<PAGE>
As filed with the Securities and Exchange Commission on September __, 1997
Registration No. 333-30997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
AMENDMENT NO. 1
TO
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
- --------------------------------------------------------------------------------
Common Stock (7)....... 50,000 $ 3.00 $ 150,000 $ 45
- --------------------------------------------------------------------------------
Total............ $4,423,990 $1,340
- --------------------------------------------------------------------------------
(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.
(7) Underlying common stock purchase option held by The Equity Group Inc.
------------------------
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 SEPTEMBER 3, 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
50,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF COMMON STOCK PURCHASE OPTION
NOTICE OF REDEMPTION OF 1994 WARRANTS
Laboratory Specialists of America, Inc. (the "Company" or "LSAI") hereby
notifies the holders (the "Warrant Holders") as of September 3, 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.,
New York City time on October 10, 1997, unless extended, in the sole discretion
of the Company, to a date not later than November 7, 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 underlying
1994 Warrants $ 2.00 $.10 $ 1.90
- --------------------------------------------------------------------------------
Per Unit underlying
Underwriters' Warrants $ 7.32 -- $ 7.32
- --------------------------------------------------------------------------------
Per share underlying
stock option $ 3.00 -- $ 3.00
- --------------------------------------------------------------------------------
Total $3,537,120 $145,200 $3,391,120
================================================================================
(1) The Company will pay certain 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 $76,400 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 145,200 shares of Common
Stock at an exercise price of $2.20 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
$255,600. 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,"
"--Underwriters' Warrants" and "--EGI Stock Option."
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. See "Selling Shareholders" and
"Description of Securities--1994 Warrants" and "--Underwriters' Warrants."
The 50,000 shares of Common Stock of the Company are offered to The Equity
Group, Inc. (the "Equity Group"), the holder of a common stock purchase option
(the "EGI Stock Option"), exercisable for the purchase of such shares of Common
Stock, and, thereafter, will be offered for resale by the Equity Group. The
Company will receive the proceeds from exercise of the EGI Stock Option, but
will not receive any proceeds from the resale of the Common Stock by the Equity
Group. See "Selling Shareholders" and "Description of Securities--EGI Stock
Option."
The Common Stock and 1994 Warrants are quoted on Nasdaq SmallCap Market
under the symbols LABZ and LABZW, respectively. On September 3, 1997, the
closing sale prices of the Common Stock and 1994 Warrants were $3.56 and $2.13,
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 (i) gives effect to the issuance on
August 28, 1997, of 103,333 shares of Common Stock to the former shareholders of
NPLI in connection with the NPLI Acquisition (see "The Company--Background--NPLI
Acquisition") and (ii) assumes 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
September 3, 1997 (the "Record Date"), of the election of the Company to redeem
(the "Warrant Redemption") the 1994 Warrants at 5:00 p.m. New York City time, on
October 10, 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 November 7, 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.
Exercise of Underwriters' Warrants and EGI Stock Option
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 and the Equity Group may exercise the EGI
Stock Option for the purchase of shares of Common Stock by presentation and
surrender of the EGI Stock Option and the Subscription 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 or in the amount
of the exercise price of the shares of Common Stock specified in the
Subscription 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."
50,000 shares of Common Stock offered to the Equity
Group in connection with the exercise of the EGI
Stock Option. The EGI Stock Option entitles the
Equity Group to purchase up to 50,000 shares of
Common Stock at an exercise price of $3.00 per
share on or before February 14, 2001. See
"Description of Securities--EGI Stock Option."
Offering exercise price:
Common Stock underlying
1994 Warrants......... $2.00 per share of Common Stock pursuant to
exercise of the 1994 Warrants. See "Description of
Securities--1994 Warrant."
Per Unit underlying
Underwriters Warrants. $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 underlying
EGI Stock Option...... $3.00 per share of Common Stock, pursuant to
exercise of the EGI Stock Option.
Common Stock outstanding... 3,416,738 shares of Common Stock as of the date of
this Prospectus; 5,050,738 after completion of
this offering, assuming exercise of the 1994
Warrants, Underwriters' Warrants and the EGI
Stock Option 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 $3,136,320 (after deduction of commissions and
other estimated expenses of this offering of
$400,800) estimated net proceeds in the event the
1994 Warrants, the Underwriters' Warrants and the
EGI Stock Option 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, the Underwriters' Warrants and the EGI
Stock Option will be exercised; therefore, the net
proceeds to the Company are not determinable as of
the date of this Prospectus.
Use of proceeds............ The reduction of indebtedness, possibly acquisition
of established drug testing companies, 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) complete and execute 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."
How to Exercise EGI Stock
Option.................... The Equity Group may exercise the EGI Stock Option,
in whole or in part, for the purchase of the Common
Stock by completion of the Subscription Form
annexed to the EGI Stock Option and forward it
along with cash or a bank check payable to the
Company in the Amount of the proper exercise price
to the Company's office. See "Description of
Securities--EGI Stock Option."
Acceptance of 1994
Warrants, Underwriters'
Warrants and the EGI Stock
Option.................... The Company will accept any and all of the 1994
Warrants, Underwriters' Warrants and the EGI Stock
Option, 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 Alabama, Arizona, Arkansas, California,
Colorado, Connecticut, District of Columbia,
Florida, Georgia, Iowa, Kansas, Kentucky, Illinois,
Louisiana, Massachusetts, Maryland, Minnesota,
Michigan, Mississippi, North Carolina, Nebraska,
New Hampshire, New York, Ohio, Oklahoma, Tennessee,
Pennsylvania, South Carolina, 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, the shares of Common Stock
and 1994 Warrants comprising the Units and
issuable upon exercise of the Underwriters'
Warrants, and the shares of Common Stock upon
exercise of the EGI Stock Option, as promptly as
practicable after exercise. See "Exercise of 1994
Warrants--Acceptance of 1994 Warrants; Delivery of
Common Stock," "Description of Securities--
Underwriters' Warrants" and "--Outstanding Stock
Options and Other 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 six months ended June 30, 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 SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ----------------------
1997 1996 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................... $ 6,010,982 $4,239,707 $8,726,799 $6,925,716
Cost of revenues.............. 2,659,857 1,856,534 3,816,114 3,246,470
Gross profit.................. 3,351,125 2,383,173 4,910,685 3,679,246
Operating expenses............ 2,208,347 1,667,545 3,673,201 2,951,415
Other income (expense)........ (70,919) (9,146) (21,808) 421,134
Income from continuing
operations before income
taxes....................... 1,071,859 706,482 1,215,676 1,148,965
Income tax expense............ 449,243 295,398 527,171 474,405
Income from continuing
operations.................. 622,616 411,084 688,505 674,560
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...... 622,616 411,084 (585,711) 661,216
Primary earnings per share:
Weighted average number
of common stock and
common stock equivalents
outstanding........... 3,343,749 3,318,127 3,316,198 3,301,582
Continuing operations..... .19 .12 .21 .20
Discontinued operation.... -- -- (.39) --
Total................. .19 .12 (.18) .20
Fully diluted earnings per
share:
Weighted average number of
common stock and common
stock equivalents
outstanding............. 3,834,644 4,046,943 3,954,787 3,843,391
Continuing operations..... .16 .10 .17 .17
Discontinued operation.... -- -- (.32) --
Total................. .16 .10 (.15) .17
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA(1):
Current assets........................... $ 3,424,243 $3,194,480 $3,842,187
Working capital.......................... (51,823) 1,002,712 3,128,818
Total assets............................. 12,457,386 9,394,808 7,319,036
Short-term debt.......................... 1,437,297 1,312,650 --
Long-term debt, net of current portion... 2,401,354 1,245,690 353,123
Stockholders' equity..................... 6,272,866 5,650,250 6,211,586
</TABLE>
- ------------------------
(1) Gives no effect to exercise of the 1994 Warrants, the Underwriters'
Warrants and the EGI Stock Option.
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, the Underwriters'
Warrants and the EGI Stock Option.
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 estimated net proceeds of this offering, which are $3,136,320,
assuming exercise of the 1994 Warrants, Underwriters' Warrants and EGI Stock
Options in full (although there is no assurance that any portion of such
warrants and options will be exercised), to general corporate purposes,
including repayment of indebtedness, acquisitions and working capital. It is
currently anticipated that up to (i) $800,000 (25.5 percent) of such estimated
net proceeds will be utilized to make installment payments in connection with
the PLL Asset Purchase, (ii) $1,600,000 (51 percent) of such estimated net
proceeds will be utilized to pay the Company's outstanding five-year term bank
loan, and (iii) $720,000 (23 percent) of such estimated net proceeds will be
utilized to pay the Company's installment bank loan that is secured by the
Company's recently acquired and renovated building in which LSI's laboratory is
currently located. See "The Company-- Background--PLL Asset Purchase," "Use of
Proceeds," and "Business--Growth Strategy." The application of the net proceeds
of this offering will be in 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.
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, possibly 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 AMONG DRUG TESTING PROVIDERS. Drug testing laboratories compete
primarily on the basis of price per specimen, technical superiority, and
customer service. The price per specimen is an important factor in obtaining and
maintaining customers, as well as maintaining profitability. Competitive pricing
by drug testing providers has resulted in a decline in the price per specimen
tested during recent years. The average price per specimen obtained by the
Company during the six months ended June 30, 1997, and during the year ended
December 31, 1996, declined 3.9 percent and 4.7 percent, respectively, compared
to the six months ended June 30, 1996, and year ended December 31, 1995. There
is non assurance that such price decline will not continue in 1997 and
thereafter. 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."
EFFECT OF LOSS OR SUSPENSION OF LABORATORY 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; HISTORY OF LOSSES. At June 30, 1997, the Company
had a deficit working capital of $51,823. 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.
During 1996, the Company sustained a loss of $585,711 from operations, that was
attributable to an aggregate $1,274,216 from operations and disposal of, the
former clinical testing and analysis operation conducted by NPLI, which were
acquired in January 1996, although before such discontinued clinical operation,
the Company's income from continuing operations for 1996 was $688,505. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although currently the Company only conducts forensic drug testing
and such operations have been historically profitable, there can be no assurance
that the Company will not sustain losses from operations in the future,
including losses from operations acquired in connection with the Company's
acquisition-growth strategy and that are subsequently discontinued. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Business--Growth Strategy."
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
six months ended June 30, 1997, and the year ended December 31, 1996, the
price per specimen decreased 3.9 percent and 4.7 percent, respectively, compared
to the six months ended June 30, 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."
POTENTIAL LIABILITIES; LIMITED INSURANCE COVERAGE. Employees of LSI, like
those of all companies that provide drug testing services dealing with urine
analysis specimens, may be exposed to risks of urine-borne infections, possibly
including infection from AIDS and hepatitis, if appropriate laboratory practices
are not followed. Although no infections of this type have been reported in
LSI's history, no assurance can be provided that such infections will not occur
in the future. 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 these types of claims, in
which event, any such legal actions could have a material adverse effect on the
Company's financial condition and results of operations.
Although LSI presently is covered by malpractice and general liability
insurance, there can be no assurance that the insurance coverage will provide
sufficient funds to satisfy any judgments which could be entered against LSI or
the Company in the future or that liability insurance in such amounts will be
available or affordable in the future. In addition, there can be no assurance
that all of the activities encompassed within the Company's business are covered
under LSI's or the Company's insurance policies. The lack of such coverage could
have a material adverse effect on the Company's financial condition and results
of operations. Moreover, although the Company maintains casualty and business
interruption insurance and has taken what it believes to be adequate safeguards,
the catastrophic loss of the Company's laboratory facility could have a material
adverse effect on the continued growth of the Company in a manner which would
not be compensated fully by insurance. See "Business--Insurance Coverage."
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 does not maintain for the benefit of
the Company life or disability insurance covering the executive officers of the
Company, and the loss of one or more of the executive officers due to death or
disability could have a material adverse effect on the Company. The Company
believes that its future success depends 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,"
"--Employment Arrangements" and "--Key-ManLife and Disability Insurance."
EFFECT OF ADVERSE JUDICIAL DECISIONS AND GOVERNMENT POLICY on Forensic Drug
TESTING. 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."
Risks Associated with Hazardous Materials. LSI's drug testing activities
involve the use of certain hazardous materials and chemicals. The hazardous
material and chemical waste of LSI's laboratory operations are disposed of by an
independent third party based upon procedures and methods that are believed to
be in compliance with applicable federal, state and local regulations and laws.
Although the Company believes that its safety procedures for handling and
disposing of such materials and chemicals comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or injury
from these materials and chemicals cannot be completely eliminated. In the event
of such an accident or improper disposal by the third party of the materials or
chemicals, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. See "Business--
Environmental Matters."
