<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _______________
COMMISSION FILE NUMBER 0-24988
LABORATORY SPECIALISTS OF AMERICA, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
OKLAHOMA 73-145065
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102-7202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(405) 232-9800
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes____ No____
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 9, 1997, 3,313,405 shares of issuer's Common Stock, $.001 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one); Yes No X
---- ----
Total Sequentially Numbered Pages is 17
--
Index to Exhibits Appears on Sequentially Numbered Page 15
--
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
Page
----
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
March 31, 1997, and December 31, 1996............... 3
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1996 and 1997.......... 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1996 and 1997.......... 6
Notes to Consolidated Financial Statements (Unaudited)...... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 9
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 13
ITEM 2. CHANGES IN SECURITIES....................................... 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
ITEM 5. OTHER INFORMATION........................................... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 14
SIGNATURES.................................................................. 14
-2-
<PAGE>
PART I-FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
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.
-3-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
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 operations............................ 784,272 679,823
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' equity........................ $9,394,808 $12,143,307
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
-4-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
--------------- ---------------
(UNAUDITED)
<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.
-5-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1997
---------------- ---------------
(UNAUDITED)
<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.
-6-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996, AND MARCH 31, 1997,
ARE 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 intangible 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.
-7-
<PAGE>
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.
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.
-8-
<PAGE>
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.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
PLL ASSET PURCHASE. On January 31, 1997, the Company acquired from Pathology
Laboratories, Ltd., a Mississippi corporation ("PLL"), certain intangible
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.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i) the
twelve months ended December 31, 1995 and 1996, which are derived from the
audited financial statements of the Company and (ii) for the three months ended
March 31, 1996 and 1997, which are derived from the unaudited financial
statements of the Company which include, in the opinion of management of the
Company, all normal recurring
-9-
<PAGE>
adjustments which management of the Company considers necessary for a fair
statement of the results for such periods The results of operations for the
periods presented are not necessarily indicative of the Company's future
operations.
<TABLE>
<CAPTION>
For the Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------------------------
1995 1996 1996 1997
-------------------- -------------------- --------------------- ------------------------------
(UNAUDITED) (UNAUDITED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- -------- ----------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $6,925,716 100.0% $8,726,799 100.0% $1,948,536 100.0% $2,587,222 100.0%
Cost of revenues.............. 3,246,470 46.9% 3,816,114 43.7% 840,161 43.1% 1,186,084 45.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit.................. 3,679,246 53.1% 4,910,685 56.3% 1,108,375 56.9% 1,401,138 54.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling..................... 561,470 8.1% 601,945 6.9% 148,269 7.6% 132,129 5.1%
General and administrative.. 2,157,410 31.2% 2,442,602 28.0% 524,523 26.9% 695,616 26.9%
Depreciation and
amortization............. 232,535 3.3% 504,123 5.8% 91,336 4.7% 140,849 5.4%
Asset impairment............ -- 0.0% 124,531 1.4% -- 0.0% -- 0.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses...... 2,951,415 42.6% 3,673,201 42.1% 764,128 39.2% 968,594 37.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations........ $ 727,831 10.5% $1,237,484 14.2% $ 344,247 17.7% $ 432,544 16.7%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
During the three months ended March 31, 1997, LSI experienced a 4.8 percent
decrease in the price per specimen, compared to the three months ended March 31,
1996, principally due to increased price competition amongst providers of drug
testing services, price per specimen being an important factor in obtaining and
maintaining clients. Management of LSI closely monitors its price per specimen,
the prices of its competitors and the costs of processing specimens to remain
competitive, as well as profitable. There can be no assurance that price decline
per specimen will not further decline during 1997. In the event price
stabilization does not occur, LSI will, as it has in the past, take appropriate
measures to downsize its drug testing personnel and possibly further automate
the testing process and employ additional technology to continue profitability,
although there can be no assurance that such measures will assure profitability
in the event of substantial price reductions within the short term.
Comparison of Three-Month Periods Ended March 31, 1996 and 1997
Revenues increased to $2,587,222 in the threee 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
-10-
<PAGE>
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 and goodwill.
Interest expense increased from $10,493 in the 1996 Interim Period to $36,876
in 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 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.
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 the testing
work force are relatively fixed over the short term, margins tend to increase
in periods of higher testing volume and decrease in periods of lower testing
volume. These effects are not always apparent because of the impact and timing
of the startup of new businesses and other factors such as the timing and amount
of price increases or decreases. Nevertheless, the results of operations for a
particular quarter may not be indicative of the results to be expected during
other quarters.
