January 31, 1998, in excess of the
aggregate sum of the prior installment payments and $1,600,000. Under the
Purchase Agreement, "Forensic Testing Revenues" defined as the gross revenues
during the calendar quarter or 12 month period ending January 31, 1998, directly
attributable to each customer comprising the customer base of PLL acquired by
LSAI.
USE OF PROCEEDS
The net proceeds of this offering to be received by the Company will be
dependent upon the number of shares of Common Stock and Units purchased by the
Warrant Holders and the Selling Shareholders pursuant to exercise of the 1994
Warrants and the Underwriters' Warrants. Therefore, the net proceeds of this
offering are not determinable as of the date of this Prospectus. In the event
the 1994 Warrants and/or Underwriters' Warrants are exercised in full the
estimated net proceeds to the Company, after deduction of estimated commissions
and other offering costs of $400,800 and commissions, will be $2,986,320. In
the event only the 1994 Warrants are exercised, the net proceeds to the Company
will be $2,511,120. However, there is no assurance that any of the 1994
Warrants and Underwriters' Warrants will be exercised; therefore, the proceeds
of this offering are not determinable as of the date of this Prospectus. Such
net proceeds will be used for general corporate purposes, including working
capital and acquisitions in the Company's current and related business area.
See "Business--Growth Strategy."
The Company's business plan contemplates acquisitions (with the net proceeds
of this offering and the other available cash equivalents of the Company) of
companies and the assets of companies engaged in the providing of drug testing
services compatible with, or complementary to, the Company's business. As of
the date of this Prospectus, the Company has not entered into any definitive
agreements or commitments with respect to any additional acquisitions, and there
can be no assurance that any additional acquisitions will be consummated. The
amount of net proceeds expended with respect to an acquisition will be
determined by the Board of Directors of LSAI, and, in most cases, it is
anticipated that each acquisition will be consummated without approval by the
shareholders of LSAI. The amount, if any, of net proceeds of this offering and
the current available cash equivalents to be utilized in the consummation of any
acquisition cannot be determined at the date of this Prospectus; however, in the
event LSAI enters into any binding commitments or definitive agreements with
respect to an acquisition, this Prospectus will be appropriately supplemented or
amended. It is anticipated by management of LSAI that the acquisitions funded
with the net proceeds of this offering, assuming exercise of the 1994 Warrants
and the Underwriters' Warrants in full, and the available cash equivalents of
the Company, will be completed within three years after completion of this
offering. In the event the net proceeds of this offering, if any, and the
available cash equivalents of the Company are not sufficient to complete an
acquisition, additional sums will be drawn from the earnings of the Company, if
any, and thereafter from borrowings or other sources of equity capital. See
"Risk Factors--Non-Specific Acquisition Strategy."
Although not anticipated as of the date of this Prospectus, the Company may
utilize up to $1,600,000 of the estimated net proceeds to fund in whole or in
part the Company's obligations to make installment payments in connection with
the PLL Asset Purchase. See "The Company--Background--PLL Asset Purchase." The
installment payments are dependent upon the amount of forensic drug testing
revenues directly attributable to the customer list acquired; therefore, the
amount of the installment payments are not determinable as of the date of this
Prospectus.
Furthermore, the estimated net proceeds may, although not anticipated as of
the date of this Prospectus, be utilized to repay all or a portion of the
outstanding borrowings under LSI's credit facility which is comprised of a five-
year term loan of $1,700,000 and a one-year revolving loan of $250,000 which, in
part, were used for the acquisition of the forensic drug testing assets of
Pathology Laboratories Limited. The outstanding principal amount of the
revolving loan bears interest at the Citibank, N.A. rate and the term loan bears
interest at such rate plus one-half percent, which were 7.5 and 8.0 percent,
respectively, at March 31, 1997. See "Management's Discussion and Analysis
16
<PAGE>
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Furthermore, the estimated net proceeds may be utilized in payment
of the acquisition and renovation costs of LSI's recently acquired building for
relocation of its laboratory in mid 1997. The acquisition and renovation costs
are estimated to be $840,000. See "Business--Properties."
Pending use, the estimated net proceeds will be invested by the Company in
investment grade, short-term, interest-bearing securities.
SELLING SHAREHOLDERS
The Underwriters' Warrants were issued to the Selling Shareholders on
October 11, 1994, in connection with the initial public offering of LSAI. Each
Underwriters' Warrant is exercisable for the purchase one Unit (comprised of two
shares of Common Stock and one 1994 Warrant) at $7.32. The following table
presents certain information as to the named Selling Shareholders, the ownership
of Common Stock and 1994 Warrants as of the date of this Prospectus, as adjusted
to give effect to exercise of the Underwriters' Warrants in full by the named
Selling Shareholders, together with the percentage holdings of the outstanding
shares of Common Stock and 1994 Warrants, and, as adjusted, after giving effect
to this offering. Each of the Selling Shareholders has not held any position or
office or had any other material relationship with the Company or its affiliates
during the past three years, other than in connection with the Company's initial
public offering.
<TABLE>
<CAPTION>
SECURITIES OFFERED
------------------------------------ COMMON STOCK OWNED
SECURITIES OWNED BEFORE THE OFFERING COMMON STOCK AFTER THE OFFERING
------------------------------------ SHARES AFTER ------------------
COMMON COMMON EXERCISE OF NUMBER
NAME OF SELLING STOCK 1994 UNDERWRITER'S STOCK 1994 1994 OF PERCENT
SHAREHOLDER SHARES WARRANTS WARRANTS(1) SHARES(2) WARRANTS(2) WARRANTS(3) SHARES OWNED
- --------------- ------ -------- ------------- --------- ----------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Kirk......... -- -- 30,000 60,000 30,000 120,000 -- --
Roger Lockhart...... -- -- 10,000 20,000 10,000 40,000 -- --
Michael Morrisett... -- -- 5,000 10,000 5,000 20,000 -- --
Glenn Desort........ -- -- 5,000 10,000 5,000 20,000 -- --
Paul Medrano........ -- -- 2,000 4,000 2,000 8,000 -- --
Joe Cornwell........ -- -- 2,000 4,000 2,000 8,000 -- --
Mike Ferraro........ -- -- 2,000 4,000 2,000 8,000 -- --
Larry Turel......... -- -- 2,000 4,000 2,000 8,000 -- --
Brian Herman........ -- -- 2,000 4,000 2,000 8,000 -- --
Jack Gilbert........ -- -- 2,000 4,000 2,000 8,000 -- --
Ken Kamen........... -- -- 2,000 4,000 2,000 8,000 -- --
Dan O'Halloran...... -- -- 1,000 2,000 1,000 4,000 -- --
Kent Grimm.......... -- -- 1,000 2,000 1,000 4,000 -- --
</TABLE>
- ------------------------
(1) Each Underwriters' Warrant is exercisable for the purchase of one Unit
comprised of two shares of Common Stock and one 1994 Warrant. See
"Description of--Underwriters' Warrants."
(2) Assumes exercise of the Underwriters' Warrants in full and the purchase
by the named Selling Shareholders of the Units (and the two shares of
Common Stock and the 1994 Warrant comprising each Unit).
(3) The number of Common Stock shares offered include the number of shares
of Common Stock comprising each Unit and the two shares of Common Stock
underlying each 1994 Warrant to be received by the named Selling Shareholder
upon exercise of the Underwriters' Warrants.
PRICE RANGE OF COMMON STOCK AND WARRANTS; DIVIDENDS
The Company's Common Stock and 1994 Warrants are traded in the over-the-
counter market and are quoted on NASDAQ SmallCap Market under the symbols LABZ
and LABZW, respectively. Prior to September 27, 1994, there was no public
trading market for the Company's Common Stock and the 1994 Warrants. The
following table sets forth, for the periods presented, the high and low closing
bid quotations in the over-the-counter market as quoted
17
<PAGE>
by NASDAQ SmallCap Market System of the Common Stock and 1994 Warrants. The bid
quotations reflect inter-dealer prices without adjustment for retail markups,
markdowns or commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
CLOSING BID
---------------------------------
COMMON STOCK 1994 WARRANTS
------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
March 31, 1997....... $3.13 $2.25 $1.06 $ .41
December 31, 1996.... $4.00 $2.88 $1.06 $ .63
September 30, 1996... 3.69 3.00 1.63 .63
June 30, 1996........ 3.38 2.38 2.00 1.38
March 31, 1996....... 3.26 2.56 2.06 1.00
December 31, 1995.... $3.75 $2.88 $2.00 $1.00
September 30, 1995... 4.00 2.88 2.50 1.25
June 30, 1995........ 3.63 3.13 1.81 1.13
March 31, 1995....... 3.44 3.00 1.50 1.06
</TABLE>
On July 7, 1997, the closing bid and asked prices of the Common Stock
as quoted on Nasdaq Small-Cap Market were $3.00 and $3.38, respectively, and the
closing bid and asked prices of the 1994 Warrants were $1.13 and $1.44. On July
7, 1997, there were approximately 850 holders of the Common Stock and 625
holders of the 1994 Warrants.
LSAI's dividend policy is to retain its earnings to support the
expansion of its operations. The Board of Directors of LSAI does not intend to
pay cash dividends on the Common Stock in the foreseeable future. Any future
cash dividends will depend on future earnings, capital requirements, LSAI's
financial condition and other factors deemed relevant by the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997, without giving effect to or assuming exercise of the 1994
Warrants and the Underwriters' Warrants. This table should be read in
conjunction with the unaudited consolidated financial statements and notes
thereto of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1997
----------
<S> <C>
Current portion of long-term debt.................................. $ 460,463
Long-term debt, net of current portion............................. 2,518,000
Stockholders' equity:
Preferred Stock, $.001 par value, 10,000,000 authorized;
none outstanding............................................... --
Common Stock, $.001 par value, 20,000,000 shares authorized;
3,313,405 shares issued and outstanding........................ 3,313
Paid-in capital in excess of par, common stock................... 5,366,027
Retained earnings................................................ 514,914
----------
Total stockholders' equity..................................... 5,884,254
----------
Total capitalization............................................... $8,862,717
==========
</TABLE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the consolidated financial statements
and related notes of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein. The
selected financial
18
<PAGE>
information presented below is not necessarily indicative of the future results
of operations or financial performance of the Company. The selected financial
information as of and for the years ended December 31, 1996 and 1995, is derived
from the Company's audited financial statements which are presented elsewhere in
this Prospectus. The selected financial information presented as of and for the
three months ended March 31, 1997 and 1996, is derived from the unaudited
financial statements of the Company which are presented elsewhere in this
Prospectus. In the opinion of management of the Company, the unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------- ------------------------
1997 1996 1996 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................. $2,587,222 $ 1,948,536 $8,726,799 $6,925,716
Cost of laboratory services.............. 1,186,084 840,161 3,816,114 3,246,470
---------- ----------- ---------- ----------
Gross profit......................... 1,401,138 1,108,375 4,910,685 3,679,246
---------- ----------- ----------
Operating expenses:
Selling expenses....................... 132,129 148,269 601,945 561,470
General and administrative............. 695,616 524,523 2,442,602 2,157,410
Depreciation and amortization.......... 140,849 91,336 504,123 232,535
---------- -----------
Asset impairment....................... -- -- 124,531 --
---------- ----------- ---------- ----------
Total operating expenses............. 968,594 764,128 3,673,201 2,951,415
---------- ----------- ---------- ----------
Interest expense....................... (36,876) (10,493) (67,185) (29,651)
Interest income........................ 11,653 9,971 41,208 126,939
Other income........................... 303 207 4,169 323,846
---------- ----------- ---------- ----------
Total other (expense) income......... (24,920) (315) (21,808) 421,134
---------- ----------- ---------- ----------
Income from operations before
income taxes........................ 407,624 343,932 1,215,676 1,148,965
Income tax expense....................... 173,621 141,686 527,171 474,405
---------- ----------- ---------- ----------
Income from continuing operations.... 234,003 202,246 688,505 674,560
Discontinued Operations:
Loss from operations of discontinued
clinical business, net of tax benefit. -- -- (500,636) --
Loss on disposal of clinical
business, net of tax benefit..... -- -- (773,580) --
---------- ----------- ---------- ----------
Net income (loss)........................ 234,003 202,246 (585,711) 674,560
Dividend on preferred stock(1)........... -- -- -- 13,344
---------- ----------- ---------- ----------
Net income (loss) available for common
stockholders............................ $ 234,003 $ 202,246 $ (585,711) $ 661,216
========== =========== ========== ==========
Primary earnings per share:
Weighted average number of common
stock and common stock equivalents
outstanding......................... 3,315,656 3,310,112 3,316,198 3,301,582
Continuing operations................ $ .07 .06 .21 .20
Discontinued operation............... -- -- (.39) --
---------- ----------- ---------- ----------
Total............................ $ .07 $ .06 $ (.18) $ .20
========== =========== ========== ==========
Fully diluted earnings per share:
Weighted average number of common
stock and common stock equivalents
outstanding......................... 3,891,723 4,025,117 3,954,787 3,843,391
Continuing operations................ .06 .05 .17 .17
Discontinued operation............... -- -- (.32) --
---------- ----------- ---------- ----------
Total............................ $ .06 $ .05 $ (.15) $ .17
========== =========== ========== ==========
CASH FLOW DATA:
Net cash provided by operating
activities.............................. $ 392,623 $ 159,888 $ 472,801 $ 734,475
Net cash used in investing activities.... 2,060,922 1,137,390 1,402,328 313,712
Net cash provided by (used in)
financing activities.................... 1,584,331 (548,754) (754,143) (454,154)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA(2):
Current assets........................................ $ 3,209,457 $3,194,480 $3,842,187
Working capital....................................... (224,496) 1,002,712 3,128,818
Total assets.......................................... 12,143,307 9,394,808 7,319,036
Short-term debt....................................... 2,348,913 1,312,650 --
Long-term debt, net of current portion................ 2,518,000 1,245,690 353,123
Stockholders' equity.................................. 5,884,254 5,650,250 6,211,586
</TABLE>
- ------------------------
(1) The Series I Cumulative Convertible Preferred Stock ("Series I Preferred
Stock") of the Company issued in connection with the LSI Acquisition was
redeemed in full on July 10, 1995. See "The Company-- Background--LSI
Acquisition."
(2) Gives effect no effect to exercise of the Underwriters' Warrants and 1994
Warrants.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
Set forth below are certain unaudited pro forma consolidated statements of
the Company as of and for the fiscal year ended December 31, 1996, presenting
the pro forma effects of the PLL Asset Purchase, assuming the PLL Asset Purchase
occurred as of the date of the balance sheet and at the beginning of the fiscal
year for which the statement of income is presented. The PLL Asset Purchase was
accounted for using the purchase method of accounting. The information presented
below is derived from, and should be read in conjunction with, the audited
financial statements of the Company as of and for the fiscal year ended December
31, 1996, and the audited statement of net assets and the related statements of
divisional operations as and for the year ended December 31, 1996, of the
Forensic Drug Testing Division of Pathology Laboratories, Ltd. presented
elsewhere in this Prospectus. The pro forma information presented is for
illustrative purposes only and is not necessarily indicative of the results of
operations that would have been achieved if the transactions included in the pro
forma adjustments had been consummated in accordance with the assumptions set
forth below, nor is it necessarily indicative of future operating results.
20
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 (PAGE 1 OF 2)
<TABLE>
<CAPTION>
LABORATORY FORENSIC DRUG
SPECIALISTS OF TESTING DIVISION
AMERICA, INC. OF PATHOLOGY
-------------- LABORATORIES, LTD.
DECEMBER 31, ------------------ PRO FORMA PRO FORMA
1996 DECEMBER 31, 1996 ADJUSTMENTS COMBINED
-------------- ------------------ ---------------- -----------
(NOTE 2)
ASSETS
------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................. $ 727,381 $ -- $ -- $ 727,381
Accounts receivable, net of
allowances of $597,499 and
$43,000, respectively.................... 1,696,744 333,385 (333,385)(a) 1,696,744
Income tax refund receivable.............. 312,664 -- -- 312,664
Inventories............................... 99,754 -- -- 99,754
Prepaid expenses and other................ 146,859 -- -- 146,859
Deferred tax asset........................ 211,078 -- -- 211,078
---------- -------- ------------ -----------
Total current assets.......... 3,194,480 333,385 (333,385) 3,194,480
---------- -------- ------------ -----------
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated depreciation of
$900,948 and $14,000, respectively....... 1,592,599 163,455 (163,455)(a) 1,592,599
---------- -------- ------------ -----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $171,355................. 2,663,850 -- -- 2,663,850
Customer lists, net of accumulated
amortization of $216,429................. 1,863,061 -- 2,600,000 (b) 4,463,061
Excess of cost over net assets of
business acquired, net of accumulated
amortization of approximately $14,000..... -- 55,284 (55,284)(a) --
Non-compete agreements, net of
accumulated amortization of approximately
$9,000.................................... -- 6,000 (6,000)(a) --
Deferred costs............................ 80,818 -- -- 80,818
---------- -------- ------------ -----------
Total other assets............ 4,607,729 61,284 2,538,716 7,207,729
---------- -------- ------------ -----------
Total assets.................. $9,394,808 $558,124 $2,041,876 $11,994,808
========== ======== ============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
21
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 (PAGE 2 OF 2)
<TABLE>
<CAPTION>
LABORATORY FORENSIC DRUG
SPECIALISTS OF TESTING DIVISION
AMERICA, INC. OF PATHOLOGY
-------------- LABORATORIES, LTD.
DECEMBER 31, ------------------ PRO FORMA PRO FORMA
1996 DECEMBER 31, 1996 ADJUSTMENTS COMBINED
-------------- ------------------ ---------------- -----------
(NOTE 2)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable......................... $ 521,705 $ -- $ -- $ 521,705
Accrued customer list costs.............. -- -- 900,000 (c) 900,000
Accrued payroll expenses................. 300,103 -- -- 300,103
Other accrued expenses................... 57,310 -- -- 57,310
Short-term debt.......................... 410,293 -- -- 410,293
Current portion of long-term debt........ 118,085 -- -- 118,085
Current maturities on equipment
note and lease obligations........... -- 63,375 (63,375)(a) --
Obligations related to discontinued
operation............................... 784,272 -- -- 784,272
---------- ------- ---------- -----------
Total current liabilities..... 2,191,768 63,375 836,625 3,091,768
---------- ------- ---------- -----------
LONG-TERM DEBT, net of current portion....... 1,245,690 -- 1,700,000 (d) 2,945,690
EQUIPMENT NOTE AND LEASE OBLIGATIONS,
less current maturities..................... -- 33,314 (33,314)(a) --
DEFERRED INCOME TAXES........................ 307,100 -- -- 307,100
---------- ------- ---------- -----------
Total liabilities.............. 3,744,558 96,689 2,503,311 6,344,558
---------- ------- ---------- -----------
STOCKHOLDERS' EQUITY:
Common stock............................. 3,313 -- -- 3,313
Paid in capital in excess of par,
common stock............................ 5,366,027 -- -- 5,366,027
Retained earnings........................ 280,910 -- -- 280,910
---------- ------- --------- -----------
Total stockholders'
equity....................... 5,650,250 -- -- 5,650,250
---------- ------- --------- -----------
Total liabilities and
stockholders' equity...... $9,394,808 $96,689 $2,503,311 $11,994,808
========== ======= ========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
22
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FORENSIC DRUG
LABORATORY TESTING DIVISION
SPECIALISTS OF OF PATHOLOGY PRO FORMA PRO FORMA
AMERICA, INC. LABORATORIES, LTD. ADJUSTMENTS COMBINED
--------------- ------------------- ---------------- ------------
(NOTE 2)
<S> <C> <C> <C> <C> <C>
REVENUES..................................... $8,726,799 $ -- $ -- $ 8,726,799
LAB REVENUES................................. -- 3,238,460 (678,460)(e) 2,560,000
---------- ---------- ------------ -----------
Total revenues........................... 8,726,799 3,238,460 (678,460) 11,286,799
---------- ---------- ------------ -----------
(2,163,081)(f)
COST OF LABORATORY SERVICES.................. 3,816,114 2,163,081 1,126,400 (g) 4,942,514
---------- ---------- ------------ -----------
Gross profit............................. 4,910,685 1,075,379 358,221 6,344,285
---------- ---------- ------------ -----------
OPERATING EXPENSES:
Selling.................................. 601,945 -- 75,000(h) 676,945
General and administrative............... 2,442,602 -- 250,000(i)
180,000(j) 2,872,602
Depreciation and amortization............ 504,123 -- 173,333(k) 677,456
Asset impairment......................... 124,531 -- -- 124,531
---------- ---------- ------------ -----------
Total operating expenses............. 3,673,201 -- 678,333 4,351,534
---------- ---------- ------------ -----------
INDIRECT COST ALLOCATIONS.................... -- 1,290,091 (1,290,091)(l) --
---------- ---------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest expense......................... (67,185) -- (148,750)(m) (215,935)
Interest income.......................... 41,208 -- -- 41,208
Other income............................. 4,169 -- -- 4,169
---------- ---------- ------------ -----------
Total other expense.................. (21,808) -- (148,750) (170,558)
---------- ---------- ------------ -----------
Income (loss) from continuing
operations before income
taxes........................... 1,215,676 (214,712) 821,229 1,822,193
(80,088)(n)
INCOME TAX BENEFIT (EXPENSE)................. (527,171) 80,088 (201,706)(o) (728,877)
---------- ---------- ------------ -----------
Income (loss) from continuing
operations....................... 688,505 (134,624) 539,435 1,093,316
DISCONTINUED OPERATION:
Loss from operations of
discontinued clinical
business, net of tax benefit
of $257,905............................. (500,636) -- -- (500,636)
Loss on disposal of clinical
business, net of tax benefit
of $489,420............................. (773,580) -- -- (773,580)
---------- ---------- ------------ -----------
Net loss......................... $ (585,711) $ (134,624) $ 539,435 $ (180,900)
========== ========== ============ ===========
PRIMARY EARNINGS PER SHARE:
Weighted average number of common
shares outstanding................... 3,316,198 3,316,198
========== ===========
Continuing operations.................... $ .21 $ .33
Discontinued operation................... (.39) (.38)
---------- -----------
Total................................ $ (.18) $ (.05)
========== ===========
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common
stock and common stock equivalents
outstanding............................. 3,954,787 3,954,787
========== ===========
Continuing operations.................... $ .17 $ .28
Discontinued operation................... (.32) (.32)
---------- -----------
Total................................ $ (.15) $ (.04)
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
23
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS FOR PRESENTATION:
The pro forma balance sheet and statement of income present the pro forma
effects of the acquisition on January 31, 1997, of certain intangible assets
of Pathology Laboratories, Ltd. ("PLL"), constituting the Forensic Drug
Testing Division of PLL, by Laboratory Specialists of America, Inc. (the
"Company") pursuant to an Asset Purchase Agreement (the "Purchase Agreement").
PLL is a privately held corporation. The assets purchased included the
forensic drug testing customer list of PLL and all contracts, contract rights
and agreements, correspondence with the customers for which PLL has provided
forensic drug testing services, and all assets owned by PLL used in connection
with the PLL office in Greenville, South Carolina (the "PLL Asset Purchase").
The PLL Asset Purchase was accounted for using the purchase method of
accounting.
Pursuant to the Purchase Agreement, (i) the Company paid $1,600,000 at closing
and (ii) the Company assumed the obligations of PLL under a certain lease,
dated September 16, 1996, which requires monthly base rental payments of
$2,083 and which expires on September 16, 1999. Furthermore, the Company is
required to make four additional installment payments to PLL within 60 days
following the end of each three month period during the 12 months ending
January 31, 1998. These quarterly payments are based on gross revenues
directly attributable to each customer comprising in part the customer base of
PLL for the year ending January 31, 1998, exceeding $1,600,000. The gross
revenues attributable to this customer base for the year ended December 31,
1996, were approximately $3,200,000. The initial purchase price of $1,600,000
was financed with additional long-term bank indebtedness. The Company
consolidated the drug testing services with its current laboratory in March
1997.
In connection with the PLL Asset Purchase, substantially all of the purchase
price of the assets acquired was recorded as a customer list, an intangible
asset, which will be amortized on a straight-line basis over 15 years, the
estimated period that the Company believes it will be benefitted by the assets
acquired pursuant to the PLL Asset Purchase. The carrying value and
recoverability of the customer list will be periodically reviewed by
management of the Company. If the facts and circumstances suggest that the
customer list may be impaired, the carrying value of the customer list will be
adjusted which will result in an immediate charge against income during the
period of adjustment and/or the length of the remaining amortization period
may be shortened which will result in an increase in the amount of
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 of
such intangible assets. Of the various factors to be considered by management
of the Company in determining impairment of the customer list, the most
significant will be (i) the loss of all or a portion of the PLL customer base
acquired, (ii) losses from operations, (iii) developments within the drug and
clinical testing industry, including the Company's inability to maintain PLL
market share, development of forensic testing technologies, imposition of
additional regulatory and certification requirements, and (iv) loss or
suspension for an extended period of laboratory certification. In the event
management of the Company determines that the customer list has become
impaired, the adjustments for impairment and recoverability may 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 reduce
profitability.
The accompanying unaudited pro forma financial statements are presented
assuming the PLL Asset Purchase occurred or was consummated as of December 31,
1996, the date of the balance sheet, or on January 1, 1996, the first day of
the year ended December 31, 1996, the period presented. The historical
information presented for the Company as of and for the year ended December
31, 1996, is derived from the audited financial statements of the Company as
of such date and for such period. The historical information presented for
PLL as of and for the period ended December 31, 1996, is derived from the
audited statements of net assets of the Forensic Drug Testing Division of PLL
as of such date.
24
<PAGE>
The pro forma financial information presented in these unaudited pro forma
financial statements is not necessarily indicative of the financial position
or results of operations that would have been achieved had the operations been
those of a single consolidated corporate entity. The results of operations
presented in the unaudited pro forma statement of operations are not
necessarily indicative of the consolidated results of future operations of the
Company following consummation of the PLL Asset Purchase.
2. ADJUSTMENTS:
The accompanying unaudited pro forma consolidated financial statements have
been adjusted to record and give effect to the PLL Asset Purchase as follows:
(a) The elimination of assets and liabilities of the Forensic Drug Testing
Division of PLL that were not acquired or assumed by the Company in
connection with the PLL Asset Purchase;
(b) The purchase of the assets of PLL and reflect the $2,600,000 increase in
customer list, assuming a 20 percent reduction in revenues of the
Forensic Drug Testing Division due to the transition and consolidation of
the Forensic Drug Testing Division with and into the Company and the
purchase price adjustment of the acquired PLL assets;
(c) The $900,000 of accrued customer list costs representing the current
liability for future purchase price payments based upon gross revenues of
the Forensic Drug Testing Division of PLL assuming a 20 percent reduction
in revenues of the Forensic Drug Testing Division due to the transition
and consolidation of the Forensic Drug Testing Division with and into the
Company and the purchase price adjustment of the acquired PLL assets;
(d) The $1,700,000 long-term liability representing bank indebtedness which
funded in part the $1,600,000 payment at closing and the transaction
costs of the PLL Asset Purchase;
(e) The $678,460 reduction in gross revenues of the Forensic Drug Testing
Division of PLL representing an anticipated 20 percent loss of revenues
due to the transition and consolidation of the forensic drug testing
operations with and into those of the Company;
(f) The elimination of $2,163,081 direct operating expenses of the Forensic
Drug Testing Division of PLL (consisting of $622,736 of salaries and
employee benefits, $956,144 of supply costs, $173,669 of professional
fees, $152,965 of equipment expenses, $77,237 of communications, postage
and couriers expenses, $83,045 of depreciation and amortization expense,
and $97,285 of other expenses), which are reflected and included in the
adjustment for the Company's cost of sales (see (g) below);
(g) The $1,126,400 increase in the cost of sales attributable to the lab
revenues of the Forensic Drug Testing Division of PLL, as adjusted, based
upon the historical cost of sales of the Company as a percent of
revenues, which for the fiscal year ended December 31, 1996, was 44
percent of revenues;
(h) The increase of $75,000 in selling expenses due to the addition of a
sales representative to maintain the acquired PLL forensic customer base;
(i) The $250,000 estimated increase in general and administrative expenses of
the Company associated with the acquired customer base and revenues of
the Forensic Drug Testing Division of PLL;
(j) The $180,000 estimated increase in general and administrative expenses
associated with operation of the additional office in Greenville, South
Carolina;
(k) The $173,333 increase in amortization of the acquired customer list of
PLL, based upon a purchase price of $2,600,000 of the acquired assets of
PLL and the straight-line amortization of the purchase price over 15
years;
(l) The $1,290,091 elimination of indirect cost allocations (consisting of
$1,268,167 of transportation, general and administrative expenses which
are reflected and included in the adjustment for cost of sales (see (g)
above) and $21,924 of interest expense) of the Forensic Drug Testing
Division of PLL;
25
<PAGE>
(m) The $148,750 increase in interest expense attributable to the
$1,700,000 long-term bank indebtedness obtained in connection with PLL
Asset Purchase, assuming an interest rate of 8.75 percent on the
outstanding principal balance of the indebtedness;
(n) The $80,088 elimination of the income tax benefit of the Forensic Drug
Testing Division of PLL; and
(o) The $201,706 increase in income taxes at the effective combined federal
and state statutory rates applicable during the period presented.
3. CUSTOMER LIST:
The customer list acquired in connection with the PLL Asset Purchase will be
amortized on a straight-line basis over 15 years. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life of the customer list may warrant revision or
that the remaining unamortized balance of the customer list 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 forensic drug testing industry, if present, indicate that goodwill or
the customer list should be evaluated for possible impairment, the Company
will use an estimate of the related undiscounted net income over the remaining
life of the customer list in measuring whether the customer list is
recoverable. Although management believes that the customer list will be
recoverable over the amortization period, it is possible, due to a change in
circumstances, that the carrying value of the customer list could become
impaired in the future. Such impairment could have a material effect on the
results of operations in a particular reporting period.
4. EARNINGS PER COMMON SHARE:
Pro forma income per common share has been computed based upon the weighted
average number of common shares outstanding during the year ended December 31,
1996.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company and "Selected Financial
Information" appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i) the
fiscal years ended December 31, 1996 and 1995, which are derived from the
audited consolidated financial statements of the Company, and (ii) the three
months ended March 31, 1997 and 1996, which are derived from the unaudited
consolidated financial statements of the Company, which include, in the opinion
of management of the Company, all normal recurring adjustments considered
necessary for a fair statement of results for such periods. The results of
operations for the periods presented are not necessarily indicative of the
Company's future operations.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------- -------------------------------------------------
1997 1996 1996 1995
--------------------- ---------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $2,587,222 100.0% $1,948,536 100.0% $8,726,799 100.0% $6,925,716 100.0%
Cost of revenues........... 1,186,084 45.9% 840,161 43.1% 3,816,114 43.7% 3,246,470 46.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit............... 1,401,138 54.1% 1,108,375 56.9% 4,910,685 56.3% 3,679,246 53.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling.................. 132,129 5.1% 148,269 7.6% 601,945 6.9% 561,470 8.1%
General and
administrative.......... 695,616 26.9% 524,523 26.9% 2,442,602 28.0% 2,157,410 31.2%
Depreciation and
amortization.......... 140,849 5.4% 91,336 4.7% 504,123 5.8% 232,535 3.3%
Asset impairment......... -- --% -- --% 124,531 1.4% -- --%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses... 968,594 37.4% 764,128 39.2% 3,673,201 42.1% 2,951,415 42.6%
---------- ----- ---------- ----- ---------- ----- ---------- -----
432,544 16.7% 344,247 17.7% 1,237,484 14.2% 727,831 10.5%
Other income (expense)..... (24,920) 1.0% (315) --% (21,808) .2% 421,134 6.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from continuing
operations before
income taxes............. 407,624 15.7% 343,932 17.7% 1,215,676 13.9% 1,148,965 16.6%
Income tax expense......... 173,621 6.7% 141,686 7.3% 527,171 6.0% 474,405 6.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from continuing
operations............... 234,003 9.0% 202,246 10.4% 688,505 7.9% 674,560 9.7%
Discontinued Operations:
Loss from operations of
discontinued clinical
business, net of tax
benefit................ -- --% -- --% (500,636) 5.7% -- --%
Loss on disposal of
clinical business, net
of tax benefit.......... -- --% -- --% (773,580) 8.9% -- --%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income (loss).......... 234,003 9.0% 202,246 10.4% (585,711) 6.7% 674,560 9.7%
=====
Dividend on preferred
stock(1)................. -- --% -- --% -- --% 13,344 .2%
---------- ----- ---------- ----- ---------- ----- ---------- =====
Net income (loss)
available for common
stockholders.............. $ 234,003 9.0% $ 202,246 10.4% $ (585,711) 6.7% $ 661,216 9.5%
========== ===== ========== ===== ========== ===== ========== =====
Primary earnings per share:
Weighted average number
of common stock and
common stock
equivalents outstanding 3,315,656 3,310,112 3,316,198 3,301,582
Continuing operations.. $ .07 .06 .21 .20
Discontinued operation.. -- -- (.39) --
---------- ---------- ---------- ----------
Total.............. $ .07 $ .06 $ (.18) $ .20
========== ========== ========== ==========
Fully diluted earnings per
share: Weighted average
number of common stock and
common stock equivalents
outstanding............... 3,891,723 4,025,117 3,954,787 3,843,391
Continuing operations..... .06 .05 .17 .17
Discontinued operation.... -- -- (.32) --
---------- ---------- ---------- ----------
Total.............. $ .06 $ .05 $ (.15) $ .17
========== ========== ========== ==========
</TABLE>
During the three months ended March 31, 1997, and the fiscal year ended
December 31, 1996, LSI experienced a 4.8 percent and a 4.7 percent decrease in
the price per specimen, respectively, compared to the three months ended March
31, 1996, and the fiscal year ended December 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
customers. 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. There can be no assurance that the
-27-
<PAGE>
price decline per specimen will not further decline during 1997 and thereafter.
In the event price stabilization has not occurred, LSI will, as it has in the
past, take appropriate measures to downsize its drug testing personnel and
possibly further automate the testing processes and employ additional technology
to continue profitability from operations, although there can be no assurance
that such measures will assure profitability in the event of substantial price
reductions within the short term. During the three months ended March 31, 1997,
and the fiscal year ended December 31, 1996, the number of specimens analyzed
increased 32.8 percent and 34.5 percent, respectively, compared to the three
months ended March 31, 1996, and the fiscal year ended December 31, 1995.
In connection with NPLI Acquisition, the Company acquired the clinical
testing and analysis operation conducted by NPLI. After several attempts to
sell the clinical testing analysis operation of NPLI, the Company discontinued
the clinical testing and analysis operation in the fourth quarter of 1996. This
resulted in a loss from the discontinued operation of $500,636 (after giving
effect to the associated tax benefit of $257,904) and a loss on disposal of the
clinical business of $773,580 (after giving effect to the associated tax benefit
of $489,420), which resulted in a loss of $.39 per weighted average number of
common shares and common share equivalents used to compute primary earnings per
share for the fiscal year ended December 31, 1996. Before such discontinued
operation, the Company's income from continuing operations for the fiscal year
ended December 31, 1996 was $688,505 or $.21 per weighted average number of
common shares and common share equivalents used to compute primary earnings per
share. See "Business--Background--NPLI Acquisition."
Through its acquisition strategy, management of the Company
anticipates, although there can be no assurance, that the consolidation and
assimilation of the operations associated with the additional companies
acquired, if any, will result in increased testing volume with minimal indirect
additional specimen processing cost, resulting in increased profitability and
cash flows. See "Business--Growth Strategy." In the event the Company fails to
make acquisitions which contribute to the profitability, the Company may be
required to reduce general and administrative expenses.
Comparison of the Three-Month Periods Ended March 31, 1997 and 1996
Revenues increased to $2,587,222 in the three months ended March 31,
1997 (the "1997 Interim Period"), from $1,948,536 in the three months ended
March 31, 1996 (the "1996 Interim Period"), an increase of 32.8 percent. The
increase in revenues was due to a 38.3 percent increase in the number of
specimens analyzed during the 1997 Interim Period as compared to the 1996
Interim Period, although partially offset by a decrease of 4.8 percent in the
average price per specimen. The increase in number of specimens analyzed was
attributable to the PLL Acquisition as well as LSI's normal sales and marketing
efforts. The decrease in the average price per specimen was principally due to
increased price competition amongst providers of drug testing services, price
per specimen being an important factor in obtaining and maintaining clients.
There can be no assurance that price decline per specimen will not further
decline in 1997.
Cost of revenues increased from $840,161 in the 1996 Interim Period to
$1,186,084 in the 1997 Interim Period, an increase of 41.2 percent, and
increased as a percentage of revenues from 43.1 percent to 45.9 percent. The
increase was primarily due to an increase in certain laboratory supplies as
compared to the first quarter of 1996. In addition, a key laboratory position
was added in late 1996 resulting in increased salaries.