Nasdaq SmallCap Market Delisting. The Company's Common Stock and 1994
Warrants are included on the Nasdaq SmallCap Market. Continued inclusion of the
Common Stock on Nasdaq SmallCap Market is subject to certain conditions,
generally including the Common Stock having a certain minimum bid price per
share, the Company having certain minimum levels of assets, stockholders'
equity, number of shareholders, and number of outstanding publicly held shares
of Common Stock. In the event such minimum requirements for inclusion are not
met, the Common Stock will be delisted and no longer included on the Nasdaq
SmallCap Market, would then be traded in the over-the-counter market, and may
become subject to the "penny stock" trading rules. The over-the-counter market
is characterized as volatile in that securities traded in such market are
subject to substantial and sudden price increases and decreases and at times
price (bid and asked) information for such securities may not be available. In
addition, when there are two or less market makers (a dealer holding itself
out as ready to buy and sell the securities on a regular basis), there is a risk
that the dealer or group of dealers may control the market in the security and
set prices that are not based on competitive forces and the available offered
price may be substantially below the quoted bid price. See "Price Range of
Common Stock and Warrants; Dividends--Penny Stock Trading Rules."
Penny Stock Trading Rules. In the event such minimum requirements for
inclusion on Nasdaq SmallCap Market are not meet, the Common Stock will be
delisted and no longer included on the Nasdaq SmallCap Market, would then be
traded in the over-the-counter market, and may become subject to the "penny
stock" trading rules. The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in common stock and other equity securities, including
determination of the purchaser's investment suitability, delivery of certain
information and disclosures to the purchaser, and receipt of a specific purchase
agreement from the purchaser prior to effecting the purchase transaction. In the
event the Common Stock becomes subject to the penny stock trading rules,
compliance with such trading rules will affect the ability to resell the Common
Stock principally because of the additional duties and responsibilities imposed
upon the broker-dealers and salespersons recommending and effecting sale and
purchase transactions in Common Stock. In addition, many broker-dealers will not
effect transactions in penny stocks, except on an unsolicited basis, in order to
avoid compliance with the penny stock trading rules. In the event the Common
Stock becomes subject to the penny stock trading rules, such rules may
materially limit or restrict the ability of a holder to resell the Common Stock,
and the liquidity typically associated with other publicly traded
equity securities may not exist or be materially restricted. See "Price Range of
Common Stock and Warrants; Dividends-- Nasdaq SmallCap Market Delisting; Penny
Stock Trading Rules."
Possible Adverse Effect of Future Sale of Restricted Shares on Market Price
of Common Stock. 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."
EFFECT OF SECURITIES ISSUABLE UPON EXERCISE OF OUTSTANDING WARRANTS AND
STOCK OPTIONS. 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). Furthermore, the EGI
Stock Option is exercisable at any time on or before February 14, 2001, for the
purchase of up to 50,000 shares of Common Stock at $3.00 per share. In addition,
there are outstanding stock options exercisable for the purchase of 260,000
shares of Common Stock, of which 250,000 are exercisable on or before March 28,
2007, for $2.00 per share and 10,000 of which are exercisable on or before March
27, 1998, for $3.00 per share. In addition, in connection with the Warrant
Redemption, the Company has agreed to issue to Barber & Bronson Incorporated
(the "Managing Agent") up to 145,200 warrants (the "Managing Agent Warrants")
exercisable for the purchase of up to 145,200 shares of Common Stock at $2.20
during a period of up to three years following the Redemption Date. During the
term of the Underwriters' Warrants, the EGI Stock Option 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 or
option may dilute the net book value per share of Common Stock at the time of
exercise. The existence of the Underwriters' Warrants, the EGI Stock Option 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" and "--
EGI Stock Option."
ABSENCE 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."
POSSIBLE EFFECT OF ANTI-TAKEOVER PROVISIONS ON MARKET PRICE OF COMMON STOCK.
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 to the Company after offering
expenses 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 the Registration Statement of
which this Prospectus is a part) and will use its best efforts to continue to
maintain registration of the shares of Common Stock underlying 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.
Pursuant to the Settlement Agreement and General Release dated August 25, 1997,
the Company issued and delivered to the former NPLI shareholders 103,333 shares
of Common Stock (the "Contingent Shares") on August 28, 1997, in full payment of
the Promissory Notes. The former NPLI shareholders further agreed to sell not
more than 2,000 shares (4,000 shares in the aggregate) of the Contingent Shares
per week from the date of the agreement until February 28, 1998.
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, pursuant to the
Amendment to Asset Purchase Agreement, dated July 30, 1997, 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 90 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 90 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 90
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 90 percent of
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 applicable period 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, the Selling Shareholders and the Equity Group, pursuant to
exercise of the 1994 Warrants, the Underwriters' Warrants and EGI Stock Option.
In the event the 1994 Warrants, Underwriters' Warrants and the Equity Group 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 $3,136,320. 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, Underwriters' Warrants and the EGI Stock Option will
be exercised; therefore, the proceeds of this offering are not determinable as
of the date of this Prospectus. Pending use, the net proceeds will be invested
by the Company in investment grade, short-term, interest-bearing securities. It
is anticipated that the Company will expend the net proceeds of this offering,
assuming exercise of the 1994 Warrants, the Underwriters' Warrants and EGI Stock
Option in full, as follows:
<TABLE>
<CAPTION>
Use of Net Proceeds Amount Percent
- ------------------- ------ -------
<S> <C> <C>
Fund in whole or in part the Company's obligations to make
installment payments in connection with the PLL Asset Purchase......... $ 800,000 25.5%
Repay of all or a portion of the outstanding borrowings under
LSI's five-year term loan which, in part, was used for the
acquisition of the forensic drug testing assets of PLL................. 1,600,000 51.0%
Repayment of LSI's installment bank loan which was obtained
on July 2, 1997, and secured by LSI's recently acquired and
renovated building in which the laboratory facilities of LSI
are currently located.................................................. 700,000 22.3%
General corporate purposes, including working capital.................... 36,320 1.2%
---------- -----
Total estimated net proceeds of this offering............................ $3,136,320 100.0%
========== =====
</TABLE>
The Company will utilize up to $800,000 (25.5 percent) of the estimated net
proceeds to fund in whole or in part the Company's obligation to make the
remaining installment payments in connection with the 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. See "The Company--Background--PLL Asset Purchase." Furthermore, it
is anticipated that up to $1,600,000 (51 percent) of the net proceeds will
utilized to repay all or a portion of the outstanding borrowings under LSI's
five-year term loan which, in part, was used for the acquisition of the forensic
drug testing assets of PLL. 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 was 8.5 at June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Furthermore, the estimated net
proceeds may be utilized in payment of up to $700,000 (22.3 percent) of the
Company's installment bank loan which was obtained on July 2, 1997, and is
secured by LSI's recently acquired and renovated building in which the
laboratory facilities of LSI are currently located. This installment bank loan
is payable in 36 monthly principal and interest payments of approximately
$9,800, followed by 23 monthly principal and interest payments of approximately
$6,000, with a final payment becoming due on July 2, 2002, of approximately
$484,700. The outstanding principal amount of this loan bears interest at 8.65
per annum. See "Business--Properties."
With respect to the repayment of all or a portion of the outstanding
borrowings under LSI's five-year term loan and LSI's installment loan
indebtedness, the Company or LSI may reborrow such amounts under such loans 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 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, the
Underwriters' Warrants and EGI Stock Option 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."
16
<PAGE>
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 and the Equity
Group, 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
and the EGI Stock Option in full by the named Selling Shareholders and the
Equity Group, 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 and the Equity Group have 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>
The Equity Group,
Inc. ............... -- -- 50,000 50,000 -- -- -- --
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.
LSAI has agreed to indemnify the Selling Shareholders and the Equity Group
against certain liabilities, including liabilities under the 1933 Act, or to
contribute to payments that they may be required to make in respect thereof, to
the extent permitted by law. In the opinion of the Securities and Exchange
Commission, such indemnification against liabilities under the 1933 Act is
against public policy and is therefore unenforceable. Furthermore, pursuant to
the Underwriters' Warrants, the Company agreed to pay and bear the cost of
registering the Units (and Common Stock and 1994 Warrants comprising the Units),
the incremental cost of which is $339. To the extent required by any state
securities regulatory agency, the Selling Shareholders and the Equity Group will
bear their allocable shares of the incremental cost of registration of the
securities underlying the Underwriters' Warrants and the EGI Stock Option.
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>
June 30, 1997........ $2.88 $2.13 $ .81 $ .25
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 September 3, 1997, the closing sale prices of the Common Stock and
the 1994 Warrants as quoted on the Nasdaq SmallCap Market were $3.57 and $2.13,
respectively. On September 3, 1997, there were approximately 850 holders of the
Common Stock and 200 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.
Nasdaq SmallCap Market Delisting; Penny Stock Trading Rules
The Company's Common Stock and 1994 Warrants are included on the
Nasdaq SmallCap Market. Continued inclusion of the Common Stock on Nasdaq
SmallCap Market is subject to certain conditions, generally including the Common
Stock having a certain minimum bid price per share, the Company having certain
minimum levels of assets, stockholders' equity, number of shareholders, and
number of outstanding publicly held shares of Common Stock. In the event such
minimum requirements for inclusion are not met, the Common Stock will be
delisted and no longer included on the Nasdaq SmallCap Market, would then be
traded in the over-the-counter market and may become subject to the "penny
stock" trading rules.
The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers recommending the purchase of a penny stock
(by a purchaser that is not an accredited investor as defined by Rule 501(a)
promulgated by the Commission under the 1933 Act) or the sale of a penny stock.
Among such duties and responsibilities, with respect to a purchaser who has not
previously had an established account with the broker-dealer, the broker-dealer
is required to (i) obtain information concerning the purchaser's financial
situation, investment experience, and investment objectives and (ii) make a
reasonable determination that transactions in the penny stock are suitable for
the purchaser and the purchaser (or his independent adviser in such
transactions) has sufficient knowledge and experience in financial matters and
may be reasonably capable of evaluating the risks of such transactions, followed
by receipt of a manually signed written statement which sets forth the basis for
such determination and which informs the purchaser that it is unlawful to
effectuate a transaction in the penny stock without first obtaining a written
agreement to the transaction. Furthermore, until the purchaser becomes an
established customer (i.e., having had an account with the dealer for at least
one year or, the dealer had effected three sales or more of penny stocks on
three or more different days involving three or more different issuers), the
broker-dealer must obtain from the purchaser a written agreement to purchase
the penny stock which sets forth the identity and number of shares or units of
the security to be purchased prior to confirmation of the purchase. A dealer is
obligated to provide certain information disclosures to the purchaser of a penny
stock, including (i) a generic risk disclosure document which is required to be
delivered to the purchaser before the initial transaction in a penny stock, (ii)
a transaction-related disclosure prior to effecting a transaction in the penny
stock (i.e., confirmation of the transaction) containing bid and asked
information related to the penny stock and the dealer's and salesperson's
compensation (i.e., commissions, commission equivalents, markups and markdowns)
in connection with the transaction, and (iii) the purchaser-customer must be
furnished account statements, generally on a monthly basis, which include
prescribed information relating to market and price information concerning the
penny stocks held in the customer's account. The penny stock trading rules do
not apply to those transactions in which a broker-dealer or salesperson does not
make any purchase or sale recommendation to the purchaser or seller of the penny
stock.
Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock by a holder principally because of
the additional duties and responsibilities imposed upon the broker-dealers and
salespersons recommending and effecting sale and purchase transactions in such
securities. In addition, many broker-dealers will not effect transactions in
penny stocks, except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. In this connection, the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices
that are not based on competitive forces. Furthermore, at times there may be a
lack of bid quotes which may mean that the market among dealers is not active,
in which case a holder of Common Stock may be unable to sell such securities.