Income Taxes
Income taxes accrued for the three months ended March 31, 1997, were based on
an effective combined federal and state corporate income tax rate of
approximately 40 percent of pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $392,623 in the three months
ended March 31, 1997, and $159,888 in 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 is a result of (i) the recording of the PLL Asset Purchase including the
four future quarterly payments to be made and (ii) the note payable of $334,460
to the former NPLI shareholders, which will be paid out in stock in accordance
with the NPLI Purchase Agreement. In the event the
-11-
<PAGE>
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 borrowing. The increase in cash used in operations will principally be due
to the timing differential between Company's payment for materials and services
to its suppliers and employee work force, and the time at which the Company
receives payment from its customers.
On December 27, 1996, LSI's revolving line credit facility with Hibernia
National Bank expired, at which time there were no outstanding borrowings. 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. The term loan was fully
advanced upon execution of the loan agreement. Advances under 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 Citibank, N.A. rate 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.
FUTURE OPERATIONS AND LIQUIDITY
On December 3, 1996, LSI 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 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, LSI entered into an agreement to pay
$439,572 upon completion of the renovation, which is expected during mid 1997.
On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement dated
January 31, 1997 (the "Purchase Agreement"). 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 Company anticipates that existing cash and cash equivalent balances and
short-term investments, and funds to be generated from future operations will be
sufficient to fund operations, and budgeted capital expenditures of LSAI and LSI
through 1997.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL. The carrying
value and recoverability of unamortized goodwill and customer lists will be
periodically reviewed by management of the Company. If the facts and
circumstances suggest that the goodwill or customer lists may be impaired, the
carrying
-12-
<PAGE>
value of goodwill or customer lists will be adjusted which will result in an
immediate charge against income during the period of the adjustment and/or the
length of the remaining amortization period may be shortened which will result
in an increase in the amount of goodwill or customer list amortization during
the period of adjustment and each period thereafter until fully amortized. Once
adjusted, there can be no assurance that there will not be further adjustments
for impairment and recoverability in future periods. In the event management of
the Company determines that goodwill or the customer list has become impaired,
the adjustment for impairment and recoverability will most likely occur during a
period of operations in which the Company has sustained losses or has only
marginal profitability from operations, and the impairment and/or increased
amortization amount will either increase such losses from operations or further
reduce profitability.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the pending litigation previously reported in the Annual Report on
Form 10-KSB filed with the Commission on April 22, 1997, LSAI does not have any
pending litigation. In the ordinary course of its business, LSI from time to
time is sued by individuals who have tested positive for drugs of abuse. To
date, LSI has not experienced any material liability related to these claims,
although there can be no assurance that LSI will not at some time in the future
experience significant liability in connection with such claims. Based upon the
prior successful defense of similar-type litigation, LSI believes they have
valid defenses to the plaintiffs claims in all pending litigation, and LSI
intends to vigorously defend themselves in such litigation. LSI is not
currently a defendant party in any other legal proceedings other than routine
litigation that is incidental to the business of LSI, and management of LSI
believes the outcome of such legal proceedings will not have a material adverse
effect upon the results of operations or financial condition of LSI.
Furthermore, management of LSI believes that the liability coverage is adequate
with respect to the pending litigation and, in general, for the business of LSI.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
-13-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No.
27 Financial Data Schedules
(b) Reports on Form 8-K
Not applicable
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LABORATORY SPECIALISTS OF
AMERICA, INC.
(Registrant)
Date: May 9, 1997 By: /s/ Arthur R. Peterson, Jr.
-------------------------------
Arthur R. Peterson, Jr.
Treasurer
-14-
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE
----------- ------- ----------
10.1 The Asset Purchase Agreement with Pathology
Laboratories, Ltd., dated January 31, 1997.* N/A
27 Financial Data Schedules 16
---------------------------------------------------------
* Incorporated by reference to Form 8-K, dated January 31, 1997,
filed with the Commission on March 3, 1997.
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 643,413
<SECURITIES> 0
<RECEIVABLES> 2,595,007
<ALLOWANCES> 627,499
<INVENTORY> 116,143
<CURRENT-ASSETS> 3,209,457
<PP&E> 2,744,502
<DEPRECIATION> 954,510
<TOTAL-ASSETS> 12,143,307
<CURRENT-LIABILITIES> 3,433,953
<BONDS> 2,518,000
0
0
<COMMON> 3,313
<OTHER-SE> 5,880,941
<TOTAL-LIABILITY-AND-EQUITY> 12,143,307
<SALES> 0
<TOTAL-REVENUES> 2,587,222
<CGS> 0
<TOTAL-COSTS> 1,186,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> 36,876
<INCOME-PRETAX> 407,624
<INCOME-TAX> 173,621
<INCOME-CONTINUING> 234,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234,003
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