Operating expenses increased from $764,128 in the 1996 Interim Period
to $968,594 in the 1997 Interim Period, an increase of 26.8 percent, but
decreased as a percentage of revenues from 39.2 percent to 37.4 percent. The
increase in operating expenses was attributable to the increase in general and
administrative expenses of $171,093 and depreciation and amortization expense of
$49,513 while selling expense decreased by $16,140. The increase in general and
administrative expenses was principally as a result of (i) an increase in
executive officer compensation, (ii) the addition of several key positions at
LSI and (iii) the addition of certain overhead costs associated with the PLL
asset purchase. The decrease in selling expenses was due to the temporary
reduction in the sales force for part of the first quarter of 1997. In
addition, LSI withdrew from a national endorsement arrangement after the first
quarter of 1996 which resulted in a savings in commissions expense.
Depreciation increased due to the addition of new laboratory equipment at LSI in
March of 1996, while amortization increased due to the acquisition of PLL and
the amortization of the PLL customer list.
Interest expense increased from $10,493 in the 1996 Interim Period to
$36,876 in the 1997 Interim Period, an increase of 251.4 percent. The increase
in interest expense was the result of a capital lease agreement for certain
laboratory equipment entered into late in the first quarter of 1996. Interest
income increased from $9,971 in the 1996
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<PAGE>
Interim Period to $11,653 in the 1997 Interim Period, a 16.9 percent increase.
The increase is a result of more cash held for investment. Other income
increased from $207 in the 1996 Interim Period to $303 in the 1997 Interim
Period, an increase of 46.4 percent. Net income, after provision for income
taxes, increased from $202,246 in the 1996 Interim Period to $234,003 in the
1997 Interim Period, a 15.7 percent increase.
Comparison of Fiscal 1996 and 1995
Revenues increased to $8,726,799 in 1996 from $6,925,716 in 1995, an
increase of 26 percent. The increase in revenues was due to a 34.5 percent
increase in the number of specimens analyzed during 1996 as compared to 1995,
although partially offset by a decrease of 4.7 percent in the average price per
specimen. The increase in number of specimens analyzed was attributable to the
NPLI Acquisition as well as the obtaining of additional accounts 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 important factor in
obtaining and maintaining clients. There can be no assurance that the price per
specimen will not further decline in 1997 which will directly impact
profitability. See "Business--Competition." Cost of laboratory services
increased $569,644 from $3,246,470 in 1995 to $3,816,114 in 1996. This increase
was primarily due to the increased volume of specimen testing and decreased as a
percentage of revenues by 3.2 percent. Gross profit on revenues increased as a
percentage of revenues from 53.1 percent in 1995 to 56.3 percent in 1996.
Operating expenses increased from $2,951,415 in 1995 to $3,673,201 in
1996, an increase of 24.5 percent, but decreased as a percentage of revenues
from 42.6 percent to 42.1 percent. The increase in operating expenses was
attributable to the increase in general and administrative expenses of $285,192,
selling expense of $40,475, depreciation and amortization of $271,588, and the
recognition of asset impairment of $124,531. The increase in general and
administrative expenses was principally due to the increase in executive officer
compensation of LSAI and accrued bonuses for certain key employees of LSI. The
increase in selling expenses was due to the addition of one sales representative
and increased personnel to assist in maintaining forensic drug testing clients
and customers obtained in connection with the NPLI Acquisition, although
partially offset by a reduction in commission expenses. Depreciation increased
due to the acquisition of new laboratory equipment in March 1996, and
amortization increased due to the amortization of the customer list and
goodwill acquired in connection with the NPLI Acquisition. Asset impairment was
attributable principally to the write-down, to the estimated fair market value,
of LSI's current laboratory facilities which are held for sale.
Interest expense increased from $29,651 in 1995 to $67,185 in 1996, a
126.6 percent increase. The increase in interest expense was the result of a
capital lease agreement for certain laboratory equipment. Interest income
decreased from $126,939 in 1995 to $41,208 in 1996, a 67.5 percent decrease.
The decrease resulted from a reduction of cash equivalents held for investment
due to the NPLI Acquisition and other acquisition activities. Other income
decreased from $323,846 in 1995 to $4,169 in 1996. The decrease in other income
was primarily due to the receipt during 1995 of a non-reoccurring settlement of
a lawsuit in which LSI was the plaintiff. Income from continuing operations,
after provision for income taxes, increased from $674,560 in 1995 to $688,505 in
1996, a 2.1 percent increase. Income per share of common stock from continuing
operations on a primary basis was $.21 ($.17 per share on a fully diluted basis)
in 1996, compared to net income per share of common stock on a primary basis of
$.20 ($.17 per share on a fully diluted basis) in 1995.
During the fourth quarter of 1996, the clinical testing and analysis
operation conducted by NPLI was discontinued, which resulted in a loss from
discontinued operation of $500,636 (after giving effect to the associated tax
benefit of $257,904) and a loss on disposal of the clinical business of $773,580
(after giving effect to the associated tax benefit of $489,420), which resulted
in a net loss from continued and discontinued operations of $585,711. Net loss
from continued and discontinued operations per share of common stock on a
primary basis was $.18 and $.15 per share of common stock on a fully diluted
basis.
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<PAGE>
Pro Forma Effect of Stock-Based Compensation
The Company has historically used options to retain and compensate its
officers, directors, employees and others. During 1996 and 1995, the Company
granted 310,000 stock options for the purchase of the Common Stock of LSAI to
certain officers, directors, employees and others. In accordance with
Accounting Principles Board Opinion No. 25, the compensation cost of such stock
options is not recognized in the consolidated financial statements of the
Company. The outstanding stock options granted in 1996 and 1995 had an
estimated fair value at the date of grant of the options of $134,250, utilizing
the methodology prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation. After giving effect to the estimated fair value of such options,
the Company had a net pro forma loss of $673,516 ($.20 per common share on a
primary basis and $.17 per common share on a fully diluted basis) for the year
ended December 31, 1996, and had a net pro forma income of $614,771 ($.19 per
common share on a primary basis and $.16 per common share on a fully diluted
basis) for the year ended December 31, 1995.
Quarterly Results of Operations
LSI'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 LSI's testing
work force are relatively fixed over the short term, LSI's 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, LSI's results of
operations for a particular quarter may not be indicative of the results to be
expected during other quarters.
Income Taxes
The provisions for accrued income taxes on pretax income were based on
the effective combined federal and state graduated corporate income tax rates of
approximately 40 percent for the three months ended March 31, 1997, 43 percent
for 1996 and 41 percent for 1994. Income tax expenses during the three months
ended March 31, 1997 and for the years ended December 31, 1996 and 1995 were
$173,621, 527,171, and $474,405, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company financed its growth through the sale of
equity securities and bank borrowings. Net cash provided by operating activities
totaled $392,623 for the three months ended March 31, 1997, compared to $159,888
for the three months ended March 31, 1996. As of March 31, 1997, LSAI had a
working capital deficit of $224,496, compared to working capital of $1,002,712,
at December 31, 1996. The working capital deficit increase was in part due to
the current liability classification of (i) the Company's estimated obligation
to make four quarterly installment payments of approximately $810,000, in the
aggregate, in connection with the PLL Asset Purchase, such installments are
subject to adjustment based upon the forensic drug testing revenues obtained by
the Company from the acquired customer base (see "Business--Background--PLL
Asset Purchase"), and (ii) approximately $340,000 of the long-term debt incurred
in connection with funding of the PLL Asset Purchase. At December 31, 1996 and
March 31, 1997, short-term debt of the Company included a note, in the recorded
amount of $334,460, payable to the former shareholders of NPLI by delivery of
152,282 shares of the Company's Common Stock. Informally, the former
shareholders of NPLI have agreed to accept 103,333 shares of Common Stock in
full satisfaction of this note payable. See "The Company--Background--NPLI
Acquisition" and "Business--Litigation."
During the three months ended March 31, 1997, in connection with the
PLL Asset Purchase which was consummated on January 31, 1997, the Company paid
and expended approximately $1,800,000 in partial payment of the purchase price
at closing and the transaction costs of the PLL Asset Purchase. In connection
with the NPLI
-30-
<PAGE>
Acquisition, which was consummated on January 2, 1996, during the first quarter
of 1996, the Company paid and expended approximately $1,740,000 as a result of
payments to the former NPLI shareholders and payment of certain NPLI bank
borrowings, shareholder loans and other indebtedness. See "Business--Background
- --NPLI Acquisition."
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 $643,413 at March 31, 1997) 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 January 9, 1997, LSI entered in to a loan agreement with Hibernia
National Bank (the "Bank") which established a credit facility comprised of a
five-year term loan of up to $1,700,000 and a one-year revolving loan of
$250,000 to be used for the acquisition of Pathology Laboratories Limited. As
of March 31, 1997, the outstanding principal amount of the five-year term loan
was $1,643,333. Advances on the revolving loan are based upon LSI maintaining
certain ratios and compliance with the covenants of the loan agreement and LSI's
liquid assets including its accounts receivable. The outstanding principal
amount of the revolving loan bears interest at the Citibank, N.A. rate (which
was 8.75 at March 31, 1997) and the term loan bears interest at such rate plus
one-half percent. The 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, all of which the Company was in full compliance with as of
April 30, 1997.
FUTURE OPERATIONS AND LIQUIDITY
On January 31, 1997, the Company acquired from Pathology Laboratories,
Ltd. ("PLL") certain forensic drug testing assets pursuant to an Asset Purchase
Agreement dated January 31, 1997 (the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company (i) paid $1,600,000 at closing and (ii) assumed
the obligations of PLL under a certain lease, dated September 16, 1996, which
requires monthly base rental payments of $2,083 and which expires on September
16, 1999. Furthermore, the Company is required to make four additional
quarterly installment payments to PLL within 60 days following the end of each
three-month period during the twelve months ending January 31, 1998. These
quarterly payments are based on gross revenues directly attributable to each
customer comprising the customer base of PLL for the year ending January 31,
1998, exceeding $1,600,000. The gross revenues attributable to this customer
base for the year ended December 31, 1996, were approximately $3,200,000. See
"The Company--Background--PLL Asset Purchase."
On December 3, 1996, LSI purchased a building to be renovated for
relocation of its laboratory. The building purchase was financed by a note
payable to the seller due on June 3, 1997, with no stated interest rate. This
note has been classified as long-term based on a written commitment from a bank
to refinance the purchase and construction costs up to the lesser of 80 percent
of appraised value or cost, not to exceed $720,000. The bank note will be
payable monthly based on a fifteen-year amortization with the balance due five
years from issuance. In connection with the building renovation, LSI entered
into an agreement to pay $439,572 upon completion of the renovation, which is
expected during mid 1997.
In February 1996, LSI entered into a capital lease obligation of
approximately $650,000 with a vendor for the purchase equipment and certain lab
supplies at a fixed price per drug screen performed. The minimum monthly amount
payable under the agreement is approximately $47,000, with approximately $13,000
per month allocated to the principal and interest of the capital lease
obligation, and 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 a long-term debt obligation payable over five years.
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As of the date of this Prospectus, other than as described above, the
Company does not have any significant future capital commitments. The Company
anticipates that existing cash equivalents 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 AND
CUSTOMER LIST. In connection with the Peterson Share Exchange, the NDAC Asset
Purchase, the NPLI Acquisition and PLL Asset Purchase, the Company recorded
goodwill and customer lists, which are being amortized over periods of 15 to 40
years on a straight-line basis over the estimated period that the Company will
be benefitted by such assets. At March 31, 1997, the unamortized portion of the
goodwill and the customer lists was $2,637,422 and $4,412,635, respectively. 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 list may be impaired, the
carrying value of goodwill or customer list 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 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. Of the
various factors to be considered by management of the Company in determining
goodwill or customer list impairment, the most significant will be (i) losses
from operations, (ii) loss of customers, (iii) developments within the drug
testing industry, including the Company's inability to maintain its market
share, development of drug testing technologies, imposition of additional
regulatory and certification requirements, and (iv) loss or suspension for an
extended period of laboratory certification, especially by SAMHSA. See "Risk
Factors--Certification," and "Business--Certification and Government
Regulation." In the event management of the Company determines that goodwill or
the customer lists have 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.
WARRANT REDEMPTION
Pursuant to this Prospectus, the Company is notifying the holders of
the 1994 Warrants as of , 1997 (the "Record Date") and the Selling Shareholders,
of the election of the Company to redeem 1994 Warrants for $.01 per warrant (the
"Redemption Price") at 5:00 p.m., Central Standard Time, on , 1997 (the
"Redemption Date"). Each of the 1994 Warrants is exercisable for the purchase of
two shares of Common Stock for $2.00 per share (the "Warrant Exercise Price"),
on or before expiration of the Redemption Date. The Redemption Date may be
extended by the Company, in its sole and absolute discretion, but not beyond
, 1997. See "Exercise of 1994 Warrants--Expiration; Extensions;
Termination; Amendments." The 1994 Warrants may be redeemed by the Company at
any time in the event that the closing bid price of the Common Stock exceeds the
Exercise Price for 10 consecutive trading days, and the Company has an effective
registration statement (including the Registration Statement of which this
Prospectus is a part) which includes the Common Stock to be issued to the
holders of the 1994 Warrants (the "Warrant Holders) upon exercise of the 1994
Warrants.
EXTENSION OF REDEMPTION DATE
The 1994 Warrants will expire on the Redemption Date (at 5:00 p.m.,
Central Standard Time, on , 1997), unless and until the Company extends the
Redemption Date, in which event the 1994 Warrants will expire at the latest time
and date to which the Redemption Date is extended. The Company expressly
reserves the right at any time and from time to time, regardless of whether or
not any of the conditions specified in "--Conditions of the Warrant Redemption"
have been satisfied, to extend the Redemption Date, which will also extend the
period during which the 1994 Warrants may be exercised by giving as promptly as
practicable notification of such extension in
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a manner reasonably calculated to inform the Warrant Holders of such extension.
Without limiting the manner in which the Company may choose to make any public
announcement, the Company will not, unless otherwise required by applicable law,
have any obligation to publish, advertise or otherwise communicate any such
public announcement other than by making a release to the Dow Jones News
Service. In the case of an extension of the Redemption Date, Securities and
Exchange Commission regulations require a public announcement of such extension
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Redemption Date. The Company's decision regarding the
advisability of extending the Redemption Date will be based upon factors and
considerations that exist and that the Company deems material and appropriate at
that time. As of the date of this Prospectus, such factors and considerations
are undeterminable. There can be no assurance that the Company will exercise its
right to extend the Redemption Date, and there is no limit on the number of
times the Company may extend the Redemption Date.
CONDITIONS OF THE WARRANT REDEMPTION
The Company may cancel the Warrant Redemption if, prior to the
Redemption Date, (i) there shall be in effect any injunction prohibiting,
restricting or delaying completion of the Warrant Redemption, (ii) there shall
have occurred any general suspension of trading in, or limitation of prices for,
securities in the over-the-counter markets; or (iii) any statute, rule or
regulation shall have been enacted, or any action shall have been taken by any
governmental authority, which would prohibit or materially restrict or delay
completion of the Warrant Redemption.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such conditions or may be waived by the Company in whole or in part at any time
and from time to time, in its sole discretion. Each right of the Company in
connection with the foregoing conditions will be deemed an ongoing right that
may be asserted any time and from time to time. The failure by the Company, at
any time, to exercise its rights with respect to any of these conditions will
not be deemed a waiver of any such conditions. Any determination by the Company
concerning applicability of the conditions to the events set forth herein will
be final and binding upon all parties.
The Company expressly reserves the right to terminate the Warrant
Redemption if any of the foregoing conditions are not satisfied.
EXERCISE OF 1994 WARRANTS
Each of the 1994 Warrants is exercisable at any time on or before the
Redemption Date to purchase two shares of Common Stock for $2.00 per share (the
"Exercise Price"). The 1994 Warrants may only be exercised by a Warrant Holder
(including the Selling Shareholders) in the event the Registration Statement of
which this Prospectus is a part is effective with the Securities and Exchange
Commission and the Common Stock is qualified for sale in the state of residence
of the Warrant Holder. See "--Acceptance of 1994 Warrants; Delivery of Shares,"
and "Risk Factors--Securities Laws Restrictions on Exercise of 1994 Warrants"
and "Description of Securities--1994 Warrants." Subject to the foregoing, the
1994 Warrants are exercisable at any time by the Warrant Holders prior to the
Redemption Date by delivery of the warrant certificate evidencing the Public
Warrant to Liberty Bank and Trust Company of Oklahoma City, N.A. (the "Warrant
Agent") by mail to Attention: Stock Transfer, Post Office Box 25848, Oklahoma
City, Oklahoma 73125, or by delivery to 100 Broadway, Oklahoma City, Oklahoma
73102, with the "Subscription Form" on the reverse of the certificate duly
completed and signed, accompanied with payment of the Exercise Price in cash or
by certified check or bank draft payable to the order of the Company. See "--How
to Exercise."
ADVANTAGES AND DISADVANTAGES OF 1994 WARRANT EXERCISE
Exercise of the 1994 Warrants prior to the Redemption Date by the
Warrant Holders may have both significant adverse and advantageous consequences
for Warrant Holders. The adverse consequences to the Warrant Holders who do not
exercise their 1994 Warrants include (i) the 1994 Warrants ceasing to be issued
and outstanding, (ii) the 1994
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Warrants becoming worthless resulting in a loss to the Warrant Holders to the
extent of their investment in the 1994 Warrants in excess of the $.01 Redemption
Price, (iii) loss of any potential appreciation in the 1994 Warrants as a result
of an increase in the trading market value of the Common Stock purchasable upon
exercise of the 1994 Warrants, and/or (iv) loss of the ability to sell the 1994
Warrants as a tradable security. The advantageous consequences for those Warrant
Holders that fail to exercise the 1994 Warrants will be entitlement to receipt
of the $.01 Redemption Price per 1994 Warrant in the event the 1994 Warrants are
redeemed by the Company.
The advantageous consequences of exercise of the 1994 Warrants and
receipt of the Common Stock include (i) acquisition and receipt of an equity
ownership interest in the Company represented by the shares of Common Stock,
(ii) participation in the potential future growth of the Company and any
potential market value appreciation of the Common Stock, and (iii) receipt of
any investment liquidity that the Common Stock has or may have in the future.
Although there may be advantages offered by exercise of the 1994 Warrants, the
Warrant Holders should also understand and be aware that (i) exercise of the
1994 Warrants will constitute an investment in the Common Stock requiring
payment of the $2.00 per share Exercise Price of the 1994 Warrants in addition
to the amount invested in the 1994 Warrants, (ii) the issuance of Common Stock
pursuant to exercise of outstanding stock options and other warrants may have an
adverse effect upon the public trading price of the Common Stock, and (iii)
there are various risks associated with such investment as disclosed in this
Prospectus. See "Risk Factors" and "Description of Securities--Common Stock,"
"--1994 Warrants" and "--Outstanding Options and Other Warrants."
HOW TO EXERCISE
For effective exercise of the 1994 Warrants, the "Subscription Form"
on the reverse side of each 1994 Warrant certificate must be completed and
executed as indicated thereon, and the 1994 Warrant must be accompanied by
payment of the aggregate Exercise Price of the number of shares of Common Stock
being purchased and any applicable transfer tax (see "--Transfer Taxes," below),
in cash or certified or official bank check, made payable to Laboratory
Specialists of America, Inc., together with any other required documents. The
warrant certificate and payment must be transmitted to and received by the
Warrant Agent at its address set forth on the back cover of this Prospectus on
or before the Redemption Date, if the 1994 Warrants are being exercised. The
beneficial holders of 1994 Warrants that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian are urged to contact such entity promptly if they wish to exercise the
1994 Warrants. The 1994 Warrants certificates, together with the cash or check
and any other required documents to be delivered, should be delivered only by
hand or by courier, or transmitted by mail, and only to the Warrant Agent and
not to the Company. The method of delivery of the 1994 Warrants and all other
required documents to the Warrant Agent is at the election and risk of the
Warrant Holder, but if such delivery is by mail it is suggested that the Warrant
Holder use properly insured, registered mail with return receipt requested, and
that the mailing be made sufficiently in advance of the Redemption Date to
permit delivery to the Warrant Agent prior to the Redemption Date.
Each signature of the Warrant Holders on the "Subscription Form" of a
1994 Warrant certificate must be guaranteed by a member firm of any registered
national securities exchange or of the National Association of Securities
Dealers, Inc., or by a commercial bank or trust company having an office or
correspondent in the United States (collectively, "Eligible Institutions").
In the event the certificates for the 1994 Warrants are registered in
the name of a person other than the person executing the "Subscription Form" of
such 1994 Warrants, or if 1994 Warrants that are not accepted for exercise are
to be returned to a person other than the registered owner, then the
"Assignment" on the reverse side of the 1994 Warrant certificate must be
endorsed or accompanied by an appropriate instrument of transfer, signed exactly
as the name of the registered owner appears on the certificate, with the
signatures on the "Assignment" or instruments of transfer guaranteed by an
Eligible Institution.
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The issuance of the Common Stock in exchange for 1994 Warrants
exercised will be made only after timely receipt by the Warrant Agent of the
certificates for such 1994 Warrants and the cash or check, together with all
other documents required. If less than the entire number of 1994 Warrants
evidenced by a submitted certificate are to be exercised, the tendering Warrant
Holder should indicate on the "Subscription Form," appearing on the reverse side
of the certificate, the number of 1994 Warrants being tendered for exercise.
With respect to those 1994 Warrants that are not exercised, the Warrant Holder
will receive the Redemption Price per warrant.
WITHDRAWAL RIGHTS
The 1994 Warrants tendered for exercise may not be withdrawn and will
be irrevocable.
VALIDITY OF EXERCISE
All questions with respect to the validity, form, eligibility
(including time of receipt) and acceptance for exercise of the 1994 Warrants
will be determined by the Company, in its sole discretion, which determination
will be final and binding upon the Warrant Holder and the Company. The Company
reserves the absolute right to reject any and all tenders of 1994 Warrants which
it determines not to be in proper form, or the acceptance or exercise of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any defect or irregularity in the exercise
of the 1994 Warrants. The Company, Warrant Agent, or any other person will not
be under any duty to give notification of any defects or irregularities in
exercise, nor will they incur any liability for failure to give such
notification. Exercise of the 1994 Warrants will not be deemed to have been
properly made until any irregularities have been waived by, or cured to the
satisfaction of, the Company.
ACCEPTANCE OF 1994 WARRANTS; DELIVERY OF SHARES
1994 Warrants properly tendered will be promptly accepted for
exercise. The Company will be deemed to have accepted for exercise properly
tendered 1994 Warrants when, as and if the Company has given oral or written
notice thereof to the Warrant Agent. Certificates for Common Stock will be
issued as promptly as practicable after the 1994 Warrants are accepted for
exercise. Any 1994 Warrants not exercised before the Redemption Date will be
redeemed.
In certain cases, the sale of the Common Stock by the Company upon
exercise of 1994 Warrants could violate the securities laws of certain states or
other jurisdictions. The Company has undertaken registration or qualification of
the Common Stock for sale in California, Colorado, Georgia, Kentucky, Illinois,
Louisiana, New Hampshire, New York, Ohio, Oklahoma, Pennsylvania, Tennessee,
Virginia, Texas, Washington and Wisconsin; however, there is no assurance that
such registration will become effective in such states. In addition, the Company
may undertake registration of the Common Stock in additional states as
determined in the sole discretion of the Company. Those Warrant Holders residing
in states in which the Common Stock has not been registered or otherwise
qualified for sale in such state, will not be permitted to exercise their 1994
Warrants.
Prior to tendering of 1994 Warrants for exercise, a Warrant Holder
should either contact the Company or the Warrant Agent to determine whether the
Common Stock has been registered or qualified in the state of such Warrant
Holder's residence. The Company has used and will continue to use its best
efforts to cause the Registration Statement of which this Prospectus is a part
to be declared effective under the laws of various states as may be required to
cause the sale of the Common Stock upon exercise of 1994 Warrants to be lawful.
However, the Company is not required to accept the exercise of the 1994
Warrants, if, in the opinion of counsel, the sale of the Common Stock upon such
exercise would be unlawful. In such cases, the Warrant Holder may sell the 1994
Warrants in the open market, or continue to hold the 1994 Warrants until the
Redemption Date and, in which case, receive the Redemption Price of the
warrants.
The Warrant Agent will act as agent for the tendering Warrant Holders
of the 1994 Warrants for the purposes of receiving from the Company the Common
Stock and transmitting such securities to the Warrant Holders. Tendered
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1994 Warrants not accepted for exercise by the Company will be returned to the
Warrant Holder and redeemed on the Redemption Date.
In the event the Company extends the Redemption Date, is delayed in
its acceptance for exercise or is unable to accept for exercise any 1994
Warrants for any reason, in such event, without prejudice to the Company's right
hereunder, the Warrant Agent, at the request of the Company, may nevertheless
retain 1994 Warrants tendered for exercise together with any cash or check and
any other required documents, subject to delivery of the shares of Common Stock,
until notified otherwise by the Company. See "--Withdrawal Rights," above.
TRANSFER TAXES
The Warrant Holders are required to pay to the Company any applicable
transfer tax, and, if requested by the Company, any other taxes or governmental
charges which the Company may be required by law to collet in respect to
exercise of the 1994 Warrants.
MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES
Any holder whose certificates evidencing 1994 Warrants have been
mutilated, lost, stolen or destroyed should contact the Warrant Agent at its
address or telephone number indicated on the back cover page of this Prospectus
for further instructions.
EXPENSES
The Company will pay the Warrant Agent reasonable and customary fees
for its services and will reimburse the Warrant Agent and Managing Agent for
their reasonable out-of-pocket expenses in connection therewith. The Company
will also reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable out-of pocket expenses incurred by them in forwarding
copies of this Prospectus and related documents to the beneficial owners of 1994
Warrants and in handling or forwarding tenders on behalf of their customers. The
Company will also pay legal, accounting, printing, listing, filing and other
similar fees and expenses in connection with the securities offered pursuant to
this Prospectus.
MANAGING AGENT
On June 5, 1997, the Company entered into an investment banking
agreement (the "Agreement") with Barber & Bronson Incorporated ("BBI"). The
investment banking services to be provided by BBI under the Agreement include
acting as Managing Agent for the Company's redemption of the 1994 Warrants, as
well as identifying prospective mergers, acquisitions, joint ventures, and
similar transactions for the Company. In connection with serving as Managing
Agent for the Warrant Redemption, BBI's responsibilities include, but are not
limited to, providing advice and counsel to the Company with respect to
maximizing the number of 1994 Warrants that are exercised, providing the Company
with the appropriate forms upon which to make notification of the Warrant
Redemption as well as for Warrant Holders to exercise their 1994 Warrants,
assisting broker-dealers in notifying Warrant Holders, reviewing press releases
related to the Warrant Redemption and exercise of the 1994 Warrants, providing
input to the Company with respect to the Registration Statement, of which this
Prospectus is a part, registering the shares underlying the 1994 Warrants, and
providing instructional materials to the Company to assist in effectuation of
the exercise of the 1994 Warrants. For providing such services, the Company has
agreed to pay to the Managing Agent, in the event 132,000 or more of the 1994
Warrants are exercised, (i) a non-accountable expense allowance equal to four
percent of the gross proceeds realized by the Company upon exercise of the 1994
Warrants and sale of Common Stock pursuant to such exercise and (ii) an
additional fee of $50,000, such amount being subject to proportionate reduction
in the event 90 percent of the 1994 Warrants are not exercised. In addition, the
Company has agreed to issue to the Managing Agent (and/or its assigns and
designees) warrants for the purchase of Common Stock (the "Managing Agent's
Warrants"), at an exercise price of $2.375 per share, subject to adjustment. The
number of shares subject to, and the corresponding
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exercise period (commencing on the Redemption Date) of, the Managing Agent's
Warrants are based upon the percent of the 1994 Warrants exercised and range
from 20,000 shares of Common Stock with a one year exercise period up to 170,000
shares of Common Stock with a three year exercise period. The Managing Agent's
Warrants will not be transferable by the holder for one year from the date of
this Prospectus, except (i) to the shareholders, directors, officers, employees
or partners of the holder, (ii) by will, or (iii) by operation of law.
The Managing Agent's Warrants contain provisions for appropriate anti-
dilution adjustment in the event of any recapitalization, stock dividend, stock
split, reorganization, merger, consolidation, or similar transaction.
The Company has also agreed that if the Company participates in any
merger, acquisition, joint venture or similar transaction prior to two years
following termination of the Investment Banking Agreement, and such merger,
acquisition, joint venture or similar transaction is as a consequence of any
introduction made, directly or indirectly, by the Managing Agent or any of its
affiliates during the term of the Investment Banking Agreement, then the Company
will pay the Managing Agent an amount equal to five percent of up to $5 million
of value paid or received in the transaction, four percent of the next $5
million, three percent of the next $5 million, two percent of the next $5
million and one percent in excess of $20 million.
The Company has agreed to indemnify, defend and hold harmless the
Managing Agent and its officers, directors, principals, affiliates and
shareholders, and their successors and assigns, against certain losses, other
than losses arising out of intentional misconduct or gross negligence of the
Managing Agent, incurred by the Managing Agent by reason of, among others, the
misstatement or omission to state material facts in connection with the
statements made in this Prospectus and the Registration Statement of which this
Prospectus is a part. The Managing Agent has in turn agreed to indemnify the
Company and its officers, directors, principals, affiliates and shareholders,
and their successors and assigns, against losses arising out of intentional
misconduct or gross negligence of the Managing Agent. To the extent that such
indemnification may purport to provide exculpation from possible liabilities
arising from the federal securities laws, in the opinion of the U.S. Securities
and Exchange Commission, such indemnification is contrary to public policy and
therefore unenforceable.
The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to the
copy of such agreement which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
DELIVERIES AND ADDITIONAL INFORMATION
All deliveries, correspondence and questions sent or presented to the
Company or the Warrant Agent relating to the Warrant Redemption should be
directed to one of their respective addresses or telephone number set forth on
the back cover of this Prospectus.
BUSINESS
The Company, through LSI, its wholly-owned subsidiary, owns and
operates a laboratory providing drug testing services to corporate and
institutional customers seeking to detect and deter the use of illegal drugs.
LSI's laboratory is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), to conduct drug testing using
procedures required for legal defensibility ("forensic") of test results. These
procedures provide reliable and accurate test results and a secure chain-of-
custody for each specimen from its collection to the reporting of the test
results. LSI tests for a number of drugs of abuse, including cocaine,
methamphetamine, heroin, PCP, marijuana and alcohol, primarily by urinalysis. In
addition to forensic drug testing, LSI offers a range of services which are
customized to assist customers in implementing cost-effective drug testing
programs. LSI's high volume customers have enabled it to develop cost-efficient
means of delivering its services while maintaining forensic testing standards.
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In connection with the Peterson Share Exchange, LSI acquired a drug
testing kit developed by MBf USA under the trademark "AWARE CONFIDENTIAL DRUG
CHECK" which consists of a small plastic specimen bottle with a foam-lined,
cardboard mailing tube. The tube is typical of containers used by hospitals and
drug testing laboratories when mailing urine specimens. The AWARE product has
been approved by the Food and Drug Administration for use by clinicians, but has
not been approved for over-the-counter sale. The AWARE product has not been
previously marketed by MBf USA or LSI and a market study has not been conducted.
At the date of this Prospectus, the Company does not have any plans to attempt
to develop a market for the AWARE product.
INDUSTRY BACKGROUND
The Office of National Drug Control Policy estimates that Americans
spend more than $40 billion a year on illegal drugs. A NIDA 1990 National Survey
concluded that 12.9 million Americans had used illegal drugs in the one-month
period prior to the survey, including an estimated 10.2 million who had used
marijuana and 1.6 million who had used cocaine. This study also estimated that
1.6 million Americans had used heroin in their lifetime. In addition, law
enforcement data indicate that drugs are involved in a majority of the nation's
violent crimes and that more than 60 percent of arrestees in 1990 had illegal
drugs in their bodies. Government data indicate that drug abuse costs American
business $100 billion annually in lost productivity, increased accidents,
absenteeism, medical claims and employee theft.
In the 1970s, drug testing was limited largely to criminal justice
agencies and drug treatment programs. In the 1980s, however, increased awareness
of the drug abuse problem and its consequences led to increased drug testing in
the workplace. This, in turn, led to litigation which has settled many of the
formerly open legal and constitutional questions on drug testing. These court
decisions, generally favoring properly implemented drug testing programs, have
reinforced the acceptance of drug testing in the workplace. In 1986, President
Reagan signed an Executive Order which mandated drug testing for many key
federal employees, and there are now comprehensive federal regulations for drug
testing by many agencies. In the private sector, the number of the nations 200
largest corporations screening applicants and employees for drug use rose from
three percent to 98 percent from 1983 to 1991, according to the Institute for a
Drug Free Workplace. Furthermore, the Department of Transportation adopted
additional regulations, which became effective in 1995, that substantially
expanded the former regulations which mandated random drug testing of workers,
especially in such safety-sensitive jobs such as trucking, aviation,
transportation, railroads and pipelines. Under these recently adopted
regulations, 50 percent of transportation workers (mass-transit workers,
interstate truckers and bus drivers) are required to be tested annually. It is
expected that under these additional regulations, 7.5 million workers are
required to undergo drug testing each year, up from 3.5 million in years prior
to 1995. Based upon industry studies, the Company believes the market for
legally defensible ("forensic") drug testing services was more than $500 million
in 1992, and as a result of expanded mandatory drug testing regulations adopted
by the Department of Transportation, it is estimated that the drug testing
market will exceed $625 million in 1997.
Historically, the drug testing market has been served by national
clinical laboratory chains, independent national drug testing laboratories and
numerous regional and local laboratories such as LSI. Thousands of general
clinical laboratories nationwide can conduct non-forensic drug testing. Over the
past 10 years, however, many corporations and government agencies have begun to
require drug testing laboratories to be certified to conduct forensic drug tests
and to offer testing services on a cost-effective basis. In addition, many of
the largest of these organizations, particularly those in the public sector,
utilize a competitive bidding procedure to select their drug testing
laboratories. The bidding process for these competitive contracts is
increasingly limited to SAMHSA certified drug testing laboratories, such as
LSI's laboratory, which can demonstrate the ability to meet the service and
volume levels specified by the customers. As of June 4, 1997, there were
approximately 69 laboratories certified by SAMHSA.
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GROWTH STRATEGY
The Company's strategy is to become a leading drug testing laboratory
providing legally defensible ("forensic") test results through the acquisition
of additional companies that perform and provide drug testing services and
expansion of its current client base and services. There are no assurances that
the Company will be able to achieve its expansion strategy or that its expanded
operations will be successful. The Company's strategy includes the following key
elements:
Acquisitions. The Company has and intends to continue the expansion of
its client base and drug testing services through the acquisition of companies
and the assets of companies providing drug testing services compatible with and
comparable to those provided by LSI. The Company completed the NDAC Asset
Purchase in 1994, the NPLI Acquisition in 1996 and the PLL Asset Purchase in
January 1997. See "The Company--Background." In connection with NPLI
Acquisition, the Company acquired, in addition to the drug testing operations,
the clinical testing and analysis operation conducted by NPLI. After several
attempts to sell the clinical testing and analysis operation of NPLI, the
Company discontinued the clinical testing and analysis operation in the fourth
quarter of 1996. This resulted in a net loss from discontinued operation of
$500,636 and a net loss on disposal of the clinical business of $773,580.
See "--Litigation," and "Management's Discussion and Analysis Financial
Condition and Results of Operations--Results of Operations."
The principal objective of the Company's acquisition strategy is to
acquire companies that, through the consolidation and assimilation of the
operations of drug testing companies acquired with and into the operations of
LSI, will result in increased testing volume with minimal additional specimen
processing cost, resulting in increased profitability and cash flows. Although
the Company will not consummate an acquisition unless, at the time of the
acquisition, it is anticipated that such acquisition will contribute to the
profitability and provide positive cash flows from operations following
consolidation and assimilation of the operations of the acquired company with
those of LSI, there can be no assurance of such increased profitability and
positive cash flows, as well as operations other than forensic drug testing may
be acquired, which may be discontinued or disposed of at a loss. In the event
the Company fails to make acquisitions which contribute to the profitability of
the Company and provide positive cash flows to the Company, the Company may be
required to reduce general and administrative expenses, possibly including
consolidation of Company operations into the offices of LSI and reduction of
management compensation, and may be required to utilize borrowings to fund
negative cash flows from operations until such reductions of general and
administrative expenses are achieved. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Future Operations and
Liquidity."