Because market quotations in the over-the-counter market are often subject to
negotiation among dealers and often differ from the price at which transactions
in securities are effected, the bid and asked quotations of the Common Stock may
not be reliable.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997, without giving effect to or assuming exercise of the 1994
Warrants, the Underwriters' Warrants and the EGI Stock Option. 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
June 30,
1997
----------
<S> <C>
Current portion of long-term debt.................................. $ 462,888
Long-term debt, net of current portion............................. 2,401,354
----------
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................................................ 903,526
----------
Total stockholders' equity..................................... 6,272,866
----------
Total capitalization............................................... $9,137,108
==========
</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
six months ended June 30, 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
SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------- ------------------------
1997 1996 1996 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................. $6,010,982 $ 4,239,707 $8,726,799 $6,925,716
Cost of laboratory services.............. 2,659,857 1,856,534 3,816,114 3,246,470
---------- ----------- ---------- ----------
Gross profit......................... 3,351,125 2,383,173 4,910,685 3,679,246
---------- ----------- ----------
Operating expenses:
Selling expenses....................... 292,095 314,496 601,945 561,470
General and administrative............. 1,599,080 1,131,605 2,442,602 2,157,410
Depreciation and amortization.......... 317,172 221,444 504,123 232,535
Asset impairment....................... -- -- 124,531 --
---------- ----------- ---------- ----------
Total operating expenses............. 2,208,347 1,667,545 3,673,201 2,951,415
---------- ----------- ---------- ----------
Interest expense....................... (90,484) (29,325) (67,185) (29,651)
Interest income........................ 19,493 19,672 41,208 126,939
Other income........................... 72 507 4,169 323,846
---------- ----------- ---------- ----------
Total other (expense) income......... (70,919) (9,146) (21,808) 421,134
---------- ----------- ---------- ----------
Income from operations before
income taxes........................ 1,071,859 706,482 1,215,676 1,148,965
Income tax expense....................... 449,243 295,398 527,171 474,405
---------- ----------- ---------- ----------
Income from continuing operations.... 622,616 411,084 688,505 674,560
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)........................ 622,616 411,084 (585,711) 674,560
Dividend on preferred stock(1)........... -- -- -- 13,344
---------- ----------- ---------- ----------
Net income (loss) available for common
stockholders............................ $ 622,616 $ 411,084 $ (585,711) $ 661,216
========== =========== ========== ==========
Primary earnings per share:
Weighted average number of common
stock and common stock equivalents
outstanding......................... 3,343,749 3,318,127 3,316,198 3,301,582
Continuing operations................ $ .19 .12 .21 .20
Discontinued operation............... -- -- (.39) --
---------- ----------- ---------- ----------
Total............................ $ .19 $ .12 $ (.18) $ .20
========== =========== ========== ==========
Fully diluted earnings per share:
Weighted average number of common
stock and common stock equivalents
outstanding......................... 3,834,644 4,046,943 3,954,787 3,843,391
Continuing operations................ .16 .10 .17 .17
Discontinued operation............... -- -- (.32) --
---------- ----------- ---------- ----------
Total............................ $ .16 $ .10 $ (.15) $ .17
========== =========== ========== ==========
CASH FLOW DATA:
Net cash provided by operating
activities.............................. $ 928,758 $ 185,641 $ 472,801 $ 734,475
Net cash used in investing activities.... 2,413,655 1,204,829 1,402,328 313,712
Net cash provided by (used in)
financing activities.................... 1,460,673 (610,645) (754,143) (454,154)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
June 30, DECEMBER 31,
----------- -----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA(2):
Current assets........................................ $ 3,424,243 $3,194,480 $3,842,187
Working capital....................................... (51,823) 1,002,712 3,128,818
Total assets.......................................... 12,457,386 9,394,808 7,319,036
Short-term debt....................................... 1,437,297 1,312,650 --
Long-term debt, net of current portion................ 2,401,354 1,245,690 353,123
Stockholders' equity.................................. 6,272,866 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 1994 Warrants, the Underwriters'
Warrants, and the EGI Stock Option.
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 six
months ended June 30, 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 SIX MONTHS ENDED JUNE 30, 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................... $6,010,982 100.0% $4,239,707 100.0% $8,726,799 100.0% $6,925,716 100.0%
Cost of revenues........... 2,659,857 44.2% 1,856,534 43.8% 3,816,114 43.7% 3,246,470 46.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit............... 3,351,125 55.8% 2,383,173 56.2% 4,910,685 56.3% 3,679,246 53.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling.................. 292,095 4.9% 314,496 7.4% 601,945 6.9% 561,470 8.1%
General and
administrative.......... 1,599,080 26.6% 1,131,605 26.7% 2,442,602 28.0% 2,157,410 31.2%
Depreciation and
amortization.......... 317,172 5.3% 221,444 5.2% 504,123 5.8% 232,535 3.3%
Asset impairment......... -- --% -- --% 124,531 1.4% -- --%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses... 2,208,347 36.8% 1,667,545 39.3% 3,673,201 42.1% 2,951,415 42.6%
---------- ----- ---------- ----- ---------- ----- ---------- -----
1,142,778 19.0% 715,628 16.9% 1,237,484 14.2% 727,831 10.5%
Other income (expense)..... (70,919) 1.2% (9,146) .2% (21,808) .2% 421,134 6.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from continuing
operations before
income taxes............. 1,071,859 17.8% 706,482 16.7% 1,215,676 13.9% 1,148,965 16.6%
Income tax expense......... 449,243 7.5% 295,398 7.0% 527,171 6.0% 474,405 6.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from continuing
operations............... 622,616 10.3% 411,084 9.7% 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).......... 622,616 10.3% 411,084 9.7% (585,711) 6.7% 674,560 9.7%
=====
Dividend on preferred
stock(1)................. -- --% -- --% -- --% 13,344 .2%
---------- ----- ---------- ----- ---------- ----- ---------- =====
Net income (loss)
available for common
stockholders.............. $ 622,616 10.3% $ 411,084 9.7% $ (585,711) 6.7% $ 661,216 9.5%
========== ===== ========== ===== ========== ===== ========== =====
Primary earnings per share:
Weighted average number
of common stock and
common stock
equivalents outstanding 3,343,749 3,318,127 3,316,198 3,301,582
Continuing operations.. $ .19 .12 .21 .20
Discontinued operation.. -- -- (.39) --
---------- ---------- ---------- ----------
Total.............. $ .19 $ .12 $ (.18) $ .20
========== ========== ========== ==========
Fully diluted earnings per
share: Weighted average
number of common stock and
common stock equivalents
outstanding............... 3,834,644 4,046,943 3,954,787 3,843,391
Continuing operations..... .16 .10 .17 .17
Discontinued operation.... -- -- (.32) --
---------- ---------- ---------- ----------
Total.............. $ .16 $ .10 $ (.15) $ .17
========== ========== ========== ==========
</TABLE>
During the six months ended June 30, 1997, and the fiscal year ended December
31, 1996, LSI experienced a 3.9 percent and 4.7 percent decrease in the price
per specimen, respectively, compared to the six months ended June 30, 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
an 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
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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 six months ended June 30, 1997,
and the fiscal year ended December 31, 1996, the number of specimens analyzed
increased 47.7 percent and 34.5 percent, respectively, compared to the six
months ended June 30, 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 Six-Month Periods Ended June 30, 1996 and 1997
Revenues increased to $6,010,982 in the six months ended June 30,
1997 (the "1997 Interim Period"), from $4,239,707 in the six months ended June
30, 1996 (the "1996 Interim Period"), an increase of 41.8 percent. The increase
in revenues was due to a 47.7 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 3.9 percent in the average price per
specimen. The increase in number of specimens analyzed was attributable to the
PLL Asset Purchase 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 among providers of drug testing services, price per specimen
being an important factor in obtaining and maintaining clients.
Cost of revenues for the 1997 Interim Period increased $803,323 from
$1,856,534 in the 1996 Interim Period to $2,659,857 in 1997 Interim Period due
to the increased costs of laboratory testing supplies and materials. Gross
profit on revenues decreased as a percentage of revenues from 56.2 percent in
the 1996 Interim period to 55.8 percent in 1997 Interim Period.
Operating expenses increased from $1,667,545 in the 1996 Interim
Period to $2,208,347 in the 1997 Interim Period, an increase of 32.4 percent,
and decreased as a percentage of revenues from 39.3 percent to 36.8 percent. The
increase in operating expenses was attributable to the increase in general and
administrative expenses of $467,475 for the 1997 Interim Period, while selling
expense decreased by $22,401 for the 1997 Interim Period, and depreciation and
amortization increased by $95,728 for the 1997 Interim Period. 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 for the 1997
Interim Period was due to the temporary reduction in the sales force for part of
the first quarter of 1997, although partially offset by the addition of one
sales representative to assist in maintaining forensic clients acquired in the
PLL Asset Purchase. Depreciation increased due to the addition of new laboratory
equipment at LSI, while amortization increased due to the acquisition of PLL and
the amortization of the PLL customer list.
Income from operations increased from $715,628 in the 1996 Interim
Period $1,142,778 in the 1997 Interim Period, a 59.7 percent increase.
Operating income increased from 16.9 percent of revenues in the 1996 Interim
Period to 19.0 percent of revenues in the 1997 Interim Period.
Interest expense increased from $29,325 in the 1996 Interim Period to
$90,484 in 1997 Interim Period, a 208.6 percent increase. 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 and the bank
loan associated with the PLL Asset Purchase. Interest income decreased from
$19,672 in the 1996 Interim Period to $19,493 in the 1997 Interim Period. Other
income decreased from $507 in the 1996 Interim Period to $72 in the 1997 Interim
Period. Net income, after provision for income taxes, increased from $411,084
in the 1996 Interim Period to $622,616 in the 1997 Interim Period, a 51.5
percent increase.
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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.
Accounting Standards Issued But Not Yet Adopted
In March 1997, The Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 of the Company for the year ending December 31, 1997. Management
believes that adoption of SFAS No. 128 will not have a material effect on the
Company's financial statements, other than the disclosure related to the
computation, presentation and disclosure of earnings per share.
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosure of capital
structure. This statement is effective for financial statements of the Company
for the year ending December 31, 1997. Management believes that adoption of SFAS
No. 129 will not have a material effect on the Company's financial
statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires the reporting of all items of income that are recognized
under accounting standards as components of comprehensive income, consisting of
both net income and those items that bypass the income statement and are
reported in the balance within a separate component of stockholders' equity, be
reported in a financial statement and displayed with the same prominence as
other financial statements. This statement is effect for financial statements of
the Company for the year ending December 31, 1998. Management of the Company
believes that adoption of SFAS No. 130 will not have a material effect on the
Company's financial statements.
Furthermore, in June 1997, FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprises and Related Information," which modifies
segment reporting requirements and establishes certain criteria for reporting
disclosures concerning a company's products and services, geographic areas and
major customers in annual and interim financial statements. This statement is
effect for financial statements of the Company for the year ending December 31,
1998. Management of the Company believes that adoption of SFAS No. 131 will not
have a material effect on the Company's financial statements, other than
possibly the disclosure related to the Company's services, geographic service,
area and major customers.
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 six months ended June 30, 1997, 43 percent
for 1996, and 41 percent for 1995. Income tax expenses during the six months
ended June 30, 1997 and for the years ended December 31, 1996 and 1995 were
$449,243, $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 $928,758 for the six months ended June 30, 1997, compared to $185,641
for the six months ended June 30, 1996. As of June 30, 1997, LSAI had a
working capital deficit of $51,823, compared to working capital of $1,002,712,
at December 31, 1996. The working capital decrease was in part due to
the current liability classification of (i) the Company's estimated obligation
to make four quarterly installment payments of approximately $745,700, 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
June 30, 1997, short-term debt of the Company included a note, in the recorded
amount of $334,460, which was paid in full by issuance and delivery of
103,333 shares of the Company's Common Stock on August 28, 1997. See "The
Company-Background-NPLI Acquisition."
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
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<PAGE>
Acquisition, which was consummated 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 $703,157 at June 30, 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 June 30, 1997, the outstanding principal amount of the five-year term loan
was $1,558,333. 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 nine percent at June 30, 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 August 31, 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"). On July 30, 1997,
the Asset Purchase Agreement was amended. Pursuant to the Purchase Agreement, as
amended, 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 90 percent of the gross revenues directly attributable to
each customer comprising the customer base of PLL acquired 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. On June 30, 1997, the Company completed payment of the first
quarterly installment of $214,282. See "The Company--Background--PLL Asset
Purchase."
On December 3, 1996, LSI purchased a building which has been renovated
and in which LSI's laboratory has been relocated. The building purchase was
financed by a note payable to the seller due on June 3, 1997, with no stated
interest rate. This note was classified as long-term based on a written
commitment from a bank to refinance the purchase and renovation costs of up to
$720,000. On July 2, 1997, LSI entered into a loan agreement with Hibernia
National Bank for a term loan in the principal amount of $720,000 to refinance
the building as renovated. This loan is payable in 36 monthly installments of
approximately $9,800, followed by 23 monthly installments of approximately
$6,000, with a final payment becoming due on July 2, 2002, of approximately
$484,700. The outstanding principal balance of this loan bears interest at a
rate of 8.65 per annum.
