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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1997.
/ / Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from_________________to_________________.
COMMISSION FILE NUMBER: 0-24988
LABORATORY SPECIALISTS OF AMERICA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
OKLAHOMA 73-145065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (405) 232-9800
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year was $12,836,953.
The aggregate market value of the voting stock held by non-affiliates based
upon the average bid and asked prices of such stock as of March 26, 1998, was
$20,289,679.
The number of outstanding of Common Stock as of March 23, 1998, was 4,924,818.
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes No X
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TABLE OF CONTENTS
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Part I
Item 1. Description of Business 1
Background 1
Business 3
Industry Background 4
Expansion Strategy 4
Drug Testing Operations 6
Contractual Arrangements 7
Insurance Coverage 7
Competition 8
Certification and Government Regulation 8
Other Regulation 8
Environmental Matters 9
Employees 9
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Common Equity and Related Stockholders Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Plan of Operation 10
Results of Operations 11
Liquidity and Capital Resources 15
Future Operations and Liquidity 15
Future Assessment of Recoverability and Impairment of Goodwill
and Customer List 16
Item 7. Financial Statements 16
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 17
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 17
Item 10. Executive Compensation 19
Aggregate Option Grants and Exercises in 1997 and Year-End
Options Values 19
Compensation of Directors 20
Employment Arrangements 20
1994 Stock Option Plan 21
1997 Non-Qualified Stock Option Plan 21
Officer and Director Liability 22
Item 11. Security Ownership of Certain Beneficial Owners and Management 23
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 24
(a) Exhibits 24
(b) Reports on Form 8-K 25
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CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements under the captions "Item 1. Description of Business"
and "Item 6. Management's Discussion and Analysis or Plan of Operation," and
elsewhere in this Report and the documents incorporated herein by reference
constitute "forward-looking statements" within the meaning of 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 Laboratory
Specialists of America, Inc., 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. 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 Laboratory Specialists of
America, Inc. nor any other person assumes responsibility for the accuracy
and completeness of these statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Laboratory Specialists of America, Inc. (the "Company" or "LSAI"),
through its wholly-owned subsidiary, Laboratory Specialists, Inc. ("LSI"),
owns and operates an independent laboratory providing drug testing services
to corporate and institutional clients seeking to detect and deter the use of
illegal drugs. The drug testing market is in an expansion mode in part due to
the recent adoptions of additional Department of Transportation regulations,
which became effective in 1995, that substantially expanded the previous
regulations which mandated random drug testing of workers, especially in such
safety-sensitive jobs such as trucking, aviation, railroads and pipelines.
Under these new regulations, 50 percent of transportation workers
(mass-transit workers and interstate truckers and bus drivers) will be
required to be tested annually.
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 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 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. All of these
services are customized to the individual needs of the clients to assist in
the implementation and cost-effective maintenance of test programs.
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 and its telephone number is (405) 232-9800. LSI was incorporated in
1978 in Louisiana, and its 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
PETERSON SHARE EXCHANGE. In April 1994, LSI issued 706,244 shares of
LSI Preferred Stock to MBf USA, Inc. ("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 a
promissory note (the "MBf USA 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
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$1,565,000 and represented a material payment for goodwill, an intangible
asset, which is being amortized over 40 years.
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. On July 10, 1995, the Series I Preferred Stock was redeemed by LSAI
in full and ceased to be issued and outstanding.
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.
INITIAL PUBLIC OFFERING. On October 11, 1994, the Company completed its
offering of 1,320,000 shares of Common Stock and 660,000 1994 Warrants in
units of two shares of Common Stock and one 1994 Warrant at a price of $5.49
per unit, which represented a 10 percent discount of the public offering
price of $6.10 per unit (the "IPO Offering"). The proceeds after offering
expenses to the Company were $3,261,660. As a portion of underwriting
compensation, the Company issued to Barron Chase Securities, Inc. and its
designees the warrants (the "Underwriters' Warrants") exercisable for the
purchase of 66,000 units for $7.32 per unit on or before October 11, 1999.
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 certain other intangible assets (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 and
(ii) assumed the obligations of NDAC under an office lease agreement. 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, 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)
$1,585,000 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"), two unsecured promissory notes (the "Promissory Notes"), in
the aggregate adjusted face value of $510,000, 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 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 on
August 28, 1997, in full payment and elimination of the Promissory Notes.
Furthermore, pursuant to the NPLI Purchase Agreement, (i) the Company paid
certain NPLI shareholder loans in the aggregate amount of $275,000 and (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. The total purchase price of approximately $3,400,000 was
recorded as intangible assets.
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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 related assets, 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 $765,601 in four quarterly installments during the 12-month
period ended January 31, 1998, 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
$2,083 and which expires on September 16, 1999.
WARRANT REDEMPTION. In October 1997, LSAI completed the redemption of
its outstanding 1994 Warrants and, in connection therewith and pursuant to
exercise of the 1994 Warrants, issued 1,440,580 shares of its Common Stock
for $2.00 per share for net proceeds to LSAI of $2,470,951 (the "Warrant
Redemption Offering"). For services performed, LSAI issued to Barber &
Bronson Incorporated and its assigns warrants to purchase 144,058 shares of
Common Stock for $2.20 per share during the three-year period ending October
14, 2000, and paid Barber & Bronson Incorporated aggregate fees of $190,829.