In selecting companies for acquisition, the various criteria that will
be considered include (i) the ability to consolidate and assimilate the
operations of the acquisition target with and into those of LSI with the
objective of achieving the anticipated increase in profitability and cash flows
from operations, (ii) the ability on a post-acquisition basis to maintain the
acquisition target's client base and market share, (iii) the ability to preserve
the essential marketing personnel of the acquisition target, (iv) the terms of
the acquisition, such as the cash requirements and willingness of the target's
owners to accept equity securities of LSAI, (v) the revenue base of the
acquisition target, and (vi) the legal and accounting costs of the acquisition.
Such acquisitions will be completed through the issuance of Common
Stock or Preferred Stock of LSAI, cash acquisitions utilizing available cash and
cash equivalents, borrowings or other sources of equity capital. The non-
specific nature of the acquisitions makes an estimation of amount to be
allocated to acquisitions from these sources impossible to estimate or determine
at the date of this Prospectus. LSAI's growth strategy will require expanded
customer services and support, increased personnel, expanded operational and
financial systems and implementation of control procedures. There can be no
assurance that LSAI will be able to manage expanded operations effectively and
efficiently. LSAI's acquisitions may involve a number of risks including the
diversion of management's attention
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to the assimilation of the acquired company, adverse short-term effects on the
Company's results of operations, the amortization of acquired intangible assets,
and the possibility that the acquired company will not contribute to the
Company's profitability and cash flows as expected, and the acquisition may
include business operations, other than forensic drug testing, the may be
discontinued or disposed of at a loss.
LSAI's shareholders will, in all likelihood, not be afforded the
opportunity to approve the terms of any such acquisitions because the Board of
Directors will, in most cases, have the authority to consummate acquisitions
without shareholder approval. Shareholders will also not have an opportunity,
prior to consummation of an acquisition, to review the financial statements of
an acquisition candidate, except where shareholder approval is required.
Expanding its Client Base. LSI intends to continue to compete
aggressively for clients, with a greater emphasis on potential clients currently
served by competitors. In this effort, LSI intends to focus in particular on the
institutional and private employers, where LSI believes demand for drug testing
services is the greatest and the average price per specimen historically has
been higher. LSI also is targeting numerous moderate volume clients which have
yet to implement drug testing programs.
Emphasizing Client Service. SAMHSA certification requirements have
established a quality baseline for forensic drug testing. As a result, it has
become increasingly difficult for laboratories to differentiate their drug
testing services on the basis of quality. LSI has chosen to differentiate itself
by providing drug testing services, customized to address each client's needs
including assisting clients with the development of drug testing programs,
training client personnel, managing specimen collection, arranging for
transportation of specimens to LSI's laboratory, identifying trends in local and
national drug use, interpreting test results and providing expert testimony
concerning challenged test results. Unlike most of LSI's competitors, LSI
specializes in drug testing, and, through specialization, LSI believes that its
customer services equal or exceed those provided by its competitors.
Improving Operating Efficiencies. LSI believes that price continues to
be an important factor in obtaining new clients and maintaining current clients.
LSI intends to continue focusing on being a low-cost provider by improving the
efficiency of both its laboratory operations and customer services. Achievement
of improved efficiency is primarily a function of increased specimen testing
volume. Increased specimen testing volume reduces the cost per specimen tested
because of the somewhat fixed nature of general and administrative costs and
permits LSI to obtain volume purchase price concessions from its vendors which
also lower the direct cost per specimen tested. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
DRUG TESTING OPERATIONS
The essential elements of legally defensible (forensic) drug testing
are a secure chain-of-custody for each specimen from its collection to the
reporting of test results, and accurate and reliable testing in which a second
independent test is performed to confirm each positive test result. LSI
carefully controls each step of the testing process by following detailed
written procedures and by using the specific forensic testing methods required
for legal defensibility of results. LSI tests for drugs of abuse, including
cocaine, methamphetamine, heroin, PCP, marijuana and alcohol, primarily by
urinalysis. LSI performs all testing at its laboratory in Gretna, Louisiana
which operates 24 hours per day, six days per week. The steps in LSI's forensic
drug testing process are as follows:
Collection and Transportation. Forensic drug testing begins with
specimen collection conducted under carefully controlled conditions. Once a
donor has provided a specimen which consists of two specimen bottles, each
specimen is assigned a unique specimen identification number. A bar-coded or
numbered label with this specimen identification number is affixed to each
specimen bottle as a tamper-proof seal. The donor is then required to sign a
statement on a chain-of-custody form which is bar-coded or numbered to match the
specimen bottles. The donor certifies that the urine in the bottles belongs to
the donor, that the bottles were sealed and labeled in the donor's presence and
that the identification number on the bottles matches the number on the form.
The collector also signs
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the form to certify the integrity of the collection process and then prepares
the specimen for shipment to LSI's laboratory, together with a signed chain-of-
custody form, which are delivered to LSI by overnight or same day courier or by
U.S. mail.
Receiving and Accessioning. LSI receives specimens in its restricted
accessioning rooms, where they are inspected for tampering and checked for
proper chain-of-custody documentation. The unique specimen identification number
is entered into the laboratory computer which automatically orders the proper
screening and confirmation testing and directs the reporting of test results. A
small portion, or aliquot, of the specimen is then poured from one of the
specimen bottles and prepared for screening. The specimen bottle is resealed
with a tamper-proof seal and placed in locked cold storage for approximately 12
months.
Screening. Each specimen submitted to LSI is screened for the presence
of the drugs specified by the client. During 1996, LSI performed more than
5,800,000 screening tests on more than 70,000 specimens per month to determine
the presence of drugs. In conducting these tests, LSI employs several different
screening methods using automated analyzers and procedures which provide rapid,
reliable screening of large numbers of specimens.
Confirmation Testing. Specimens that screen negative are reported to
the client without further testing. Specimens that screen positive are confirmed
by testing a separate portion or aliquot using a different and independent
technology from that used for initial screening. The confirmation technologies
employed by LSI include those required by SAMHSA.
Quality Assurance and Control. LSI carefully monitors the accuracy and
reliability of its test results by internal and external quality assurance and
control programs. LSI's staff evaluates laboratory performance by inserting
"open" and "blind" quality control samples into each batch of client specimens
during both screening and confirmation testing. An "open" sample is a urine
specimen sample containing known quantities of one or more drugs of which the
testing operator may have been informed contains drugs, but is not made aware of
the kind and quantity of drugs contained in the sample. A "blind" sample is a
urine specimen sample containing unknown quantities and kinds of drugs and which
is indistinguishable from other specimen samples contained within a testing
batch of samples. All specimens in a testing batch are retested if the results
obtained for these control samples are not within specified limits. In addition,
LSI is subject to frequent proficiency testing by various certifying bodies
which send their own open and blind samples to the laboratory.
LSI's laboratory is certified by SAMHSA, the College of American
Pathology ("CAP"), as well as eight states and local jurisdictions. Of the
various certifications, SAMHSA certification is considered the most important by
LSI. SAMHSA is a federal regulatory agency charged with the responsibility and
authority to license laboratories performing forensic drug testing services for
the Federal Government and its agencies and industries which are federally
regulated, such as the Department of Transportation, Department of Defense, etc.
SAMHSA certifies, inspects, and monitors laboratories that perform forensic drug
testing services under numerous specific mandated guidelines, including (i)
strict adherence to chain-of-custody procedures, (ii) strict security of urine
specimens from collection through testing, (iii) qualifications of technicians
and the procedures employed in testing and the supervision thereof, (iv)
segregation of SAMHSA-related specimens from non-SAMHSA-related specimens, (v)
proficiency testing standards, and (vi) strict adherence to confidential
reporting of test results.
SAMHSA certification is essential to LSI's business because a major
number of its clients are required to use certified laboratories, and many of
its clients look to certification as an indication of reliability and accuracy
of tests. In order to remain certified, LSI is subject to frequent inspections
and proficiency tests. Failure to meet any of the numerous certification
requirements, to which LSI is subject, could result in suspension or loss of
certification. Such suspension or loss of certification could have a material
adverse effect on LSI and LSAI. In such event, until the suspension is lifted or
certification reobtained, LSI would be required to utilize the drug testing
services of a SAMHSA certified competitor to process SAMHSA-related specimens,
which would result in a substantial reduction
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in the number of specimens tested at LSI's laboratory and the price received per
specimen received net of such competitor's cost to LSI of performing such
testing services. In the event such suspension or loss of certification
continued for a substantial period, LSI may be required to downsize its
laboratory personnel and operations and, upon lifting of the suspension or
reobtaining of SAMHSA certification, restaffing of the laboratory could occur
over an extended period, and client base and market share may be required to be
reestablished, all at substantial cost and expense to LSI.
Data Review. Each test result, whether negative or positive, undergoes
four independent levels of review before being reported. A result is first
reviewed by the laboratory analyst conducting the test. Following the analyst's
review, the screening or confirmation laboratory supervisor reviews the result.
Next, a quality assurance and control technician reviews the result. Finally,
the test result, including all chain-of-custody and testing documentation, is
reviewed by a certifying scientist. It is only after all of these reviews have
been successfully completed and all documentation is in order that the
certifying scientist signs and releases a test result.
Reporting of Results. LSI transmits an increasing number of its test
results electronically through a secured national communications network. This
network immediately encrypts and transmits each test result from the laboratory
computer to the client's personal computer or secure fax machine as soon as it
has been released by the certifying scientist. Using this network, LSI routinely
reports results for specimens that screen negative within 24 hours of receipt in
the laboratory and within 48 hours for specimens that require confirmation.
Other clients receive test results via overnight courier or U.S. mail.
CONTRACTUAL ARRANGEMENTS
Most large drug testing clients, including the majority of public
employers and criminal justice agencies, use a formal competitive bid process in
which the potential client provides a detailed specification of the drug testing
services it requires. While price is an important factor, in most cases these
organizations are not required to accept the lowest bid, but rather may choose
the winning bidder on the basis of technical superiority and client service. LSI
has previously obtained contracts through biding and procurement procedures and
will continue to attempt to obtain such contracts through competitive bidding.
Such contracts are typically long-term, but are also subject to termination on
short notice with little or no penalty.
Other than drug testing services performed pursuant to contracts
obtained through competitive bidding procedures, LSI performs most of its drug
testing services without a formal contract. In most cases, LSI accepts and tests
specimens for an agreed price which is generally renegotiated periodically.
Because LSI does not currently have any long-term contracts, which is typical of
high volume clients, LSI is not dependent to any significant degree upon any one
client or contractual relationship with a client, the termination of which would
have a material adverse effect upon LSI.
COMPETITION
Drug testing laboratories compete primarily on the basis of technical
superiority, client service and price. The price per specimen is an important
factor in obtaining and maintaining customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations." The Company believes that LSI competes favorably in each of these
categories. LSI competes with three types of companies which offer forensic drug
testing services, i.e., national SAMHSA laboratory chains such as Smith-Kline
Beecham Clinical Laboratories and Laboratory Corporation of America, regional
SAMHSA laboratories such as LabOne, Inc. and Clinical Reference Lab and
companies providing on site screening devices. Many of these competitors have
greater financial resources than the Company. In addition, some clients and
potential clients of LSI operate their own drug testing facilities, or may
develop such facilities in the future.
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CERTIFICATION AND GOVERNMENT REGULATION
Companies which compete in the forensic drug testing market generally
must be certified by SAMHSA and may be required to have other types of
certification imposed by certain states or clients. LSI's laboratory is
currently certified by SAMHSA and CAP, as well as eight states and local
jurisdictions. LSI is subject to frequent inspections by certifying bodies,
including two SAMHSA inspections per year, and is also subject to frequent
proficiency testing by SAMHSA, CAP and other certifying bodies. Failure to meet
certification requirements could result in suspension or loss of certification.
Certification is essential to LSI's business because some of its clients are
required to use a certified laboratory, and many of its clients look to
certification as an indication of reliability and accuracy of test results. With
respect to its operations, LSI considers SAMHSA certification to be the most
important of its various certifications. In order to obtain SAMHSA
certification, a laboratory must apply for certification, meet certain minimum
facility requirements and then successfully complete a series of proficiency
tests, which takes approximately 12 months to complete at substantial cost and
expense. See "--Drug Testing Operations--Quality Assurance and Control."
Employee drug testing by federal agencies and certain private
employers is subject to regulation by certain federal agencies. Legislation
currently exists in a number of states regulating the circumstances under which
employers may test employees and the procedures under which such tests must be
conducted. In addition, the circumstances under which drug testing can legally
be required by employers is subject to court precedent and judicial review.
OTHER REGULATION
The operations of LSAI and LSI are also subject to various federal,
state and local requirements which affect businesses generally, such as taxes,
postal regulations, labor laws, and environment and zoning regulations and
ordinances.
ENVIRONMENTAL MATTERS
Certain testing procedures used by LSI require the use of hazardous
materials. Failure to comply with current or future federal, state or local
environmental laws or regulations could have a material adverse effect on LSI
and LSAI. LSI believes that it has adequately warned employees of potential
risks associated with working at LSI and has provided a workplace safe from
hazard, as required by the Occupational Safety and Health Administration and
certain Louisiana laws.
EMPLOYEES
As of June 30, 1997, LSAI had three full-time employees, and LSI had
104 full-time and 30 part-time employees, none of which are represented by a
labor organization. LSAI considers its and LSI's relations with their employees
to be good.
PROPERTIES
LSAI maintains its executive office in approximately 1800 square feet
at Suite 810, 101 Park Avenue, Oklahoma City, Oklahoma 73102. The office
premises are occupied under a long-term lease which expires August 31, 2000, and
the monthly rental payment is $1,685. LSAI considers such space to be adequate
for its current needs.
LSI's executive offices and laboratory are located in approximately
20,000 square feet at 1111 Newton Street, Gretna Louisiana 70053, in a building
owned by LSI. The building was acquired in December 1996 and remodeling was
completed in June 1997 at an estimated aggregate cost of $890,000. The Company
believes that, with the acquisition of the building, the new location of the
offices and laboratory will be adequate for the current and
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anticipated future needs of LSI. In addition, LSI's owns and holds for sale a
7,390 square foot building located at 113 Jarrell Drive, Belle Chasse,
Louisiana, in which the laboratory and executive offices of LSI were formerly
located.
In connection with the PLL Asset Purchase (see "The Company--
Background--PLL Asset Purchase"), the Company assumed the obligations of
Pathology Laboratories Limited ("PLL") under a certain Lease between Edith
Schlien and PLL, dated September 16, 1996, covering approximately 2,500 square
feet of office space located in Greenville, South Carolina. This lease requires
monthly base rental payments of $2,083, and will expire on September 16, 1999.
LITIGATION
In connection with the NPLI Acquisition, LSAI agreed to issue 153,282
additional shares of Common Stock to the former shareholders of NPLI in
connection with the aggregate $462,911 reduction in the principal amounts of
certain promissory notes issued to and held by the former NPLI shareholders. See
"The Company--Background--NPLI Acquisition." The former NPLI shareholders made
certain representations to LSAI regarding certain contracts and agreements for
the providing of forensic drug testing, which were relied upon by LSAI in
consummation of the NPLI Acquisition and which management of LSAI believes such
representations to have been inaccurate and misleading based upon information
obtained by LSAI following consummation of the NPLI Acquisition. LSAI has
refused to make additional payments of accrued interest and principal of the
promissory notes and has also refused to deliver the additional shares of Common
Stock. On February 21, 1997, the former NPLI shareholders initiated an action
against the Company, styled Kenneth O. Jobson and Haroutune K. Dekirmenjian v.
Laboratory Specialists of America, Inc., Case No. 3:97-CV-117, in the United
States District Court for the Eastern District of Tennessee at Knoxville,
seeking recovery of the accrued interest and outstanding principal amounts of
the promissory notes, which, based upon the NPLI Purchase Agreement, the Company
has no obligation to pay. The Company filed its answer in this action and made a
counterclaim against the former NPLI shareholders seeking a declaratory judgment
that the Company is not in default under the terms of the promissory notes and
recovery of an unspecified amount of damages for misrepresentation of known
material facts with the intent that the Company would rely upon such
misrepresentation in connection with the consummation of the NPLI Acquisition.
On April 15, 1997, the Company initiated a legal action against the
former NPLI shareholders, styled Laboratory Specialists of America, Inc. and
National Psychopharmacology Laboratory, Inc. v. Kenneth O. Jobson and Haroutune
K. Dekirmenjian, Case No. 97-2582-63, in the District Court of Oklahoma County,
State of Oklahoma, seeking a declaratory judgment that the Company is not in
default under the terms of the promissory notes and recovery of damages in
excess of $10,000 for misrepresentation of known material facts with the intent
that the Company would rely upon such misrepresentation in connection with the
consummation of the NPLI Acquisition. The former NPLI shareholders have not
filed an answer in this action.
The Company is vigorously defending and prosecuting the respective
actions. It is believed by management of the Company that the former
shareholders of NPLI will not be successful in obtaining payment of the accrued
interest and formerly outstanding principal amounts of the promissory notes;
however, there is no such assurance. Furthermore, there is no assurance that the
Company will recover any damages based upon the representations of the NPLI
stockholders made with the intent of inducing the Company to consummate the NPLI
Acquisition. It is anticipated by management that the Company will eventually
deliver all or a portion of the additional shares of Common Stock. The former
NPLI shareholders and LSAI have reached tentative settlement of the pending
litigation, although a formal settlement agreement has not been executed. Under
the terms of the proposed settlement agreement, the former NPLI shareholders
have informally agreed to accept 103,333 shares of the Company's Common Stock in
full satisfaction of the promissory notes.
Other than the litigation described above, LSAI does not have any
pending litigation. In the ordinary course of their businesses, LSI and NPLI
from time to time are sued by individuals who have tested positive for drugs of
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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
these types of claims. Based upon the prior successful defense of similar-type
litigation, management believes LSI and NPLI have valid defenses to the
plaintiffs' claims in all pending litigation, and LSI and NPLI intend to
vigorously defend themselves in such litigation. LSI and NPLI are not currently
defendant parties in any legal proceedings other than routine litigation that is
incidental to the business of LSI and NPLI, and management of LSI and NPLI
believes 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 insurance
coverage is adequate with respect to the pending litigation and, in general, for
the businesses of LSI and NPLI.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
each executive officer and director of LSAI and LSI. Directors are generally
elected at the annual shareholders' meeting and hold office until the next
annual shareholders' meeting and until their successors are elected and
qualified. Executive officers are elected by the Board of Directors and serve at
its discretion. LSAI's Bylaws authorize the Board of Directors to be constituted
of not less than one and such number as the Board of Directors may from time to
time determine by resolution or election. The Board currently consists of seven
members.
NAME AGE POSITION WITH LSAI POSITION WITH LSI AND NPLI
- ------------ --- ------------------ ---------------------------
John Simonelli............. 50 Chairman of the
Board, Chief
Executive Officer,
Secretary, and
Director
Larry E. Howell............ 50 President and Chief Vice President and
Operating Officer, Director
and Director
Arthur R. Peterson, Jr..... 51 Treasurer and President and Chief
Director Executive Officer,
and Director
Robert A. Gardebled, Jr.... 32 Director Controller, Secretary
and Director
Jerome P. Welch(1)......... 59 Director --
Michael E. Dunn(1)......... 51 Director --
Harry Gray Browne, M.D.(1). 66 Director --
- -----------------------
(1) Member of the Stock Option Committee and Compensation Committee.
See "--Stock Option Plan," below.
The executive officers of LSI devote their full-time to LSI's
business, while Messrs. Simonelli and Howell devote such time to the business
and affairs of LSAI as may be required, but not less than 50 percent of their
time is and will continue to be devoted to the business and affairs of LSAI.
The following is a brief description of the business background of the
executive officers and directors of LSAI:
John Simonelli is Chairman of the Board, Chief Executive Officer,
Secretary and a Director of LSAI. Mr. Simonelli served as a Director, Chief
Executive Officer and Secretary of Vantage Capital Resources, Inc. from March
1996 until its merger with Applied Intelligence Group, Inc. and thereafter
served as a Director and Vice President of Applied Intelligence Group, Inc.
until October 14, 1996. He served as Chairman of the Board and Chief Executive
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Officer of MBf USA, Inc. (formerly American Drug Screens, Inc.), a publicly-held
company engaged in the medical products and services industry, from February
1988 through June 1992. He served as Chief Executive Officer of Unico, Inc.
(formerly CMS Advertising, Inc.), a publicly-held company engaged in the
franchising of cooperative direct mail advertising businesses, from June 1986 to
June 1988. From July 1981 through June 1985, he served in various capacities,
including President and Director, with Moto Photo, Inc., a publicly-held company
engaged in the business of franchising one-hour, photo development laboratories.
Mr. Simonelli served as President and CEO, from May 1985 until November 1985,
and a Director, from May 1985 through 1988, of TM Communications, Inc. (formerly
Video Image, Inc. and TM Century, Inc.), a publicly-held company engaged in
radio broadcasting and corporate communications.
Larry E. Howell is President and Chief Operating Officer, and a
Director of LSAI. Mr. Howell served as a Director, President and Treasurer of
Vantage Capital Resources, Inc. from March 1996 until its merger with Applied
Intelligence Group, Inc. and thereafter served as a Director and Vice President
of Applied Intelligence Group, Inc. until October 14, 1996. He served as
President and Chief Operating Officer of MBf USA, Inc. (formerly American Drug
Screens, Inc.), a publicly-held company engaged in the medical products and
services industry, from February 1988 through June 1992. From June 1986 to April
1988, Mr. Howell served first as Vice President and than as President and Chief
Operating Officer of Unico, Inc. (formerly CMS Advertising, Inc.), a publicly-
held company engaged in the franchising of cooperative direct mail advertising
businesses. Since January 1982, Mr. Howell as the sole proprietor of Howell and
Associates, Inc. provides consulting services principally related to corporate
acquisitions and mergers.
Arthur R. Peterson, Jr. was elected Treasurer and a Director of LSAI
in July 1994. Mr. Peterson founded LSI in 1978 and served as its President and
Chief Executive Officer and a Director from inception. From March 1989 until
April 1994, he served as a Director of MBf USA, Inc. (formerly American Drug
Screens, Inc.), a publicly held company in the medical products and services
industry and former parent of LSI. Prior to 1978, Mr. Peterson was Chairman of
the Board and Chief Executive Officer of Clinical Laboratories of La., Inc., a
company he founded which served the medical community in clinical studies.
Robert A. Gardebled, Jr. was elected a Director of LSAI in July 1994.
Since July 1989, he has served as an assistant to the President and was elected
Controller of LSI and in connection with the LSI Acquisition, he was elected
Secretary of LSI. From July 1991 until April 1994, Mr. Gardebled served as a
Director of MBf USA, Inc. (formerly American Drug Screens, Inc.), a publicly
held company in the medical products and services industry and former parent of
LSI. Prior to joining LSI, he was a Production Manager for Halter Yachts, Inc.,
a Louisiana ship building company.
Jerome P. Welch was elected a Director of LSAI on August 26, 1994. Mr.
Welch is President of Prospect Publishers, Inc., a publisher of literary
hardback anthologies and newsletters. From May 1990 through June 1992, he served
as a Director and in July 1990 was elected Secretary of MBf USA, Inc. (formerly
American Drug Screens, Inc.), a publicly-held company engaged in the medical
products and services industry. From July 1988 to January 1990, Mr. Welch served
as President of Simon & Schuster Supplementary Publishers, a subsidiary of
Paramount Communications, Inc. and was Senior Vice President and Publisher of
McGraw Hill Educational Publishing from July 1987 to July 1988.
Michael E. Dunn was elected a Director of LSAI on August 26, 1994.
Since April 1980 to January 1995, he was a member, shareholder and director of
the law firm of Zrenda Dunn & Swan, A Professional Corporation (formerly Bright
Zrenda & Dunn), in Oklahoma City, Oklahoma, and President from April 1992 until
January 1995. Mr. Dunn has been a member, shareholder and President of Dunn &
Swan, A Professional Corporation, since February 28, 1995. He has been the owner
of the Woodlake Racquet Club, a recreational athletic club, since 1981. From
November 1991 to November 1992, he served as a director of Tide West Oil
Company, a publicly-held, independent oil and gas
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exploration and production company. Mr. Dunn was graduated from the University
of Oklahoma College of Law in 1972, and holds a Bachelor of Science in
Accounting and pursued graduate studies at the University of Oklahoma.
Harry Gray Browne, M.D. was elected a Director of LSAI on December 12,
1994. Dr. Browne is President and Chairman of the Board of NDA Corporation and
held the same positions with National Drug Assessment Corporation until their
merger on December 19, 1994. Further, he is Vice Chairman and Senior Vice
President of Scientific Affairs of Therapeutic Antibodies, Inc., and a Director
of Therapeutic Antibodies London, Ltd. (both are international biopharmaceutical
companies), Chairman of the Board of Winchester Research Laboratories (a
development stage, genetic research company), a Director of Harley Screen PLC (a
clinical laboratory in London, England), and a member of the Board of Governors
of Thomas Aquinas College (a liberal arts college in Santa Paula, California).
Until December 1, 1994, National Drug Assessment Corporation was engaged in the
providing of drug testing services. Dr. Browne received a Bachelor of Arts from
Yale University in 1951 and a Medicinae Doctorate from Cornell University
Medical College in 1956 and a Diploma of Tropical Medicine and Parasitology from
the University of Havana in 1953.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
total cash compensation, paid or accrued, of the President and Chief Executive
Officer of LSAI and each of the executive officers that during 1996 received
compensation in excess of $100,000.
OFFICER COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
John Simonelli........................... 1996.... $100,000 $ -- $12,600
Chief Executive Officer of LSAI 1995.... $ 75,000 $ -- $12,000
1994.... $ 75,000 $ -- $ 8,592
Larry E. Howell.......................... 1996.... $100,000 $ -- $14,100
President and Chief Operating 1995.... $ 75,000 $ -- $12,000
Officer of LSAI 1994.... $ 75,000 $ -- $ 8,592
Arthur R. Peterson, Jr................... 1996.... $120,133 $50,000 $21,700
Treasurer of LSAI and Chief Executive 1995.... $100,000 $50,000 $16,000
Officer of LSI 1994.... $100,000 $76,956 $16,000
</TABLE>
- ------------------------
(1) Dollar value of base salary earned during the year.
(2) Dollar value of bonus earned during the year.
(3) The amounts reflected are for an automobile allowance and life and
disability insurance premiums paid by the Company.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1996 AND YEAR-END OPTION VALUES
Stock Options and Option Values. The following table sets forth
information related to options granted to the executive officers named in the
Officer Compensation Table during 1996.
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<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
NUMBER OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OF OPTIONS EMPLOYEES IN BASE PRICE ----------------------------
NAME GRANTED 1996 PER SHARE EXPIRATION DATE FIVE PERCENT TEN PERCENT
- ---- ---------- ------------------ ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
John Simonelli............. 50,000 27% $2.75 October 30, 2006 $223,973 $356,640
Larry E. Howell............ 50,000 27% $2.75 October 30, 2006 $223,973 $356,640
Arthur R. Peterson, Jr..... 50,000 27% $2.75 October 30, 2006 $223,973 $356,640
</TABLE>
- ------------------------
(1) The potential realizable value portion of the foregoing table
illustrates the value that might be realized upon exercise of the
options immediately prior to the expiration of their term, assuming
the specified compound rates of appreciation of LSAI's Common Stock
over the term of the options. These amounts do not take into
consideration provisions restricting transferability and represent
certain assumed rates of appreciation only. Actual gains on stock
option exercises are dependent on the future performance of LSAI's
Common Stock and overall stock market conditions. There can be no
assurance that the potential values reflected in this table will be
achieved. All amounts have been rounded to the nearest whole dollar
amount.
Aggregate Stock Option Exercise and Year-End and Option Values. The
following table sets forth information related to the number of options
exercised in 1996 and the value realized by the named executive officers, as
well as, information related to the number and value of options held by the
named executive officers at the end of 1996. During 1996, there were no options
to purchase LSAI's Common Stock exercised by the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUED OF UNEXERCISED IN-THE-MONEY
AS OF DECEMBER 31, 1996 OPTIONS AS DECEMBER 31, 1996(1)
----------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John Simonelli............. 10,000 50,000 $-- $12,500
Larry E. Howell............ 10,000 50,000 $-- $12,500
Arthur R. Peterson, Jr..... 10,000 50,000 $-- $12,500
</TABLE>
- ------------------------
(1) The closing sale price of the Common Stock as quoted on Nasdaq SmallCap
Market on December 31, 1996, was $3.00. Because the closing highest bid
price of the Common Stock on December 31, 1996, was equal to the exercise
price, exercisable options were not in the money on such date.
COMPENSATION OF DIRECTORS
The directors of LSAI that are employees of LSAI or LSI are not
currently compensated for attending meetings of directors and committees of the
Board of Directors, but are reimbursed for out-of-pocket expenses. The
compensation of non-employee directors has not been determined by the Board of
Directors, but non-employee directors are reimbursed for out-of-pocket expenses
incurred in attending meetings of directors and committees on which they serve.
During 1996, all actions taken by the Board of Directors were pursuant to
memoranda of action without formal meeting and the directors of LSAI were not
paid any compensation nor was any compensation accrued.
EMPLOYMENT ARRANGEMENTS
LSAI has employment agreements with Messrs. Simonelli and Howell,
which were amended on April 15, 1996, and expire on April 15, 2000, each of
which provides, among other things, (i) an annual base salary of $112,500, (ii)
bonuses at the discretion of the Board of Directors, but not in excess of 10
percent of the net income of LSAI, (iii) eligibility for stock options under
LSAI's Stock Option Plan, (iv) health and disability insurance benefits and life
insurance, (v) an automobile allowance, and (vi) benefits consistent with
similar executive employment
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<PAGE>
agreements. The agreements require Messrs. Simonelli and Howell to devote not
less than 50 percent of their time and attention to the business and affairs of
LSAI. The agreements also restrict the employee's right to participate in other
activities outside of LSAI to the extent such activities conflict with the
employee's ability to perform his duties and that would violate his duty and
loyalty to LSAI. The Board of Directors has delegated to the Compensation
Committee, which is comprised of Messrs. Peterson, Welch and Dunn, the
responsibility of determining the bonus compensation to be paid to the officers
of LSAI.
Furthermore, LSI has an employment agreement with Mr. Peterson which
expires April 15, 2000, and which provides, among other things, (i) an annual
base salary of $125,000, (ii) annual bonuses equal to the lesser of $50,000 or
10 percent of the net income of LSAI before provision for income taxes, (iii)
eligibility for stock options under LSAI's Stock Option Plan, (iv) health and
disability insurance benefits and life insurance, maintained at the Company's
cost and expense, covering the life of Mr. Peterson in the face amount of
$1,000,000, (v) an automobile allowance, and (vi) benefits consistent with
similar executive employment agreements. The agreement requires Mr. Peterson
to devote his full time and attention to the business and affairs of LSAI.
Each of the employment agreements with the officers of LSAI and LSI
may be terminated by LSAI or LSI in the event the Board of Directors determines
in good faith that the officer is guilty of gross negligence or fraud materially
injurious to LSAI or LSI.
STOCK OPTION PLAN
LSAI established the Laboratory Specialists of America, Inc. 1994
Stock Option Plan (the "Stock Option Plan" or the "Plan") in May 1994. The Board
of Directors amended and restated the Plan on October 30, 1996, which will not
become effective unless and until approved of the shareholders of LSAI. The
following summary of the Plan does not reflect the amended and restated Plan,
which in part will increase the total number of shares of Common Stock
authorized and reserved for issuance under the Plan to 425,000.
The Plan provides for the issuance of incentive stock options ("ISO
Options") with or without stock appreciation rights ("SARs") and nonincentive
stock options ("NSO Options") with or without SARs to employees and consultants
of the Company, including employees who also serve as directors of the Company.
The total number of shares of Common Stock authorized and reserved for issuance
under the Plan is 225,000. As of the date of this Prospectus, NSO Options to
purchase 235,000 shares (exercisable after September 28, 1997 and on or before
March 28, 2007) at an exercise price of $2.00 per share. The outstanding NSO
Options were granted on March 28, 1997, in replacement of the then outstanding
NSO Options which consisted of 50,000 (exercisable on or before July 20, 2005),
and 185,000 shares (exercisable after April 30, 1997 and on or before October
30, 2006) of Common Stock at an exercise price of $3.00 and $2.75 per share,
respectively, were outstanding. In the event the Plan as amended and restated is
not approved by the shareholders, 10,000 of the NSO Options granted under the
Plan will be canceled. No options have been exercised and no SARs have been
granted under the Plan.
The Stock Option Committee, which is currently comprised of Messrs.
Browne, Welch and Dunn, administers and interprets the Plan and has authority to
grant options to all eligible employees and determine the types of options
granted, with or without SARs, the terms, restrictions and conditions of the
options at the time of grant, and whether SARs, if granted, are exercisable at
the time of exercise of the Option to which the SAR is attached.
The option price of the Common Stock is determined by the Stock Option
Committee, provided such price may not be less than the fair market value of the
shares on the date of grant of the option. The fair market value of a share of
the Common Stock is determined by averaging the closing high bid and low asked
quotations for such share on the date of grant of the option as reported by
Nasdaq or, if not quoted on Nasdaq, by the Stock Option Committee. Upon the
exercise of an option, the option price must be paid in full, in cash or with an
SAR. Subject to the Stock Option Committee's approval, upon exercise of an
option with an SAR attached, a participant may receive cash, shares
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<PAGE>
of Common Stock or a combination of both in an amount or having a fair market
value equal to the excess of the fair market value, on the date of exercise, of
the shares for which the option and SAR are exercised over the option exercise
price.
Options granted under the Plan may not be exercised until six months
after the date of the grant and rights under an SAR may not be exercised until
six months after the SAR is attached to an option, if not attached at the time
of the grant of the option, except in the event of death or disability of the
participant. ISO Options and any SARs are exercisable only by participants
while actively employed as an employee or a consultant by LSAI or a subsidiary
of LSAI, except in the case of death, retirement or disability. Options may be
exercised at any time within three months after the participant's retirement or
within one year after the participant's disability or death, but not beyond the
expiration date of the option. No option may be granted after April 30, 2004.
Options are not transferable except by will or by the laws of descent and
distribution.
AMENDMENT AND RESTATEMENT OF THE PLAN. On October 30, 1996, the Board
of Directors approved the amendment and restatement of the Plan, subject to
approval by the shareholders of LSAI. The amendments to the Plan, if approved by
the shareholders, will (a) remove the prohibition on participation by non-
employee members of the Board of Directors as permitted by the recently amended
and adopted rules under Section 16 of the Securities Exchange Act of 1934, as
amended (the "Rules"), (b) increase in the number of shares of Common Stock of
the Company reserved and available for granting of options to purchase pursuant
to the Plan to 425,000, and (c) make other revisions to comply with the
provisions of the recently adopted Rules that do not require stockholder
approval.
INSIDER TRADING POLICY AND NON-PUBLIC INFORMATION DISCLOSURE
The Company has adopted policies relating to insider trading to
prevent the misuse of material and non-public information by officers, directors
and employees of the Company, as well as the disclosure of such information to
any person outside of the Company. Under this policy, officers, directors and
employees of the Company are prohibited from engaging in transactions in the
securities of the Company when such person possesses material information (i.e.,
information that would affect an investor's decision to purchase or sell the
securities of the Company or any other publicly-held company) which has not
previously been made public ("non-public information"). In addition, officers,
directors and employees of the Company are prohibited from disclosing any non-
public information to any person outside of the Company, whether such
information is related to the Company or any other company which has been
obtained as a result of or in connection with the position of the officer,
director or employee with the Company, and from using such information in
connection with securities transactions of the Company or any other publicly-
held company. These policies also provide guidelines regarding maintenance of
confidentiality of non-public information to avoid dissemination of such
information prior to public disclosure of such non-public information and
requiring the obtaining of confidentiality agreements from persons outside the
Company. See "Business--Growth Strategy--Acquisitions."
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation
Act, the Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of LSAI for a breach of their
fiduciary duty as directors. These provisions do not eliminate the liability of
a director for (i) a breach of the director's duty of loyalty to LSAI or its
shareholders, (ii) acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) liability
arising under Section 1053 of the Oklahoma General Corporation Act (relating to
the declaration of dividends and purchase or redemption of shares in violation
of the Oklahoma General Corporation Act), or (iv) any transaction from which the
director derived an improper personal benefit. In addition, these provisions do
not eliminate liability of a director for violations of federal securities laws,
nor do they limit the rights of LSAI or its shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. Such remedies may not be effective in all cases.