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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<PAGE>
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 June 30, 1997, the unamortized portion of the
goodwill and the customer lists was $2,612,602 and $4,369,602, 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 September 3, 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., New York City time, on
October 9, 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 November 7, 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.,
New York City time, on October 10, 1997), unless and until the Company, in its
sole discretion, extends the Redemption Date to a date not later than November
7, 1997, 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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<PAGE>
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 Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Iowa, Kansas, Kentucky,
Illinois, Louisiana, Massachusetts, Maryland, Minnesota, Michigan, Mississippi,
North Carolina, Nebraska, New Hampshire, New York, Ohio, Oklahoma, Tennessee,
Pennsylvania, South Carolina, Texas, Virginia, 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 three
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 $76,400 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 $2.20 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
145,200 shares of Common Stock, with a three-year exercise period. However, in
no event will the number of shares of Common Stock covered by the Managing
Agent's Warrant exceed 10 percent of the shares of Common Stock issued pursuant
to exercise of the 1994 Warrants. 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.
INSURANCE COVERAGE
Employees of LSI, like those of all companies that provide drug
testing services dealing with urine analysis specimens, may be exposed to risks
of urine-borne infections, possibly including infection from AIDS and hepatitis,
if appropriate laboratory practices are not followed. Although no infections of
this type have been reported in LSI's history, no assurance can be provided that
such infections will not occur in the future. In the ordinary course of its
business, LSI from time to time is sued by individuals who have tested positive
for drugs abuse. To date, LSI has not experienced any material liability in
connection with these types of claims, in which event, such legal actions could
have a material adverse effect on the Company's financial condition and results
of operations.
LSI maintains various policies of casualty, commercial and worker
compensation insurance. In addition, LSI maintains professional liability
insurance with limits of $1 million per incident with an aggregate limit of $2
million per incident. Although the Company currently is covered by malpractice
and general liability insurance, there can be no assurance that the insurance
coverage will provide sufficient funds to satisfy any judgments which could be
entered against LSI in the future or that liability insurance in such amounts
will be available or affordable in the future. In addition, there can be no
assurance that all of the activities encompassed within the Company's business
are covered under LSI's insurance policies. The lack of such coverage could have
a material adverse effect on the Company's financial condition and results of
operations. Moreover, although the Company maintains casualty and business
interruption insurance and has taken what it believes to be adequate safeguards,
the catastrophic loss of the Company's laboratory facility could have a material
adverse effect on the continued growth of the Company in a manner which would
not be compensated fully by insurance.
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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<PAGE>
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
LSI and consequently the Company is subject to federal, state and
local laws, regulations and policies governing the use, generation, storage,
effluent discharge, handling and disposal of certain materials, chemicals and
wastes. LSI utilizes the services of an independent third party to dispose of
hazardous material and chemical waste. The Company believes that the procedures
and methods utilized to dispose of the hazardous waste by such third party
comply in all material respects with all applicable federal, state and local
laws, regulations and policies. Although since beginning operations in 1978 LSI
has not been required to take any extraordinary action to correct any
noncompliance, there can be no assurance that LSI will not be required to incur
significant costs to comply with environmental and health and safety regulations
in the future.
LSI's drug testing activities involve the controlled use of certain
hazardous materials and chemicals, including possibly the testing of infectious
urine specimens. 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. Although LSI believes that its safety procedures for
handling and disposing of such materials and chemicals comply with the standards
prescribed by federal, state and local laws and regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of any such accident, LSI and consequently the Company could be held
liable for any damages that result and any such liability could exceed any
applicable insurance coverage and the financial resources of the Company.
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
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 six
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 --
- -----------------------
(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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<PAGE>
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.
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(1)
------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
NUMBER OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM(1)(2)
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) On March 28, 1997, each outstanding stock option granted under the
Company's Stock Option Plan, including those stock options granted
in 1996, was regranted at an exercise price per share of $2.00, the
fair market value of the Common Stock on such date, with an expiration
date of March 28, 2007. The potential realizable value of the stock
options regranted to each named executive officer, at the assumed
rates of stock price appreciation of five percent and 10 percent per
annum during the term of the options, were $162,889 and $259,374,
respectively, as of March 28, 1997.
(2) 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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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.
Key-Man Life and Disability Insurance
The Company does not maintain any key-man life and disability
insurance for the benefit of the Company or LSI. The loss of one or more of the
executive officers of the Company due to death or disability could have a
material adverse effect on the Company.
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 Plan
was amended restated on October 30, 1996.
The Plan provides for the issuance of incentive stock options ("ISO
Option") with or without stock appreciation rights ("SARs") and nonincentive
stock options ("NSO Options") with or without SARs to directors, employees and
consultants of the Company and its subsidiaries. The total number of shares of
Common Stock authorized and reserved for issuance under the Plan is 425,000. 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 have been granted under the Plan. No options
have been exercised and no ISO Options and SARs have been granted under the
Plan.
The Board of Directors administers and interprets the Plan and has the
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 Options to which the SAR is attached. The Board
of Directors may at any time appoint a committee of two or more members of the
Board of Directors and delegate to such committee administration of the Plan.
Options under the Plan may be granted only to persons who at the time
of grant are directors, executive officers, key employees and independent
contractors and consultants of the Company and its subsidiaries. Non-employee
directors are not eligible to be granted ISO Options. Any ISO Options granted
under the Plan must be consistent with the qualification requirements set forth
in the Internal Revenue code of 1986, as amended. The maximum number of shares
of stock for which employee-directors may be granted options in any calendar
year may not exceed 25 percent of the aggregate number of share of stock with
respect to which Options may be granted under the Plan. The Board of Directors
determines the period during which any Option may be exercised; but may not be
exercisable more than 10 years after the date of grant. The exercise prices of
Options are determined by the Plan Administrator, but in no event may such price
be less than 85 percent (100 percent for ISO Options) of the fair market value
of the stock on the date of grant. Options granted are non-transferable except
by will or by the laws of descent and distribution. No option may be granted
under the Plan after June 30, 2005.
Options are exercisable only by eligible persons while serving as a
director, an employee, an independent contractor or a consultant of the Company
or a subsidiary, except that such Options will be exercisable if an eligible
person's termination was due to (i) death, in which case the personal
representative of a deceased eligible person may exercise such options within 12
months after the eligible person's death, (ii) retirement, in which case such
Options will be exercisable within three months of such date of termination, or
(iii) disability, in which case such Options will be exercisable at any time
within 12 months of such date of termination, but in no event may an Option be
exercised beyond the exercise period of such Option. However, the Board of
directors, in its sole discretion, may persit an eligible person who is
terminated due to retirement or disability, or upon the occurrence of special
circumstances (as determined by the Board), or the personal representative of a
deceased Eligible Person to exercise and purchase (with three years of such
termination) all or any part of the shares of Common Stock Subject to Options
on the date of termination.
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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.
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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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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.(a former Director of the Company), 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
March 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 six 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% 10.8%
Joan F. Peterson (5)..................... 490,000 14.3% 9.7%
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%
Executive Officers and Directors as a
group (six persons)(11)................. 1,149,000 31.6% 21.8%
</TABLE>
- ---------------------------
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(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 5,050,738
shares of Common Stock after this offering, assuming the 1994
Warrants, the Underwriters' Warrants and the EGI Stock Option are
exercised in full. See "Description of Securities--1994 Warrants,"
"--Underwriters' Warrants "and "--EGI Stock Option."
(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 215,000 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, (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, and (iii) 50,000 shares of Common Stock which are being offered in the
event of exercise of the EGI Stock Option at $3.00 per share. 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, the EGI Stock
Option, 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 5,050,738
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, the Underwriters' Warrants and the EGI Stock Option
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, and the
EGI Stock Option, all of which are either incorporated by reference or included
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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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 (132,000 shares of Common Stock and 66,000 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, 1999, 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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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.
EGI Stock Option
On December 1, 1995, LSAI issued to the Equity Group the EGI Stock
Option to purchase 50,000 shares of Common Stock at an exercise price of $3.00
per share on or before February 14, 2001. LASI has registered the shares of
Common Stock underlying the EGI Stock Option under the 1933 Act pursuant to the
Registration Statement of which this Prospectus is a part and has agreed, at its
expense, to maintain such registration in force until such time that an
amendment to the Registration Statement is required pursuant to Section 10(a)(3)
of the 1933 Act.
The EGI Stock Option may be exercised by presentation and surrender
of the EGI Stock Option to LSAI at its principal office accompanied by the duly
completed and executed Subscription Form annexed to the EGI Stock Option and
payment, in cash or in bank check payable to "Laboratory Specialists of America,
Inc." in the amount of the exercise price of the number of shares of Common
Stock being purchased. Upon exercise, LSAI will deliver to the Equity Group one
or more certificates evidencing the Common Stock. In the event the exercise is
in part only, LSAI will promptly execute and deliver a new EGI Stock Option
evidencing the right of the Equity Group to purchase the balance of the shares
of Common Stock purchasable pursuant to the EGI Stock Option.
REFERRED 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 10,000 outstanding
stock options exercisable on or before March 27, 1998, for the purchase of
Common Stock at $3.00 per share.
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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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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(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. Upon completion of this offering (assuming exercise of the
1994 Warrants, the Underwriters' Warrants and the EGI Stock Option in full),
LSAI will have outstanding 5,050,738 shares of Common Stock and an aggregate of
260,000 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 1,502,000 shares of Common Stock (assuming exercise
of the 1994 Warrants, the Underwriters' Warrants and the EGI Stock Option 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 $400,800) 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 and the EGI Stock Option. The Common
Stock sold to the Selling Shareholders upon exercise of the Underwriters'
Warrants and sell to the Equity Group upon exercise of the EGI Stock Option 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 the assigns of Barron Chase Securities, Inc. 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 agreed, upon the
exercise of any 1994 Warrant, to pay Barron Chase Securities, Inc., J.
Alexander Securities, Inc., Princeton Securities Corp. and Euro-Atlantic
Securities, Inc., (the "IPO Underwriters") 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 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. The Company similarly
agreed to pay Barber & Bronson Incorporated a fee equal to five percent of
exercise price of the 1994 Warrants the exercise of which Barber & Bronson
Incorporated was responsible.
LSAI has agreed to indemnify those IPO Underwriters and Barber &
Bronson Incorporated 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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<PAGE>
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, June 30, 1997 (Unaudited), and December 31, 1996............... F-2
Consolidated Statements of Income (Unaudited) for the
Six Months Ended June 30, 1996 and 1997............................................... F-4
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 1996 and 1997............................................... F-5
Notes to Consolidated Financial Statements (Unaudited).................................... F-6
Report of Independent Public Accountants.................................................. F-9
Consolidated Balance Sheets, December 31, 1996 and 1995................................... F-10
Consolidated Statement of Income for the Pre-Acquisition Period
of January 1, 1994, through April 17, 1994............................................ F-12
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-13
Consolidated Statement of Stockholders' Equity for the Pre-Acquisition Period
of January 1, 1994, through April 17, 1994............................................ F-14
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-15
Consolidated Statement of Cash Flows for the Pre-Acquisition Period
of January 1, 1994, through April 17, 1994............................................ F-16
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-17
Notes to Consolidated Financial Statements................................................ F-18
FORENSIC DRUG TESTING DIVISION OF PATHOLOGY LABORATORIES, LTD.:
Report of Independent Public Accountants.................................................. F-28
Statements of Net Assets as of December 31, 1996 and 1995................................ F-29
Statements of Divisional Operations for the Years Ended
December 31, 1996 and 1995............................................................ F-30
Statements of Divisional Cash Flows for the Years Ended
December 31, 1996 and 1995............................................................ F-31
Notes to Divisional Financial Statements for the Years Ended
December 31, 1996 and 1995............................................................ F-32
</TABLE>
F-1
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (PAGE 1 OF 2)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1996 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............... $ 727,381 $ 703,157
Accounts receivable, net of
allowances of $597,499
in 1996 and $637,499 in 1997........... 1,696,744 2,284,415
Income tax refund receivable............ 312,664 71,421
Inventories............................. 99,754 75,370
Prepaid expenses and other.............. 146,859 78,802
Deferred tax asset...................... 211,078 211,078
---------- -----------
Total current assets.................. 3,194,480 3,424,243
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $900,948 in
1996 and $1,024,749 in 1997.............. 1,592,599 1,983,990
---------- -----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $171,355 in
1996 and $222,604 in 1997.............. 2,663,850 2,612,602
Customer list, net of accumulated
amortization of $216,429
in 1996, and $358,264 in 1997.......... 1,863,061 4,369,602
Deferred costs.......................... 80,818 66,949
---------- -----------
Total other assets.................... 4,607,729 7,049,153
---------- -----------
Total assets.......................... $9,394,808 $12,457,386
========== ===========
</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, JUNE 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.............................. $ 521,705 $ 868,580
Accrued payroll............................... 300,103 394,432
Accrued expenses.............................. 57,310 30,039
Accrued customer list costs................... -- 745,718
Obligations from discontinued 784,272 575,782
operations...................................
