<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 31, 1997
LABORATORY SPECIALISTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 0-24988 73-145065
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 232-9800
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS AND EXHIBITS.
The response to this portion of Item 7 is submitted in a separate section
of this report on page F-2 through F-8.
(B) PRO FORMA FINANCIAL INFORMATION.
The response to this portion of Item 7 is submitted in a separate section
of this report on page F-9 through F-14.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LABORATORY SPECIALISTS
OF AMERICA, INC.
(Registrant)
By: /s/JOHN SIMONELLI
--------------------------
John Simonelli
Chief Executive Officer
Date: May 9, 1997
2
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC.
FORENSIC DRUG TESTING DIVISION
PATHOLOGY LABORATORIES, LTD.
STATEMENTS OF NET ASSETS AND
STATEMENTS OF DIVISIONAL OPERATIONS AND DIVISIONAL CASH FLOWS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
Page
----
FORENSIC DRUG TESTING DIVISION OF PATHOLOGY LABORATORIES, LTD.:
Report of Independent Public Accountants.............................. F-2
Statements of Net Assets as of December 31, 1996..................... F-3
Statements of Divisional Operations for the Years Ended
December 31, 1996 and 1995.......................................... F-4
Statements of Divisional Cash Flows for the Years Ended
December 31, 1996 and 1995.......................................... F-5
Notes to Divisional Financial Statements for the Years
Ended December 31, 1996 and 1995.................................... F-6
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES:
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1996................................................... F-9
Unaudited Pro Forma Condensed Consolidated Statement of
Income for the Year Ended December 31, 1996......................... F-11
Notes to Unaudited Pro Forma Consolidated Financial Statements........ F-12
F-1
<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
March 7, 1997
F-2
<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
NET ASSETS.............................................. $461,435 $433,129
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<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-4
<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
(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-5
<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 deemed uncollectible.
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
F-6
<PAGE>
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 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 the
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 (estimated to approximate
$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
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C>
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 debt............................................... $33,314 $ 41,872
======= ========
</TABLE>
Aggregate future principal payments on these obligations, were as follows:
<TABLE>
<S> <C>
Year ended December 31,
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, all of which are scheduled to expire
in 1997, approximate $51,000.
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-8
<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)
<S> <C> <C> <C> <C> <C>
ASSETS
------
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................................ 99,745 -- -- 99,745
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.
F-9
<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)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
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.
F-10
<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) $ 459,347 $ (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.
F-11
<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
F-12
<PAGE>
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.
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;
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(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;
(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.
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