-50-
<PAGE>
The Certificate and Bylaws of LSAI provide that LSAI shall indemnify
all directors and officers of LSAI to the full extent permitted by the Oklahoma
General Corporation Act. Under such provisions, any director or officer, who in
his capacity as such, is made or threatened to be made, a party to any suit or
proceeding, may be indemnified if the Board of Directors determines such
director or officer acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of LSAI. The Certificate and Bylaws
and the Oklahoma General Corporation Act further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under the Certificate, the Bylaws, an agreement, vote of
shareholders or disinterested directors or otherwise. Insofar as indemnification
for liabilities arising under the Act may be permitted to directors and officers
of LSAI pursuant to the foregoing provisions, or otherwise, LSAI has been
advised that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
LSAI may enter into indemnity agreements with each of its directors
and executive officers. Under each indemnity agreement, it is anticipated that
LSAI will pay on behalf of the indemnitee, and his executors, administrators and
heirs, any amount which he is or becomes legally obligated to pay because of (i)
any claim or claims from time to time threatened or made against him by any
person because of any act or omission or neglect or breach of duty, including
any actual or alleged error or misstatement or misleading statement, which he
commits or suffers while acting in his capacity as a director and/or officer of
LSAI or its affiliate or (ii) being a party, or being threatened to be made a
party, to any threatened, pending or contemplated action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was an officer, director, employee or agent of LSAI or its
affiliate or is or was serving at the request of LSAI as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. It is anticipated that the payments which LSAI will be
obligated to make thereunder shall include, inter alia, damages, charges,
judgments, fines, penalties, settlements and cost of investigation and costs of
defense of legal, equitable or criminal actions, claims or proceedings and
appeals therefrom, and costs of attachment, supersedeas, bail, surety or other
bonds.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between
LSI and LSAI and certain of its officers, directors and shareholders during the
last two years. Certain of these transactions will continue in effect during and
following this offering and may result in conflicts of interest between LSAI and
such individuals. Although these persons have fiduciary duties to the Company
and its shareholders, there can be no assurance that conflicts of interest will
always be resolved in favor of the Company.
In connection with the LSI Acquisition (see "The Company--Background--
LSI Acquisition"), Arthur R. Peterson, Jr. exchanged all outstanding common
stock of LSI for 1,000,000 shares of Common Stock and 300,000 shares of Series I
Cumulative Convertible Preferred Stock ("Series I Preferred Stock") of LSAI. The
Series I Preferred Stock was fully redeemed on July 10, 1995, at the aggregate
stated value of $300,000 and cumulative dividends of $24,748 were paid in full.
Until June 1996, LSAI's offices located at 1101-A Sovereign Row in
Oklahoma City were subleased from Unico, Inc. ("Unico") on a month-to-month
basis currently for $1,500 per month, and the lessors of such premises to Unico
include Messrs. Simonelli and Howell, who are officers and directors of LSAI.
Messrs Simonelli and Howell own, in the aggregate, a 50 percent undivided
interest in such premises, and are former directors of Unico. During 1996 and
1995, LSAI paid Unico, pursuant to the sublease, aggregate monthly rent of
$6,000 and $21,000, respectively.
During 1995, the law firm of Zrenda Dunn & Swan, A Professional
Corporation, performed legal services as counsel to LSI and LSAI. During 1994,
Michael E. Dunn, a Director of the Company, was President, a Director
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<PAGE>
and a shareholder of Zrenda Dunn & Swan. During 1995, LSAI paid Zrenda Dunn &
Swan $8,520 for services rendered and $993 in reimbursement of expenses advanced
on behalf of LSAI. During 1996 and 1995, LSAI paid Dunn Swan & Cunningham, A
Professional Corporation, $27,525 and $112,530, respectively, for services
rendered and $3,577 and $5,577, respectively, in reimbursement of expenses
advanced on behalf of LSAI. During 1996 and 1995, Michael E. Dunn, a Director of
the Company, was President, a Director and a shareholder of Zrenda Dunn & Swan
and Dunn Swan & Cunningham.
On July 20, 1995, Jerome P. Welch, Michael E. Dunn and Harry Gray
Browne, M.D., were each granted option to purchase 5,000 shares of LSAI Common
Stock at $3.00 per share, which became exercisable on January 20, 1996, and
remain exercisable until July 20, 2005. On November 28, 1996, in replacement of
the previously granted stock options, Messrs. Welch and Dunn and Dr. Browne were
each granted options to purchase 5,000 shares of LSAI Common Stock at $2.00 per
share, exercisable after September 28, 1997, and on or before March 28, 2007.
The Board of Directors of LSAI believes that the terms of the
transactions described above were at least as favorable as could be obtained
from unaffiliated third parties. LSAI has adopted policies that any loans to
officers, directors and five percent or more shareholders ("affiliates") are
subject to approval by a majority of the disinterested independent directors of
LSAI and that further transactions with affiliates will be on terms no less
favorable than could be obtained from unaffiliated parties and approved by a
majority of the disinterested independent directors. As of the date of this
Prospectus, the Board of Directors is comprised of the seven members of which
three are independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Common Stock as of the date of this Prospectus, and the
beneficial ownership of the Common Stock, as adjusted to give effect to this
offering (assuming exercise of the 1994 Warrants and Underwriters' Warrants in
full), of (i) each person who is known to LSAI to be the beneficial owner of
more than five percent thereof, (ii) each director and executive officer of
LSAI, and (iii) all executive officers and directors as a group, together with
their percentage holdings of the outstanding shares, and, as adjusted, after
giving effect to this offering. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated, and
there are no family relationships between the executive officers and directors
of LSAI.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
PERCENT OF
COMMON STOCK(2)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------- ------------- -------- --------
<S> <C> <C> <C>
Arthur R. Peterson, Jr.(3)(4)............ 550,000 15.8% 10.9%
Joan F. Peterson (5)..................... 490,000 14.3% 9.8%
John Simonelli(6)(7)..................... 260,000 7.4% 5.1%
Larry E. Howell(6)(8).................... 260,000 7.4% 5.1%
Robert A. Gardebled, Jr.(3)(9)........... 50,000 1.5% 1.0%
Jerome P. Welch(10)...................... 24,000 .7% .5%
Michael E. Dunn(10)...................... 5,000 .2% .1%
Harry Gray Browne, M.D.(10).............. 5,000 .2% .1%
Executive Officers and Directors as a
group (seven persons)(11)............... 1,154,000 31.7% 22.1%
</TABLE>
- ---------------------------
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<PAGE>
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person to acquire them within 60 days are treated as
outstanding for determining the amount and percentage of Common Stock
owned by such person. To the Company's knowledge, each named person
has sole voting and sole investment power with respect to the shares
shown except as noted, subject to community property laws, where
applicable.
(2) Rounded to the nearest one-tenth of one percent, based upon 3,416,738
shares of Common Stock outstanding before this offering and 5,000,738
shares of Common Stock after this offering, assuming the 1994 Warrants
and the Underwriters' Warrants are exercised in full. See "Description
of Securities--1994 Warrants" and "--Underwriters' Warrants."
(3) The business address of the named person is 1111 Newton Street,
Gretna, Louisiana 70053.
(4) The shares and each percent include 490,000 shares held of record by
Mr. Peterson and exercisable stock options to purchase 60,000 shares
of Common Stock.
(5) The address of Ms. Peterson is 3712 Fran Street, Metairie, Louisiana
70001.
(6) The business address of the named person is 101 Park Avenue, Suite
810, Oklahoma City, Oklahoma 73102.
(7) The number of shares and each percent include 200,000 shares held of
record by Mr. Simonelli and exercisable stock options to purchase
60,000 shares of Common Stock.
(8) The number of shares and each percent include 200,000 shares held of
record by Mr. Howell and exercisable stock options to purchase 60,000
shares of Common Stock.
(9) The number of shares and each percent include 25,000 shares of held of
record by Mr. Gardebled and exercisable stock options to purchase
25,000 shares of Common Stock.
(10) The number of shares and each percent include exercisable stock
options to purchase 5,000 shares of Common Stock.
(11) The number of shares and each percent include exercisable stock
options to purchase 220,000 shares of Common Stock.
DESCRIPTION OF SECURITIES
Pursuant to its Certificate of Incorporation, LSAI is currently
authorized to issue up to 30,000,000 shares of capital stock, consisting of
20,000,000 shares of Common Stock, $.001 par value ("Common Stock"), and
10,000,000 shares of Preferred Stock, $.001 par value ("Preferred Stock"), of
which 300,000 shares were designated by the Board of Directors as the Series I
Cumulative Convertible Preferred Stock (the "Series I Preferred Stock"). The
Series I Preferred Stock was redeemed in full on July 10, 1995, at the aggregate
stated value of $300,000 and ceased to be issued and outstanding. This offering
consists of (i) 1,452,000 shares of Common Stock which are being offered in the
event of exercise of the 1994 Warrants at $2.00 per share and (ii) 66,000 Units,
each consisting of two shares of Common Stock and one 1994 Warrant, which are
being offered in the event of exercise of the Underwriters' Warrants at $7.32
per Unit. The shares of Common Stock and the 1994 Warrant comprising each Unit
will be immediately detachable and separately tradeable upon issuance. After
giving effect to this offering and assuming full exercise of the Underwriters'
Warrants and the 1994 Warrants (including the 1994 Warrants offered and issued
as a portion of the Units pursuant to full exercise of the Underwriters'
Warrants), the issued and outstanding capital stock of LSAI will consist of
5,000,738 shares of Common Stock. See "--Common Stock," "1994 Warrants," "--
Underwriters' Warrants," and "--Preferred Stock."
The following description of certain matters relating to the capital
stock and the 1994 Warrants and the Underwriters' Warrants is a summary and is
qualified in its entirety by the provisions of LSAI's Certificate of
Incorporation, the Warrant Agreement between LSAI and Liberty Bank and Trust
Company of Oklahoma City, N.A. (the "Warrant Agent"), and the Representative's
Warrant evidencing each of the Underwriters' Warrants, all of which are
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part. See "Additional Information."
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<PAGE>
COMMON STOCK
Pursuant to its Certificate of Incorporation, LSAI is authorized to
issue up to 20,000,000 shares of Common Stock. The holders of outstanding shares
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of assets legally
available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that may be outstanding. In the event of
liquidation, dissolution and winding-up of LSAI, the holders of outstanding
Common Stock are entitled to share ratably in all assets available for
distribution to the Common Stock shareholders after payment of all liabilities
of LSAI, subject to the prior distribution rights of the holders of any
Preferred Stock that may be outstanding at that time. Holders of outstanding
Common Stock are entitled to one vote per share on matters submitted to a vote
by the Common Stock shareholders of LSAI. The Common Stock has no preemptive
rights and no subscription, redemption or conversion privileges. The Common
Stock does not have cumulative voting rights, which means that holders of a
majority of shares voting for the election of directors can elect all members of
the Board of Directors subject to election. In general, a majority vote of
shares represented at a meeting of Common Stock shareholders at which a quorum
(a majority of the outstanding shares of Common Stock) is present is sufficient
for all actions that require the vote or concurrence of shareholders, subject to
and possibly in connection with the voting rights of the holders of any
Preferred Stock that from time to time may be outstanding and entitled to vote
with the holders of the Common Stock. Upon issuance of the Common Stock pursuant
to this offering (including the shares of Common Stock comprising the Units),
all of the outstanding shares of Common Stock will be fully paid and
nonassessable.
1994 WARRANTS
The Board of Directors of LSAI has authorized the issuance and sale of
726,000 1994 Warrants (the "1994 Warrants"), of which 660,000 were issued as
components of the units (each consisting of two shares of Common Stock and one
1994 Warrant) in connection with LSAI's initial public offering, which was
completed on October 11, 1994 (the "IPO Offering"), and 66,000 are reserved for
issuance in the event of exercise the Underwriters' Warrants for purchase of the
Units offered pursuant to this Prospectus. See "--Underwriters' Warrants,"
below. The terms and conditions of the 1994 Warrants are set forth in the
Warrant Agreement.
Each 1994 Warrant entitles the holder to purchase two shares of Common
Stock at any time during the five-year period ending September 27, 1999 (the
"Expiration Date"), for a current exercise price of $2.00 per share, subject to
adjustment as described below (the "Exercise Price"). During the period
commencing after April 15, 1998, and ending on the Expiration Date, the Exercise
Price of the 1994 Warrants is subject to an increase adjustment to $2.50 per
share of Common Stock and may be subject to further increase adjustment based
upon the Company achieving certain levels of net income per share of Common
Stock for the fiscal year ended December 31, 1997. In the event net income per
share of Common Stock for the fiscal year ended December 31, 1997, is $.40 or
more, the Exercise Price will be increased to $3.50 per share of Common Stock,
or in the event such net income per share of Common Stock is less than $.40 but
$.30 or more, the Exercise Price will be increased to $3.00 per share of Common
Stock, or in the event such net income per share of Common Stock is less than
$.30, the Exercise Price will be increased to $2.50 per share of Common Stock.
For purposes of adjustment of the Exercise Price of the 1994 Warrants,
"Net Income Per Share of Common Stock" means the primary net income per share of
the Common Stock (and any other securities of LSAI purchasable upon exercise of
the 1994 Warrants) for the fiscal year ended December 31, 1997, determined in
accordance with generally accepted accounting principles, adjusted to the extent
required based upon the assumption that the outstanding 1994 Warrants, at fiscal
year end, were not issued and outstanding during such fiscal year. Therefore,
the net income per share of Common Stock determined for financial accounting
purposes on a fully diluted basis may not represent the Net Income Per Share of
Common Stock for purposes of determining the adjusted exercise price of the 1994
Warrants.
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<PAGE>
The number and kind of securities or other property for which the 1994
Warrants are exercisable are subject to adjustments in certain events, such as
mergers, reorganizations or stock splits, to prevent dilution.
In certain cases, the sale of securities by LSAI upon exercise of 1994
Warrants could violate the securities laws of the United States, certain states
thereof or other jurisdictions. LSAI has agreed to use its best efforts to cause
a registration statement with respect to such securities under the 1933 Act to
continue to be effective during the term of the 1994 Warrants and to take such
other actions under the laws of various states as may be required to cause the
sale of securities upon exercise of 1994 Warrants to be lawful. However, LSAI
will not be required to honor the exercise of 1994 Warrants if, in the opinion
of counsel, the sale of securities upon such exercise would be unlawful. In
certain cases, LSAI may, but is not required to, purchase 1994 Warrants
submitted for exercise for a cash price equal to the difference between the
market price of the securities obtainable upon such exercise and the exercise
price of such 1994 Warrants.
The 1994 Warrants may be exercised by filling out and signing the
Subscription Form on the reverse side of the certificate evidencing the 1994
Warrants and mailing or delivering the 1994 Warrants to the Warrant Agent in
time to reach the Warrant Agent by the Redemption Date, accompanied by payment
in full of the exercise price for the 1994 Warrants being exercised (and any
applicable transfer tax and, if requested by the Company, any other taxes or
governmental charges which the Company may be required by law to collect in
respect to such exercise) in United States funds (in cash or by check or bank
draft payable to the order of LSAI). Common Stock certificates will be issued as
soon as practicable after exercise and payment of the exercise price (and taxes
and governmental charges) and as described above.
UNDERWRITERS' WARRANTS
In connection with the its initial public offering ("IPO Offering"),
LSAI issued the Underwriters' Warrants (as evidenced by each of the
Representative's Warrants, dated October 11, 1994) to the underwriters and their
assigns (the "Selling Shareholders") of the IPO Offering to purchase 66,000
Units (120,000 shares of Common Stock and 60,000 1994 Warrants) at an exercise
price of $7.32 per Warrant). The Underwriters' Warrants are exercisable at any
time during the period ending October 11, 1999. The number and kind of
securities or other property for which the Underwriters' Warrants are
exercisable are subject to adjustments in certain events, such as mergers,
reorganizations or stock splits, to prevent dilution. During the term of the
Underwriters' Warrants, the holder thereof is given the opportunity to profit
from a rise in the market price of the Common Stock and 1994 Warrants. LSAI may
find it more difficult to raise additional equity capital while the
Underwriters' Warrants are outstanding. At any time at which the Underwriters'
Warrants are likely to be exercised by the Selling Shareholders (or their
assignees), LSAI will probably be able to obtain additional equity capital on
more favorable terms. LSAI has registered the Units (and the shares of Common
Stock underlying Units and the 1994 comprising in part the Units) underlying the
Underwriters' Warrants under the 1933 Act pursuant to the Registration Statement
of which this Prospectus is a portion and has agreed, at its expense, to
maintain such registration in force until October 11, 1995, the expiration date
of the Underwriters' Warrants.
The Underwriters' Warrants are not redeemable by LSAI. However, as a
result of the Warrant Redemption, the Selling Shareholders (or their assignees)
are required to be notified of the redemption call in the same manner as the
holders of the 1994 Warrants. Pursuant to this Prospectus, the Company hereby
notifies the Selling Shareholders of the Warrant Redemption. Accordingly, the
Selling Shareholders have the right to exercise the Underwriters' Warrants for
the purchase of the 1994 Warrants comprising in part the Units for $.12 per 1994
Warrant and exercise the 1994 Warrants prior to the Redemption Date. Following
the Redemption Date, the Underwriters' Warrants will remain exercisable for the
purchase of the Units (then consisting of two shares of Common Stock) at an
exercise price of $7.20 per Unit.
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<PAGE>
The Underwriters' Warrants may be exercised by presentation and
surrender of the Underwriter Warrant to LSAI at its principal office accompanied
by the duly executed Purchase Form annexed to the Underwriter Warrant and
payment, in cash, certified or official bank check payable to Laboratory
Specialists of America, Inc. in the amount of the exercise price of the number
of Units being purchased. Upon exercise, LSAI will deliver to the Selling
Shareholder (or the assignee holder) one or more certificates evidencing the
Common Stock and 1994 Warrants. In the event the exercise is in part only, LSAI
will promptly execute and deliver a new Underwriters' Warrant evidencing the
rights of the Selling Shareholder (or the assignee holder) to purchase the
balance of the Units purchasable pursuant to the Underwriters' Warrants.
The Underwriters' Warrants may be assigned by surrender of the
Underwriters' Warrants to the Company at its principal office with the
Assignment Form annexed thereto duly executed and funds sufficient to pay any
transfer tax. In such event, LSAI will, without charge, execute and deliver a
new Underwriters' Warrant in the name of the assignee. The Underwriters'
Warrants may be divided or combined with other Underwriters' Warrants.
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, LSAI has an authorized
class of Preferred Stock of 10,000,000 shares, $.001 par value, of which 300,000
shares were designated the Series I Preferred Stock. On July 10, 1995, the
Series I Preferred Stock was redeemed in full at the aggregated stated value of
$300,000 and thereafter there were no shares of Preferred Stock issued and
outstanding. The Preferred Stock may be issued from time to time in one or more
series, and the Board of Directors of LSAI, without further approval of its
shareholders, is authorized to fix the relative rights, preferences, privileges
and restrictions applicable to each series of Preferred Stock. Management of
LSAI believes that having such a class of Preferred Stock provides LSAI with
greater flexibility in financing, acquisitions and other corporate activities.
While there are no current plans, commitments or understandings, written or
oral, to issue any additional shares of Preferred Stock, in the event of any
issuance, the holders of Common Stock will not have any preemptive or similar
rights to acquire any of such Preferred Stock.
The Board of Directors has the authority to issue shares of Preferred
Stock and to determine its rights and preferences to eliminate delays associated
with a shareholder vote on specific issuances. The issuance of Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of LSAI.
OUTSTANDING OPTIONS AND OTHER WARRANTS
The Board of Directors is authorized to issue options and other stock
purchase rights pursuant to The Laboratory Specialists of America, Inc. 1994
Stock Option Plan. As of the date of this Prospectus, 235,000 options under such
Stock Option Plan have been granted. See "Management--Stock Option Plan." In
addition, 15,000 stock options have been granted to the three non-employee
directors of LSAI, each option is exercisable on or before March 28, 2007, for
the purchase of one share of Common Stock at $2.00 per share. See "Certain
Transaction." Furthermore, the Company has an additional 60,000 outstanding
stock options (of which 10,000 are exercisable on or before March 27, 1998, and
50,000 are exercisable on or before February 14, 2001) exercisable at $3.00 per
share of Common Stock.
In connection with this offering, the Company has agreed to issue and
deliver to Barber & Bronson, Incorporated, the Managing Agent, for its services
in connection with the Warrant Redemption, warrants to purchase up to 170,000
shares of Common Stock at $2.375, during a period of up to three years from the
date of this Prospectus. See "Exercise of 1994 Warrants--Managing Agent."
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<PAGE>
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation of LSAI and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions include availability of
authorized but unissued Common Stock and Preferred Stock.
COMMON AND PREFERRED STOCK. The Certificate of Incorporation
authorizes the issuance of Common Stock and Preferred Stock in classes, and the
Board of Directors to set and determine the voting rights, redemption rights,
conversion rights and other rights relating to such class of Common Stock or
Preferred Stock, and to issue such stock in either private or public
transactions. In some circumstances, the Common Stock or Preferred Stock could
be issued and have the effect of preventing a merger, tender offer or other
takeover attempt which the LSAI's Board of Directors opposes.
OKLAHOMA ANTI-TAKEOVER STATUTE. During any period that LSAI has 1,000
or more shareholders, LSAI will be subject to Sections 1145 through 1155 of the
Oklahoma General Corporation Act (the "anti-takeover provisions"). In general,
shares ("interested shares") of voting stock acquired (within the meaning of a
"control share acquisition" under the anti-takeover provisions) become nonvoting
stock for a period of three years following such control share acquisition,
unless a majority of the holders of non-interested shares approve a resolution
reinstating the interested shares with the same voting rights that such shares
had before such interested shares became control shares. Any person ("acquiring
person") who proposes to make a control share acquisition may, at the person's
election, and any acquiring person who has made a control share acquisition is
required to deliver an acquiring person statement to the corporation at its
principal office setting forth (i) the identity of the acquiring person, (ii)
the number of shares owned, directly or indirectly, the acquisition date and
price at which the shares were or are to be acquired, (iii) the voting power the
acquiring person would be entitled but for the anti-takeover provisions, (iv)
the form of resolution to be considered by the shareholders to approve
reinstatement of voting rights with respect to the shares acquired, and (v) in
the event the control share acquisition has not been consummated, a description
in reasonable detail of the terms of the proposed control share acquisition and
representations, together with a statement in reasonable detail of the facts
upon which they are based, that the proposed control share acquisition, if
consummated, will not be contrary to law, and that the acquiring person has the
financial capacity to make the proposed control share acquisition. The
corporation is required to present to the next annual meeting of the
shareholders the reinstatement of voting rights with respect to the control
shares that resulted in the control share acquisition, unless the acquiring
person requests a special meeting of shareholders for such purpose and
undertakes to pay the costs and expenses of such special meeting within 10 days
thereafter. In the event voting rights of control shares acquired in a control
share acquisition are reinstated in full and the acquiring person has acquired
control shares with a majority or more of all voting power, all shareholders of
the corporation have dissenters' rights entitling them to receive the fair value
of their shares which will not be less than the highest price paid per share by
the acquiring person in the control share acquisition.
Within the meaning of the anti-takeover provisions, "control share
acquisition" means the acquisition by any person (including persons acting as a
group) of ownership of, or the power to direct the exercise of voting power with
respect to, control shares (generally shares having more than 20 percent of all
voting power in the election of directors of a publicly held corporation), other
than an acquisition (and then only if made in good faith and not for the purpose
of circumventing the anti-takeover provisions) (i) pursuant to the laws of
descent and distribution, (ii) pursuant to the satisfaction of a pledge or other
security interest, (iii) pursuant to an agreement of merger, consolidation, or
share acquisition to which the corporation is a party and is effected in
compliance with certain Sections of the Oklahoma General Corporation Act, (iv)
by a donee receiving the shares pursuant to an inter vivos gift, (v) by a person
of additional shares within the range of voting power for which such person has
received approval pursuant to a resolution by the majority of the holders of
non-interested shares, (vi) an increase in voting power resulting from any
action taken by the corporation, provided the person whose voting power is
thereby affected is not an affiliate of the corporation,
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<PAGE>
(vii) pursuant to proxy solicitation under and in accordance with the Exchange
Act or the laws of Oklahoma, (viii) pursuant to transfer between or among
immediate family members, or between or among persons under direct common
control, or (ix) from any person whose previous acquisition of shares did not
constitute a control share acquisition, provided the acquisition does not result
in the acquiring person holding voting power within a higher range of voting
power than that of the person from whom the control shares were acquired.
SHAREHOLDER ACTION
Pursuant to the Certificate of Incorporation of LSAI, with respect to
any act or action required of or by the shareholders, the affirmative vote of
the holders of a majority of the issued and outstanding shares of Common Stock
entitled to vote thereon is sufficient to authorize, affirm, ratify or consent
to such act or actions, except as otherwise provided by law or in the
Certificate.
Pursuant to Oklahoma law, shareholders of a corporation with less than
1,000 shareholders may take actions without the holding of a meeting by written
consent or consents signed by the holders of a sufficient number of shares to
approve the transaction had all of the outstanding shares of the capital stock
of LSAI entitled to vote thereon been present at a meeting. Upon completion of
the Offering (assuming exercise of the 1994 Warrants and the Underwriters'
Warrants in full), the current officers and directors of LSAI will beneficially
own approximately 19.3 percent of the outstanding Common Stock. Pursuant to the
rules and regulations of the Commission, if shareholder action is taken by
written consent, LSAI will be required to send each shareholder entitled to vote
on the matter acted on, but whose consent was not solicited, an information
statement containing information substantially similar to that which would have
been contained in a proxy statement.
TRANSFER AGENT AND WARRANT AGENT
Liberty Bank and Trust Company of Oklahoma City, N.A. is the registrar
and transfer agent for the Common Stock and the Warrant Agent for the 1994
Warrants, whose address is 100 Broadway, Oklahoma City, Oklahoma 73102, and
mailing address is Post Office Box 25848, Oklahoma City, Oklahoma 73125. The
Company is the transfer agent of the Underwriters' Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, LSAI has 3,416,738 shares of Common
Stock outstanding, assuming 103,333 shares of Common Stock are issued in
connection with the NPLI Acquisition. See "The Company--Background-- NPLI
Acquisition." Upon completion of this offering (assuming exercise of the 1994
Warrants and the Underwriters' Warrants in full), LSAI will have outstanding
4,868,738 shares of Common Stock and an aggregate of 315,000 outstanding stock
options exercisable for the purchase of Common Stock. See "Description of
Securities--Outstanding Options and Other Warrants." No prediction can be made
as to the effect, if any, that future sales or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock of LSAI in the
public market could adversely affect the prevailing market price of the Common
Stock and could impair LSAI's ability to raise capital through sales of its
equity securities.
The 66,000 Units (and the component shares of Common Stock and 1994
Warrants of the Units) and 1,452,000 shares of Common Stock (assuming exercise
of the 1994 Warrants and the Underwriters' Warrants in full) offered in this
offering will be immediately eligible for resale in the public market without
restriction or further registration under the 1933 Act, except for Common Stock
and Units purchased by an "affiliate" (as that term is defined under the 1933
Act) of LSAI, which will be subject to the resale limitations of Rule 144
promulgated under the 1933 Act. In addition, there are 1,886,405 shares of
Common Stock (assuming additional shares of Common Stock are not issued in
connection with the NPLI Acquisition) (the "Restricted Shares") outstanding
which have not been registered under the 1933 Act, of which 934,000 are held by
the executive officers and directors of LSAI, all of which may be
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<PAGE>
sold without registration under the 1933 Act pursuant to Rule 144, subject to
the limitations thereunder and the contractual restrictions described below.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned Restricted Shares for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of LSAI's Common Stock
or (ii) an amount equal to the average weekly reported volume of trading in such
shares during the four calendar weeks preceding the date on which notice of such
sale is filed with the Commission. Sales under Rule 144 are also subject to
certain manner of sale limitations, notice requirements and the availability of
current public information about LSAI. Restricted Shares properly sold in
reliance on Rule 144 are thereafter freely tradable without restrictions or
registration under the 1933 Act, unless thereafter held by an affiliate of LSAI.
In addition, affiliates of LSAI must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of Common Stock which are not Restricted Shares (such as
shares of Common Stock acquired by affiliates of LSAI in this offering). As
defined in Rule 144, an "affiliate" of an issuer is a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with such issuer. If two years have elapsed since the
later of the date of any acquisition of Restricted Shares from LSAI or from any
affiliate of LSAI, and the acquiror or subsequent holder thereof is deemed not
to have been an affiliate of LSAI at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
pursuant to Rule 144(k) without regard to volume limitations, manner of sale
restrictions, or public information or notice requirements.
Pursuant to a Promotional Share Escrow Agreement imposed by the
Oklahoma Department of Securities, John Simonelli and Larry E. Howell, officers
and directors of LSAI, agreed with LSAI to place with Liberty Bank and Trust
Company of Oklahoma City, N.A., as escrow agent, the 200,000 shares of Common
Stock held of record by each of them, and, in connection therewith, are
prohibited from selling, transferring or otherwise disposing of such Common
Stock during the period ending September 27, 1997. This Agreement was imposed by
the Oklahoma Department of Securities in connection with the registration and
qualification of the initial public offering of the Company.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances permits qualified institutional buyers, as defined in the Rule, to
more easily acquire and sell "restricted securities." The Company is unable to
predict the effect that Rule 144A will have on the prevailing market price of
LSAI's Common Stock due to the recent adoption of the Rule.
PLAN OF DISTRIBUTION
The Common Stock and Units are being offered on a best efforts basis
by the Company and its officers and directors, without their receipt of or
entitlement to commissions, selling fees or direct or indirect remuneration.
From the proceeds of this offering received by the Company, the costs (which are
estimated to be $100,000) incurred with respect to this offering will be paid by
the Company. Offers by the Company will be limited to the holders of the 1994
Warrants and the Underwriters' Warrants. The Common Stock sold to the Selling
Shareholders upon exercise of the Underwriters' Warrants and which is reoffered
for sale pursuant to this Prospectus is being offered on a best efforts basis by
the respective Selling Shareholders.
The outstanding 1994 Warrants were issued in connection with LSAI's
initial public offering of 660,000 units (each consisting of two shares of
Common Stock and one 1994 Warrant) (the "IPO Offering") and the Underwriters'
Warrants were issued to Barron Chase Securities, Inc., J. Alexander Securities,
Inc., Princeton Securities Corp. and Euro-Atlantic Securities, Inc. (the "IPO
Underwriters") and their assigns as a portion of the underwriting compensation
of the IPO Offering which was closed on October 11, 1994. See "The Company--
Background--Initial Public Offering," and "Description of Securities--1994
Warrants" and "--Underwriters' Warrants." Subject to the terms and
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<PAGE>
conditions set forth in the Underwriting Agreement, dated September 27, 1994,
entered into with Barron Chase Securities, Inc., LSAI has agreed, upon the
exercise of any 1994 Warrant to pay the IPO Underwriters responsible for
exercise of 1994 Warrants a fee of up to but not in excess of five percent of
the aggregate exercise price of each 1994 Warrant, if (i) the market price of
LSAI's Common Stock is greater than the exercise price of such 1994 Warrant on
the date of exercise, (ii) the exercise of such 1994 Warrant was solicited by a
member of the National Association of Securities Dealers, Inc., (iii) such 1994
Warrant is not held in a discretionary account, and (iv) the solicitation of
such 1994 Warrant was not in violation of Rule 10b-6 (currently Regulation M)
promulgated under the Securities Exchange Act of 1934, as amended.
LSAI has agreed to indemnify those IPO Underwriters responsible for
exercise of the 1994 Warrants against certain liabilities, including liabilities
under the 1933 Act, or to contribute to payments that the IPO Underwriters may
be required to make in respect thereof. In the opinion of the Commission, such
indemnification against liabilities under the 1933 Act is against public policy
and is therefore unenforceable.
The foregoing is a summary of the principal terms of the agreement
described above and does not purport to be complete. Reference is made to the
copy of such agreement which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
LEGAL MATTERS
The validity of issuance of the shares of Common Stock and Units
offered hereby and certain other legal matters in connection with this offering
will be passed upon for LSAI by its counsel, Dunn Swan & Cunningham, A
Professional Corporation, of Oklahoma City, Oklahoma.
EXPERTS
The financial statements of the Company included in this Prospectus
and Registration Statement to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
The statements of net assets, statements of divisional operations and
statements of divisional cash flows of the Forensic Drug Testing Division of
Pathology Laboratories, Ltd. as of December 31, 1996 and 1995, and for the years
then ended included in this Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (herein,
together with all amendments thereto, the "Registration Statement"), of which
this Prospectus constitutes a part, under the Securities Act of 1933, as amended
(the "1933 Act"), with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., with respect to the securities offered by this
Prospectus. As permitted by the rules and regulations of the Commission, this
Prospectus, filed as part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and in the exhibits
thereto. The statements contained in this Prospectus as to the contents of any
contract or other document referenced herein are not necessarily complete, and
in each instance, if the contract or document was filed as an exhibit, reference
is hereby made to the copy of the contract or other document filed as an exhibit
to the Registration Statement and each such statement is qualified in all
respects by such reference. The
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<PAGE>
Registration Statement (including the exhibits thereto) may be inspected at the
office of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549-1004, and at the regional offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and
the exhibits and schedules thereto may be obtained from the Commission at such
offices, upon payment of prescribed rates. In addition, the Registration
Statements and certain other filings, including annual and quarterly reports,
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the World Wide Web on the Internet, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR. The Company will provide
without charge to each person who receives this Prospectus, upon written or oral
request, a copy of any information incorporated by reference in this Prospectus
(excluding exhibits to information incorporated by reference unless such
exhibits are themselves specifically incorporated by reference). Such requests
should be directed to Laboratory Specialists of America, Inc. at 101 Park
Avenue, Suite 810, Oklahoma City, Oklahoma 73102, telephone: (405) 232-9800.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act") as a "small
business issuer" as defined under Regulation S-B promulgated under the 1933 Act.
In accordance with the 1934 Act, the Company files reports and other information
with the Commission (File No. 33-25701), and such reports and other information
can be inspected and copied at, and copies of such materials can be obtained at
prescribed rates from, the Public Reference Section of the Commission in
Washington, D.C.
The Company distributes to its shareholders annual reports containing
financial statements audited by its independent public accountants and, upon
request, quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information. Such requests should be
directed to Laboratory Specialists of America, Inc. at 101 Park Avenue, Suite
810, Oklahoma City, Oklahoma 73102, telephone: (405) 232-9800.
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INDEX TO FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES:
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Consolidated Balance Sheet, December 31, 1996......................... 21
Unaudited Pro Forma Consolidated Statement of Income for the Year
Ended December 31, 1996............................................................... 23
Notes to Unaudited Pro Forma Consolidated Financial Statements............................ 24
Consolidated Balance Sheets (Unaudited), March 31, 1997, and December 31, 1996.............. F-2
Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 1996 and 1997............................................ F-4
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 1996 and 1997............................................ F-5
Notes to Consolidated Financial Statements (Unaudited).................................... F-6
Report of Independent Public Accountants.................................................. F-8
Consolidated Balance Sheets, December 31, 1996 and 1995................................... F-9
Consolidated Statement of Income for the Pre-Acquisition Period
of January 1, 1994, through April 17, 1994............................................ F-11
Consolidated Statements of Income for the Post-Acquisition Periods of
the Years Ended December 31, 1996 and 1995, and April 18, 1994
through December 31, 1994............................................................. F-12
Consolidated Statement of Stockholders' Equity for the Pre-Acquisition Period
of January 1, 1994, through April 17, 1994............................................ F-13
Consolidated Statements of Stockholders' Equity for the Post-Acquisition
Periods of the Years Ended December 31, 1996 and 1995, and
April 18, 1994 through December 31, 1994.............................................. F-14
Consolidated Statement of Cash Flows for the Pre-Acquisition Period
of January 1, 1994, through April 17, 1994............................................ F-15
Consolidated Statements of Cash Flows for the Post-Acquisition Periods of the
Years Ended December 31, 1996 and 1995, and April 18, 1994 through
December 31, 1994..................................................................... F-16
Notes to Consolidated Financial Statements................................................ F-17
FORENSIC DRUG TESTING DIVISION OF PATHOLOGY LABORATORIES, LTD.:
Report of Independent Public Accountants.................................................. F-27
Statements of Net Assets as of December 31, 1996 and 1995................................ F-28
Statements of Divisional Operations for the Years Ended
December 31, 1996 and 1995............................................................ F-29
Statements of Divisional Cash Flows for the Years Ended
December 31, 1996 and 1995............................................................ F-30
Notes to Divisional Financial Statements for the Years Ended
December 31, 1996 and 1995............................................................ F-31
</TABLE>
F-1
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (PAGE 1 OF 2)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1996 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............... $ 727,381 $ 643,413
Accounts receivable, net of
allowances of $597,499
in 1996 and $627,499 in 1997........... 1,696,744 1,967,508
Income tax refund receivable............ 312,664 139,043
Inventories............................. 99,754 116,143
Prepaid expenses and other.............. 146,859 132,272
Deferred tax asset...................... 211,078 211,078
---------- -----------
Total current assets.................. 3,194,480 3,209,457
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $900,948 in
1996 and $954,510 in 1997................ 1,592,599 1,789,992
---------- -----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $171,355 in
1996 and $197,784 in 1997.............. 2,663,850 2,637,422
Customer list, net of accumulated
amortization of $216,429
in 1996, and $277,288 in 1997.......... 1,863,061 4,412,635
Deferred costs.......................... 80,818 93,801
---------- -----------
Total other assets.................... 4,607,729 7,143,858
---------- -----------
Total assets.......................... $9,394,808 $12,143,307
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (PAGE 2 OF 2)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.............................. $ 521,705 $ 710,005
Accrued payroll............................... 300,103 281,395
Accrued expenses.............................. 57,310 93,640
Accrued customer list costs................... -- 810,000
Obligations from discontinued 784,272 679,823
operations...................................