Short-term debt............................... 410,293 398,627
Current portion of long-term debt............. 118,085 462,888
---------- -----------
Total current liabilities................... 2,191,768 3,476,066
---------- -----------
LONG-TERM DEBT, net of current portion.......... 1,245,690 2,401,354
---------- -----------
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
December 31, 1996 and June 30, 1997........... 3,313 3,313
Paid in capital in excess of par,
common stock.................................. 5,366,027 5,366,027
Retained earnings.............................. 280,910 903,526
---------- -----------
Total stockholders' equity.................. 5,650,250 6,272,866
---------- -----------
Total liabilities and stockholders' $9,394,808 $12,457,386
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 SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
REVENUES..................................... $4,239,707 $6,010,982
COST OF LABORATORY SERVICES.................. 1,856,534 2,659,857
---------- ----------
Gross profit............................... 2,383,173 3,351,125
---------- ----------
OPERATING EXPENSES:
Selling.................................... 314,496 292,095
General and administrative................. 1,131,605 1,599,080
Depreciation and amortization.............. 221,444 317,172
---------- ----------
Total operating expenses................. 1,667,545 2,208,347
---------- ----------
Income from operations................... 715,628 1,142,778
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense........................... (29,325) (90,484)
Interest income............................ 19,672 19,493
Other income............................... 507 72
---------- ----------
Total other income (expense)............. (9,146) (70,919)
---------- ----------
Income before income taxes............... 706,482 1,071,859
INCOME TAX EXPENSE........................... 295,398 449,243
---------- ----------
Net income............................... $ 441,084 $ 622,616
========== ==========
PRIMARY EARNINGS PER SHARE:
Weighted Average Number Of Common
Stock and Common Stock
Equivalents Outstanding................... 3,318,127 3,343,749
========== ==========
Earnings Per Common Stock and Common
Stock Equivalents......................... $ .12 $ .19
========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Weighted Average Number Of Common
Stock and Common Stock
Equivalents Outstanding................... 4,046,943 3,834,644
========== ==========
Earnings Per Common Stock and Common
Stock Equivalents......................... $ .10 $ .16
========== ==========
</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 SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 411,084 $ 622,616
Adjustments to reconcile net income
to net cash provided by operating activities -
Depreciation and amortization........................... 221,444 317,172
Provision for bad debts and other....................... 24,000 40,000
Impact of changes in assets and
liabilities:
Accounts receivable................................... (457,593) (627,671)
Income tax refund receivable.......................... 158,982 241,243
Inventories........................................... 5,604 24,384
Prepaid expenses and other............................ 100,391 53,759
Accounts payable and accrued
expenses............................................. (278,271) 257,255
----------- -----------
Net cash provided by operating
activities......................................... 185,641 928,758
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (61,533) (481,957)
Purchase of NPLI Stock, net of cash acquired............ (1,022,597) --
Purchase of PLL Customer List........................... -- (1,894,184)
Acquisition costs....................................... (120,699) (37,514)
----------- -----------
Net cash used in investing
activities.......................................... (1,204,829) (2,413,655)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings....................... (545,621) (11,667)
Payments on long-term borrowings........................ (65,024) (199,533)
Proceeds from long-term borrowings...................... -- 1,682,293
Warrant offering costs.................................. -- (10,420)
----------- -----------
Net cash provided by (used in)
financing activities............................... (610,645) 1,460,673
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS.................... (1,629,833) (24,224)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of
period................................................... 2,411,051 727,381
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................. $ 781,218 $ 703,157
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest................ $ 16,170 $ 90,484
=========== ===========
Cash paid during the period for taxes................... $ 197,949 $ 190,000
=========== ===========
</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, as amended on July 11, 1997, (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 90 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 90 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 90 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 90 percent of 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
applicable period directly attributable to each customer comprising the
customer base of PLL acquired by the Company. As of June 30, 1997, total
payments of $214,282 were recorded as reductions in the liability owed to
PLL for the first installment. These payments consisted of $38,414, which
was paid on June 30, 1997, and $175,868 in advances and other costs which
were previously paid.
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.
6. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the PLL Asset Purchase (see Note 2), the Company
recorded a liability of $960,000 based upon the estimated future
quarterly payments. As of June 30, 1997, total payments of $214,282 were
recorded as reductions in the liability owed to PLL for the first
installment. These payments consisted of a $38,414 payment on June 30,
1997, and prior payments of advances and other costs of $175,868.
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 in 1996 and
increased to approximately $60,000 in 1997, with approximately $13,000
per month being 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.
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.
7. ACCOUNTING PRONOUNCEMENTS
-------------------------
In March, 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
In June, 1997, the FASB issued SFAS No. 130, which requires that all
items required to be recognized under accounting standards as components
of comprehensive income, consisting of both net income and those items
that bypass the income statement and are reported in a balance within a
separate component of stockholders' equity, be reported in a financial
statement is displayed with the same prominence as other financial
statements. The company does not believe that comprehensive income will
differ materially from net income.
8. SUBSEQUENT EVENTS
-----------------
On July 2, 1997, LSI entered into a loan agreement with Hibernia National
Bank (the "bank") for a term loan of up to $720,000 to refinance the
purchase and construction of its new laboratory. The loan was fully
advanced upon execution of the loan agreement and the December 3, 1996
note payable was paid in full with a portion of the proceeds. The bank
note is payable monthly with the first 36 consecutive principal and
interest payments of approximately $9,811, then 23 consecutive principal
and interest payments of approximately $6,007, and a final payment due on
July 2, 2002 of approximately $484,666. The loan bears interest at the
rate of 8.65 per annum.
On July 10, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission to redeem the outstanding 1994
warrants at a redemption price of $.01 per warrant. The proposed
redemption will be limited to a specific time period after the
declaration of effectiveness of the Registration Statement.
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 1999,
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
------------
================================================================================
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..................... $ 207.00
N.A.S.D. Filing Fees......................... 927.00
*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................................... 47,000.00
*Accounting Fees and Expenses................. 10,000.00
*Transfer and Warrant Agent's Fees............ 2,000.00
*Miscellaneous................................ 1,866.00
-----------
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.(3)
2.2 The Asset Purchase Agreement with National Drug Assessment
Corporation, dated November 30, 1994.(4)
2.3 The Stock Purchase Agreement with National Psychopharmacology
Laboratory, Inc., Haroutune K. Dekirmenjian and Kenneth O. Jobson,
dated January 1, 1996.(5)
3.1 Registrant's Certificate of Incorporation.(3)
3.2 Registrant's Bylaws.(3)
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.(3)
4.7 Laboratory Specialists of America, Inc. 1994 Stock Option Plan
(Amended and Restated October 30, 1996).(2)
4.8 Common Stock Purchase Warrant issued to The Equity Group, Inc.,
dated December 1, 1995 (the "EGI Stock Option").
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.
10.12 Amendment to Asset Purchase Agreement between Pathology
Laboratories, Ltd. and Laboratory Specialists of America, Inc.,
dated July 30, 1997.
10.13 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated July 2, 1997.(9)
10.14 Promissory Note issued by Laboratory Specialists, Inc. to Hibernia
National Bank, dated July 2, 1997.(9)
10.15 Settlement Agreement and General Release by and between Laboratory
Specialists of America, Inc., National Psychopharmacology
Laboratory, Inc., Kenneth O. Jobson and Haroutune K. Dekirmenjian,
dated August 25, 1997.
22.1 Subsidiary of Registrant.
23.1 Consent of Arthur Andersen LLP, dated August 29, 1997.
23.2 Consent of Deloitte & Touche LLP, dated August 26, 1997.
23.3 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated August 29, 1997.
25.1 Power of Attorney of John Simonelli, dated July 7, 1997.(2)
25.2 Power of Attorney of Larry E. Howell, dated July 7, 1997.(2)
25.3 Power of Attorney of Arthur R. Peterson, Jr.,July 7, 1997.(2)
25.4 Power of Attorney of Robert A. Gardebled, Jr., dated July 7,
1997.(2)
25.5 Power of Attorney of Jerome P. Welch, dated July 7, 1997.(2)
25.6 Power of Attorney of Michael E. Dunn, dated July 7, 1997.(2)
II-3
<PAGE>
28.1 Stock Exchange Agreement between and among Laboratory Specialists,
Inc., MBf USA, Inc. and Arthur R. Peterson, Jr., dated February
23, 1994.(3)
28.2 Promissory Note issued to MBf USA, Inc. by Laboratory Specialists,
Inc., dated February 23, 1994.(3)
______________________________________________________
(1) To be furnished by amendment.
(2) Previously furnished.
(3) 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.
(4) Incorporated by reference to Form 8-K, dated December 1, 1994, filed with
the Commission on December 15, 1994.
(5) Incorporated by reference to Form 8-K, dated January 2, 1996, filed with
the Commission on April 9, 1997.
(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.
(9) Incorporated by reference to Form 10-QSB Quarterly Report for quarterly
period ended June 30, 1997, filed with the Commission on August 14,
1997.
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.
II-4
<PAGE>
(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.
II-5
<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 Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned in the
City of Oklahoma City, State of Oklahoma, on the 3rd day of September, 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 Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ JOHN SIMONELLI Chairman of the Board, Chief September 3, 1997
John Simonelli Executive Officer, Secretary
and Director
/s/ LARRY E. HOWELL President and Chief Operating September 3, 1997
Larry E. Howell Officer and Director
/s/ ARTHUR R. PETERSON, JR. Treasurer and Director September 3, 1997
Arthur R. Peterson, Jr.
/s/ ROBERT A. GARDEBLED, JR. Director September 3, 1997
Robert A. Gardebled, Jr.
/s/ MICHAEL E. DUNN Director September 3, 1997
Michael E. Dunn
/s/ JEROME P. WELCH Director September 3, 1997
Jerome P. Welch
</TABLE>
II-6
<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 $2.20 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,
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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
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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 In connection with the first demand registration pursuant to
Subsection 2.1 hereof, as well as any registration statement to be filed
pursuant to Subsection 2.2 hereof, 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. The Holders shall bear all expenses in connection
with the second demand registration filed pursuant to Subsection 2.1
hereof.
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
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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.
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<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 Market Price of
such Common Stock, then 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. For purposes of this
Section 5, Market Price shall mean the closing offer price of the Company's
Common Stock on the date of issuance.
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 Market Price, as herein defined, 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. Both the Company and the Holder agree no such transfer shall
take place if such transfer would be deemed to be a violation of Rule
2710(c)(7)(A) of the NASD's Conduct Rule 5.
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
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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
101 Park Avenue, Suite 810, Oklahoma City, Oklahoma 73102. 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 4.8
LABORATORY SPECIALISTS OF AMERICA, INC.
COMMON STOCK PURCHASE OPTION
For the Purchase of 50,000 Shares of Common Stock
This certifies that, for value received, The Equity Group Inc. (the
"Holder) is entitled, subject to the terms and conditions hereinafter set forth,
at any time, and from time to time, and prior to and including February 14, 2001
(the "Expiration Date"), to purchase up to a total of Fifty Thousand (50,000)
shares (the "Stock") of the $.001 par value common stock ("Common Stock"), of
Laboratory Specialists of America, Inc., and its successors and assigns, an
Oklahoma corporation, (the "Company"), at a price of Three Dollars ($3.00) per
share, in lawful funds of the United States of America payable in cash or by
certified or official bank check, such price and the number of shares
purchasable being subject to adjustment as set forth in this Common Stock
Purchase Option (the "Option").
This Option is subject to the following further terms and conditions:
1. EXERCISE
The purchase rights represented by this Option are exercisable, at the
option of the Holder, in whole at any time, or in part from time to time and
with respect to the purchase; provided, however, that with respect to the
exercise of 25,000 shares of Common Stock, this Option shall not be exercisable
until after August 14, 1996. Upon presentation and surrender of this Option,
with the Subscription Form annexed hereto duly executed, together with payment
of the Purchase Price of the shares of Common Stock thereby purchased, at the
principal office of the Company, the Holder shall be entitled to receive a
certificate or certificates representing the shares of Common Stock so
purchased. The term Holder shall include any person to whom this Option has been
transferred. All shares which may be issued upon the exercise of this Option
will, upon issuance, be fully paid and non-assessable and free from all taxes,
liens and charges with respect thereto. In the case of the purchase of less than
all the shares purchasable under this Option, the Company shall cancel this
Option upon the surrender hereof and shall execute and deliver a new Option of
like tenor for the balance of the shares purchasable hereunder.
Notwithstanding the foregoing, in the event that certain Consulting
Contract, dated as of December 1, 1995, between the Company and The Equity
Group, Inc. (the "Consulting Contract") is terminated on or before August 14,
1996, in accordance with Paragraph 9 of the Consulting Contract, then and in
that event this Option with respect to 25,000 shares of Common Stock shall
terminate and, with respect to such shares of Common Stock, shall be of no
further force and effect on and as of the date of such termination.
2. REGISTRATION
2.1 Registrable Securities. The Holder shall have the registration
----------------------
rights set forth in this Section 2 with respect to (i) this Option, (ii) any
shares of Common Stock issued to the Holder pursuant to exercise of this Option,
and (iii) any securities issued or issuable with respect to any Common Stock
referred to in the foregoing clause by way of stock dividend or stock split or
in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise (the "Registrable
Securities"). As to any particular Registrable Securities issued pursuant to
exercise of this Option, once issued, such securities shall cease to be
Registrable Securities, upon (i) a Registration Statement (as defined below)
with respect to the sale of the Registrable Securities shall have been declared
effective by the Securities and Exchange Commission (the "Commission"), (ii) the
Registrable Securities shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent disposition of the securities shall not
require registration or qualification under the Securities Act of 1933, as
amended (the "Securities Act") or any similar state law then in force, or (iii)
the Registrable Securities shall have ceased to be outstanding.
2.2 Registration Rights. If the Company shall at any time and from time
-------------------
to time, propose the registration under the Securities Act of any securities of
the Company, the Company shall give at least thirty (30)
<PAGE>
days' written notice of each such proposed registration to the Holder and will
permit the Holder to include in each such Registration Statement this Option
and/or any or all of the Registrable Securities issued or issuable upon the
exercise of this Option as the Holder specifies as permitted and in accordance
with the Securities Act and rules and regulations thereunder (the "Piggy-Back
Registration Rights"). The Holder shall exercise the Piggy-Back Registration
Rights under this Section 2 by giving written notice to the Company within
thirty (30) days of the Holder's receipt of the notice of the proposed
registration. The term "Registration Statement" as used in this Section 2 being
deemed to include any form (other than by registration on Form S-8 or Form S-4
or any successor or similar form) which may be used to register a distribution
of securities to the public for cash, a post-effective amendment to the
Registration Statement but only to the extent the Registrable Securities were
included within and covered by the Registration Statement as initially declared
effective by the Commission, or a notification and offering circular pursuant to
a Regulation A offering when necessary to perfect an exemption thereunder), (i)
prepare and file with the appropriate state Blue Sky authorities the necessary
documents to register or qualify such Option and/or Registrable Securities, and
(ii) use its best efforts to cause such Registration Statement to become
effective and to keep such Registration Statement and Blue Sky filings correct
and effective until such time as an amendment to such Registration Statement is
required to be filed pursuant to the provisions of Section 10(a) (3) of the
Securities Act.
If, for any reason, the Holder is not afforded an opportunity to
exercise the Piggy-Back Registration Rights on all of the Registrable Securities
prior to the Expiration Date, then the Expiration Date shall be extended until
90 days after the Holder has the opportunity to exercise such Piggy-Back
Registration Rights with respect to all of the Registrable Securities.
2.3 Registration Costs and Expenses. The Company shall bear all costs
-------------------------------
and expenses of any Registration Statement (and all amendments and supplements
thereto) relating to the registration of this Option and/or the Registrable
Securities and any related underwriting agreement, including printing, legal and
accounting expenses, and Commission filing fees, expenses and transfer agency
fees, but the Company shall have no obligation to pay or otherwise bear (i) any
portion of the fees or disbursements of any counsel which any Holder may retain
in connection with the registration of the Option and/or the Registrable
Securities, (ii) any portion of the underwriter's commission, discounts and
expenses attributable to such Option and/or the Registrable Securities being
offered and sold by the Holder or (iii) any applicable stock transfer taxes.
2.4 Company Indemnification. The Company shall indemnify and hold
-----------------------
harmless the Holder and any underwriter (as defined in the Securities Act) for
such Holder, and each person, if any, who controls the Holder or underwriter
within the meaning of the Securities Act, against all losses, claims, damages or
liabilities, joint or several, to which such Holder or underwriter or
controlling person may be subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities, joint or several, to
which such Holder or underwriter or controlling person may be subject, under the
Securities Act or otherwise, are caused by any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
under which the Registrable Securities were registered under the Securities Act,
or qualified under the Blue Sky laws of applicable jurisdictions, pursuant to
this Section 2, any prospectus contained therein, or any amendment or supplement
thereto, or arising out of or based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement or
alleged untrue statement or omission based upon and made in conformity with
information furnished to the Company in writing by the Holder or by any
underwriter for the Holder expressly for use therein. Provided, however,
notwithstanding the foregoing, the Company shall not be liable in any such case
to the extent that such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with information furnished to the Company by the Holder specifically stating
that it is for use in the preparation of such Registration Statement; and
provided further, that the Company shall not be liable to any person who
participates as an underwriter in the offering or sale of Registrable Securities
or any person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of such person's failure to send or give a copy of the final prospectus, as
the same may be then supplemented or amended, to the person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
person if such
<PAGE>
statement or mission was contained in such final prospectus. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of the Holder or any such director, officer, representative, agent,
underwriter or controlling person shall survive the transfer of such Registrable
Securities by the Holder.
2.5 Holder Indemnification. The Company may require, as a condition to
----------------------
including any Registrable Securities in any Registration Statement filed
pursuant to this Section 2.2 hereof, that the Company shall have received an
undertaking reasonably satisfactory to it from the Holder of such Registrable
Securities, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Section 2.4 hereof) the Company, each director, officer,
representative and agent of the Company and each other person, if any, who
controls the Company within the meaning of the Securities Act, with respect to
any statement or alleged statement in or omission or alleged omission from such
Registration Statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with information furnished to the Company by the
Holder for use in the preparation of such Registration Statement, preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement. Such
indemnity shall remain in full force and effect, regardless of any investigation
made by or on behalf of the Company or any such director, officer,
representative, agent, or controlling person and shall survive the transfer of
such Registrable Securities by the Holder.
2.6 Restrictive Legend. The Company may imprint on all certificates
------------------
representing Registrable Securities, or shares issued in substitution or
exchange therefor, the following legend:
THE SECURITIES REPRESENTED UNDER THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE
OKLAHOMA SECURITIES ACT OR UNDER THE SECURITIES LAWS OF ANY OTHER
STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION OF THEM UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND/OR THE SECURITIES ACT OF ANY STATE OR AN OPINION OF COUNSEL OR
OTHER DOCUMENTATION SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER SUCH ACT OR ACTS.
3. COMPANY'S ACKNOWLEDGMENT OF OBLIGATIONS
The Company will, at the time of the exercise of this Option, upon the
request of the Holder, acknowledge in writing its continuing obligation to
afford to any holder of Common Stock any rights (including without limitation,
any right to registration of the shares of Common Stock) to which such holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Option; provided, however, that if the Holder shall fail to
make any such request, such failure shall not affect the continuing obligation
of the Company to afford to the Holder any such rights.
4. ADJUSTMENTS
In case the Company shall at any time subdivide its outstanding shares
of Common Stock into a greater number of shares, the Purchase Price in effect
immediately prior to such subdivision shall be proportionately reduced and the
number of shares of Common Stock purchasable hereunder shall be proportionately
increased. In case the outstanding shares of the Common Stock of the Company
shall be combined into a smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall be proportionately increased and the
number of shares of Common Stock purchasable hereunder shall be proportionately
reduced. Except upon consolidation or reclassification of the shares of Common
Stock of the Company as provided for in this paragraph, the Purchase Price in
effect at any time may not be adjusted upward or increased in any manner
whatsoever.
If any capital reorganization or reclassification of the capital stock
of the Company (other than as provided in the prior paragraph), or consolidation
or merger of the Company with another corporation shall be effected, then, as a
condition of such reorganization, reclassification, consolidation, merger, sale
or conveyance, lawful and adequate provision shall be made whereby the Holder
shall thereafter have the right to purchase and receive upon the
<PAGE>
basis and upon the terms and conditions specified in this Option and in lieu of
the shares of the Common Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby,
such shares of stock or securities as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock equal to
the number of shares of such Common Stock immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation or merger not taken place. In
any such case appropriate provision shall be made with respect to the rights and
interest of the Holder to the end that the provisions hereof (including without
limitation provisions for adjustment of the Purchase Price and of the number of
shares purchasable upon the exercise of this Option) shall thereafter be
applicable, as nearly as may be in relation to any stock or securities
thereafter deliverable upon the exercise hereof.
(a) Upon any increase or decrease in the number of shares of Common
Stock purchasable upon the exercise of this Option then, and in each such case,
the Company within 30 days thereafter shall give written notice thereof,
pursuant to Section 9, which notice shall state the increased or decreased
number of shares purchasable upon the exercise of this Option, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation are based. Where appropriate, such notice may be given in advance
and included as a part of the notice required to be mailed under the provisions
of paragraph (b) of this subsection.
(b) In case at any time:
(i) The Company shall declare any dividend upon its Common Stock
payable otherwise than in cash or in Common Stock of the Company or
payable otherwise than out of the net income or retained earnings of
the Company; or
(ii) The Company shall offer for subscription to the holders of its
Common Stock any additional shares of stock of any class or any other
securities convertible into or exchangeable for shares of stock or any
rights or options to subscribe thereto; or
(iii) There shall be any capital reorganization or reclassification of
the capital stock of the Company, or a sale or conveyance of all or
substantially all of the assets of the Company, or a consolidation or
merger of the Company with another corporation; or
(iv) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
pursuant to Section 9, at the earliest time legally practicable (and not less
than 60 days before any record date or other date set for definitive action) of
the date on which (A) the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or options, or (B)
such reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation or winding up shall take place, as the case may be.
Such notice shall also specify the date as of which the holders of the Common
Stock of record shall participate in said dividend, distribution, subscription
rights or options or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, sale, conveyance, consolidation, merger, dissolution,
liquidation, or winding up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the right to exercise this Option shall cease and terminate).
5. REPLACEMENT
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Option, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Option, if mutilated, the
Company will make and deliver a new Option of like tenor, in lieu of this
Option.
6. NO FRACTIONAL SHARES
<PAGE>
The Company shall not be required to issue stock certificates
representing fractions of shares of Common Stock, but may, at its option, in
respect of any final fraction of a share make a payment in cash based on the
Purchase Price.
7. RESERVATION OF SHARES
The Company will reserve and keep available a sufficient number of
shares of Common Stock to satisfy the requirements of this Option and any other
outstanding Options. Before taking any action which would cause an adjustment
reducing the Purchase Price below the then par value of the shares of Common
Stock issuable upon exercise of this Option, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and non-assessable shares of
such Common Stock at such adjusted Purchase Price.
8. MERGER, ETC.
The Company shall not effect any consolidation or merger, unless prior
to or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger shall assume
by written instrument executed and mailed or delivered to the Holder at the
address indicated in Section 9, the obligation of such corporation to deliver to
the Holder shares of stock, securities or property as, in accordance with the
provisions of this Option, the Holder may be entitled to purchase, and to
perform and to observe each and every covenant and condition of this Option to
be performed and observed by the Company.
9. NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid:
(i) if to the Holder, at 919 Third Avenue, New York, New York 10022,
or at such other address as may have been furnished to the Company in
writing by the Holder;
(ii) if to the Company, at 1101-A Sovereign Row, Oklahoma City,
Oklahoma 73108-1827; Attention of the Secretary, or at such other
address as may have been furnished to the Holder in writing by the
Company.
10. GOVERNING LAW
This Option shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of Oklahoma,
without regard to principles of conflicts of laws.
11. COUNTERPARTS
This Option may be executed in any number of counterparts, each of
which shall be deemed an original, but all such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed and delivered this
Option, or have caused this Option to be executed and delivered by their
respective duly authorized officers, on this 1st day of December, 1995.
"Company" LABORATORY SPECIALISTS OF
AMERICA, INC.
By: /s/ JOHN SIMONELLI
----------------------------------------------
John Simonelli, Chief Executive Officer
"Holder" THE EQUITY GROUP INC.
By: /s/ ROBERT GOLDSTEIN
----------------------------------------------
Robert Goldstein, President
<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED BY THE HOLDER OF THE COMMON STOCK PURCHASE
OPTION IF EXERCISED IN WHOLE OR IN PART)
To: LABORATORY SPECIALISTS OF AMERICA, INC.