Short-term debt............................... 410,293 398,627
Current portion of long-term debt............. 118,085 460,463
---------- -----------
Total current liabilities................... 2,191,768 3,433,953
---------- -----------
LONG-TERM DEBT, net of current portion.......... 1,245,690 2,518,000
---------- -----------
DEFERRED INCOME TAXES........................... 307,100 307,100
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value,
20,000,000 shares authorized, 3,313,405
shares issued and outstanding at
12/31/96 and 3/31/97.......................... 3,313 3,313
Paid in capital in excess of par,
common stock.................................. 5,366,027 5,366,027
Retained earnings.............................. 280,910 514,914
---------- -----------
Total stockholders' equity.................. 5,650,250 5,884,254
---------- -----------
Total liabilities and stockholders' $9,394,808 $12,143,307
equity..................................... ========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-3
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
REVENUES..................................... $1,948,536 $2,587,222
COST OF LABORATORY SERVICES.................. 840,161 1,186,084
---------- ----------
Gross profit............................... 1,108,375 1,401,138
---------- ----------
OPERATING EXPENSES:
Selling.................................... 148,269 132,129
General and administrative................. 524,523 695,616
Depreciation and amortization.............. 91,336 140,849
---------- ----------
Total operating expenses................. 764,128 968,594
---------- ----------
Income from operations................... 344,247 432,544
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense........................... (10,493) (36,876)
Interest income............................ 9,971 11,653
Other income............................... 207 303
---------- ----------
Total other income (expense)............. (315) (24,920)
---------- ----------
Income before income taxes............... 343,932 407,624
INCOME TAX EXPENSE........................... 141,686 173,621
---------- ----------
Net income............................... $ 202,246 $ 234,003
========== ==========
DIVIDEND ON PREFERRED STOCK.................. -- --
---------- ----------
Net income available to common
stockholders............................ $ 202,246 $ 234,003
========== ==========
PRIMARY EARNINGS PER SHARE:
Weighted Average Number Of Common
Stock and Common Stock
Equivalents Outstanding................... 3,310,112 3,315,656
========== ==========
Earnings Per Common Stock and Common
Stock Equivalents......................... $ .06 $ .07
========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Weighted Average Number Of Common
Stock and Common Stock
Equivalents Outstanding................... 4,025,117 3,891,723
========== ==========
Earnings Per Common Stock and Common
Stock Equivalents......................... $ .05 $ .06
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 202,246 $ 234,003
Adjustments to reconcile net income
to net cash provided by operating activities -
Depreciation and amortization........................... 91,336 140,849
Provision for bad debts and other....................... 12,000 30,000
Impact of changes in assets and
liabilities:
Accounts receivable................................... (264,746) (300,764)
Income tax refund receivable.......................... 160,989 173,621
Inventories........................................... (5,541) (16,389)
Prepaid expenses and other............................ 31,676 290
Accounts payable and accrued
expenses............................................. (68,072) 131,013
------------ ------------
Net cash provided by operating
activities......................................... 159,888 392,623
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (38,171) (217,431)
Purchase of NPLI Stock, net of cash acquired............ (1,022,597) --
Purchase of PLL Customer List........................... -- (1,650,433)
Acquisition costs....................................... (76,622) (193,058)
------------ ------------
Net cash used in investing
activities.......................................... (1,137,390) (2,060,922)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings....................... (528,212) (11,666)
Payments on long-term borrowings........................ (20,542) (85,312)
Proceeds from long-term borrowings...................... -- 1,681,309
----------- -----------
Net cash provided by (used in)
financing activities............................... (548,754) 1,584,331
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS.................... (1,526,256) (83,968)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of
period................................................... 2,411,051 727,381
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................. $ 884,795 $ 643,413
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest................ $ 10,501 $ 36,876
=========== ===========
Cash paid during the period for taxes................... $ 6,034 $ --
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996, IS UNAUDITED.)
1. GENERAL
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,
1996, 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 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 22, 1997. The financial data for the interim periods
presented may not necessarily reflect the results to be expected for the
full year.
2. PLL ASSET PURCHASE
On January 31, 1997, the Company acquired from Pathology Laboratories,
Ltd., a Mississippi corporation ("PLL"), certain forensic drug testing
assets (the "PLL Asset Purchase") pursuant to an Asset Purchase Agreement
dated January 31, 1997 (the "PLL Purchase Agreement"). The assets purchased
included the customer list of PLL and all contracts, contract rights and
agreements, correspondence with the customers for which PLL has provided
forensic drug testing services, and all assets owned by PLL used in
connection with the PLL office in Greenville, South Carolina.
Pursuant to the Purchase Agreement, (i) the Company paid $1,600,000 at
closing and (ii) the Company assumed the obligations of PLL under a certain
Lease between Edith Schlien and PLL, dated September 16, 1996, covering
approximately 2,500 square feet of office space located in Greenville,
South Carolina, which requires monthly base rental payments of $2,083 and
which expires on September 16, 1999. Furthermore, the Company agreed to
make four additional installment payments to PLL within 60 days following
the end of each three month period during the 12 months ending January 31,
1998, as follows: (i) the first installment payment being equal to 75
percent of Forensic Testing Revenues (as defined below) during the first
three month period ending April 30, 1997, in excess of $400,000; (ii) the
second installment payment being equal to 75 percent of Forensic Testing
Revenues during the six month period ending July 31, 1997, in excess of the
aggregate sum of the prior installment payment and $800,000, (iii) the
third installment payment being equal to 85 percent of Forensic Testing
Revenues during the nine month period ending October 30, 1997, in excess of
the aggregate sum of the prior installment payments and $1,200,000, and
(iv) the fourth installment being equal to Forensic Testing Revenues during
the 12 month period ended January 31, 1998, in excess of the aggregate sum
of the prior installment payments and $1,600,000. Under the Purchase
Agreement, "Forensic Testing Revenues" defined as the gross revenues during
the calendar quarter or 12 month period ending January 31, 1998, directly
attributable to each customer comprising the customer base of PLL acquired
by the Company.
3. EARNINGS PER COMMON SHARE
Both Primary and Fully Diluted Earnings per common share were computed
using the weighted average number of common shares outstanding after adding
the dilutive effect, if any, of the conversion of stock options,
outstanding warrants and contingent shares. In the fully diluted earnings
per share calculation the outstanding warrants were calculated using the
lowest possible exercise price during the term of the warrants.
F-6
<PAGE>
4. 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.
5. 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
Laboratory Specialists, Inc.'s, the company's wholly owned subsidiary
("LSI"), alleged failure to properly administer drug urinalysis tests.
LSI is currently a defendant 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 LSI maintains insurance to protect itself
against such liability, and LSI's insurance carriers have assumed the
defense of LSI 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 LSI has not experienced any material liability related to such
claims, there can be no assurance that LSI, 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.
In connection with the Pathology Laboratories, Ltd. Purchase (see Item
2), LSI has recorded a liability of $810,000 based upon estimated future
quarterly payments.
6. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
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 principal and interest
of the capital lease obligation, and 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. The above transactions, except the monthly
payment to the vendor, are non-cash transactions and have been excluded
from the accompanying statements of cash flows.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Laboratory Specialists of America, Inc.:
We have audited the accompanying consolidated balance sheets of Laboratory
Specialists of America, Inc. (an Oklahoma corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the period January 1, 1994 through April
17, 1994 (pre-acquisition), and the period April 18, 1994 through December 31,
1994 (post-acquisition), and for each of the years ended December 31, 1995 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Laboratory Specialists of
America, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the period January 1, 1994 through
April 17, 1994 (pre-acquisition), and the period April 18, 1994 through December
31, 1994 (post-acquisition), and the years ended December 31, 1995 and 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
March 7, 1997
F-8
<PAGE>
Page 1 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 727,381 $2,411,051
Accounts receivable, net of allowance
of $597,499 in 1996 and $91,546 in 1995................. 1,696,744 1,096,477
Income tax refund receivable............................. 312,664 131,626
Inventories.............................................. 99,754 87,542
Prepaid expenses and other............................... 146,859 115,491
Deferred tax asset....................................... 211,078 --
---------- ----------
Total current assets................................. 3,194,480 3,842,187
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $900,948 in 1996 and $899,559 in 1995..... 1,592,599 830,660
---------- ----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $171,355 in
1996 and $69,104 in 1995................................ 2,663,850 1,539,045
Customer lists, net of accumulated amortization of
$216,429 in 1996 and $77,783 in 1995.................... 1,863,061 1,001,707
Deferred costs........................................... 80,818 105,437
---------- ----------
Total other assets................................... 4,607,729 2,646,189
---------- ----------
Total assets......................................... $9,394,808 $7,319,036
========== ==========
</TABLE>
F-9
<PAGE>
Page 2 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable.......................................... $ 521,705 $ 446,223
Accrued payroll expenses.................................. 300,103 215,308
Other accrued expenses.................................... 57,310 51,838
Short-term debt........................................... 410,293 --
Current portion of long-term debt......................... 118,085 --
Obligations related to discontinued operation............. 784,272 --
---------- ----------
Total current liabilities............................. 2,191,768 713,369
---------- ----------
LONG-TERM DEBT................................................ 1,245,690 353,123
---------- ----------
DEFERRED INCOME TAXES......................................... 307,100 40,958
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares
authorized, 3,313,405 shares issued and
outstanding in 1996 and 3,298,405 shares issued and
outstanding in 1995..................................... 3,313 3,298
Paid in capital in excess of par, common stock............ 5,366,027 5,341,667
Retained earnings......................................... 280,910 866,621
---------- ----------
Total stockholders' equity............................ 5,650,250 6,211,586
---------- ----------
Total liabilities and stockholders' equity............ $9,394,808 $7,319,036
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-10
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
PRE-ACQUISITION PERIOD (NOTE 1)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1994
THROUGH
APRIL 17, 1994
---------------
<S> <C>
REVENUES................................................................ $1,294,775
COST OF LABORATORY SERVICES............................................. 635,653
----------
Gross profit.................................................... 659,122
----------
OPERATING EXPENSES:
Selling............................................................. 121,764
General and administrative.......................................... 381,899
Depreciation and amortization....................................... 41,830
----------
Total operating expenses........................................ 545,493
----------
OTHER INCOME (EXPENSE):
Interest expense.................................................... (7,966)
Interest income..................................................... 57
Other income........................................................ 32
----------
Total other expense............................................. (7,877)
----------
Income before income taxes...................................... 105,752
INCOME TAX EXPENSE...................................................... 32,249
----------
Net income...................................................... $ 73,503
==========
Weighted average number of common stock shares outstanding.............. 1,550,000
==========
Primary earnings per share.............................................. $ 0.05
==========
Fully diluted earnings per share........................................ $ 0.05
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-11
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
POST-ACQUISITION PERIODS (NOTE 1)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR APRIL 18, 1994
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ --------------
<S> <C> <C> <C>
REVENUES............................................................. $8,726,799 $6,925,716 $3,705,749
COST OF LABORATORY SERVICES.......................................... 3,816,114 3,246,470 1,655,692
---------- ---------- ----------
Gross profit................................................. 4,910,685 3,679,246 2,050,057
---------- ---------- ----------
OPERATING EXPENSES:
Selling.......................................................... 601,945 561,470 311,156
General and administrative....................................... 2,442,602 2,157,410 1,299,823
Depreciation and amortization.................................... 504,123 232,535 117,054
Asset impairment................................................. 124,531 -- --
---------- ---------- ----------
Total operating expenses..................................... 3,673,201 2,951,415 1,728,033
---------- ---------- ----------
OTHER (EXPENSE) INCOME:
Interest expense................................................. (67,185) (29,651) (24,409)
Interest income.................................................. 41,208 126,939 31,422
Other income..................................................... 4,169 323,846 66,546
---------- ---------- ----------
Total other (expense) income................................. (21,808) 421,134 73,559
---------- ---------- ----------
Income from continuing operations before income taxes........ 1,215,676 1,148,965 395,583
INCOME TAX EXPENSE................................................... 527,171 474,405 178,774
---------- ---------- ----------
Income from continuing operations............................. 688,505 674,560 216,809
DISCONTINUED OPERATION:
Loss from operations of discontinued clinical business,
net of tax benefit of $257,904................................ (500,636) -- --
Loss on disposal of clinical business, net of tax benefit
of $489,420................................................... (773,580) -- --
---------- ---------- ----------
Net (loss) income............................................ (585,711) 674,560 216,809
DIVIDENDS ON PREFERRED STOCK......................................... -- 13,344 11,404
---------- ---------- ----------
Net (loss) income available for common stockholders................ $ (585,711) $ 661,216 $ 205,405
========== ========== ==========
PRIMARY EARNINGS PER SHARE:
Weighted average number of common stock and common
stock equivalents outstanding................................. 3,316,198 3,301,582 2,227,498
========== ========== ==========
Continuing operations............................................ $ 0.21 $ 0.20 $ 0.09
Discontinued operation........................................... (0.39) -- --
---------- ---------- ----------
Total........................................................ $ (0.18) $ 0.20 $ 0.09
========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common stock and common
stock equivalents outstanding.................................. 3,954,787 3,843,391 2,227,498
========== ========== ==========
Continuing operations............................................ $ 0.17 $ 0.17 $ 0.09
Discontinued operation........................................... (0.32) -- --
---------- ---------- ----------
Total........................................................ $ (0.15) $ 0.17 $ 0.09
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-12
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PRE-ACQUISITION PERIOD (NOTE 1)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1994
THROUGH
APRIL 17, 1994
--------------
<S> <C>
Common stock, $0.001 par value........................... $ 1,550
Paid in capital in excess of par, common stock:
Balance, beginning of period......................... 2,290,152
Dividends to MBf (Note 1)............................ (949,082)
----------
Balance, end of period........................... 1,341,070
----------
Retained earnings:
Balance, beginning of period......................... 139,868
Net income........................................... 73,503
----------
Balance, end of period........................... 213,371
----------
Total stockholders' equity....................... $1,555,991
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-13
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
POST-ACQUISITION PERIODS (NOTE 1)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR APRIL 18, 1994
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------------ ----------------------- -------------------
<S> <C> <C> <C>
Preferred stock, $0.001 par value,
$1 stated value:
Balance, beginning of period............ $ -- $ 300,000 $ --
Issuance of stock in
connection with the
Exchange (Note 1)...................... -- -- 300,000
Issuance to MBf in
connection with
Peterson's acquisition
of LSI (Note 1)........................ -- -- 658,896
Effect of the Exchange
(Note 1)............................... -- -- (658,896)
Redemption of stock
(Note 1)............................... -- (300,000) --
---------- ---------- ----------
Balance, end of
period............................. -- -- 300,000
---------- ---------- ----------
Common stock, $0.001 par
value:
Balance, beginning of
period................................. 3,298 3,298 1,550
Issuance of stock in
connection with the
Exchange (Note 1)...................... -- -- 239
Public offering of
stock (Note 1)......................... -- -- 1,320
Issuance of stock in
connection with the
purchase of the
customer list (Note 3)................. -- -- 189
Other issuance of stock................. 15 -- --
---------- ---------- ----------
Balance, end of
period............................. 3,313 3,298 3,298
---------- ---------- ----------
Paid in capital in excess
of par, common stock:
Balance, beginning of
period................................. 5,341,667 5,341,667 1,341,070
Eliminate retained
earnings and record
the effect of
Peterson's
acquisition of LSI
(Note 1)............................... -- -- 29,023
Effect of the Exchange
(Note 1)............................... -- -- 427,923
Public offering of
stock (Note 1)......................... -- -- 3,260,340
Issuance of stock in
connection with the
purchase of
the customer list
(Note 3)............................... -- -- 283,311
Other issuance of stock................. 24,360 -- --
---------- ---------- ----------
Balance, end of..................... 5,366,027 5,341,667 5,341,667
period............................. ---------- ---------- ----------
Retained earnings:
Balance, beginning of
period................................. 866,621 205,405 213,371
Net (loss) income....................... (585,711) 674,560 216,809
Eliminate retained
earnings and record
the effect of
Peterson's
acquisition of LSI
(Note 1)............................... -- -- (213,371)
Preferred stock
dividends.............................. -- (13,344) (11,404)
---------- ---------- ----------
Balance, end of
period............................. 280,910 866,621 205,405
---------- ---------- ----------
Total
stockholders'
equity............................. $5,650,250 $6,211,586 $5,850,370
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-14
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PRE-ACQUISITION PERIOD (NOTE 1)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1,
1994 THROUGH
APRIL 17, 1994
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income.............................................................. $ 73,503
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization....................................... 42,421
Provision for bad debts and other................................... 45,229
Impact of changes in assets and liabilities-
Accounts receivable............................................. (218,844)
Inventories..................................................... 3,460
Prepaid expenses and other...................................... 35,515
Other assets.................................................... 567
Accounts payable and accrued expenses........................... 137,963
---------
Net cash provided by operating activities................... 119,814
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (8,097)
Due to/from affiliate................................................... (75,000)
---------
Net cash used in investing activities....................... (83,097)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under line of credit........................................... (110,858)
Payments on long-term debt.............................................. (20,376)
---------
Net cash used in financing activities....................... (131,234)
---------
DECREASE IN CASH AND CASH EQUIVALENTS....................................... (94,517)
CASH AND CASH EQUIVALENTS, beginning of period.............................. 94,517
---------
CASH AND CASH EQUIVALENTS, end of period.................................... $ --
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................ $ 7,966
=========
Cash paid during the period for income taxes............................ $ --
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-15
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
POST ACQUISITION PERIODS (NOTE 1)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR APRIL 18, 1994
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................... $ (585,711) $ 674,560 $ 216,809
Adjustments to reconcile net (loss)
income to net cash provided by operating
activities-
Depreciation and amortization............... 550,933 232,535 116,463
Provision for bad debts and other........... 446,087 84,246 73,011
Gain on sales of assets..................... (50,000) -- (3,631)
Deferred income taxes....................... (744,936) (18,694) --
Asset impairment............................ 174,531 -- --
Disposal of clinical business............... 1,263,000 -- --
Impact of changes in assets and
liabilities-
Accounts receivable..................... (411,079) (222,300) (186,042)
Income tax refund receivable............ (54,939) 8,600 (140,226)
Inventories............................. 43,582 (3,745) (18,001)
Prepaid expenses and other.............. 64,182 (13,045) (34,814)
Other assets............................ -- -- 433
Accounts payable and accrued
expenses............................... (222,849) (7,682) 233,273
----------- ---------- ----------
Net cash provided by
operating activities............... 472,801 734,475 257,275
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (127,915) (211,886) (127,747)
Proceeds from sales of assets................... 50,000 -- 5,300
Purchase of customer list....................... -- -- (787,440)
Purchase of NPLI stock, net of cash
acquired....................................... (1,022,597) -- --
Acquisition costs............................... (301,816) (101,826) --
----------- ---------- ----------
Net cash used in investing
activities............................. (1,402,328) (313,712) (909,887)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid.................................. -- (24,748) --
Redemption of preferred stock................... -- (300,000) --
Warrant offering costs.......................... -- (38,821) --
Payments on short-term debt..................... (598,515) -- (89,142)
Payments on long-term debt...................... (155,628) (90,585) (75,464)
Net proceeds from issuance of
common stock................................... -- -- 3,261,660
----------- ---------- ----------
Net cash (used in) provided
by financing activities................ (754,143) (454,154) 3,097,054
----------- ---------- ----------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................................ (1,683,670) (33,391) 2,444,442
CASH AND CASH EQUIVALENTS, beginning of
period............................................. 2,411,051 2,444,442 --
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period............ $ 727,381 $2,411,051 $2,444,442
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
interest....................................... $ 112,698 $ 29,651 $ 24,409
=========== ========== ==========
Cash paid during the period for
income taxes................................... $ 631,564 $ 480,405 $ 319,000
=========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-16
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Effective July 8, 1994, Laboratory Specialists of America, Inc. (the
"Company" or "LSAI"), an Oklahoma corporation, acquired all of the capital
stock of Laboratory Specialists, Inc. ("LSI"), and LSI became a wholly
owned subsidiary of LSAI. This transaction was accounted for as a reverse
acquisition of LSAI by LSI, and LSI is treated as the acquiror for
accounting purposes. Therefore, the accompanying financial statements for
the periods prior to July 8, 1994, are those of LSI and not those of LSAI.
Through LSI, the Company operates an independent forensic drug testing
laboratory providing integrated drug testing services to corporations and
governmental bodies, by negotiated contract, for detection of illegal drug
use by employees and prospective employees. The Company's customers are
primarily in the construction, transportation, service, mining and
manufacturing industries, principally located in the southeast and
southwest United States.
On February 27, 1992, LSI's then parent, American Drug Screens, approved a
transaction whereby American Health Products Corporation ("AHP"), a Texas
corporation, acquired control of American Drug Screens. The transaction was
accounted for as a purchase. The excess purchase price over the fair value
of the net assets acquired amounting to $2,875,703 was recorded as
goodwill, of which $1,125,703 was allocated to the Company and $1,750,000
to AHP. The goodwill allocated to the Company is being amortized using the
straight-line method over 40 years. The retained earnings of the Company at
the date of acquisition were eliminated in accordance with purchase
accounting. Subsequent to the date of the transaction, American Drug
Screens changed its name to MBf USA, Inc. ("MBf").
On February 23, 1994, LSI's then parent, MBf, exchanged its common
stock investment in LSI for 1,300,000 shares of MBf's common stock (having
a market value of $1,178,125) held by LSI's president and former owner,
Arthur R. Peterson, Jr., and 706,244 shares of cumulative, redeemable,
convertible preferred stock of LSI (the "LSI Preferred Stock").
Additionally, LSI paid a cash dividend of $75,000, declared a noncash
dividend forgiving amounts due from MBf of approximately $545,000, and
issued a note payable to MBf in the amount of $353,123. These transactions
have been reflected as dividends to MBf reducing the Company's paid in
capital balance in the accompanying consolidated statement of stockholders'
equity. The acquisition of the LSI common stock by Mr. Peterson was
accounted for under the purchase method of accounting. The purchase price
exceeded the fair market value of the net tangible assets of LSI by
approximately $1,565,000 which was recorded as goodwill on April 18, 1994,
to be amortized over 40 years. All of the above transactions, except the
$75,000 cash dividend, are noncash transactions, and have been excluded
from the accompanying statement of cash flows.
The pre-acquisition period presented is not comparable to the post-
acquisition period due to the purchase accounting adjustments recorded by
LSI. The primary difference is the recording of additional goodwill, as
described above, and the increase in the related amortization of $11,000
annually. Retained earnings of LSI at the date of acquisition were
eliminated in accordance with purchase accounting.
On July 8, 1994, (i) Arthur R. Peterson, Jr. exchanged all of the
outstanding common stock of LSI for 1,000,000 shares of common stock and
300,000 shares of Series I Cumulative Redeemable Convertible Preferred
Stock (the "Series I Preferred Stock") of LSAI, and (ii) MBf exchanged all
of its LSI Preferred Stock for 239,405 shares of common stock of LSAI (the
"Exchange"). The Series I Preferred Stock was entitled to annual cumulative
dividends based upon the national prime rate which initially was 6.75%
subject to a maximum 2% rate increase or decrease adjustment. LSAI redeemed
the Series I Preferred Stock in July 1995 at $1.00 per share, totaling
$300,000. As a result of the Exchange, LSI became a subsidiary of LSAI. The
Exchange was accounted for as a reverse acquisition of LSAI by LSI and LSI
was treated as the acquiror for accounting purposes.
F-17
<PAGE>
On October 11, 1994, LSAI completed a public offering of 660,000 units
comprised of two shares of common stock and one 1994 warrant at a price of
$6.10, which resulted in net proceeds to the Company of approximately
$3,260,000, net of underwriting discounts, commissions and other offering
expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash equivalents consist of all highly liquid debt instruments with a
maturity of three months or less at the date of purchase. The Company
invests excess cash overnight in repurchase agreements, which are
government collateralized securities. The carrying amount of cash and cash
equivalents approximates fair value of those instruments due to their short
maturity.
INVENTORIES
Inventories consist of supplies of laboratory chemicals and specimen
collection materials. Inventories are valued at the lower of cost, on a
first-in, first-out basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, and are depreciated
over the estimated useful lives of the assets using the straight-line
method as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Land.................................................. N/A $ 29,353 $ 29,353
Building and improvements............................. 10 - 40 Years 867,110 631,244
Equipment............................................. 5 - 12 Years 1,492,633 987,480
Vehicles.............................................. 5 Years 32,419 26,511
Furniture and fixtures................................ 5 - 10 Years 72,032 55,631
---------- ----------
2,493,547 1,730,219
Less- Accumulated depreciation and amortization....... (900,948) (899,559)
---------- ----------
$1,592,599 $ 830,660
========== ==========
</TABLE>
GOODWILL AND CUSTOMER LISTS
Goodwill is amortized on a straight-line basis over 20 or 40 years and the
customer lists are amortized on a straight-line basis over fifteen years.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill or
the customer lists may warrant revision or that the remaining unamortized
balance of goodwill or the customer lists may not be recoverable. When
factors, such as operating losses, loss of customers, loss or suspension of
laboratory certification for an extended period, or changes in the drug
testing industry, if present, indicate that goodwill or the customer lists
should be evaluated for possible impairment, the Company uses an estimate
of the related undiscounted net cash flows over the remaining life of the
goodwill or the customer lists in measuring whether they 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
could become impaired in the future. Such impairment could have a material
effect on the results of operations in a particular reporting period.
DEFERRED COSTS
Deferred costs at December 31, 1996, include $38,821 of legal and
accounting expenses incurred in connection with the pending registration of
the Company's outstanding warrants (see Note 12), $33,523 related to
construction in progress, and $8,474 other. The deferred registration costs
will be recorded as a reduction of the proceeds from the exercise of the
warrants; if the warrants are not exercised, the costs
F-18
<PAGE>
deferred will be expensed. The Company will begin depreciating the deferred
building costs when the related building is put into use during 1997.
EMPLOYEE STOCK OPTION PLAN
The Company accounts for its employee stock option plan using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (see Note 11).
INCOME TAXES
Deferred income taxes are provided to reflect the future tax consequences
of differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements.
EARNINGS PER COMMON SHARE
Earnings per common share for the pre-acquisition period presented have
been computed using the number of common shares outstanding prior to the
Exchange and public offering as the Securities and Exchange Commission
requires promotional shares issued within one year of the initial filing
date of the public offering to be treated as outstanding for all reported
periods. Primary earnings per common share for the post-acquisition periods
were computed using the weighted average number of common shares
outstanding after adding the dilutive effect of the conversion of stock
options. Outstanding warrants and a note payable to be paid in stock are
included in the fully diluted weighted average shares outstanding
calculation for the years ended December 31, 1996 and 1995.
USE OF ESTIMATES
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, the
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 as additional information becomes known.
3. BUSINESS ACQUISITIONS:
NATIONAL DRUG ASSESSMENT CORPORATION
On December 1, 1994, the Company acquired from National Drug Assessment
Corporation ("NDAC"), pursuant to an Asset Purchase Agreement dated
November 30, 1994, certain intangible assets. The assets purchased included
the customer list of NDAC and all contracts, contract rights and
agreements, correspondence with the customers for which NDAC provided drug
testing services (the "customer list"), all specimens with respect to which
testing was in process and had not been completed, all rights to business
conducted by NDAC related to drug testing, and all rights in the name
"National Drug Assessment" or "National Drug Assessment Corporation" (the
"Purchased Assets"). The purchase price of these assets included: (i) a
cash payment of $750,000; (ii) the issuance of 189,000 shares of LSAI
common stock; and (iii) the contingent issuance, on or before February 1,
1996, of such number of additional shares of common stock that have, in the
aggregate, a value equal to the revenues attributable to the customer list
during the 12 months ended December 1, 1995, in excess of $1,175,000. Based
on the revenues attributable to the customer list during the Company's
first 12 months of ownership, no additional shares were issued by LSAI. The
$1,070,940 purchase price of the NDAC purchased assets was allocated
entirely to the customer list and recorded as an intangible asset on
December 1, 1994, to be amortized over 15 years. The issuance of 189,000
shares of common stock has been excluded from the accompanying consolidated
statement of cash flows as it is a non-cash transaction.
NATIONAL PSYCHOPHARMACOLOGY LABORATORY, INC.
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
F-19
<PAGE>
(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 $1,585,000 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"), with an aggregate adjusted
face value of $510,000, 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 $875,000, and (iv) incurred deferred
income taxes of approximately $800,000 as a result of NPLI's tax basis
being significantly less than the purchase price of the NPLI Stock. All of
the above resulted in a total purchase price of approximately $3,400,000,
substantially all of which was recorded as intangible assets.
The forensic portion of NPLI's business was merged into LSI's operation
effective February 1996. The Company intended to sell the clinical business
during 1996, but after negotiations with three potential buyers failed, the
Company shut down the clinical operations effective in the fourth quarter
of 1996. The revenues related to the discontinued clinical operation for
the year ended December 31, 1996, were approximately $3,413,000. The
related operating loss and shut down expenses of the clinical business are
included in the accompanying income statement as "Discontinued Operation"
and "Disposition of Discontinued Operation," respectively. Assuming the
acquisition had occurred at the beginning of 1995, the unaudited
consolidated pro forma results of operations (excluding the clinical
business) for the year ended December 31, 1995, are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
(Unaudited)
-----------
<S> <C>
Revenues.................................................... $8,626,000
Net income from continuing operations....................... 851,000
Primary earnings per share from continuing operations....... 0.26
</TABLE>
4. OTHER INCOME:
Other income, as reflected in the consolidated statement of income for the
year ended December 31, 1995, includes proceeds of $320,000 received from
the settlement of litigation brought by LSI.
5. ACCOUNTING CHANGES:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
requires that long-lived assets, certain identifiable intangibles and
goodwill related to those assets be reviewed for impairment. The adoption
resulted in no adjustment to the financial statements. During the fourth
quarter of 1996, the Company made a decision to hold for sale the
laboratory building, which resulted in an impairment of approximately
$111,000 being recorded, which reduced the net book value to $225,000. The
impairment is included in "Asset Impairment" in the accompanying income
statements.
The Financial Accounting Standards Board also recently issued SFAS No. 128,
"Earnings Per Share," which specifies the computation, presentation, and
disclosure requirements for earnings per share. This statement is effective
for financial statements with periods ending after December 15, 1997.
Management has not determined the impact this standard will have on
earnings per share.
6. TRANSACTIONS WITH RELATED PARTIES:
During the years 1996, 1995 and 1994, LSAI incurred approximately $30,000,
$130,000 and $125,000, respectively, for legal services rendered by a
director of the Company who also serves as legal counsel for the
F-20
<PAGE>
Company. Management believes that the amounts incurred approximate those
which would have been paid to unrelated parties for the same services.
Until June 1996, LSAI's office in Oklahoma City was subleased from Unico,
Inc. ("Unico") on a month-to-month basis. Rental expense paid to Unico for
1996, 1995 and 1994 totaled approximately $6,000, $21,000 and $13,000,
respectively. The lessors of such premises to Unico include the President
and Chief Executive Officer of LSAI, who own, in the aggregate, a 50
percent undivided interest in such premises and are former directors of
Unico.
7. LINE OF CREDIT:
In December 1995, LSI entered into a $1 million line of credit arrangement,
which matured in December 1996. The line of credit was renewed for $250,000
in January 1997, maturing in January 1998, with an interest rate equal to
the Citibank N.A. rate, which was 8.25% at the date of renewal. LSAI is a
guarantor of any balances outstanding under the line of credit, which is
collateralized by LSI's accounts receivable, intangibles, inventories,
equipment, and furniture and fixtures. No drawings had been made against
the line of credit as of December 31, 1996.
8. DEBT:
Short-term debt at December 31, 1996, consists of a note payable to the
former shareholders of NPLI with a recorded amount of $334,460,
representing the discounted value of approximately 153,282 shares reserved
for issuance pursuant to the NPLI Purchase Agreement. The Company has not
issued and delivered these shares to the former shareholders based upon
certain representations made by the NPLI shareholders which the Company
believes to have been misleading and false at the closing of the NPLI
Acquisition. The remaining short-term debt of $75,833 relates to the note
payable for NPLI Goodwill (see Note 3).
Long-term debt consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Note payable to MBf, due February 1999,
interest rate 7%,collateralized by
substantially all of the assets of
LSI (see Note 1)........................ $ 353,123 $353,123
Note payable for purchase of laboratory
building................................ 450,000 --
Capital lease agreement with
Boehringer-Mannheim Corporation......... 560,652 --
---------- --------
Total long-term debt..................... 1,363,775 353,123
Less-Current portion..................... (118,085) --
---------- --------
$1,245,690 $353,123
========== ========
</TABLE>
In late 1996, the Company purchased a building to be renovated for its new
laboratory. The purchase was financed by a note payable to the seller due
on June 3, 1997, with no stated interest rate. This was a noncash
transaction and has been excluded from the accompanying consolidated
statement of cash flows. This note has been classified as long-term based
on a written commitment from a bank to refinance the purchase and
construction costs up to the lesser of 80% of appraised value or cost, not
to exceed $720,000. The bank note will be payable monthly based on a
fifteen-year amortization with the balance due five years from issuance. In
connection with the renovation of the new laboratory, the Company entered
into an agreement to pay $439,572 upon completion of the renovation, which
is expected during mid 1997.
During February 1996, LSI entered into an agreement with Boehringer-
Mannheim Corporation through February 2001, to purchase equipment and
certain lab supplies at a fixed price, per drug screen performed. The
agreement resulted in the Company recording approximately $650,000 in
additional equipment, with an equal amount recorded as a capital lease
obligation payable over five years. The amortization of the capital lease
assets is included in depreciation expense in the accompanying consolidated
statement of income. The total monthly payment during 1995 was $46,740. The
agreement was amended during December 1996, and the new monthly payment
will be $59,750, with $13,223 allocated to the principal and interest of
the capital
F-21
<PAGE>
lease obligation, with the remaining cost allocated to the cost of
laboratory supplies. The future minimum lease payments related to the
capital lease obligation are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997......................................... $ 158,670
1998......................................... 158,670
1999......................................... 158,670
2000......................................... 158,670
2001......................................... 26,446
---------
661,126
Less-Interest on capital lease obligation.... (100,474)
---------
Total future minimum lease payments....... $ 560,652
=========
</TABLE>
9. INCOME TAXES:
For the pre-acquisition periods presented, LSI filed a consolidated income
tax return with its former parent and calculated its income taxes as though
a separate income tax return were filed. Prior to 1995, the Company had no
material differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements, except for certain
goodwill which is not deductible for tax purposes, and treated as a
permanent difference.
The 1996 and 1995 provision (benefit) for income taxes on income from
continuing operations is summarized below:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
U.S. Federal-
Current............................ $ 581,467 $390,008
Deferred........................... (166,115) (8,735)
--------- --------
415,352 381,273
State.................................. 111,819 93,132
--------- --------
Total........................... $ 527,171 $474,405
========= ========
</TABLE>
Deferred tax liabilities (assets) at December 31, 1996 and 1995, are
composed of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net deferred tax liability:
Accelerated depreciation............... $ (69,748) $ 56,818
Customer list, net of amortization..... 372,000 --
Deferred taxable revenue, long-term.... 4,848 32,432
--------- --------
307,100 89,250
--------- --------
Net deferred tax asset:
Allowance for doubtful accounts........ (134,273) (37,534)
Accrued liabilities.................... (105,180) (35,522)
Deferred taxable revenue, short-term... 28,375 27,699
Operating loss carryforward............ -- (2,935)
--------- --------
(211,078) (48,292)
--------- --------
Total deferred taxes................... $ 96,022 $ 40,958
========= ========
</TABLE>
The results of the discontinued operation include a tax benefit of
$747,324.
In the following table, the U.S. Federal income tax rate is reconciled to
the Company's 1996 and 1995 effective tax rates from continuing operations
for income as reflected in the consolidated statements of income.