The undersigned ( )
---------------------------------------------------
Please insert Social Security or Employer Identification
number of Subscriber hereby irrevocably elects to exercise the right of purchase
represented by the Common Stock Purchase Option (the "Option") to which this
Subscription Form is attached, for, and to purchase thereunder,________________
_________________________________ (__________) shares of Common Stock provided
for therein and tenders payment herewith to the order of LABORATORY SPECIALISTS
OF AMERICA, INC. in the amount of $____________ . In accordance with Option the
undersigned requests that certificates for such shares of Common Stock be issued
as follows:
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Deliver to:
--------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
and if said number of shares of Common Stock shall not be all the shares of
Common Stock purchasable thereunder, that a new common stock purchase option for
the balance remaining of shares of Common Stock purchasable under the Option be
registered in the name of, and delivered to the undersigned at the address
stated below:
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Deliver to:
--------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Dated: , Signature
-------------------- ------
---------------------------------------
(Signature must conform in all
respects to the name of Holder
as specified on the face of the
Common Stock Purchase Option in
every particular, without alteration,
enlargement or any change whatever.)
<PAGE>
ASSIGNMENT FORM
(TO BE EXECUTED BY THE HOLDER OF THE COMMON STOCK
PURCHASE OPTION ONLY UPON ASSIGNMENT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________________________________________________________
_______________________________________________________("Assignee") the right to
purchase _________________________________(__________________) shares of Common
Stock subject to purchase under the Common Stock Purchase Option (the "Option")
to which this Assignment Form is attached, and appoints ________________________
attorney to transfer said Option or portion thereof on the books of LABORATORY
SPECIALISTS OF AMERICA, INC. (the "Company") with the full power of substitution
in the premises. In accordance with the Option, the undersigned requests that
the Company execute, issue and deliver a new Option evidencing the rights of the
Assignee to purchase such assigned shares of Common Stock to Assignee as
follows:
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Deliver to:
--------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
and if said number of shares of Common Stock shall not be all the shares of
Common Stock purchasable under the Option, that the Company execute, issue and
deliver a new option to purchase Common Stock for the balance remaining of
shares of Common Stock purchasable under the Option to be registered in the name
of, and delivered to the undersigned at the address stated below:
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Deliver to:
--------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Dated: , .
--------------------- -------
In the presence of:
Signature
- ---------------------------------------
Signature Guaranteed:
------------------------------------
(Signature must conform in all
respects to the name of Holder as
specified on the face of the Common
Stock Purchase Option in every
particular, without alteration,
enlargement or any change
whatsoever, and the signature must
be guaranteed in the usual manner.)
<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
August 29, 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"), (iii) 50,000 shares of Common Stock upon exercise of the Common
Stock Purchase Option, dated December 1, 1995, by The Equity Group, Inc., and
(iv) 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;
5. The 50,000 shares of Common Stock or any portion thereof to be sold to
The Equity Group, Inc. pursuant to exercise of the Common Stock Purchase
Option, when issued against payment therefor pursuant to exercise of and
in accordance with the Common Stock Purchase Option (a copy 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; and
6. 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.
August 29, 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
1
<PAGE>
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 3% of the gross proceeds realized upon exercise of the
Warrants, and (2) a flat fee equal to $76,400, 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. The Company hereby agrees and
acknowledges that BBI shall be entitled to receive the fee equal to 5% of
the exercise price of the Warrants for which BBI is responsible for
exercise as described in Section 5(u) of the Underwriting Agreement between
the Company, Barron Chase Securities, Inc., J. Alexander Securities, Inc.,
Princeton Securities Corp. and Euro-Atlantic, Inc., dated September 27,
1994.
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 (based upon the denominator of 660,000), as
set forth below. The BBI warrants shall be exercisable at a price per share
equal to $2.20.
% 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
Notwithstanding anything contained herein, the maximum number of warrants
issuable to BBI shall not exceed 10% of the total number of shares issued
upon exercise of the Warrants, including such shares as may be issued upon
exercise of the Warrants granted to the underwriters of the Company's
initial public offering.
(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:
2
<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 10.12
AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT TO ASSET PURCHASE AGREEMENT (this "Amendment") is made
and entered into this 30th day of July, 1997, by and between PATHOLOGY
LABORATORIES, LTD., a Mississippi corporation ("PLL"), and LABORATORY
SPECIALISTS OF AMERICA, INC., an Oklahoma corporation ("LSAI").
R E C I T A L S
1. PLL and LSAI are each engaged in the providing of forensic drug
testing services to corporate and institutional customers, and on January 31,
1997, PLL and LSAI entered into that certain Asset Purchase Agreement which
provided for the sale by PLL and the purchase by LSAI of certain forensic drug
testing assets of PLL (the "PLL Assets").
2. PLL and LSAI desire to amend the terms of the Asset Purchase
Agreement to properly reflect the intent of PLL to sell and LSAI to purchase the
PLL Assets for a purchase price based upon 90 percent of the Forensic Testing
Revenues during the First Anniversary Period attributable to the PLL Assets.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, PLL and LSAI have agreed, and hereby
agree, subject to the terms and conditions hereinafter set forth, as follows:
1. The capitalized terms used in this Amendment shall have the same
meanings as set forth and contained in the Asset Purchase Agreement dated
January 31, 1997, unless otherwise defined herein.
2. Section 2.2 of the Asset Purchase Agreement is hereby deleted in its
entirety and, in lieu thereof, the following Section 2.2 is hereby substituted:
2.2 Purchase Price of PLL Assets. In consideration for the PLL
Assets to be sold, assigned, conveyed, transferred and delivered to
LSAI pursuant to Section 2.1 hereof, LSAI shall pay (i) at Closing of
the Asset Purchase, One Million Six Hundred Thousand Dollars
($1,600,000) to PLL in immediately available funds and (ii) during the
First Anniversary Period, pay an additional amount equal to 90 percent
of the Forensic Testing Revenues during the First Anniversary Period
less the One Million Six Hundred Thousand Dollars ($1,600,000) paid at
closing, (the "Installment Purchase Price"). The Installment Purchase
Price shall be paid in four installments, as follows:
(i) the first installment shall be payable in full
within one day following execution of this Amendment by PLL
and LSAI ("Three-Month Period") and shall be in an amount
equal to 90 percent of Forensic Testing Revenues of the
Three-Month Period in excess of Four Hundred Thousand Dollars
($400,000) (the "First Installment Payment");
(ii) the second installment shall be payable within
60 days following the end of the six-month period following
closing of the Asset Purchase ("Six-Month Period") and shall
be in an amount equal to 90 percent of Forensic Testing
Revenues of the Six-Month Period in excess of the aggregate
sum of the First Installment payment and Eight Hundred
Thousand Dollars ($800,000) (the "Second Installment
Payment");
(iii) the third installment shall be payable within
60 days following the end of the nine-month period following
Closing of the Asset Purchase ("Nine-Month Period") and shall
be in an amount equal to 90 percent of Forensic Testing
Revenues of the Nine-Month Period in excess of the aggregate
sum of the First Installment Payment, the Second Installment
Payment, and One
1
<PAGE>
Million Two Hundred Thousand Dollars ($1,200,000) (the "Third
Installment Payment"); and
(iv) the fourth installment shall be payable within
60 days following the end of the First Anniversary Period and
shall be in an amount equal to 90 percent of the amount of
Forensic Testing Revenues of the First Anniversary Period in
excess of the aggregate sum of the First Installment Payment,
the Second Installment Payment, the Third Installment Payment,
One million Six Hundred Thousand Dollars ($1,600,000);
provided, however, that in the event the aggregate sum of the
First Installment Payment, the Second Installment Payment, the
Third Installment Payment and One Million Six Hundred Thousand
Dollars ($1,600,000) exceed 90 percent of the Forensic Testing
Revenues of the First Anniversary Period, PLL shall repay to
LSAI within 60 days following the end of the First Anniversary
Period an amount equal to the excess of the aggregate sum of
the First Installment Payment, the Second Installment Payment,
the Third Installment Payment and One Million Six Hundred
Thousand Dollars ($1,600,000) in excess of 90 percent of the
Forensic Testing Revenues of the First Anniversary Period.
Forensic Testing Revenues shall be separately accounted for by
LSAI on a customer basis so as to identify each customer and the
revenues attributable to each customer in order to further determine
the Forensic Testing Revenues that are attributable to the customers
comprising in part the Customer Base of PLL purchased as a portion of
the PLL Assets.
Forensic Testing Revenues shall be reduced by the amount of
any billing which is uncollectible as a result of the failure to
assign, or to obtain the prior consent to any assignment by PLL of any
agreement for drug testing services between PLL and clients in the
Customer Base.
3. This Amendment shall be effective as of January 31, 1997. Each of
PLL and LSAI hereby ratify and reconfirm the terms and provisions of the Asset
Purchase Agreement as amended pursuant to this Amendment.
IN WITNESS WHEREOF, PLL and LSAI have caused this Amendment to be duly
executed by their duly authorized representatives as of the date first written
above.
"LSAI" LABORATORY SPECIALISTS OF
AMERICA, INC.
By: /s/ JOHN SIMONELLI
--------------------------------
John Simonelli
Chief Executive Officer
"PLL" PATHOLOGY LABORATORIES, LTD.
By: /s/ THOMAS G. PUCKETT
--------------------------------
Dr. Thomas G. Puckett
Chief Executive Officer
2
<PAGE>
EXHIBIT 10.15
SETTLEMENT AGREEMENT AND GENERAL RELEASE
----------------------------------------
This Settlement Agreement and General Release (the "Agreement") is entered
into by and between Kenneth O. Jobson ("Jobson"), Haroutune K. Dekirmenjian
("Dekirmenjian"), Laboratory Specialists of America, Inc. ("LSAI"), and National
Psychopharmacology Laboratory, Inc. ("NPL").
Recitals
--------
WHEREAS, the parties entered into a Stock Purchase Agreement and certain
other agreements on January 1, 1996; and
WHEREAS, Jobson and Dekirmenjian commenced an action in the Federal Court
for the Eastern District of Tennessee styled Kenneth O. Jobson, and Haroutune K.
-----------------------------------
Dekirmenjian v. Laboratory Specialists of America, Inc., Docket No 3.97-cv-117
- -------------------------------------------------
(the "Tennessee Lawsuit"); and
WHEREAS, LSAI filed a counterclaim in the Tennessee Lawsuit; and
WHEREAS, LSAI and NPL filed an action in the State of Oklahoma in the
District Court for Oklahoma County styled Laboratory Specialists of America,
----------------------------------
Inc., and National Psychopharmacology Laboratory, Inc. v. Kenneth O. Jobson and
- -------------------------------------------------------------------------------
Haroutune K. Dekirmenjian, Docket No. 97-2582 (the " Oklahoma Lawsuit"); and
- -------------------------
WHEREAS, the parties have denied and continue to deny any and all liability
one to another; and
WHEREAS, the parties to the Agreement desire to compromise and settle the
Tennessee Lawsuit and the Oklahoma Lawsuit and to resolve any and all disputes
between them.
Undertakings
------------
For and in consideration of the mutual promises set forth herein and other
good and valuable consideration, the parties do hereby agree to the following
terms:
1. LSAI agrees to pay Jobson and Dekirmenjian the total aggregate sum of
Sixteen Thousand and No/100 Dollars ($16,000.00) in good funds.
<PAGE>
2. LSAI agrees simultaneously with the execution of this Agreement to
transfer to Jobson and Dekirmenjian 103,333 shares of stock in LSAI (the
"Shares"). One-half of the Shares shall be transferred to Jobson, and one-half
shall be transferred to Dekirmenjian. The Shares issued pursuant to this
paragraph 2 above are "Contingent Shares" as defined in the Section 1.2.3 of the
Stock Purchase Agreement and are being issued pursuant to, and in satisfaction
of LSAI's obligations under, the Replacement Promissory Notes issued pursuant to
the Stock Purchase Agreement. The following provisions restate and/or clarify
and supersede the provisions of the Stock Purchase Agreement relating to the
circumstances under which the Shares are being issued:
(a) Jobson and Dekirmenjian agree that the certificates evidencing the
Shares shall bear the following restrictive legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 or under any
applicable state law; they have been acquired by the holder for
investment purposes and not with a view to distribution, and may
not be pledged, hypothecated, sold, transferred or otherwise
disposed of except as may be authorized under the Securities Act
of 1933 and the rules and regulations promulgated thereunder, and
under any applicable state law.
(b) Jobson and Dekirmenjian understand that the Shares have not been
registered under the Securities Act of 1933, as amended, (the "Act"),
or under any applicable state law, and may not be pledged,
hypothecated, sold, transferred or otherwise disposed of by either of
them except as may be authorized under the Act, and the rules and
regulations promulgated thereunder, and under any applicable state
law;
(c) Jobson and Dekirmenjian represent and warrant to LSAI that they
entered into the Stock Purchase Agreement and are now acquiring the
Shares to be issued to each of them for their own account for
investment purposes, and not with a view, directly or indirectly,
toward the distribution thereof, as defined in the Act and the rules
and regulations promulgated thereunder;
2
<PAGE>
(d) Jobson and Dekirmenjian understand and agree that they must bear the
economic risk associated with the acquisition of the Shares for an
indefinite period of time because the shares have not been registered
under the Act or any state securities laws;
(e) Jobson and Dekirmenjian will not attempt to pledge, transfer, convey
or otherwise dispose of any Shares except in a transaction that is the
subject of either (i) an effective registration under the Act, and any
applicable state securities laws, or (ii) in a transaction exempt from
registration under the Act and any applicable state securities laws as
to which transaction, at their expense, Jobson and Dekirmenjian shall
have provided to LSAI an opinion of reputable counsel, satisfactory to
LSAI, whose approval shall not be unreasonably withheld (and is hereby
given with respect to Bass, Berry & Sims PLC), which opinion of
counsel shall be satisfactory to LSAI in form and content to the
effect that LSAI may rely on such opinion of counsel in making such
determination;
(f) Jobson and Dekirmenjian agree to indemnify and hold LSAI and its
officers, directors, employees, agents and affiliates (collectively,
the "Indemnified Parties") harmless against any liability, loss,
expense (including without limitation reasonable attorneys' fees,
expert witness fees and court costs), damages, fines, judgments or
other loss which any one or more of the Indemnified Parties may
suffer or incur by reason of the pledge, hypothecation, sale, transfer
or other disposition (collectively, a "Transfer") of any or all
shares of the stock to be issued to them pursuant to this Agreement if
the Transfer is in violation of Section 5 of the Act or the
registration requirements of any applicable state securities law, or
the rules and regulations promulgated under the Act of such state
securities law with respect thereto;
3
<PAGE>
(g) LSAI acknowledges that pursuant to subsection (d)(3)(iii) of Rule
144, the holding period for the Shares commenced on January 1,
1996, and LSAI agrees that, so long as LSAI and its counsel receive
customary Rule 144 opinions as contemplated in subparagraph (e)
above, LSAI will not attempt to restrict the sale of the Shares
based solely on the assertion that the holding period for the
Shares commenced as of a later date.
(h) Jobson and Dekirmenjian confirm their intention to, and agree that
they each shall effect any sales of the Shares made by either of
them prior to February 1, 1998, in amounts not greater than 2000
shares each per calendar week.
3. LSAI agrees to pay Dekirmenjian the remaining amounts under Section
1.2.4. of the Stock Purchase Agreement for Dekirmenjian's goodwill in NPL,as
follows:
1) monthly payments in the amount of Ten Thousand, Six Hundred
Ninety-Four Dollars and Forty-Five Cents ($10,694.45) until the balance of the
indebtedness, Six-Four Thousand, One Hundred Sixty-Six Dollars and Sixty-Three
Cents ($64,166.63), is paid in full.
2) the first payment shall be made at the time that this Agreement is
delivered to Dekirmenjian for signing. All subsequent payments shall be made on
or before the 25th day of each month, with the final payment to be made on or
before December 25, 1997.
4. LSAI agrees to continue to provide medical benefits to Dekirmenjian
for two years from the date January 1, 1996 (the date of the closing of the NPL
stock purchase by LSAI from Jobson and Dekirmenjian) at the sole cost and
expense of LSAI, either (i) through continuation of the current medical benefits
provided by NPL or by provision to Dekirmenjian of medical benefits currently
being provided by LSAI to its employees, or (ii) through an individual medical
benefit policy, in which event the monthly cost of such individual policy
coverage shall be paid by LSAI up to $600 per month, with the excess, if any,
above such amount, to be paid by Dekirmenjian.
5. LSAI, Jobson and Dekirmenjian recognize and reaffirm the continuing
effect of the Registration Rights Agreements entered into between these parties
on
4
<PAGE>
January 2, 1996, and recognize and reaffirm their respective obligations in
accordance with the respective terms of these agreements. The parties
acknowledge that these Registration Rights Agreements are not subject to the
respective releases of liability stated below.
The foregoing notwithstanding, by execution of this Agreement Jobson and
Dekirmenjian waive their rights to include shares of stock issued by LSAI
pursuant to this Agreement in the registration statement LSAI is preparing with
regard to the redemption of the outstanding 1994 warrants of LSAI.
6. The parties recognize, reaffirm, and incorporate by reference the
provisions of 9.9 and 9.10 of the Stock Purchase Agreement relating to the
obligations of Jobson and Dekirmenjian not to compete with NPL. The parties
acknowledge that these rights and obligations are not subject to the respective
releases of liability stated below.
6. Jobson, Dekirmenjian, and LSAI will dismiss, with full prejudice, the
Tennessee Lawsuit, including all claims and counterclaims therein. It is agreed
that each party shall be responsible for its own costs and attorney's fees in
connection with that action.
7. LSAI and NPL will dismiss, with full prejudice, the Oklahoma Lawsuit. It
is agreed that each party shall be responsible for its own costs and attorney's
fees in connection with that action.
8. The parties further declare their understanding that this settlement in
no way constitutes an admission of liability for the allegations set forth in
the Tennessee Lawsuit or the Oklahoma Lawsuit, liability therefore being
expressly denied by the parties. It is understood that, by this Agreement, the
parties are merely resolving a disputed claim or claims and buying their peace
to settle all disputes and to avoid further litigation of all kinds between
them.
9. Except for obligations stated or referenced herein, by the execution of
this Agreement, Jobson and Dekirmenjian (along with their heirs,representatives,
5
<PAGE>
administrators, agents, assigns, and attorneys) do hereby remise, release,
covenant not to sue and forever discharge LSAI and NPL, together with their
predecessors and successors, and all of their current and former principals,
directors, officers, shareholders, employees, attorneys, agents,
representatives, and assigns of and from all manner of action and actions, cause
and causes of action, suits, debts, sums of money, torts, controversies,
agreements, premises, judgments, executions, claims and demands whatsoever, in
law or in equity, whether known or unknown, arising out of or in any way related
to any transactions or occurrences between the parties up to and including the
date of this instrument. This includes but is not limited to all claims in the
Tennessee Lawsuit.
10. Except for obligations stated or referenced herein, by the execution
of this Agreement, LSAI and NPL (along with their predecessors and successors
and all of their current and former principals, officers, directors,
shareholders, agents, employees, representatives, assigns, and attorneys), do
hereby remise, release, covenant not to sue and forever discharge Jobson and
Dekirmenjian (along with their heirs, administrators, representatives, agents,
assigns, and attorneys) of and from all manner of action and actions, cause and
causes of action, suit, debts, sums of money, torts, controversies, agreements,
premises, judgments, executions, claims and demands whatsoever, in law or in
equity, whether known or unknown, arising out of or in any way related to the
transactions and occurrences between the parties up to and including the date of
this instrument. This includes but is not limited to all claims in the Tennessee
Lawsuit and in the Oklahoma Lawsuit.
11. The parties specifically acknowledge that it is possible that damages,
conditions, or consequences presently unknown, in whole or in part, may
hereafter arise, become known, or be discovered; and they further acknowledge
that evidence of facts presently unknown to them and relating either to
liability or damages may hereafter become known or discovered by them or their
attorneys. Nevertheless, they agree that any and all claims or possible claims
against one another arising from such subsequently
6
<PAGE>
known or discovered matters are released and discharged, and are subject to the
covenants and agreements set forth herein.
12. The parties represent that no promise, statement, representation,
inducement, or agreement not herein expressed has been made to them and that
this Agreement contains the entire agreement between the parties hereto and that
the terms hereof are contractual and not a mere recital. Jobson and Dekirmenjian
represent and warrant to LSAI that, in entering into this Agreement and
receiving the Shares they have neither received nor relied on any information
from LSAI which has not been filed with the Securities and Exchange Commission
by LSAI or otherwise publicly disseminated by LSAI to its shareholders and the
investment public generally.
13. If any party hereto shall later commence a civil action against
another party hereto, and if it should be adjudged that this Agreement is a bar
to all or part of such action, then the prevailing party shall be entitled to
all costs, including reasonable attorney's fees, incurred in defense of such
action. Similarly, if any party hereto shall commence a civil action to enforce
the terms of this Agreement, then the prevailing party in that action shall be
entitled to all costs, including reasonable attorney's fees.
14. The unenforceability or invalidity of any provision of this Agreement
shall not affect the enforceability or validity of any other provision of this
Agreement. If is further understood that the wording of this Agreement is a
result of compromise between the parties. Thus, any ambiguity contained herein
shall not be construed against any party hereto.
15. The parties hereby declare that the terms of this Agreement have been
completely read and are fully understood and voluntarily accepted by them and
that they have had the benefit of counsel by their attorneys in connection
therewith. The parties acknowledge that they have entered into this Agreement
freely and voluntarily, without coercion or duress.
16. The parties agree that all contracts and agreements that have
previously been entered into between Jobson and Dekirmenjian on the one hand and
LSAI and NPL
7
<PAGE>
on the other are hereby canceled and terminated other than this Agreement. This
includes the Stock Purchase Agreement, which is the subject of the Tennessee
Lawsuit and the Oklahoma Lawsuit, and the promissory notes which are the subject
of the Tennessee Lawsuit. The parties expressly acknowledge that this provision
does not include any separate contracts or agreements between Jobson and
Dekirmenjian or between LSAI and NPL.
17. The parties agree to take such actions and to execute such documents as
necessary to effect the terms of this Agreement.
18. Any amendments to or modifications to this Agreement or waivers of its
terms shall not be enforceable unless in writing and signed by the parties
hereto.
19. This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of such counterparts together shall constitute
but one agreement.
IN WITNESS WHEREOF, the undersigned have affixed their signatures on the
dates indicated.
KENNETH O. JOBSON
---------------------------------------------------
STATE OF TENNESSEE )
COUNTY OF KNOX )
Before me, the undersigned, a Notary Public in and for said county and
state, personally appeared Kenneth O. Jobson, with whom I am personally
acquainted or proven to me on the basis of satisfactory evidence, who
acknowledged that he executed the foregoing instrument, that he did so of his
own free will and as his personal act and deed, that he had the authority to do
so, and that he did so for the purposes and considerations therein expressed.
WITNESS my hand and seal of office, this __ day of August, 1997.
-----------------------------------------
Notary Public [SEAL]
My commission expires:
-----------------
8
<PAGE>
HAROUTUNE K. DEKIRMENJIAN
--------------------------------
STATE OF TENNESSEE )
COUNTY OF KNOX )
Before me, the undersigned, a Notary Public in and for said county and
state, personally appeared Haroutune K. Dekirmenjian, with whom I am personally
acquainted or proven to me on the basis of satisfactory evidence, who
acknowledged that he executed the foregoing instrument, that he did so of his
own free will and as his personal act and deed, that he had the authority to do
so, and that he did so for the purposes and considerations therein expressed.
WITNESS my hand and seal of office, this _____________day of August, 1997.
My commission expires: --------------------------------------
Notary Public [SEAL]
- -----------------------
LABORATORY SPECIALISTS OF AMERICA, INC.
By: /s/ Larry E. Howell
----------------------------------
Its: President
---------------------------------
STATE OF OKLAHOMA )
COUNTY OF OKLAHOMA )
--------
Before me, the undersigned, a Notary Public in and for said county and
state, personally appeared Larry E. Howell, the President of Laboratory
--------------- ---------
Specialists of America, Inc., with whom I am personally acquainted or proven to
me on the basis of satisfactory evidence, who acknowledged that he executed the
foregoing instrument, that he did so of his own free will and as his personal
act and deed, that he had the authority to do so, and that he did so for the
purposes and considerations therein expressed.
WITNESS my hand and seal of office, this 25th day of August, 1997.
----
/s/ Sherry D. Harrison
---------------------------------
Notary Public [SEAL]
My commission expires: 7-3-2000
------------
9
<PAGE>
NATIONAL PSYCHOPHARMACOLOGY
LABORATORY, INC. ("NPL")
By: /s/ Larry E. Howell
----------------------------
Its: President
--------------------------
STATE OF OKLAHOMA )
COUNTY OF OKLAHOMA )
--------------
Before me, the undersigned, a Notary Public in and for said county and
state, personally appeared Larry E. Howell, the President of National
--------------- ---------
Psychopharmacology, with whom I am personally acquainted or proven to me on the
basis of satisfactory evidence, who acknowledged that he executed the foregoing
instrument, that he did so of his own free will and as his personal act and
deed, that he had the authority to do so, and that he did so for the purposes
and considerations therein expressed.
WITNESS my hand and seal of office, this ___ day of August, 1997.
/s/ Sherry D. Harrison
-----------------------------------
Notary Public [SEAL]
My commission expires: 7-3-2000
----------------
10
<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,
August 29, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Amendment No. 1 to the 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
August 26, 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,
August 29, 1997