F-22
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. statutory rate..................... 34.0% 34.0%
Increases resulting from-
State income taxes.............. 6.1 5.4
Goodwill amortization........... 2.9 1.2
Other........................... .4 .7
---- ----
43.4% 41.3%
==== ====
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
CONTINGENT LIABILITIES
Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse, generally arising
from LSI's alleged failure to properly administer drug urinalysis tests.
LSI is currently a defendant 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 LSI maintains insurance to protect itself against
such liability, and LSI's insurance carriers have assumed the defense of
LSI 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 its 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, LSI
has not experienced any material liability related to such claims, there
can be no assurance that LSI, 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 effect upon the results of operations and financial
condition of the Company.
CERTIFICATION
The Company's laboratory is certified by the Substance Abuse and Mental
Health Services Administration ("SAMHSA"), the successor to the National
Institute on Drug Abuse, as well as certain state and local jurisdictions.
Certification by SAMHSA is essential to the Company's business, as certain
clients are required to use certified laboratories, and many of its clients
look to certification as an indication of reliability and accuracy of
tests. In order to remain certified, the Company is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements could result in suspension or loss of
certification. Such suspension or loss of certification could have a
material adverse effect on the Company.
EMPLOYMENT AGREEMENTS
LSAI has written employment agreements with its President and Chief
Executive Officer which provide, among other things, the following: (i) a
term of four years from April 16, 1996; (ii) a base salary of $112,500
each; (iii) bonuses at the discretion of the Board of Directors; (iv)
eligibility for stock options under LSAI's Stock Option Plan (see Note 11);
(v) health and disability insurance benefits and life insurance of
$500,000; (vi) an automobile allowance; and (vii) benefits consistent with
similar executive employment agreements. The agreements also restrict the
right to participate in other activities outside of LSAI to the extent such
activities conflict with the ability to perform duties and that would
violate duty and loyalty to LSAI.
LSI has a written agreement with its President and verbal employment
agreements with four key employees, each of which provides, among other
things, the following: (i) with respect to the President, a base salary of
$125,000 for a term of five years from April 16, 1996, and a bonus equal to
10 percent of the pre-tax income of LSI, not to exceed $50,000; (ii) with
respect to the four key employees, bonuses equal to 1 percent for each
employee of the pre-tax income of LSI; (iii) eligibility for stock options
under the stock option plan of its parent, LSAI (see Note 11); and (iv)
eligibility for health, disability and life insurance benefits on the same
terms as other employees. The agreements require the Company's President
and the four key employees to devote their full time and attention to the
business of LSI.
F-23
<PAGE>
JUDICIAL DECISIONS AND GOVERNMENT POLICY
Employee drug testing by federal agencies and certain private employers is
subject to regulation by certain federal agencies. Legislation currently
exists in a number of states regulating the circumstances under which
employers may test employees and the procedures under which such tests must
be conducted. In addition, the circumstances under which drug testing can
legally be required by employers is subject to court precedent and judicial
review.
HAZARDOUS MATERIALS
Certain testing procedures employed by the Company require the use of
hazardous materials. Failure to comply with current or future federal,
state or local environmental laws or regulations could have a material
adverse effect on the Company.
11. STOCK OPTION PLAN:
LSAI established the Laboratory Specialists of America, Inc. 1994 Stock
Option Plan (the "Stock Option Plan" or the "Plan") on May 10, 1994. On
October 30, 1996, the Plan was amended, subject to shareholder approval,
and the total number of shares of common stock authorized and reserved for
issuance was increased from 225,000 to 425,000. The Plan provides for the
issuance of both incentive stock options ("ISO Options") and nonqualified
stock options with or without stock appreciation rights ("SARs") to
directors, executive officers, key employees and independent contractors
and consultants of the Company and its subsidiaries. ISO Options may be
granted only to employees of the Company and its subsidiaries. The Board of
Directors interprets the Plan and establishes certain committees to
administer the Plan. These committees or the Board of Directors have
authority to grant options to all eligible employees and determine the
types of options granted, with or without SARs, the terms, restrictions and
conditions of the options at the time of grant, and whether SARs, if
granted, are exercisable at the time of the exercise of the option to which
the SAR is attached. The option price of the common stock is determined by
the Board of Directors or the various committees. The price may not be less
than 85 percent of the fair market value of the shares on the date of the
grant of the option, with the exception of ISO options, which may not be
less than the fair market value of the shares on the date of grant. The
Company's stock options are fixed-price options granted at the fair market
value of the underlying common stock on the date of grant. Generally, the
options vest and become exercisable six months from the grant date and
expire five to ten years after the grant date.
The following table shows the activity for options issued under the plan as
well as other options issued:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
OPTIONS PER OPTION
------- --------------
<S> <C> <C>
Balance outstanding January 1, 1995.............. -- $ --
Options granted.............................. 125,000 3.00
-------
Balance outstanding December 31, 1995............ 125,000 3.00
Options granted.............................. 185,000 2.75
-------
Balance outstanding December 31, 1996............ 310,000 2.85
=======
Options exercisable:
December 31, 1995............................ 10,000 3.00
December 31, 1996............................ 125,000 3.00
</TABLE>
Following are the range of exercise prices, the weighted-average remaining
life of all stock options outstanding at December 31, 1996, and the
weighted-average price within each price range of those options outstanding
and those options exercisable at year-end 1996.
F-24
<PAGE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1996 DECEMBER 31, 1996
---------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICE CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
OPTIONS PER OPTION LIFE (YEARS) PER OPTION OPTIONS PER OPTION
------- ---------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
125,000 $ 3.00 6.3 $3.00 125,000 $3.00
185,000 2.75 9.8 2.75 -- --
------- -------
310,000 2.75-3.00 8.4 2.85 125,000 3.00
======= =======
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a
fair-value method of accounting for employee stock options under which
compensation expense is measured based on the estimated fair value of
stock options at the grant date and recognized over the period that the
options vest. The Company will continue to account for its stock option
plan under the optional intrinsic value method of APB No. 25, whereby no
compensation expense is recognized for fixed-price stock options. Had
compensation expense been determined in accordance with SFAS No. 123, the
estimated weighted-average, grant-date fair value would have been $1.14
and $1.23 per option for those options granted in 1996 and 1995,
respectively, and the resulting compensation expense would have reduced
net income and primary earnings per share as shown in the following pro
forma amounts. These amounts may not be representative of compensation
expense that might be expected to result in future years using the fair-
value method of accounting for employee stock options, as the number of
options granted in a particular year may not be indicative of the number
of options granted in future years.
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Net (loss) income:
As reported.................. $(585,711) $661,216
Pro forma.................... (673,516) 614,771
(Loss) earnings per share:
Primary, as reported......... $ (0.18) $ 0.20
Fully diluted, as reported... (0.15) 0.17
Primary, pro forma........... (0.20) 0.19
Fully diluted, pro forma..... (0.17) 0.16
</TABLE>
The fair value of each option granted in 1996 and 1995 was estimated as of
the grant date using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Expected life (years)............... 5 5
Risk-free interest rate............. 6% 6%
Expected dividend yield............. -- --
Expected volatility................. 35% 35%
</TABLE>
12. COMMON STOCK WARRANTS:
In connection with the public offering, the Company issued 660,000
warrants which expire on September 27, 1999. Until April 15, 1997, each
warrant may be exercised to purchase two shares of common stock, for $3.50
per share. After April 15, 1997, and on or before April 15, 1998, each
warrant may be exercised to purchase two shares of common stock for $2.00
per share. After April 15, 1998, the exercise price adjusts based on
certain levels of net income per share of common stock for the year ended
December 31, 1997, as follows:
F-25
<PAGE>
<TABLE>
<CAPTION>
NET INCOME PER SHARE OF COMMON STOCK EXERCISE PRICE PER SHARE
------------------------------------ OF COMMON STOCK
EXERCISE PERIOD YEAR ENDED AMOUNT OF NET INCOME PER SHARE DURING EXERCISE PERIOD
---------------------- ----------------- ------------------------------ ------------------------
<S> <C> <C> <C>
After April 15, 1998 December 31, 1997 $.40 or more per share ....... $3.50
Less than $.40 but $.30
or more per share............. $3.00
Less than $.30 per share...... $2.50
</TABLE>
No warrants had been exercised at December 31, 1996 or 1995. The warrants
may be redeemed by the Company at any time, upon 30 days notice, at a price
of $.01 per warrant, only in the event the common stock trades in excess of
the exercise price of the warrant for 10 consecutive trading days.
As a portion of underwriting compensation, the Company issued warrants to
purchase 66,000 units at $7.32 per unit, consisting of two shares of common
stock and one warrant for two additional shares of common stock,
exercisable during a four-year period commencing on October 11, 1995. None
of these warrants had been exercised at December 31, 1996 or 1995. The
warrant included within each unit is exercisable under the same terms as
the warrants issued in connection with the public offering as described
above.
13. SUBSEQUENT EVENTS:
On January 31, 1997, LSAI acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement
dated January 31, 1997 (the "Purchase Agreement"). PLL is a privately held
corporation. The assets purchased included the forensic drug testing
customer list of PLL and all contracts, contract rights and agreements,
correspondence with the customers for which PLL has provided forensic drug
testing services, and all assets owned by PLL used in connection with the
PLL office in Greenville, South Carolina. Pursuant to the Purchase
Agreement, (i) the Company paid $1,600,000 at closing and (ii) the Company
assumed the obligations of PLL under a certain lease, dated September 16,
1996, which requires monthly base rental payments of $2,083 and which
expires on September 16, 1999. Furthermore, the Company is required to make
four additional quarterly installment payments to PLL within 60 days
following the end of each three-month period during the twelve months
ending January 31, 1998. These quarterly payments are based on gross
revenues directly attributable to each customer comprising the customer
base of PLL for the year ending January 31, 1998, exceeding $1,600,000. The
gross revenues attributable to this customer base for the year ended
December 31, 1996, were approximately $3,200,000. The initial purchase
price of $1,600,000 was financed with additional long-term bank
indebtedness. The Company consolidated the drug testing services with its
current laboratory in March 1997.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Pathology Laboratories, Ltd.:
We have audited the accompanying statements of net assets of the Forensic Drug
Testing Division (the "Division") of Pathology Laboratories, Ltd. (the
"Company") as of December 31, 1996 and 1995, and the related statements of
divisional operations and divisional cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Forensic Drug Testing Division of
Pathology Laboratories, Ltd., as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As more fully disclosed in Note 1a, the accompanying financial statements have
been prepared from the separate records of the Forensic Drug Testing Division of
Pathology Laboratories, Ltd. and may not necessarily be indicative of the
conditions that would have existed or the results of operations that would have
occurred had the Division been operated as an unaffiliated company.
Deloitte & Touche LLP
Jackson, Mississippi
March 7, 1997
F-27
<PAGE>
FORENSIC DRUG TESTING DIVISION
PATHOLOGY LABORATORIES, LTD.
STATEMENTS OF NET ASSETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................... $ -- $ --
Accounts receivable (net of allowance
for doubtful accounts of approximately
$43,000 in 1996 and $46,000 in 1995)..................... 333,385 322,590
-------- --------
Total current assets................................... 333,385 322,590
-------- --------
PROPERTY AND EQUIPMENT, net.................................... 163,455 158,519
OTHER ASSETS:
Excess of cost over net assets of business acquired, net
of accumulated amortization of approximately $14,000
in 1996 and $9,000 in 1995............................... 55,284 59,891
Non-compete agreements, net of accumulated amortization
of approximately $9,000 in 1996 and $6,000 in 1995....... 6,000 9,000
-------- --------
TOTAL ASSETS................................................... 558,124 550,000
-------- --------
CURRENT LIABILITIES--
Current maturities on equipment note and lease obligations... 63,375 74,999
-------- --------
EQUIPMENT NOTE AND LEASE
OBLIGATIONS, less current maturities......................... 33,314 41,872
-------- --------
TOTAL LIABILITIES.............................................. 96,689 116,871
-------- --------
COMMITMENTS AND CONTINGENCY (Note 5)
NET ASSETS..................................................... $461,435 $433,129
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-28
<PAGE>
FORENSIC DRUG TESTING DIVISION
PATHOLOGY LABORATORIES, LTD.
STATEMENTS OF DIVISIONAL OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
LAB REVENUE....................................... $3,238,460 $2,937,598
DIRECT OPERATING EXPENSES
Salaries and employee benefits.................. 622,736 633,078
Supply Costs.................................... 956,144 845,191
Professional fees............................... 173,669 177,779
Equipment expenses.............................. 152,965 171,272
Communications, postage and couriers expenses... 77,237 95,150
Depreciation and amortization expense........... 83,045 110,132
Other expenses.................................. 97,285 84,165
---------- ----------
Total direct operating expenses........... 2,163,081 2,116,767
---------- ----------
INDIRECT COST ALLOCATIONS
Transportation, general and administrative...... 1,268,167 1,157,226
Interest expense................................ 21,924 31,476
---------- ----------
Total indirect cost allocations.......... 1,290,091 1,188,702
---------- ----------
LOSS BEFORE INCOME TAX BENEFIT.................... (214,712) (367,871)
INCOME TAX BENEFIT................................ 80,088 137,216
---------- ----------
NET LOSS.......................................... $ (134,624) $ (230,655)
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-29
<PAGE>
FORENSIC DRUG TESTING DIVISION
PATHOLOGY LABORATORIES, LTD.
STATEMENTS OF DIVISIONAL CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss........................................................ $(134,624) $(230,655)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 83,045 110,132
Provision for doubtful accounts............................. 12,057 4,347
Changes in operating assets and liabilities--
Increase in accounts receivable........................... (22,852) (21,127)
--------- ---------
Net cash used in operating activities..................... (62,374) (137,303)
--------- ---------
INVESTING ACTIVITIES:
Property and equipment purchased................................ (17,374) (23,074)
Proceeds from sale of property and equipment.................... -- 41,977
--------- ---------
Net cash (used in) provided by investing activities....... (17,374) 18,903
--------- ---------
FINANCING ACTIVITIES:
Contributions from Pathology.................................... 134,624 230,655
Proceeds from long-term debt.................................... -- 160,000
Repayments of long-term debt and capitalized lease obligations.. (83,182) (149,135)
--------- ---------
Net cash provided by financing activities................. 51,442 241,520
--------- ---------
NET (INCREASE) DECREASE IN NET ASSETS............................. $ (28,306) $ 123,120
========= =========
SUPPLEMENTAL DISCLOSURES
Non-cash activity -- equipment purchase through
lease obligation.............................................. $ 63,000 $ --
========= =========
Interest paid................................................... $ 7,400 $ 14,500
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-30
<PAGE>
FORENSIC DRUG TESTING DIVISION
PATHOLOGY LABORATORIES, LTD.
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Pathology Laboratories, Ltd. ("the Company")
was incorporated on September 26, 1972 for the purpose of establishing and
maintaining medical and industrial testing laboratories and presently
provides clinical and pathological laboratory testing services in the
Southeastern United States. The Company conducts the majority of its
business under the name of Puckett Laboratory, which was originally founded
in 1955.
Effective January 31, 1997, the Company sold the customer base and certain
assets of its Forensic Drug Testing Division to Laboratory Specialists of
America, Inc. ("LSAI") for cash and notes approximating $3,200,000.
A. BASIS OF PRESENTATION AND USE OF ESTIMATES -- The accompanying
statements of net assets and the related statements of divisional
operations and divisional cash flows have been prepared using the
December 31, 1996 and 1995 account balances and the related revenues and
expenses for the years then ended which relate to the Forensic Drug
Testing Division of the Company.
The results of operations include all operating activities directly
related to the Forensic Drug Testing Division and indirect cost
allocations of all transportation, general and administrative, and
interest expense. These indirect expenses were allocated pro-rata to the
divisional results of operations based upon the ratio of revenues of the
Forensic Drug Testing Division to total revenues of all of the Company's
various revenue producing divisions.
The results of operations reported herein are not necessarily indicative
of results that would have been obtained had the division operated as an
independent entity for the years presented.
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.
B. CASH AND CASH EQUIVALENTS -- The Company utilizes a common cash account
for all operating divisions. Accordingly, these divisional financial
statements do no present any cash or cash equivalents for any period
presented.
C. ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION -- Sales and accounts
receivable are recorded upon completion of rendered services or the
related procedures based upon the estimated amounts realizable from
third party payors.
The Company maintains an allowance for doubtful accounts to reflect
amounts realizable from third party payors.
D. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Major additions and betterments are capitalized while replacements,
maintenance and repairs which do not improve or extend the lives of the
respective assets are expensed. Depreciation of property and equipment
is provided using both straight-line and accelerated methods over the
estimated useful lives of the related assets which range from five to
ten years.
E. INTANGIBLE ASSETS -- Intangible assets consist of non-compete agreements
and the excess of cost over net assets of businesses acquired related to
the Forensic Drug Testing Division resulting principally
F-31
<PAGE>
from business acquisitions consummated in 1994 and 1993. The costs are
being amortized by the straight-line basis over periods ranging from
five to fifteen years.
F. INCOME TAXES -- The benefit for income taxes is allocated to these
divisional financial statements based upon the Company's effective rate
of 37.3%. This benefit and any applicable deferred tax liabilities and
assets are included in the net assets of the division.
G. EMPLOYEE BENEFIT PLANS -- The Company has a 401(k) profit-sharing plan
which covers substantially all full-time employees. Matching
contributions by the Company to the plan are based upon the Board of
Director discretion. Allocated contributions based upon the personnel
involved with the Forensic Drug Testing Division approximated $400 in
1996 and 1995.
2. BUSINESS DISPOSITION
Effective January 31, 1997, the Company entered into an agreement to sell
its forensic drug testing customer base and certain related operating
assets of LSAI for cash and a note estimated to approximate $3,200,000. In
connection therewith, LSAI assumed the obligations under a lease agreement.
The aggregate principal amount of the notes (estimating $1,600,000) is
subject to adjustment in the event revenues from forensic drug testing
within the first year after closing are greater or lesser than a predefined
level as specified in the agreement.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Technical equipment............. $127,000 $113,560
Computer equipment.............. 131,804 82,126
Furniture and fixtures.......... 95,210 94,685
Vehicles........................ 83,830 67,099
-------- --------
437,844 357,470
Less accumulated depreciation... 274,389 198,951
-------- --------
Property and equipment, net..... $163,455 $158,519
======== ========
</TABLE>
4. EQUIPMENT NOTE AND LEASE OBLIGATIONS
The Company's Forensic Drug Testing Division was obligated under various
equipment note and capital lease obligations for computer and technical
equipment as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
7.75% note payable to a bank, in monthly installments of
$906, including interest, with the final payment due
January, 1997, and collateralized by computer equipment....... $ 900 $ 10,969
10% note payable to a company, in monthly installments of
$10,065, including interest, with the final payment due
July, 1997, and collateralized by laboratory equipment........ 46,632 105,902
Capital lease, payable to a company in monthly installments
of $1,753 with the final payment due on April 15, 2000........ 49,157 --
------- --------
Total liabilities....................................... 96,689 116,871
Less current maturities......................................... 63,375 74,999
------- --------
Total long-term debt............................................ $33,314 $ 41,872
======= ========
</TABLE>
F-32
<PAGE>
Aggregate future principal payments on these obligations, were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
1998................................... $63,375
1999................................... 15,843
2000................................... 17,471
-------
$96,689
=======
</TABLE>
5. COMMITMENTS AND CONTINGENCY
The Company's Forensic Drug Testing Division leases various laboratory
facilities and certain equipment under noncancelable operating lease
agreements. Rent expense relative to these and other cancelable lease
arrangements approximated $110,000 in 1996 and $133,000 in 1995. Future
lease payments under these agreements, which expire in 1997 and 199,
approximate $89,000. Included in these future lease payments are monthly
rental payments of $2,083 through September 1999, which were assumed by
LSAI pursuant to the Asset Purchase Agreement described in Note 2.
In connection with a business acquisition of assets of the division
consummated prior to 1994, the Company and seller entered into a referral
agreement wherein the Company agreed to pay a royalty fee of 18% of gross
revenues from customers retained and any new customers referred by the
seller medical facility for a period of five years. This agreement expires
in 1998. Fees paid approximated $170,000 in 1996 and $171,000 in 1995.
* * * * * *
F-33
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------
The Warrant Agent for the Warrant Redemption is:
LIBERTY BANK AND TRUST COMPANY,
OKLAHOMA CITY, N.A.
By Mail: By Hand:
P.O. Box 25848 100 Broadway
Oklahoma City, Oklahoma City,
Oklahoma 73125 Oklahoma 73102
Telephone:
(405) 231-6711
------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
1,452,000 SHARES
COMMON STOCK
ISSUABLE UPON EXERCISE OF
THE 1994 WARRANTS
66,000 UNITS
EACH UNIT CONSISTING OF
TWO SHARES OF
COMMON STOCK AND
ONE 1994 WARRANT
LABORATORY SPECIALISTS
OF AMERICA, INC.
------------
PROSPECTUS
------------
Holders of 1994 Warrants who require information about the procedures for
exercise and tendering of the 1994 Warrants should contact the Warrant Agent.
Requests for general information or additional copies of the Prospectus should
be directed to the Managing Agent or the Company.
Any requests for information concerning the Warrant Redemption may be made by
calling the Company's office at (405) 232-9800 or by writing to Laboratory
Specialists of America, Inc., 101 Park Avenue, Suite 810, Oklahoma City,
Oklahoma 73102, Attention: Larry E. Howell.
-----------
,1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and
Registrant's Certificate of Incorporation and Bylaws, which are incorporated by
reference herein, authorize) indemnification of directors and officers of
Registrant and officers and directors of another corporation, partnership, joint
venture, trust or other enterprise who serve at the request of Registrant,
against expenses, including attorneys fees, judgments, fines and amount paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding in which such person is a party by reason of such
person being or having been a director or officer of Registrant or at the
request of Registrant, if he conducted himself in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Registrant,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. Registrant may not indemnify an officer or
a director with respect to any claim, issue or matter as to which such officer
or director shall have been adjudged to be liable to Registrant, unless and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper. To
the extent that an officer or director is successful on the merits or otherwise
in defense on the merits or otherwise in defense of any action, suit or
proceeding with respect to which such person is entitled to indemnification, or
in defense of any claim, issue or matter therein, such person is entitled to be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection therewith.
The circumstances under which indemnification is granted with an action
brought on behalf of Registrant are generally the same as those set forth above;
however, expenses incurred by an officer or a director in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
final disposition upon receipt of an undertaking by or on behalf of such officer
or director to repay such amount if it is ultimately determined that such
officer or director is not entitled to indemnification by Registrant.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
S.E.C. Registration Fees..................... $ 1,000.00
N.A.S.D. Filing Fees......................... 3,242.00
*State Securities Laws (Blue Sky) Legal Fees.. 12,000.00
*State Securities Laws Filing Fees............ 10,000.00
*Printing and Engraving....................... 15,000.00
*Legal Fees................................... 45,000.00
*Accounting Fees and Expenses................. 10,000.00
*Transfer and Warrant Agent's Fees............ 2,000.00
*Miscellaneous................................ 1,758.00
-----------
Total..................................... $100,000.00
===========
</TABLE>
________________________________________
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Registrant has sold and issued the securities described below within the
past three years which were not registered under the Act.
Pursuant to a certain Exchange Agreement, effective June 30, 1994,
Registrant issued 1,000,000 shares of its Common Stock, $.001 par value per
share, and 300,000 shares of its Series I Cumulative Convertible Preferred
Stock, $1.00 stated value per share (the "Preferred Stock"), to Arthur R.
Peterson, Jr. (who became and is a director and an officer of Registrant) in
exchange for 1,000 shares of the common stock of Laboratory Specialists, Inc., a
Louisiana corporation (the "Exchange"), and issued to MBf USA, Inc. 239,405
shares of Registrant's Common Stock in exchange for 706,244 shares of
convertible preferred stock of Laboratory Specialists, Inc.
II-1
<PAGE>
In addition, in connection with a private placement pursuant to Regulation
D under the Securities Act of 1933, Registrant issued 150,000 shares of the
Common Stock, $.001 par value, to the following persons for cash, which sales
were not registered under the Securities Act of 1933:
<TABLE>
<CAPTION>
PURCHASE NUMBER OF
DATE OF PRICE PER SHARES NET
NAME PURCHASE SHARE PURCHASED PROCEEDS(1)
- -------------------------- -------- --------- --------- -----------
<S> <C> <C> <C> <C>
Thomas M. Hunt............ 5/6/94 1.00 50,000 $50,000
Robert A. Gardebled(2).... 5/6/94 1.00 5,000 5,000
Patricia A. Pizzo......... 5/6/94 1.00 5,000 5,000
W.J. Hankins, Jr.......... 5/6/94 1.00 5,000 5,000
J. Hugh Martin............ 5/6/94 1.00 5,000 5,000
John Peterson............. 5/6/94 1.00 5,000 5,000
John Lestino.............. 5/6/94 1.00 5,000 5,000
R. Randall Richison....... 5/6/94 1.00 15,000 15,000
Warren H. Carey........... 4/20/94 1.00 10,000 10,000
Tom Howell................ 5/6/94 1.00 5,000 5,000
Patricia M. Simonelli(3).. 5/6/94 1.00 5,000 5,000
John H. Brown............. 5/6/94 1.00 10,000 10,000
Patsy S. Fancher.......... 5/6/94 1.00 5,000 5,000
Gary Massad............... 5/6/94 1.00 10,000 10,000
Terry Bell................ 5/23/94 1.00 5,000 5,000
Frank G. McGuire III...... 6/1/94 1.00 5,000 5,000
</TABLE>
- -------------------
(1) No underwriting discounts or commissions were paid with respect to such
sales.
(2) Director of Registrant.
(3) Wife of John Simonelli, an officer and director of Registrant.
Pursuant to a certain Asset Purchase Agreement, dated November 30, 1994,
Registrant issued 189,000 shares of its Common Stock, $.001 par value per share,
to National Drug Assessment Corporation, pursuant to Regulation D under the
Securities Act of 1933, in exchange for certain of its assets.
Registrant relied on Rule 504 and Sections 3(b) and 4(2) of the Securities
Act of 1933 for exemption from the registration requirements of such Act. Each
investor was furnished information concerning the formation and operations of
Registrant, and each had the opportunity to verify the information supplied.
Additionally, Registrant obtained a signed representation from each of the
foregoing persons in connection with the purchase of the Common Stock and
Preferred Stock of his, her or its intent to acquire such Common Stock and/or
Preferred Stock for the purpose of investment only, and not with a view toward
the subsequent distribution thereof; each of the certificates representing the
Common Stock and Preferred Stock of Registrant was stamped with a legend
restricting transfer of the securities represented thereby, and Registrant
issued stop transfer instructions to Liberty Bank and Trust Company of Oklahoma
City, N.A., the Transfer Agent for the Common Stock of the Company, concerning
all certificates representing the Common Stock held by the aforementioned
shareholders of Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
-----------
2.1 The Exchange Agreement, among Registrant, Arthur R. Peterson, Jr.,
MBf USA, Inc., John Simonelli and Larry E. Howell, dated June 30,
1994.
2.2 The Asset Purchase Agreement with National Drug Assessment
Corporation, dated November 30, 1994.(3)
2.3 The Stock Purchase Agreement with National Psychopharmacology
Laboratory, Inc., Haroutune K. Dekirmenjian and Kenneth O. Jobson,
dated January 1, 1996.(4)
3.1 Registrant's Certificate of Incorporation.(5)
3.2 Registrant's Bylaws.(5)
4.1 Form of Certificate of Common Stock of Registrant.(6)
II-2
<PAGE>
4.2 Form of 1994 Warrant.(6)
4.3 Form of Warrant Agreement between Registrant and Liberty Bank and
Trust Company of Oklahoma City, N.A.(6)
4.4 Form of Representative's Warrants ("Underwriters' Warrants").(6)
4.5 Form of Warrant for Purchase of Common Stock (the "Managing
Agent's Warrant").
4.6 Laboratory Specialists of America, Inc. 1994 Stock Option Plan,
adopted May 10, 1994.(5)
4.7 Laboratory Specialists of America, Inc. 1994 Stock Option Plan
(Amended and Restated October 30, 1996).
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities
covered by this Registration Statement.
10.1 Employment Agreement with John Simonelli, dated April 15, 1996.(7)
10.2 Employment Agreement with Larry E. Howell, dated April 15,
1996.(7)
10.3 Employment Agreement between Arthur R. Peterson, Jr. and
Laboratory Specialists, Inc., dated April 15, 1996.(7)
10.4 Standard Oklahoma Business Complex Lease with 101 Park L.L.C.,
dated June 25, 1996.(7)
10.5 Garden Offices Building Lease Agreement between Swiss/M Ltd
Partners and Laboratory Specialists, Inc., dated July 22, 1996.(7)
10.6 Credit Sale Agreement among Hugh O'Connor, Laboratory Specialists,
Inc. and Laboratory Specialists of America, Inc., dated December
3, 1996.(8)
10.7 Standard Form of Agreement between Owner and Contractor among
Kerry O'Connor General Contractor, Inc., Laboratory Specialists,
Inc. and Laboratory Specialists of America, Inc.(8)
10.8 The Stock Purchase Agreement with National Psychopharmacology
Laboratory, Inc., Haroutune K. Dekirmenjian and Kenneth O. Jobson,
dated January 1, 1996.(4)
10.9 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated December 27, 1995.(8)
10.10 Promissory Note issued by Laboratory Specialists, Inc. to Hibernia
National Bank, dated December 27, 1995.(8)
10.11 Investment Banking Agreement between Laboratory Specialists of
America, Inc. ("Registrant") and Barber & Bronson Incorporated,
dated June 5, 1997.
22.1 Subsidiary of Registrant.
23.1 Consent of Arthur Andersen LLP, dated June 25, 1997.
23.2 Consent of Deloitte & Touche LLP, dated July 3, 1997.
23.3 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated July 7, 1997.
25.1 Power of Attorney of John Simonelli, dated July 7, 1997.
25.2 Power of Attorney of Larry E. Howell, dated July 7, 1997.
25.3 Power of Attorney of Arthur R. Peterson, Jr.,July 7, 1997.
25.4 Power of Attorney of Robert A. Gardebled, Jr., dated July 7, 1997.
25.5 Power of Attorney of Jerome P. Welch, dated July 7, 1997.
25.6 Power of Attorney of Michael E. Dunn, dated July 7, 1997.
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28.1 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated November 8, 1993.**
28.2 Stock Exchange Agreement between and among Laboratory Specialists,
Inc., MBf USA, Inc. and Arthur R. Peterson, Jr., dated February
23, 1994.(5)
28.3 Promissory Note issued to MBf USA, Inc. by Laboratory Specialists,
Inc., dated February 23, 1994.(5)
______________________________________________________
(1) To be furnished by amendment.
(2) Previously furnished.
(3) Incorporated by reference to Form 8-K, dated December 1, 1994, filed with
the Commission on December 15, 1994.
(4) Incorporated by reference to Form 8-K, dated January 2, 1996, filed with
the Commission on April 9, 1997.
(5) Incorporated by reference to Form SB-2 Registration Statement No. 33-82058-
D as filed with the Central Regional Office of the Commission on July 28,
1994.
(6) Incorporated by reference to Amendment No. 2 to Form SB-2 Registration
Statement No. 33-82058-D as filed with the Central Regional Office of the
Commission on September 21, 1994.
(7) Incorporated by reference to Form 10-QSB Quarterly Report for the quarterly
period ended June 30, 1996, filed with the Commission on August 15, 1996.
(8) Incorporated by reference to Form 10-KSB Annual Report for the year ended
December 31, 1995, filed with the Commission on April 15, 1996.
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement; and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of Registrant pursuant to the foregoing provisions,
or otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by Registrant of expenses incurred or paid by a
director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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(f) RULE 430A.
Registrant hereby undertakes that it will (i) for determining any liability
under the Securities Act, treat the information omitted from the form of
prospectus filed as a part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by Registrant under
Rule 424(b)(1), or (4) or 497(h) under the Securities Act as a part of this
Registration Statement as of the time the Commission declared it effective,
and (ii) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Oklahoma
City, State of Oklahoma, on the 7th day of June, 1997.
LABORATORY SPECIALISTS OF AMERICA, INC.
(Registrant)
By: /s/ LARRY E. HOWELL
Larry E. Howell, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN SIMONELLI Chairman of the Board, Chief July 7, 1997
John Simonelli Executive Officer, Secretary
and Director
/s/ LARRY E. HOWELL President and Chief Operating July 7, 1997
Larry E. Howell Officer and Director
/s/ ARTHUR R. PETERSON, JR. Treasurer and Director July 7, 1997
Arthur R. Peterson, Jr.
/s/ ROBERT A. GARDEBLED, JR. Director July 7, 1997
Robert A. Gardebled, Jr.
/s/ MICHAEL E. DUNN Director July 7, 1997
Michael E. Dunn
/s/ JEROME P. WELCH Director July 7, 1997
Jerome P. Welch
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<PAGE>
EXHIBIT 4.5
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
OTHERWISE DISPOSED OF, IN WHOLE OR IN PART, UNLESS ANY SUCH TRANSACTION IS
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS UNDER SAID ACT IS AVAILABLE, AND THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT, WHICH OPINION IS REASONABLY
SATISFACTORY TO THE COMPANY.
LABORATORY SPECIALISTS OF AMERICA, INC.
WARRANT TO PURCHASE COMMON STOCK
Securities Subject to Warrant to Purchase Common Stock. Subject to the
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terms and conditions hereinafter set forth, __________________ (the "Holder"),
is entitled to purchase from Laboratory Specialists of America, Inc., an
Oklahoma corporation (the "Company"), at any time and from time to time during
the period from _________________, 1997 (the "Commencement Date") until 5:00
p.m., Miami, Florida Time, on __________________, _________ (the "Expiration
Date"), at which time this Warrant to Purchase common Stock (the "Warrant")
shall expire and become void, an aggregate of _______________ shares of the
Company's common stock, par value $.001 per share (the "Common Stock"), which
number of shares of Common Stock is subject to adjustment from time to time, as
described below, upon payment therefor of the exercise price of $2.375 per share
of Common Stock in lawful funds of the United States of America, such amounts
(the "Basic Exercise Price") being subject to adjustment in the circumstances
set forth hereinbelow. This applicable Basic Price, until such adjustment is
made and thereafter as adjusted from time to time, is called the "Exercise
Price."
1. Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time from and after the Commencement Date and on or before the Expiration
Date, provided however, if such Expiration Date is a day on which on which
Federal or State chartered banking institutions located in the State of Florida
are authorized by law to close, then the Expiration Date shall be deemed to be
the next succeeding day which shall not be such a day, by presentation and
surrender to the Company at its principal office, or at the office of any
transfer agent for the Warrants ("Transfer Agent"), designated by the Company,
of this Warrant accompanied by the form of election to purchase on the last page
hereof signed by the Holder and upon payment of the Exercise Price for the
Common Stock purchased thereby, by cashier's check or by wire transfer of
immediately available funds. Notwithstanding anything contained herein to the
contrary, the Exercise Price for the Warrant may be satisfied by the delivery of
an unexercised portion of this Warrant to the Company or the Transfer Agent for
cancellation having a market value, as determined by the spread as of the date
of
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<PAGE>
surrender equal to the difference between the then Exercise Price and the
market price of the shares of Common Stock underlying this Warrant, equal to the
aggregate Exercise Price of the portion of this Warrant desired to be then
exercised. If this Warrant is exercised in part only, the Company or Transfer
Agent shall, promptly after presentation of this Warrant upon such exercise,
execute and deliver a new Warrant, dated the date hereof, evidencing the rights
of the Holder to purchase the balance of the Common Stock purchasable hereunder
upon the same terms and conditions herein set forth. This Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
date of its surrender for exercise as provided above, and the person entitled to
receive the Common Stock shall be treated for all purposes as the holder of such
shares of record as of the close of business on such date. As promptly as
practicable, the Company shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
shares of Common Stock issuable upon such exercise, together with cash in lieu
of any fraction of a share as provided below.
2. Registration Rights,
-------------------
2.1 If, at any time prior to the Expiration Date, the Holders of a
majority of the Warrants and the shares of Common Stock issued upon exercise of
the Warrants (collectively, the "Securities") shall give notice to the Company
requesting that the Company file with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement")
relating to the shares of Common Stock issuable upon the exercise of the
Warrants, the Company shall promptly give written notice of such proposed
Registration Statement to the Holders of such Securities, and to any subsequent
permissible transferee of any of the Securities (at the address of such persons
appearing on the books of the Company or its transfer agent) which notice shall
offer to include the shares of common stock in the requested Registration
Statement. The Company shall, as expeditiously as possible, file and use its
best efforts to cause to become effective under the Securities Act of 1933, as
amended (the "Securities Act"), the Registration Statement covering such of the
shares of Common Stock as the Company has been requested to register for
disposition by the Holders thereof, to the extent required to permit the public
sale or other public disposition thereof by the Holders. The Company shall cause
the Registration Statement to remain effective until such date as all of the
shares of Common Stock have been sold or the Warrants expire (the "Effective
Period"). The Holders shall have the right to demand registration of the shares
of Common Stock as described above on two separate occasions.
2.2 In addition, if at any time during the three (3) years after the
Commencement Date, the Company shall prepare and file one or more registration
statements under the Securities Act, with respect to a public offering of equity
or debt securities of the Company, or of any such securities of the Company held
by its security brokers, the Company will include in any such registration
statement such information as is required, and such number of shares of Common
Stock held by the Holders thereof or their respective designees or transferees
as may be requested by them, to permit a public offering of the shares of Common
Stock so requested; provided, however, that if, in the written opinion of the
-------- -------
Company's managing underwriter, if any, for such offering, the inclusion of the
shares of Common Stock requested to be registered, when added to the securities
being
2
<PAGE>
registered by the Company or the selling security holder(s), would exceed
the maximum amount of the Company's securities that can be marketed without
otherwise materially and adversely affecting the entire offering, then the
Company may exclude from such offering that portion of the shares of Common
Stock requested to be so registered, so that the total number of securities to
be registered is within the maximum number of shares that, in the opinion of the
managing underwriter, may be marketed without otherwise materially and adversely
affecting the entire offering. The Company shall bear all fees and expenses
incurred by it in connection with the preparation and filing of such
registration statement. In the event of such a proposed registration, the
Company shall furnish the then Holders with not less than thirty (30) days`
written notice prior to the proposed date of filing of such registration
statement. The Company shall use its best efforts to ensure that such
registration statement is declared effective and remains effective until such
time as all of the shares of Common Stock have been registered or may be sold
without registration under the Securities Act or applicable state securities
laws and regulations, and without limitation as to volume, pursuant to Rule 144
of the Securities Act. The holders of shares of Common Stock shall exercise the
rights provided for in this Subsection 2.2 by giving written notice to the
Company, within twenty (20) days of receipt of the Company's notice of its
intention to file a registration statement.
2.3 The Company shall bear all expenses, incurred in the preparation
and filing of such registration statements or post-effective amendment (and
related state registrations, to the extent permitted by applicable law) and the
furnishing of copies of the preliminary and final prospectus thereof to the
Holder, other than expenses of the Holder's counsel, and other than sales
commissions incurred by the then holders with respect to the sale of such
securities.
2.4 Notwithstanding anything contained herein to the contrary, if on
the Expiration Date a registration statement covering any portion of shares
issuable upon the exercise of the Warrants has not been declared effective by
the Commission for a period of at least 90 days, the Expiration Date shall be
extended to the date that is 180 days following the date of effectiveness of
such registration statement.
3. Reservation of Common Stock. The Company covenants that, during the
---------------------------
period this Warrant is exercisable, the Company will reserve from its authorized
and unissued Common Stock a sufficient number of shares of Common Stock to
provide for the issuance of the shares of Common Stock upon the exercise of this
Warrant. This Company agrees that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
4. No Shareholder Rights. This Warrant, as such, shall not entitle the
---------------------
Holder to any rights of a shareholder of the Company, until the Holder has
exercised this Warrant in accordance with Section 1 hereof.
5. Adjustment of Exercise Price and Number of Shares.
-------------------------------------------------
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<PAGE>
5.1 The number and kind of securities issuable upon the exercise of
this Warrant shall be subject to adjustment from time to time, and the Company
agrees to provide notice upon the happening of certain events, as follow:
a. If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or
smaller number of shares of Common Stock, the number of shares of Common
Stock for which this Warrant may be exercised shall be increased or
reduced, as of the record date for such recapitalization, in the same
proportion as the increase or decrease in the outstanding shares of Common
Stock, and the Exercise Price shall be adjusted so that the aggregate
amount payable for the purchase of all of the shares of Common Stock
issuable hereunder immediately after the record date for such
recapitalization shall equal the aggregate amount so payable immediately
before such record date.
b. If the Company declares a dividend on its common Stock payable in
shares of its Common Stock or securities convertible into shares of its
Common stock, the number of shares of Common Stock for which this Warrant
may be exercised shall be increased as of the record date for determining
which holders of Common Stock shall be entitled to receive such dividend,
in proportion to the increase in the number of outstanding shares of Common
Stock (and shares of Common Stock issuable upon conversion of all such
securities convertible into shares of Common Stock) as a result of such
dividend, and the Exercise Price shall be adjusted so that the aggregate
amount payable for the purchase of all the shares of Common Stock issuable
hereunder immediately after the record date for such dividend shall equal
the aggregate amount so payable immediately before such record date.
c. If the Company effects a general distribution to holders of its
Common Stock, other than as part of the Company's dissolution or
liquidation or the winding up of its affairs, of any shares of its capital
stock, any evidence of indebtedness or any of its assets (other than cash,
shares of Common Stock or securities convertible into shares of Common
Stock), the Company shall give written notice to the Holder of any such
general distribution at least fifteen (15) days prior to the proposed
record date in order to permit the Holder to exercise this Warrant on or
before the record date. There shall be no adjustment in the number of
shares of Common Stock for which this Warrant may be exercised, or in the
Exercise Price, by virtue of any such general distribution, except as
otherwise provided herein.
d. If the Company offers rights or warrants (other than the Warrant)
to all holders of its Common Stock which entitle them to subscribe to or
purchase additional shares of Common Stock or securities convertible into
shares of Common Stock, the Company shall give written notice of any such
proposed offering to the Holder at least fifteen (15) days prior to the
proposed record date in order to permit the Holder to exercise this Warrant
on or before such record date.
4
<PAGE>
e. In the event an adjustment in the Exercise Price or the number of
shares of Common Stock issuable hereunder is made under subsection a. or b.
above, and such an event does not occur, then any adjustments in the
Exercise Price or number of shares of Common Stock issuable upon exercise
of this Warrant that were made in accordance with such subsection a. or b.
shall be re-adjusted to the Exercise Price and number of shares of Common
Stock as were in effect immediately prior to the record date for such an
event.
f. If and whenever the Company issues or sells, or in accordance
with Subsection 5.1 is deemed to have issued or sold, any shares of its
Common Stock for a consideration per share less than the Exercise Price in
effect immediately prior to the time of such issuance or sale (except for
the issuance or deemed issuance of securities in a transaction described in
paragraph g. of this Subsection 5.1), then immediately upon such issuance
or sale the Exercise Price will be reduced to an Exercise Price determined
by multiplying the Exercise Price in effect immediately prior to the
issuance or sale by a fraction, the numerator of which shall be the sum of
(i) the number of shares of Common Stock outstanding prior to the issuance
or sale plus (ii) the number of shares of Common Stock issuable hereunder
that the maximum aggregate amount of consideration receivable by the
Company upon such issuance or sale would purchase at the Exercise Price in
effect immediately prior to the issuance or sale, and the denominator of
which shall be the number of shares of Common Stock deemed outstanding, as
hereinafter determined, immediately after such issuance or sale.
g. The following securities or transactions shall be excluded from
the operation of paragraph f. of this Subsection 5.1:
(i) The existence and any exercise of any option, convertible
promissory note, warrant, or other right to purchase Common Stock that is
outstanding on the date hereof; and
(ii) Any grant or exercise of options for Common Stock granted
under the Company's stock option plans, in existence as of the date hereof,
provided said grant or exercise is not effectuated as a result of any
amendment to such plans subsequent to the date hereof, with an exercise
price equal to at least the fair market value of the shares of Common Stock
on the date of grant.
h. If the Company in any manner grants any rights or options to
subscribe for or to purchase Common Stock or any stock or other securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "Rights" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), and the price per
share for which Common stock is issuable upon the exercise of such Rights
or upon conversion or exchange of such Convertible Securities is less than
the Exercise Price in effect immediately prior to the time of the granting
of such Rights, then the total maximum number of shares of Common Stock
issuable upon the exercise of such
5
<PAGE>
Rights or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Rights will be
deemed to be outstanding and to have been issued and sold by the Company
for such price per share and the Exercise Price shall be adjusted in
accordance with paragraph f. of this Section 5.1. For purposes of this
Section, the "price per share for which Common Stock is issuable upon
exercise of such Rights or upon conversion or exchange of such Convertible
Securities" will be determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the granting of
such Rights, plus the minimum aggregate amount of additional consideration
payable to the Company upon exercise of all such Rights, plus, in the case
of Rights that relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common
Stock then issuable upon the exercise of such Rights or upon the conversion
or exchange of all Convertible Securities issuable upon the exercise of
such Rights. Except as otherwise provided, no adjustment of the Exercise
Price will be made when Convertible Securities are actually issued upon the
exercise of such Rights or when Common Stock is actually issued upon the
exercise of such Rights or the conversion or exchange of such Convertible
Securities.
i. The number of shares of Common Stock deemed outstanding at any
given time shall include the number of shares of Common Stock outstanding,
as adjusted as provided herein, but shall not include shares owned or held
by or for the account of the Company, and the disposition of any shares so
owned or held will be considered an issuance or sale of Common Stock
hereunder.
j. No adjustment of the Exercise Price shall be made if the amount
of such adjustment would be less than one cent per share of Common Stock,
but in such case any adjustment that otherwise would be required to be made
shall be carried forward and shall be made at the time and together with
the next subsequent adjustment that, together with any adjustment or
adjustments so carried forward, shall amount to not less than one cent per
share of Common Stock.
5.2 In the event of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value, or from no
par value to par value, or from par value to no par value, or as a result of a
subdivision or combination) or in the event of any consolidation or merger of
the Company with another entity at any time prior to the expiration of this
Warrant, the Holder shall have the right to exercise this Warrant. Upon such
exercise, the Holder shall have the right to receive the same kind and number of
shares of capital stock and other securities, cash or other property as would
have been distributed to the Holder upon such reorganization, reclassification,
consolidation or merger. The Holder shall pay upon such exercise the Exercise
Price that otherwise would have been payable pursuant to the terms of this
Warrant. If any such reorganization, reclassification, consolidation or merger
results in a cash distribution in excess of the then applicable Exercise Price,
the Holder may, at the Holder's option, exercise this
6
<PAGE>
warrant without making payment of the Exercise Price, and in such case the
company shall, upon distribution to the Holder, consider the Exercise Price to
have been paid in full, and in making settlement to the Holder, shall deduct an
amount equal to the Exercise Price from the amount payable to the Holder. In the
event of any such reorganization, merger or consolidation, the corporation
formed by such consolidation or merger or the corporation which shall have
acquired the assets of the Company shall execute and deliver a supplement hereto
to the foregoing effect, which supplement shall also provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided in the Warrant.
5.3 If the Company shall, at any time before the expiration of this
Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the
right to exercise this Warrant. Upon such exercise the Holder shall have the
right to receive, in lieu of the shares of Common Stock of the Company that the
Holder otherwise would have been entitled to receive, the same kind and amount
of assets as would have been issued, distributed or paid to the Holder upon any
such dissolution, liquidation or winding up with respect to such stock
receivable upon exercise of this Warrant on the date for determining those
entitled to receive any such distribution. If any such dissolution, liquidation
or winding up results in any cash distribution in excess of the Exercise Price
provided by this Warrant, the Holder may, at the Holder's option, exercise this
Warrant without making payment of the Exercise Price and, in such case, the
Company shall, upon distribution to the Holder, consider the Exercise Price to
have been paid in full and, in making settlement to the Holder, shall deduct an
amount equal to the Exercise Price from the amount payable to the Holder.
5.4 Upon each adjustment of the Exercise Price pursuant to Section 5
hereof, the Holder shall thereafter (until another such adjustment) be entitled
to purchase, at the adjusted Exercise Price in effect on the date this Warrant
is exercised, the number of shares of Common Stock, calculated to the nearest
whole number of shares, determined by (a) multiplying the number of shares of
Common Stock purchasable hereunder immediately prior to the adjustment of the
Exercies Price by the Exercise Price in effect immediately prior to such
adjustment, and (b) dividing the product so obtained by the adjusted Exercise
Price in effect on the date of such exercise. The provisions of Section 8 shall
apply, however, so that no fractional share of Common Stock or fractional
Warrant shall be issued upon exercise of this Warrant.
5.5 The Company may retain a firm of independent public accountants
of recognized standing (who may be any such firm regularly employed by the
Company) to make any computation required under this Section 5, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 5.
6. Notice to Holder. So long as this Warrant shall be outstanding (a) if
----------------
the Company shall pay any dividends or make any distribution upon the Common
Stock otherwise than in cash or (b) if the Company shall offer generally to the
holders of Common Stock the right to subscribe to or purchase any shares of any
class of capital stock or securities convertible into capital stock or any
similar rights or (c) if there shall be any capital reorganization of the
Company in which the Company is not the surviving entity, recapitalization of
the capital stock of the Company, consolidation or
7
<PAGE>
merger of the Company with or into another corporation, sale, lease or other
transfer of all or substantially all of the property and assets of the Company,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company, then in such event, the Company shall cause to be mailed by registered
or certified mail to the Holder, at least thirty (30) days prior to the relevant
date described below (or such shorter period as is reasonably possible if thirty
(30) days is not reasonably possible), a notice containing a description of the
proposed action and stating the date or expected date on which a record of the
Company's shareholders is to be taken for the purpose of any such dividend,
distribution of rights, or such reorganization, recapitalization, consolidation,
merger, sale, lease or transfer, dissolution, liquidation or winding up is to
take place and the date or expected date, if any is to be fixed, as of which the
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such event.
7. Certificate of Adjustment. Whenever the Exercise Price or number or
-------------------------
type of securities issuable upon exercise of this Warrant is adjusted, as herein
provided, the Company shall promptly deliver to the Holder of this Warrant a
certificate of an officer of the Company setting forth the nature of such
adjustment and a brief statement of the facts requiring such adjustment.
8. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any subscription hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of exercise, as determined in good faith by the
Company's Board of Directors.
9. Transfer or loss of Warrant.
---------------------------
9.1 All or any part of this warrant may be transferred to any of the
shareholders, directors, officers, employees or partners of the Holder or any
successor upon the delivery of this Warrant as specified in Section 1 hereof
accompanied by a certificate from the Holder that each of the transferees have
such status with the Holder. Except as provided in the preceding sentence, prior
to any proposed transfer of the Securities, unless there is in effect a
registration statement under the Securities Act, covering the proposed transfer,
the Holder thereof shall give written notice to the Company of such Holder's
intention to effect such transfer. Each such notice shall describe the manner
and circumstances of the proposed transfer in sufficient detail, and shall, if
the Company so requests, be accompanied by an unqualified written opinion of
legal counsel who shall be reasonably satisfactory to the Company addressed to
the Company and reasonably satisfactory in form and substance to the Company's
counsel, to the effect that the proposed transfer of the Securities may be
effected without registration under the Securities Act, whereupon the Holder of
the Securities shall be entitled to transfer the Securities in accordance with
the terms of the notice delivered by the Holder to the Company. Each certificate
evidencing the Securities transferred as above provided shall not bear such
restrictive legends if in the opinion of counsel for the Company such legends
are not required in order to established compliance with any provisions of the
Securities Act.
9.2 Upon receipt by the Company of evidence satisfactory to it of
loss, theft,
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destruction or mutilation of this Warrant and, in the case of loss, theft or
destruction, of reasonably satisfactory indemnification, or, in the case of
mutilation, upon surrender of this Warrant, the Company will execute and
deliver, or instruct the Transfer Agent to execute and deliver, a new Warrant of
like tenor and date and any such lost, stolen or destroyed Warrant thereupon
shall become void.
10. Notices. Notices and other communications to be given to the Holder
-------
shall be deemed sufficiently given if delivered by hand, or five (5) days after
mailing by registered or certified mail, postage prepaid, to the Holder at c/o
Barber & Bronson Incorporated, 201 South Biscayne Boulevard, Suite 2950, Miami,
Florida 33131. Notices or other communications to the Company shall be deemed to
have been sufficiently given if delivered by hand or five (5) days after mailing
if mailed by registered or certified mail postage prepaid, to the Company at
_____________________. A party may change the address to which notice shall be
given by notice pursuant to this Section 10.
11. Entire Agreement and Modification. The Company and the Holder of this
---------------------------------
Warrant hereby represent and warrant that this Warrant is intended to and does
contain and embody all of the understandings and agreements, both written and
oral, of the parties hereto with respect to the subject matter of this Warrant,
and that there exists no oral agreement or understanding, express or implied,
whereby the absolute, final and unconditional character and nature of this
Warrant shall be in any way invalidated, impaired or affected. A modification or
waiver of any of the terms, conditions or provisions of this Warrant shall be
effective only if made in writing and executed with the same formality of this
Warrant.
12. Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of Florida, without application of the
principles of conflicts of laws.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
day of ____________________.
LABORATORY SPECIALISTS OF
AMERICA, INC., an Oklahoma corporation
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
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ELECTION TO PURCHASE
--------------------
TO: LABORATORY SPECIALISTS OF AMERICA, INC.
The undersigned hereby irrevocably elects to exercise Warrants represented
by this Purchase Warrant to Purchase Common Stock to purchase ________________
shares of Common Stock issuable upon the exercise of such Warrants and requests
that certificates for such shares and Warrants be issued in the name of:
----------------------------------------------------------
(Please insert social security or other identifying number)
------------------------------------
(Please print name and address)
Dated: _________________, ____ _____________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
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EXHIBIT 4.7
LABORATORY SPECIALISTS OF AMERICA, INC.
1994 STOCK OPTION PLAN
(AS AMENDED THROUGH OCTOBER 31, 1996)
ARTICLE I
GENERAL PROVISIONS
On May 10, 1994, Laboratory Specialists of America, Inc.(the "Company")
adopted the Laboratory Specialists of America, Inc. 1994 Stock Option Plan (the
"Original Plan"). On October 30, 1996, the Board of Directors of the Company
(the "Board") approved certain amendments of the Original Plan (including an
increase in the shares of stock authorized to be issued under the Original Plan
and certain other technical changes) and readopted the 1994 Stock Option Plan
(the "Revised 1996 Plan"). The Revised 1996 Plan must be approved by the
shareholders of the Company within one year of the date of its adoption by the
Board. If the Revised 1996 Plan is not timely approved by the shareholders, (i)
the Original Plan will continue in effect and (ii) any Options issued under the
Revised 1996 Plan shall remain valid and unchanged to the extent that such
Options contain terms which could have been granted under the Original Plan.
The Revised 1996 Plan shall be known as the Laboratory Specialists of America,
Inc. 1994 Stock Option Plan (the "Plan"). Any Options outstanding prior to the
adoption by the Board of the Revised 1996 Plan shall remain valid and unchanged.
1.1 PURPOSE. The purpose of the Plan shall be to attract, retain and
motivate directors, executive officers, key employees and independent
contractors and consultants of the Company and its subsidiaries ("Eligible
Persons") by way of granting (i) non-qualified stock options ("Stock Options"),
(ii) non-qualified stock options with stock appreciation rights attached ("Stock
Option SARs"), (iii) incentive stock options ("ISO Options"), and (iv) ISO
Options with stock appreciation rights attached ("ISO Option SARs"). For the
purpose of this Plan, Stock Option SARs and ISO Option SARs are sometimes
collectively herein called "SARs;" and Stock Options and ISO Options are
sometimes collectively herein called "Options." The ISO Options to be granted
under the Plan are intended to be qualified pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the Stock Options to
be granted are intended to be "non-qualified stock options" as described in
Sections 83 and 421 of the Code. Furthermore, under the Plan, the terms
"parent" and "subsidiary" shall have the same meaning as set forth in
Subsections (e) and (f) of Section 425 of the Code unless the context herein
clearly indicates to the contrary.
1.2 GENERAL. The terms and provisions of this Article I shall be
applicable to Stock Options, SARs and ISO Options unless the context herein
clearly indicates to the contrary.
1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board and/or committees established by the Board.
1.3.1 DIVISION OF PARTICIPANTS AND ESTABLISHMENT OF COMMITTEES. The
Eligible Persons under the Plan ("Participants") shall be divided into two
groups and there shall be a separate administrator for each group. One
group will be comprised of Participants that are Affiliates. For purposes
of this Plan, "Affiliate" shall mean all "officers" (as defined in Rule
16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) and directors of the Company and all persons who own
10 percent or more of the Company's issued and outstanding equity
securities. Initially, the power to administer the Plan with respect to
Participants who are Affiliates shall be vested with the Board. At any
time the Board may vest the power to administer the Plan with respect to
Participants who are Affiliates exclusively with a committee (the "Senior
Committee") comprised of two or more Non-Employee Directors (as defined in
Rule 16b-3(3)(i) promulgated under the Exchange Act) which are appointed by
the Board. The Senior Committee, in its sole discretion, may require
approval of the Board for specific grants of Options. The administration
of all Participants that are not Affiliates ("Non-Affiliates") shall be
vested exclusively with the Board. The Board, however, may at any time
appoint a committee (the "Employee Committee") of two or more members of
the Board and delegate to such Employee Committee the power to administer
the Plan with respect to Non-Affiliates. In addition, the Board may
establish an additional committee or committees of persons who are members
of the Board and delegate to such other committee or committees the power
to administer all or any portion of the Plan with respect to all or a
portion of the Participants. Members of each and all committees
administering all or any portion of the Plan shall serve for such period of
time as the Board may determine and shall be subject to removal by the
Board at any time. The Board may at any time terminate all or a
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portion of the functions of the Senior Committee, the Employee Committee,
or any other committee allowed under this Plan and reassume all or a
portion of the powers and authority previously delegated to such committee.
The Board in its discretion may also require the members of any committee
allowed under this Plan to be "outside directors" as defined in any
applicable regulations promulgated under Section 162(m) of the Code.
1.3.2 PLAN ADMINISTRATOR. The Board, the Employee Committee, Senior
Committee, and/or any other committee allowed under this Plan, whichever is
applicable, shall be each referred to herein as a "Plan Administrator."
Unless otherwise provided in the Plan, each Plan Administrator shall have,
with respect to its administered group, the power where consistent with the
general purpose and intent of the Plan to (i) modify the requirements of
the Plan to conform with the law or to meet special circumstances not
anticipated or covered in the Plan, (ii) suspend or discontinue the Plan,
(iii) establish policies and (iv) adopt rules and regulations and prescribe
forms for carrying out the purposes and provisions of the Plan including
the form of any "stock option agreements" ("Stock Option Agreements"). A
majority of the members of a Plan Administrator shall constitute a quorum,
and an act of the majority of the members present at any meeting at which a
quorum is present shall be the act of such Plan Administrator.
1.3.3 PLAN INTERPRETATION. Unless otherwise provided in the Plan,
the Board shall have the authority to interpret and construe the Plan, and
determine all questions arising under the Plan and any agreement made
pursuant to the Plan. Any interpretation, decision or determination made
by the Board shall be final, binding and conclusive.
1.3.4 SELECTION OF PARTICIPANTS. In designating and selecting
Eligible Persons for participation in the Plan, a Plan Administrator shall
consult with and give consideration to the recommendations and criticisms
submitted by appropriate managerial and executive officers of the Company.
A Plan Administrator also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and potential
contributions to the success of the Company and such other factors as a
Plan Administrator shall deem relevant in connection with accomplishing the
purpose of the Plan.
1.4 SHARES SUBJECT TO THE PLAN. Shares of stock ("Stock") covered by
Stock Options, SARs and ISO Options shall consist of 425,000 shares of the
Common Stock, $.001 par value, of the Company, subject to adjustment pursuant to
Section 1.7 of the Plan, which may be either authorized and unissued shares or
treasury shares, as determined in the sole discretion of the Board. If any
Option for shares of Stock, granted to a Participant lapses, or is otherwise
terminated, the Plan Administrator may grant Stock Options, SARs or ISO Options
for such shares of Stock to other Participants. However, Stock Options, SARs
and ISO Options shall not be granted again for shares of Stock which have been
(i) subject to SARs which are surrendered in exchange for cash or shares of
Stock issued pursuant to the exercise of SARs as provided in Article II hereof
and (ii) shares withheld for tax withholding requirements.
1.5 PARTICIPATION IN THE PLAN. A Plan Administrator shall determine from
time to time those Eligible Persons within the group of Eligible Persons
administered by such Plan Administrator, who are to be granted Stock Options,
SARs and ISO Options and the number of shares of Stock covered thereby. Non-
Employee Directors shall not be eligible to be granted ISO Options. The maximum
number of shares of Stock for which employee-Directors may be granted Options in
any calendar year shall not exceed 25 percent of the aggregate number of shares
of Stock with respect to which Options may be granted under the Plan.
1.6 DETERMINATION OF FAIR MARKET VALUE. As used in the Plan, "fair market
value" shall mean on any particular day (i) if the Stock is listed or admitted
for trading on any national securities exchange or the SmallCap Market System or
the National Market System of Nasdaq Stock Market, Inc. ("Nasdaq"), the last
sale price, or if no sale occurred, the mean between the closing high bid and
low asked quotations, for such day of the Stock, (ii) if Stock is not traded on
any national securities exchange but is quoted on an automated quotation system
or any similar system of automated dissemination of quotations or securities
prices in common use, the mean between the closing high bid and low asked
quotations for such day of the Stock on such system, (iii) if neither clause (i)
nor (ii) is applicable, the mean between the high bid and low asked quotations
for the Stock as reported by the National Daily Quotation Bureau, Incorporated
if at least two securities dealers have inserted both bid and asked quotations
for shares of the Stock on at least five (5) of the ten (10) preceding days,
(iv) in lieu of the above, if actual transact ions in the shares of Stock are
reported on a consolidated transaction reporting system, the last sale price of
the shares of Stock on such system or, (v) if none of the conditions set forth
above is met, the fair market value of shares of Stock as determined by the
Board.
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Provided, however, for purposes of determining "fair market value" of the Common
Stock of the Company, such value shall be determined without regard to any
restriction other than a restriction which will never lapse.
1.7 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The grants of Options
shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
assets or business. The aggregate number of shares of Stock under Options
granted under the Plan, the Option Price and the ISO Price and the total number
of shares of Stock which may be purchased by a Participant on exercise of an
Option shall be appropriately adjusted by the Board to reflect any
recapitalization, stock split, merger, consolidation, reorganization,
combination, liquidation, stock dividend or similar transaction involving the
Company. Provided, however, and notwithstanding the foregoing, (i) a
dissolution or liquidation of the Company, (ii) a merger or consolidation in
which the Company is not the surviving or the resulting corporation or (iii) a
reverse merger in which the Company is the surviving entity but in which the
securities possessing more than 50 percent of the total combined voting power of
the Company's outstanding securities are transferred to a person or persons
different from those who held such securities immediately prior to the merger
(collectively referred to herein as a "Corporate Transaction"), shall cause the
Plan and any Stock Option, SAR or ISO Option granted thereunder, to terminate
upon the effective date of such dissolution, liquidation, merger or
consolidation, subject to Section 1.21 of the Plan. Provided, further, that for
the purposes of this Section 1.7, if any merger, consolidation or combination
occurs in which the Company is not the surviving corporation and is the result
of a mere change in the identity, form or place of organization of the Company
accomplished in accordance with Section 368(a)(1)(F) of the Code, then, such
event will not cause a termination of the Plan. Appropriate adjustment may also
be made by the Board in the terms of a SAR to reflect any of the foregoing
changes.
1.8 AMENDMENT AND TERMINATION OF THE PLAN. The Plan shall terminate at
midnight, June 30, 2005, but prior thereto may be altered, changed, modified,
amended or terminated by written amendment approved by the Board. Provided,
that no action of the Board may (A) without the approval of the shareholders of
the Company, (i) increase the aggregate number of shares of Stock which may be
purchased under Stock Options, SARs or ISO Options granted under the Plan, (ii)
withdraw the administration of the Plan from the Plan Administrator, (iii) amend
or alter the Option Price or ISO Price, as applicable, (iv) change the manner of
computing the spread upon the exercise of a SAR, (v) amend the Plan in any
manner which would impair the applicability of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, to the Plan or (B) without the consent of the
holder of ISO Options, disqualify any ISO Options previously granted under the
Plan from treatment as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Except as provided in this
Article I, no amendment, modification or termination of the Plan shall in any
manner adversely affect any Stock Option, SAR or ISO Option theretofore granted
under the Plan without the consent of the affected Participant. Notwithstanding
the foregoing, Options may be granted under the Plan to purchase shares of Stock
in excess of the number of shares then available for issuance under the Plan if
(i) an amendment to increase the maximum number of shares issuable under the
Plan is adopted by the Board prior to the initial grant of any such Option and
within one year thereafter such amendment is approved by the Company's
shareholders and (ii) each such Option granted is not to become exercisable or
vested, in whole or in part, at any time prior to the obtaining of such
shareholder approval.
1.9 EFFECTIVE DATE. The Plan shall be effective May 10, 1994, subject to
approval by the holders of a majority of the outstanding Common Stock of the
Company present, or represented, and entitled to vote at a meeting called for
such purpose or pursuant to a consent in lieu of meeting executed by a majority
of the holders of the outstanding Common Stock of the Company, and upon the
issuance of a favorable opinion of counsel with respect to certain tax
consequences of the Plan as it affects Stock Options, ISO Options and SARs. The
Revised 1996 Plan shall be submitted to the shareholders of the Company for
their approval at a regular or special meeting to be held within 12 months after
the adoption of the Revised 1996 Plan by the Board. Shareholder approval shall
be evidenced by the affirmative vote of the holders of a majority of the shares
of the Company's Common Stock present in person or by proxy and voting at the
meeting. The date such shareholder approval has been obtained shall be referred
to in this Plan as the Revised 1996 Plan Effective Date.
1.10 SECURITIES LAW REQUIREMENTS. The Company shall have the right, but
not the obligation to cause the shares of Stock issuable upon exercise of the
Options to be registered under the Securities Act of 1933, as amended (the
"Securities Act") or the securities laws of any state or jurisdiction.
1.10.1 RESTRICTIONS ON TRANSFERABILITY AND LEGEND ON CERTIFICATES.
As a condition precedent to the grant of any Stock Option or the issuance
or transfer of shares pursuant to the exercise of any Stock Option,
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the Company may require the Participant or holder to take any reasonable
action to meet such requirements or to obtain such approvals. The Company
shall have the right to restrict the transferability of shares of Stock
issued or transferred upon exercise of the Stock Options in such manner as
it deems necessary or appropriate to insure the availability of any
exemption from registration under the Securities Act and any other
applicable securities laws or regulations that may be available, including
the endorsement with a legend reading as follows:
The shares of Common Stock evidenced by this certificate have been
issued to the registered owner in reliance upon written
representations that these shares have been purchased solely for
investment purposes. These shares may not be sold, transferred or
assigned unless in the opinion of the Company and its legal counsel
such sale, transfer or assignment will not be in violation of the
Securities Act of 1933, as amended, and the rules and regulations
thereunder.
1.10.2 REGISTRATION STATEMENT. If a registration statement covering
the shares of Stock issuable upon exercise of the Options granted under the
Plan is filed under the Securities Act, and is declared effective by the
Securities and Exchange Commission, the provisions of Section 1.10.1 shall
terminate during the period of time that such registration statement, as
periodically amended, remains effective.
1.11 SEPARATE CERTIFICATES. Separate certificates representing the Common
Stock of the Company to be delivered to a Participant upon the exercise of any
Stock Option, SAR, or ISO Option will be issued to such Participant.
1.12 PAYMENT FOR STOCK; RECEIPT OF STOCK OR CASH IN LIEU OF PAYMENT.
1.12.1 PAYMENT FOR STOCK. Payment for shares of Stock purchased
under this Plan shall be made (i) in full and in cash or check made payable
to the Company or (ii) may also be made in Common Stock of the Company held
for the requisite period necessary to avoid a charge to the Company's
reported earnings and valued at fair market value on the date of exercise
of the Option, or (iii) a combination of cash and Common Stock of the
Company. In the event that Common Stock of the Company is utilized in
consideration for the purchase of Stock upon the exercise of an Option,
such Common Stock shall be valued at the "fair market value" as defined in
Section 1.6 of the Plan.
1.12.2 RECEIPT OF STOCK OR CASH IN LIEU OF PAYMENT. Furthermore, a
Participant may exercise an Option without payment of the Option Price or
ISO Price in the event that the exercise is pursuant to rights under an SAR
attached to the Option and such SAR is exercisable on the date of exercise
of the Option to which it is attached. In the event an Option with an SAR
attached is exercised without payment of the Option Price or ISO Price in
cash or by check, the Participant shall be entitled to receive either (i) a
cash payment from the Company equal to the excess of the total fair market
value of the shares of Stock on such date as determined with respect to
which the Option is being exercised over the total cash Option Price or ISO
Price of such shares of Stock as set forth in the Option or (ii) that
number of whole shares of Stock as is determined by dividing (A) an amount
equal to the fair market value per share of Stock on the date of exercise
into (B) an amount equal to the excess of the total fair market value of
the shares of Stock on such date with respect to which the Option is being
exercised over the total cash Option Price or ISO Price of such shares of
Stock as set forth in the Option, and fractional shares will be rounded to
the next lowest number and the Participant will receive cash in lieu
thereof.
1.13 INCURRENCE OF DISABILITY AND RETIREMENT. A Participant shall be
deemed to have terminated his employment as an employee, his independent
contractor arrangement or consulting arrangement with the Company and incurred a
disability ("Disability") if such Participant suffers a physical or mental
condition which, in the judgment of the Board, totally and permanently prevents
a Participant from engaging in any substantial gainful employment with or the
providing of services or consulting for the Company or a subsidiary. A
Participant shall be deemed to have terminated employment as an employee,
independent contractor or a consultant due to retirement ("Retirement") if such
Participant ceases to be an employee, independent contractor or a consultant of
the Company or its subsidiary, without cause, after attaining the age of 55.
1.14 STOCK OPTIONS AND ISO OPTIONS GRANTED SEPARATELY. Because the Plan
Administrator is authorized to grant Stock Options, SARs and ISO Options to
Participants, the grant thereof and Stock Option Agreements relating thereto
will be made separately and totally independent of each other. Except as it
relates to the total number of shares
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of Stock which may be issued under the Plan, the grant or exercise of a Stock
Option or SARs shall in no manner affect the grant and exercise of any ISO
Options. Similarly, the grant and exercise of any ISO Option shall in no manner
affect the grant and exercise of any Stock Option or SARs.
1.15 GRANTS OF OPTIONS AND STOCK OPTION AGREEMENT. Each Stock Option, ISO
Option and/or SAR granted under this Plan shall be evidenced by the minutes of a
meeting of the Plan Administrator or by the written consent of the Plan
Administrator and by a written Stock Option Agreement effective on the date of
grant and executed by the Company and the Participant. Each Option granted
hereunder shall contain such terms, restrictions and conditions as the Plan
Administrator may determine, which terms, restrictions and conditions may or may
not be the same in each case.
1.16 USE OF PROCEEDS. The proceeds received by the Company from the sale
of Stock pursuant to the exercise of Options granted under the Plan shall be
added to the Company's general funds and used for general corporate purposes.
1.17 NON-TRANSFERABILITY OF OPTIONS. Except as otherwise herein provided,
any Option or SAR granted shall not be transferable otherwise than by will or
the laws of descent and distribution, and the Option may be exercised, during
the lifetime of the Participant, only by him. More particularly (but without
limiting the generality of the foregoing), the Option and/or SAR may not be
assigned, transferred (except as provided above), pledged or hypothecated in any
way, shall not be assignable by operation of law and shall not be subject to
execution, attachment, or similar process. Any attempted assignment, transfer,
pledge, hypothecation, or other disposition of the Option and/or SAR contrary to
the provisions hereof shall be null and void and without effect.
1.18 ADDITIONAL DOCUMENTS ON DEATH OF PARTICIPANT. No transfer of an
Option and/or SAR by the Participant by will or the laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished with written notice and an unauthenticated copy of the will
and/or such other evidence as the Plan Administrator may deem necessary to
establish the validity of the transfer and the acceptance by the successor to
the Option and/or SAR of the terms and conditions of such Option and/or SAR.
1.19 CHANGES IN EMPLOYMENT. So long as the Participant shall continue to
be a director, an employee, an independent contractor or a consultant of the
Company or any one of its subsidiaries, any Option granted to such Participant
shall not be affected by any change of duties or position. Nothing in the Plan
or in any Stock Option Agreement which relates to the Plan shall confer upon any
Participant any right to continue as a director or in the employ as an employee,
independent contractor or consultant of the Company or of any of its
subsidiaries, or interfere in any way with the right of the Company or any of
its subsidiaries to terminate such Participant as a director, employee or
independent contractor or consultant at any time.
1.20 SHAREHOLDER RIGHTS. No Participant shall have a right as a
shareholder with respect to any shares of Stock subject to an Option prior to
the purchase of such shares of Stock by exercise of the Option.
1.21 RIGHT TO EXERCISE UPON COMPANY CEASING TO EXIST. In the event of a
Corporate Transaction, the Participant shall have the right immediately prior to
consummation of the Corporate Transaction to exercise, in whole or in part, such
Participant's then remaining Options whether or not then exercisable, but
limited to that number of shares that can be acquired without causing the
Participant to have an "excess parachute payment" as determined under Section
280G of the Code determined by taking into account all of Participant's
"parachute payments" determined under Section 280G of the Code. Provided, the
foregoing notwithstanding, after the Participant has been afforded the
opportunity to exercise the Participant's then remaining Options as provided in
this Section 1.21, and to the extent such Options are not timely exercised as
provided in this Section 1.21, then, the terms and provisions of this Plan and
any Stock Option Agreement will thereafter continue in effect, and the
Participant will be entitled to exercise any such remaining and unexercised
Options in accordance with the terms and provisions of this Plan and such Stock
Option Agreement as such Options thereafter become exercisable. Provided
further, that for the purposes of this Section 1.21, if any merger,
consolidation or combination occurs in which the Company is not the surviving
corporation and is the result of a mere change in the identity, form, or place
of organization of the Company accomplished in accordance with Section
368(a)(1)(F) of the Code, then, such event shall not cause an acceleration of
the exercisability of any such Options granted hereunder.
1.22 ASSUMPTION OF OUTSTANDING OPTIONS AND SARS. To the extent permitted
by the then applicable provisions of the Code, any successor to the Company
succeeding to, or assigned the business of, the Company as the
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result of or in connection with a corporate merger, consolidation, combination,
reorganization, dissolution or liquidation transaction shall assume Options and
SARs outstanding under the Plan or issue new Options and/or SARs in place of
outstanding Options and/or SARs under the Plan.
1.23 TAX WITHHOLDINGS. The Company's obligation to deliver Stock upon the
exercise of Options under the Plan shall be subject to the satisfaction of all
applicable federal, state and local income tax withholding requirements. The
Board may in its discretion and in accordance with the provisions of Section
1.23 and such supplemental rules as the Board may from time to time adopt,
provide any or all holders of Options with the right to use shares of Stock in
satisfaction of all or part of the federal, state and local income tax
liabilities incurred by such holders in connection with the exercise of their
Options ("Taxes"). Such right may be provided to any such holders of Options in
either or both of the following methods: (i) the holder of an Option may be
provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable
upon exercise of such Option, a portion of those shares of Stock with an
aggregate fair market value equal to the percentage (not to exceed 100 percent)
of the applicable Taxes designated by the holder of the Options, and/or (ii) the
Board may, in its discretion, provide the holder of the Options with the
election to deliver to the Company, at the time the Option is exercised, one or
more shares of Stock previously acquired by such holder (other than pursuant to
the transaction triggering the Taxes) with an aggregate fair market value equal
to the percentage (not to exceed 100 percent) of the Taxes incurred in
connection with such Option exercise designated by such holder.
1.24 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Oklahoma.
ARTICLE II
TERMS OF STOCK OPTIONS AND EXERCISE
2.1 GENERAL TERMS.
2.1.1 GRANT AND TERMS FOR STOCK OPTIONS. Stock Options shall be
granted by the Plan Administrator on the following terms and conditions:
No Stock Option shall be exercisable more than 10 years after the date of
grant. Subject to such limitation, the Plan Administrator shall have the
discretion to fix the period (the "Option Period") during which any Stock
Option may be exercised. Stock Options granted shall not be transferable
except by will or by the laws of descent and distribution. Stock Options
shall be exercisable only by the Participant while serving as a Non-
Employee Director of the Company or a subsidiary or while actively employed
as an employee, an independent contractor or a consultant by the Company or
a subsidiary, except that (i) any such Stock Option granted and which is
otherwise exercisable, may be exercised by the personal representative of a
deceased Participant within 12 months after the death of such Participant
(but not beyond the Option Period of such Stock Option), (ii) if a
Participant is terminated as a Non-Employee Director, an employee, an
independent contractor or a consultant of the Company or a subsidiary on
account of Retirement, such Participant may exercise any Stock Option which
is otherwise exercisable at any time within three months of such date of
termination, or (iii) if a Participant is terminated as a Non-Employee
Director, as an employee, an independent contractor or a consultant of the
Company or a subsidiary on account of incurring a Disability, such
Participant may exercise any Stock Option which is otherwise exercisable at
any time within 12 months of such date of termination. If a Participant
should die during the applicable three-month or 12-month period following
the date of such Participant's Retirement or termination on account of
Disability, the rights of the personal representative of such deceased
Participant as such relate to any Stock Options granted to such deceased
Participant shall be governed in accordance with Subsection 2.1.1(i) of
this Article II.
2.1.2 OPTION PRICE. The option price ("Option Price") for shares of
Stock subject to Stock Option shall be determined by the Plan
Administrator, but in no event shall such Option Price be less than 85
percent of the fair market value of the Stock on the date of grant.
2.1.3 ACCELERATION OF OTHERWISE UNEXERCISABLE STOCK OPTION ON
RETIREMENT, DEATH, DISABILITY OR OTHER SPECIAL CIRCUMSTANCES. The Board,
in its sole discretion, may permit (i) a Participant who is terminated as a
Non-Employee Director, an employee, an independent contractor or a
consultant due to Retirement or Disability, (ii) the personal
representative of a deceased Participant, or (iii) any other Participant
who is terminated as a Non-Employee Director, an employee, an independent
contractor or a consultant upon the occurrence of special circumstances (as
determined by the Board), to exercise and
6
<PAGE>
purchase (within three years of such date of such Participant's
termination) all or any part of the shares subject to Stock Option on the
date of the Participant's termination, Retirement, Disability, death, or as
the Board otherwise so determines, notwithstanding that all installments,
if any, with respect to such Stock Option, had not accrued on such
termination date.
2.1.4 NUMBER OF STOCK OPTIONS GRANTED. Participants may be granted
more than one Stock Option. In making any such determination, the Plan
Administrator shall obtain the advice and recommendation of the officers of
the Company or a subsidiary which have supervisory authority over such
Participants. The granting of a Stock Option under the Plan shall not
affect any outstanding Stock Option previously granted to a Participant
under the Plan.
2.1.5 NOTICE OF EXERCISE STOCK OPTION. Upon exercise of a Stock
Option, a Participant shall give written notice to the Secretary of the
Company, or other officer designated by the Plan Administrator, at the
Company's main office in Oklahoma City, Oklahoma. No Stock shall be issued
to any Participant until the Company receives full payment for the Stock
purchased, if applicable, and any required Taxes.
ARTICLE III
SARS
3.1 GENERAL TERMS.
3.1.1 GRANT AND TERMS OF SARS. The Plan Administrator of each
administered group may grant SARs to Participants in connection with Stock
Options or ISO Options granted under the Plan. SARs shall terminate at such
time as the Plan Administrator determines and shall be exercised only upon
surrender of the related Stock Option or ISO Option and only to the extent
that the related Stock Option or ISO Option (or the portion thereof as to
which the SAR is exercisable) is exercised. SARs may be exercised only by
the Participant while a Non-Employee Director, an employee, an independent
contractor or a consultant of the Company or a subsidiary except that (i)
any SARs previously granted to a Participant which are otherwise
exercisable may be exercised, with the approval of the Plan Administrator,
by the personal representative of a deceased Participant (but not beyond
the expiration date of such SAR), and (ii) if a Participant is terminated
as a Non-Employee Director, an employee, an independent contractor or a
consultant of the Company or a subsidiary, as the case may be, on account
of Retirement or Disability, such Participant may exercise any SARs which
are otherwise exercisable, with the approval of the Plan Administrator,
anytime within three months of the date of the termination by Retirement or
within 12 months of termination by Disability. If a Participant should die
during the applicable three-month period following the date of such
Participant's Retirement or during the applicable 12 month period following
the date of termination on account of Disability, the rights of the
personal representative of such deceased Participant as such relate to any
SARs granted to such deceased Participant shall be governed in accordance
with (i) of the second sentence of this Subsection 3.1.1. The applicable
SAR shall (i) terminate upon the termination of the underlying Stock Option
or ISO Option, as the case may be, (ii) only be transferable at the same
time and under the same conditions as the underlying Stock Option or ISO
Option is transferable, (iii) only be exercised when the underlying Stock
Option or ISO Option is exercised, and (iv) may be exercised only if there
is a positive spread between the Option Price or ISO Price, as applicable
and the fair market value of the Stock for which the SAR is exercised.
3.1.2 ACCELERATION OF OTHERWISE UNEXERCISABLE SARS ON RETIREMENT,
DEATH, DISABILITY OR OTHER SPECIAL CIRCUMSTANCES. The Board, in its sole
discretion, may permit (i) a Participant is terminated as a Non-Employee
Director, an employee, an independent contractor, or a consultant with the
Company or a subsidiary due to Retirement or Disability, (ii) the personal
representative of such deceased Participant, or (iii) any other Participant
who is terminated as a Non-Employee Director, an employee, an independent
contractor or a consultant with the Company or a subsidiary upon the
occurrence of special circumstances (as determined by the Board) to
exercise (within three years of such date of such termination) all or any
part of any such SARs previously granted to such Participant as of the date
of such Participant's termination, Retirement, Disability, death, or as the
Board otherwise so determines, notwithstanding that all installments, if
any with respect to such SARs, had not accrued on such date.
3.1.3 FORM OF PAYMENT OF SARS. The Participant may request the
method and combination of payment upon the exercise of a SAR; however, the
Board has the final authority to determine whether the
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<PAGE>
value of the SAR shall be paid in cash or shares of Stock or both. Upon
exercise of a SAR, the holder is entitled to receive the excess amount of
the fair market value of the Stock (as of the date of exercise) for which
the SAR is exercised over the Option Price or ISO Price, as applicable,
under the related Stock Option or ISO Option, as the case may be. All
applicable Taxes will be paid by the Participant to the Company upon the
exercise of a SAR because the excess amount described above will be
required to be included within taxable income in accordance with Sections
61 and 83 of the Code.
ARTICLE IV
GRANTING OF ISO OPTIONS
4.1 GENERAL. With respect to ISO Options granted on or after the
effective date of the Plan the following provisions in this Article IV shall
apply to the exclusion of any inconsistent provision in any other Article in the
Plan because the ISO Options to be granted under the Plan are intended to
qualify as "incentive stock options" as defined in Section 422 of the Code.
4.2 GRANT AND TERMS OF ISO OPTIONS. ISO Options may be granted only to
employees of the Company and any of its subsidiaries. No ISO Options shall be
granted to any person who is not eligible to receive "incentive
stock options" as provided in Section 422 of the Code. No ISO Options shall be
granted to any management employee if, immediately before the grant of an ISO
Option, such employee owns more than 10 percent of the total combined voting
power of all classes of stock of the Company or its subsidiaries (as determined
in accordance with the stock attribution rules contained in Section 425(d) of
the Code). Provided, the preceding sentence shall not apply if, at the time the
ISO Option is granted, the ISO Price is at least 110 percent of the "fair market
value" of the Stock subject to the ISO Option, and such ISO Option by its terms
is not exercisable after the expiration of five years from the date such ISO
Option is granted.
4.2.1 ISO OPTION PRICE. The option price for shares of Stock subject
to an ISO Option ("ISO Price") shall be determined by the Plan
Administrator, but in no event shall such ISO Price be less than the fair
market value of the Stock on the date of grant.
4.2.2 ANNUAL ISO OPTION LIMITATION. The aggregate "fair market
value" (determined as of the time the ISO Option is granted) of the Stock
with respect to which ISO Options are exercisable for the first time by any
Participant during in any calendar year (under all "incentive stock option"
plans qualified under Section 422 of the Code sponsored by the Company and
its subsidiary corporations) shall not exceed $100,000.
4.2.3 TERMS OF ISO OPTIONS. ISO Options shall be granted on the
following terms and conditions: (i) no ISO Option shall be exercisable more
than 10 years after the date of grant (five years if the ISO Option is
granted to a Participant who at the time of the grant owns or is deemed to
own stock possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company or a subsidiary); (ii) the
Plan Administrator shall have the discretion to fix the period (the "ISO
Period") during which any ISO Option may be exercised; (iii) ISO Options
granted shall not be transferable except by will or by the laws of descent
and distribution; (iv) ISO Options shall be exercisable only by the
Participant while actively employed by the Company or a subsidiary, except
that (A) any such ISO Option granted and which is otherwise exercisable,
may be exercised by the personal representative of a deceased Participant
within 12 months after the death of such Participant (but not beyond the
expiration date of such ISO Option), (B) if a Participant terminates his
employment as an employee with the Company or a subsidiary on account of
Retirement, such Participant may exercise any ISO Option which is otherwise
exercisable at any time within three months of such date of termination and
(C) if a Participant terminates his employment with the Company or a
subsidiary on account of incurring a Disability, such Participant may
exercise any ISO Option which is otherwise exercisable at any time within
12 months of such date of termination. If a Participant should die during
the applicable three-month or 12 month period following the date of such
Participant's Retirement or Disability, then in such event, the rights of
the personal representative of such deceased Participant as such relate to
any ISO Options granted to such deceased Participant shall be governed in
accordance with this Subsection 4.2.3.
4.2.4 ACCELERATION OF OTHERWISE UNEXERCISABLE ISO OPTION ON
RETIREMENT, DEATH, DISABILITY OR OTHER SPECIAL CIRCUMSTANCES. The Board,
in its sole discretion, may permit (i) a Participant who terminates
employment as an employee with the Company or a subsidiary due to
Retirement or a Disability, (ii) the personal representative of a deceased
Participant, or (iii) any other Participant who terminates employment
8
<PAGE>
as an employee with the Company or a subsidiary upon the occurrence of
special circumstances (as determined by the Board) to exercise and purchase
(within three months of such date of termination of employment as an
employee or 12 months in the case of a disabled or deceased Participant)
all or any part of the shares of Stock subject to ISO Option on the date of
the Participant's Retirement, Disability, death, or as the Board otherwise
so determines, notwithstanding that all installments, if any, had not
accrued on such date.
4.2.5 NUMBER OF ISO OPTIONS GRANTED. Subject to the applicable
limitations contained in the Plan with respect to ISO Options, Participants
may be granted more than one ISO Option. In making any such determination,
the Plan Administrator shall obtain the advice and recommendation of the
officers of the Company or a subsidiary which have supervisory authority
over such Participants. The granting of an ISO Option under the Plan shall
not affect any outstanding ISO Option previously granted to a Participant
under the Plan.
4.2.6 NOTICE TO EXERCISE ISO OPTION. Upon exercise of an ISO Option,
a Participant shall give written notice to the Secretary of the Company, or
other officer designated by the Plan Administrator, at the Company's main
office in Oklahoma City, Oklahoma.
ARTICLE V
OPTIONS NOT QUALIFYING AS
INCENTIVE STOCK OPTIONS
5.1 NON-QUALIFYING OPTIONS. With respect to all or any portion of any
option granted under the Plan not qualifying as an "incentive stock option"
under Section 422 of the Code, such option shall be considered as a Stock Option
granted under this Plan for all purposes.
9
<PAGE>
EXHIBIT 5.1
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE FACSIMILE 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
July 8, 1997
Board of Directors
Laboratory Specialists of America, Inc.
1101-A Sovereign Row
Oklahoma City, Oklahoma 73108
Gentlemen:
Reference is made to the Registration Statement on Form SB-2 filed by
Laboratory Specialists of America, Inc. (the "Company") with the United States
Securities and Exchange Commission (the "Commission"), as declared effective by
the Commission (the "Registration Statement"), with respect to the proposed
initial issuance of (i) 1,452,000 shares of common stock, $.001 par value, of
the Company (the "Common Stock"), upon exercise of 726,000 warrants, each
exercisable for the purchase of two shares of Common Stock (the "1994
Warrants"), (ii) 66,000 units (and the components thereof), each consisting of
two shares of Common Stock and one 1994 Warrant (the "Units"), upon exercise of
warrants (the "Underwriters' Warrants) by the holders thereof (the "Selling
Shareholders"), and (iii) 170,000 shares of Common Stock upon exercise of
warrants to be issued to Barber & Bronson Incorporated and its assigns and
designees (the "Managing Agent's Warrants").
Based upon the Registration Statement (including the Prospectus contained
therein and the exhibits thereto), certificate of the Secretary of State of the
State of Oklahoma, and the financial statements of the Company, we are of the
opinion that:
1. The Company is duly organized and existing under the laws of the State
of Oklahoma;
2. All of the issued and outstanding shares of the Common Stock of the
Company have been legally issued, are fully paid and are not liable to
further call or assessment;
3. The 1,452,000 shares of Common Stock proposed to be sold by the Company
pursuant to exercise of the 1994 Warrants, when issued to the respective
holders of the 1994 Warrants against payment therefor in accordance with
that certain Warrant Agreement between the Company and Liberty Bank and
Trust Company of Oklahoma City, N.A. (as included as an exhibit to the
Registration Statement by incorporation by reference), will be legally
issued and fully paid, and will not be liable to further call or
assessment;
4. The 66,000 Units and the 132,000 shares of Common Stock and 66,000 1994
Warrants underlying the Units proposed to be sold by the Company to the
Selling Shareholders, when issued to the Selling Shareholders against
payment therefor pursuant to exercise of and in accordance with the
Underwriters's Warrants (the form of which is included as an exhibit to
the Registration Statement by incorporation by reference), will be
legally issued and fully paid, and will not be liable to further call or
assessment; and
5. The 170,000 shares of Common Stock or any portion thereof to be issued
to the Managing Agent pursuant to and in accordance with the proposed
form of the Managing Agent's Warrants (to be dated as of the Redemption
Date and the form of which is included as an exhibit to the Registration
Statement), will be legally issued and fully paid, and will not be
liable to further call or assessment.
<PAGE>
DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
Laboratory Specialists of America, Inc.
July 7, 1997
Page 2
In arriving at the foregoing opinion, we have relied, among other things,
upon the examination of the corporate records of the Company and certificates of
officers of the Company and of public officials. We hereby consent to the use
of this opinion in the Registration Statement and all amendments thereto, and to
the reference to our firm name under the caption "Legal Matters" of the
Prospectus which is included as a part of the Registration Statement and any
amendments thereto.
Very truly yours,
DUNN SWAN & CUNNINGHAM
<PAGE>
EXHIBIT 10.11
BARBER & BRONSON INCORPORATED
201 S. BISCAYNE BLVD.
SUITE 2950
MIAMI, FL 33131
TEL: (305) 536-8500
THIS INVESTMENT BANKING AGREEMENT, made as of this 5th day of June, 1997,
is by and between Laboratory Specialists of America, Inc., an Oklahoma
corporation (the "Company"), with its address at 101 Park Avenue, Suite 810,
Oklahoma City, Oklahoma 73102 and Barber & Bronson Incorporated ("BBI"), having
its principal place of business at 201 South Biscayne Blvd., Suite 2950, Miami,
Florida 33131
R E C I T A L S:
- - - - - - - -
A. The Company is a public company with a class of publicly traded common
stock purchase warrants (the "Warrants") which the Company desires to have
exercised, and also desires to identify prospects for mergers, acquisitions,
joint ventures, and similar transactions; and
B. The Company desires to have BBI's assistance in connection with the
Company's contemplated Warrant call, and with respect to identifying prospects
for mergers, acquisitions, joint ventures, and similar transactions on the terms
specified herein.
NOW, THEREFORE, in consideration of the mutual promises set forth herein,
the parties hereto hereby agree as follows:
1. TERM. The term of this Agreement shall be for one year commencing as
----
of the date first written above. Thereafter, this Agreement may be renewed for
subsequent one year terms upon mutual agreement of the parties. After December
31, 1997, either party may terminate this Agreement upon 60 days prior written
notice.
2. SERVICES. The Company and BBI agree that BBI shall serve as the
--------
manager for the Company's contemplated Warrant call and corresponding exercise,
and that BBI's responsibilities shall include, but not be limited to, providing
advice and counsel to the Company with respect to maximizing the number of
Warrants that are exercised, providing the Company with the appropriate forms
upon which to make notification of the Warrant call as well as for holders to
exercise their Warrants, assisting broker-dealers in notifying holders,
reviewing press releases related to the Warrant call and exercise, providing
input to the Company with respect to the registration statement registering the
shares underlying the Warrants, and providing instructional materials to the
Company
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to help effectuate the exercise. BBI shall also work with the Company in
identifying prospects for mergers, acquisitions, joint ventures, and similar
transactions.
3. FEES FOR SERVICES RENDERED AND TO BE RENDERED HEREUNDER.
-------------------------------------------------------
(a) FOR SERVING AS MANAGER OF THE WARRANT CALL. If the Company receives
any proceeds from the exercise of the Warrants on or prior to December 31,
1997, the Company agrees to pay to BBI (1) a non-accountable expense
allowance equal to 4% of the gross proceeds realized upon exercise of the
Warrants, and (2) a flat fee equal to $50,000, which amount shall be
reduced if at least 90% of the Warrants are not exercised, to an amount
that equals $50,000 times a fraction, the numerator of which shall be the
number of Warrants exercised and and the denominator of which shall be
660,000. In no case shall any fees be due and payable under this Section if
less than 132,000 Warrants are exercised.
Notwithstanding anything contained herein to the contrary, the company
hereby agrees that the Company will not change any of the terms and
conditions of the Warrants without the prior written consent of BBI,
including, without limitation, the exercise price, term of the Warrants and
redemption price of the Warrants. In addition, the Company hereby agrees
that the Company will take no action that will cause the anti-dilution
provisions of the Warrants to be triggered without the prior written
consent of BBI. The Company further hereby represents and warrants that the
terms and conditions of this Agreement will not trigger any of the any of
the anti-dilution provisions set forth in the Warrants.
Additionally, the Company herein agrees to issue to BBI, its assignees and
designees, that number of warrants (the "BBI Warrants"), identical in kind
to those included as Exhibit B herein, that corresponds to the Percentage
of Warrants that are exercised, as set forth below. The BBI warrants shall
be exercisable at a price per share equal to $2.375.
% of Warrants Exercised Total Number of BBI Warrants Exercise Period
----------------------- ---------------------------- ---------------
Up to 19.999% 20,000 1 Year
20-39.999 40,000 1 Year
40-59.999 60,000 1 Year
60-79.999 85,000 2 Years
80-89.999 120,000 3 Years
90 or Over 170,000 3 Years
(b) MERGERS, ACQUISITIONS AND SIMILAR TRANSACTIONS.
In the event the Company effectuates a merger, acquisition, joint venture, or
similar transaction subsequent to the date hereof and prior to two years from
the date of termination of this Agreement, and such merger, acquisition, joint
venture, strategic alliance or similar transaction is effectuated as a result or
a consequence of an introduction made, directly or indirectly, by BBI or any of
its affiliates during the term of this Agreement, then the Company hereby agrees
to pay BBI the following cash consideration, which payment shall be due and
payable in cash on the date of any such closing with respect thereto:
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<PAGE>
5% of the consideration from $1 and up to $5,000,000, plus
4% of the consideration in excess of $5,000,000 and up to $10,000,000, plus
3% of the consideration in excess of $10,000,000 and up to $15,000,000,
plus
2% of the consideration in excess of $15,000,000 and up to $20,000,000,
plus
1% of the consideration in excess of $20,000,000.
For purposes of this Agreement, "consideration" shall mean the value of the
transaction described herein and shall include the aggregate value of all
cash, securities, and other property and consideration of every kind,
including but not limited to assumption and forgiveness of indebtedness,
the maximum amount realizable under the terms of an "earn- out" provision,
rights to receive periodic payments and all other rights that may be at any
time either (I) transferred or contributed to the Company, its affiliates
or shareholders in connection with an acquisition of equity or assets
thereof, or (ii) transferred or contributed by the Company, its affiliates
or shareholders in any transaction involving an investment in or
acquisition of any third party, or acquisition of the equity or assets
thereof, by the Company or any affiliate thereof, or (iii) transferred or
contributed by the Company, its affiliates or shareholders and any other
parties entering into any joint venture or similar joint enterprise or
undertaking with the Company or any affiliate thereof. The aggregate value
of all such cash, securities and other property shall be the aggregate fair
market value thereof as determined by BBI and the Company, or by an
independent appraiser jointly selected by BBI and the Company, the cost of
which shall be borne entirely by the Company.
In the event BBI or any of its affiliates agrees to act as Placement Agent
or Underwriter for the Company in raising capital, the parties hereto
herein agree that the compensation to be paid to BBI or its affiliates for
said assistance shall be the subject of an agreement, the terms of which
are to be mutually agreed to, by and between the parties hereto.
4. EXPENSES. The Company hereby agrees to pay all out-of-pocket expenses
--------
incurred by BBI in connection with such services to be rendered hereunder,
provided, however, that all singular expenses in excess of $500 be approved, in
advance, by the Company. BBI may, from time to time, deem it to be in the best
interests of the Company to retain an outside consultant in connection with
certain specific acquisitions or proposed transactions. BBI agrees to obtain
the written consent of the Company prior to retaining such consultant. In such
event, the Company agrees to pay any and all fees and expenses of such
consultant.
5. REPRESENTATION OF THE COMPANY. The Company hereby represents and
-----------------------------
warrants that any and all information supplied hereunder to BBI in connection
with any and all services to be performed hereunder by BBI for and on behalf of
the Company shall be true, complete and correct as of the date of such
dissemination and shall not fail to state a material fact necessary to make any
of such information not misleading. The Company hereby acknowledges that the
ability of BBI to adequately provide services as described herein is dependent
upon the prompt dissemination of accurate, correct and complete information to
BBI. The Company further represents and warrants
3
<PAGE>
hereunder that this Agreement and the transactions contemplated hereunder have
been duly and validly authorized by all requisite corporate action; that the
Company has the full right, power and capacity to execute, deliver and perform
its obligations hereunder; and that this Agreement, upon execution and delivery
of the same by the Company, will represent the valid and binding obligation of
the Company enforceable in accordance with its terms. The representations and
warranties set forth herein shall survive the termination of this Agreement.
6. INDEMNIFICATION. See Exhibit A attached hereto.
---------------
7. CONFIDENTIALITY. See Exhibit A attached hereto.
---------------
8. INDEPENDENT CONTRACTOR. See Exhibit A attached hereto.
----------------------
9. AMENDMENT. No modification, waiver, amendment, discharge or change of
---------
this Agreement shall be valid unless the same is evidenced by a written
instrument, executed by the party against which such modification, waiver,
amendment, discharge, or change is sought.
10. NOTICES. All notices, demands or other communications given hereunder
-------
shall be in writing and shall be deemed to have been duly given when delivered
in person or transmitted by facsimile transmission or on the third calendar day
after being mailed by United States registered or certified mail, return receipt
requested, postage prepaid, to the addresses herein above first mentioned or to
such other address as any party hereto shall designate to the other for such
purpose in the manner hereinafter set forth.
11. ENTIRE AGREEMENT. This Agreement contains all of the understandings
----------------
and agreements of the parties with respect to the subject matter discussed
herein. All prior agreements, whether written or oral, are merged herein and
shall be of no force or effect.
12. SEVERABILITY. The invalidity, illegality or unenforceability of any
------------
provision or provisions of this Agreement will not affect any other provision of
this Agreement, which will remain in full force and effect, nor will the
invalidity, illegality or unenforceability of a portion of any provision of this
Agreement affect the balance of such provision. In the event that any one or
more of the provisions contained in this Agreement or any portion thereof shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
this Agreement shall be reformed, construed and enforced as if such invalid,
illegal or unenforceable provision had never been contained herein.
13. CONSTRUCTION AND ENFORCEMENT. This Agreement shall be construed in
----------------------------
accordance with the laws of the State of Florida, without application of the
principles of conflicts of laws. If it becomes necessary for any party to
institute legal action to enforce the terms and conditions of this Agreement,
the successful party will be awarded reasonable attorney's fees, expenses and
costs at all trial and appellate levels.
14. BINDING NATURE. The terms and provisions of this Agreement shall be
--------------
binding upon and inure to the benefit of the parties, and their respective
successors and assigns.
4
<PAGE>
15. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, including facsimile signatures which shall be deemed as original
signatures. All executed counterparts shall constitute one Agreement,
notwithstanding that all signatories are not signatories to the original or the
same counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
LABORATORY SPECIALISTS OF
AMERICA, INC. , an Oklahoma corporation
By:
---------------------------------------
John Simonelli, Chief Executive Officer
BARBER & BRONSON INCORPORATED,
a Florida corporation
By:
---------------------------------------
James S. Cassel, Executive Vice President
5
<PAGE>
EXHIBIT A
INDEMNIFICATION; CONFIDENTIALITY; AND INDEPENDENT CONTRACTOR STATUS
1. (a) The Company hereby agrees to indemnify, defend and hold harmless
BBI, its officers, directors, principals, employees, affiliates, and
shareholders, and their successors and assigns from and against any and all
claims, damages, losses, liability, deficiencies, actions, suits, proceeding,
costs and legal expenses (collectively the "Losses") arising out of or resulting
from: (I) any breach of a representation, or warranty by the Company contained
in the attached Agreement; or (ii) any activities or services performed
hereunder by BBI, unless such Losses were the result of the intentional
misconduct or gross negligence of BBI or were the result of any information
supplied by BBI in writing; or (iii) any and all costs and expenses (including
reasonable attorneys' and paralegals' fees) related to the foregoing, and as
more fully described below.
(b) If BBI receives written notice of the commencement of any legal
action, suit or proceeding with respect to which the Company is or may be
obligated to provide indemnification pursuant to this Paragraph, BBI shall,
within thirty (30) day period of the receipt of such written notice, give the
Company written notice thereof (a "Claim Notice"). Failure to give such Claim
Notice within such thirty (30) day period shall not constitute a waiver by BBI
of its right to indemnify hereunder with respect to such action, suit or
proceeding, unless the defense thereof is prejudiced thereby. Upon receipt by
the Company of a Claim Notice from BBI with respect to any claim for
indemnification which is based upon a claim made by a third party ("Third Party
Claim"), the Company may assume the defense of the Third Party Claim with
counsel of its own choosing, as described below. BBI shall cooperate in the
defense of the Third Party Claim and shall furnish such records, information and
testimony and amend all such conferences, discovery proceedings, hearings, trial
and appeals as may be reasonably required in connection therewith. BBI shall
have the right to employ its own counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of BBI unless the Company shall
not have with reasonable promptness employed counsel to assume the defense of
the Third Party Claim, in which event such fees and expenses shall be borne
solely by the Company. The Company shall not satisfy or settle any Third Party
Claim for which indemnification has been sought and is available hereunder,
without the prior written consent of BBI, which consent shall not be reasonably
withheld or delayed and which shall not be required if BBI is granted a release
in connection therewith. If the Company shall fail with reasonable promptness to
defend such Third Party Claim, BBI may defend, satisfy or settle the Third Party
Claim at the expense of the Company (but subject to its consent which shall not
be unreasonably withheld) and the Company shall pay to BBI the amount of any
such Loss with ten (10) days after written demand therefor. The indemnification
provisions hereunder shall survive the termination of the attached Agreement.
(c) BBI hereby agrees to indemnify, defend and hold harmless the
Company, its officers, directors, principals, employees, affiliates, and
shareholders, and their successors, and assigns from
6
<PAGE>
and against Losses arising out of or resulting from intentional misconduct or
gross negligence of BBI. The procedure set forth in (B) above shall also serve
as the protocol to permit the Company to seek indemnification from BBI.
2. BBI agrees that all non-public information pertaining to the prior,
current or contemplated business of the Company are valuable and confidential
assets of the Company. Such information shall include, without limitation,
information relating to customer lists, bidding procedures, intellectual
property, patents, trademarks, trade secrets, financing techniques and sources
and such financial statements of the Company as are not available to the public.
BBI, its officers, directors, employees, agents and shareholders shall hold all
such information in trust and confidence for the Company and shall not use or
disclose any such information for other than the Company's business and shall be
liable for damages incurred by the Company as a result of the use or disclosure
of such information by BBI, its officers, directors, employees, agents or
shareholders for any purpose other than the Company's business, either during
the term of the attached Agreement or after the premature termination or
expiration thereof, except (I ) where such information is publicly available or
later becomes publicly available other than through a breach of the attached
Agreement, or (ii) where such information is subsequently lawfully obtained by
BBI from a third party or parties, or (iii) if such information is known to BBI
prior to the execution of the attached Agreement, or (iv) as may be required by
law.
3. It is expressly understood and agreed that BBI shall, at all times, act
as an independent contractor with respect to the Company and not as an employee
or agent of the Company, and nothing contained in the attached Agreement shall
be construed to create a joint venture, partnership, association or other
affiliation, or like relationship, between the parties. It is specifically
agreed that the relationship is and shall remain that of independent parties to
a contractual relationship and that BBI shall have no right to bind the Company
in any manner. In no event shall either party be liable for the debts or
obligations of the other except as otherwise specifically provided in the
attached Agreement. BBI shall not have any claim under the attached Agreement,
or otherwise against the Company for vacation pay, paid sick leave, retirement
benefits, social security, worker's compensation, health, disability,
unemployment insurance benefits, or other employee benefits of any kind. BBI
understands and agrees that: (I) BBI will not be treated as an employee of the
Company for Federal tax purposes; (ii) the Company will not withhold on BBI's
behalf any sums for income tax, unemployment insurance, social security or any
other withholding pursuant to any law or requirement of any governmental body,
or make available any of the benefits afforded to employees of the Company;
(iii) all of such payments, withholdings or benefits, if any, are BBI's sole
responsibility; and (iv) BBI will indemnify and hold harmless the Company from
any and all loss or liability arising from its failure to make such payments,
withholdings and benefits, if any. In the event the Internal Revenue Service or
any other governmental agency should question or challenge BBI's independent
contractor status, the parties hereby agree that both BBI and the Company shall
have the right to participate in any discussion or negotiation occurring with
such agency or agencies, regardless of with whom or by whom such discussions or
negotiations are initiated.
7
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
NAME UNDER WHICH
NAME OF SUBSIDIARY STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS
- ------------------ ---------------------- ------------------------
Laboratory Specialists, Inc. Louisiana Laboratory Specialists, Inc.
National Psychopharmacology Tennessee National Psychopharmacology
Laboratory, Inc. Laboratory, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Oklahoma City, Oklahoma,
June 25, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Registration Statement of Laboratory Specialists
of America, Inc. on Form SB-2 of our report dated March 7, 1997, on the
statements of net assets of the Forensic Drug Testing Division of Pathology
Laboratories, Ltd. as of December 31, 1996 and 1995, and the related statements
of divisional operations and divisional cash flows for the years then ended,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Jackson, Mississippi
July 3, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF DUNN SWAN & CUNNINGHAM
Dunn & Swan, A Professional Corporation, hereby consents to the use of its
name under the heading "Legal Matters" in the Prospectus constituting a part of
this Registration Statement.
DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma,
July 7, 1997
<PAGE>
EXHIBIT 25.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that John Simonelli constitutes and
appoints Larry Howell and Michael E. Dunn, and each of them, his true and lawful
attorney-in-fact and agent, with all power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, including post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto same attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated July 7, 1997 /s/ JOHN SIMONELLI
John Simonelli
<PAGE>
EXHIBIT 25.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Larry E. Howell constitutes and
appoints John Simonelli and Michael E. Dunn, and each of them, his true and
lawful attorney-in-fact and agent, with all power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 7, 1997 /s/ LARRY E. HOWELL
Larry E. Howell
<PAGE>
EXHIBIT 25.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Arthur R. Peterson, Jr.
constitutes and appoints John Simonelli, Larry E. Howell and Michael E. Dunn,
and each of them, his true and lawful attorney-in-fact and agent, with all power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 7, 1997 /s/ ARTHUR R. PETERSON, JR.
Arthur R. Peterson, Jr.
<PAGE>
EXHIBIT 25.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Robert A. Gardebled, Jr.
constitutes and appoints John Simonelli, Larry E. Howell and Michael E. Dunn,
and each of them, his true and lawful attorney-in-fact and agent, with all power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 7, 1997 /s/ ROBERT A. GARDEBLED, JR.
Robert A. Gardebled, Jr.
<PAGE>
EXHIBIT 25.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Jerome P. Welch constitutes and
appoints John Simonelli, Larry Howell and Michael E. Dunn, and each of them, his
true and lawful attorney-in-fact and agent, with all power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 7, 1997 /s/ JEROME P. WELCH
Jerome P. Welch
<PAGE>
EXHIBIT 25.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Michael E. Dunn constitutes and
appoints John Simonelli and Larry Howell, and each of them, his true and lawful
attorney-in-fact and agent, with all power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, including post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto same attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated July 7, 1997 /s/ MICHAEL E. DUNN
Michael E. Dunn