In addition, 30,000 of the Underwriter's Warrants were exercised for the
purchase 30,000 units (60,000 shares of Common Stock) and the Company
received net proceeds of $216,000.
ACCU-PATH ASSET PURCHASE. On December 1, 1997, the Company acquired
from Accu-Path Medical Laboratory, Inc. ("Accu-Path") certain intangible
assets pursuant to an Asset Purchase Agreement, dated December 1, 1997,
("Accu-Path Asset Purchase"). The assets purchased included the customer
list of Accu-Path and all related assets and certain assets utilized in the
office of Accu-Path at its offices in Ruston, Louisiana (the "Accu-Path
Assets"). In connection with the acquisition of the Accu-Path Assets, the
Company agreed to pay 180 percent of the forensic testing revenues during the
period of June through November 1998, with an advance payment of $100,000 on
December 1, 1997, and the remaining purchase price balance will be paid
through four quarterly installment payments with the first of such payments
due on December 31, 1998. The purchase price of the Accu-Path Assets was or
will be allocated entirely to the customer list, which was recorded as an
intangible asset, which is being amortized over 15 years. At December 31,
1997, the accrued installment payments totaled $260,000.
BUSINESS
The Company, through LSI, its wholly-owned subsidiary, owns and operates
an independent laboratory providing drug testing services to corporate and
institutional clients seeking to detect and deter the use of illegal drugs.
LSI is certified by SAMHSA, 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 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 clients in implementing cost-effective drug testing programs. LSI's
high volume clients have enabled it to develop cost-efficient means of
delivering its services while maintaining forensic testing standards.
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.
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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.
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 and Accu-Path Asset Purchase in
December 1997. See "--Background." In connection with the 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 "Item 3. Legal Proceedings," and "Item 6. Management's
Discussion and Analysis or Plan of Operation--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
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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 "Item 6. Management's Discussion
and Analysis or Plan of Operation-- 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 Report. 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 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 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 "Item 6. Management's Discussion and Analysis or Plan of
Operation--Results of Operations."
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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 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 1997, LSI performed more than
5,700,000 screening tests on more than 68,000 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
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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 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, possible 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
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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, 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 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 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 "Item 6. Management's
Discussion and Analysis or Plan of Operation--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.
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.
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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. During 1997, LSI incurred $2,957 costs in compliance with the
applicable 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'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 December 31, 1997, LSAI had three full-time employees, and LSI had
111 full-time and 43 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.
ITEM 2. DESCRIPTION OF PROPERTY.
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 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, 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. See "Item 1. Description of Business-- Background--PLL
Asset Purchase."
ITEM 3. LEGAL PROCEEDINGS.
LSAI does not have any pending litigation. In the ordinary course of its
business, LSI from time to time is sued by individuals who have tested positive
for drugs of abuse. To date, LSI has not experienced any material liability
related to these claims, although there can be no assurance that LSI will not at
some time in the future experience significant liability in connection with
these types of claims. Based upon the prior successful defense of similar-type
litigation, management believes LSI has valid defenses to the plaintiffs' claims
in all pending litigation, and LSI intends to vigorously defend itself in such
litigation. LSI is not currently defendant parties in any legal proceedings
other than routine litigation that is incidental to the business of LSI, and
management of LSI believes the outcome of
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such legal proceedings will not have a material adverse effect upon the
results of operations or financial condition of LSI. Furthermore, management
of LSI believes that the liability insurance coverage is adequate with
respect to the pending litigation and, in general, for the business of LSI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1997, the
Company did not submit any matters to a vote of its shareholders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The LSAI's Common Stock is traded in the over-the-counter market and is
quoted on Nasdaq Small Cap Market under the symbol LABZ. The following table
sets forth, for the periods presented, the high and low closing bid quotations
in the over-the-counter market as quoted by Nasdaq Small Cap Market. The bid
quotations reflect inter-dealer prices without adjustment for retail markups,
markdowns or commissions and may not reflect actual transactions.
<TABLE>
CLOSING BID
--------------------
HIGH LOW
----- -----
<S> <C> <C>
1997:
First Quarter Ended March 31, 1997 $3.13 $2.25
Second Quarter Ended June 30, 1997 2.88 2.13
Third Quarter Ended September 30, 1997 3.69 2.56
Fourth Quarter Ended December 31, 1997 6.19 3.16
1996:
First Quarter Ended March 31, 1996 $4.00 $2.88
Second Quarter Ended June 30, 1996 3.69 3.00
Third Quarter Ended September 30, 1996 3.38 2.38
Fourth Quarter Ended December 31, 1996 3.26 2.56
</TABLE>
On March 26, 1998, the closing sale price of the Common Stock as quoted on
Nasdaq Small Cap Market was $5.06. On March 26, 1998, there were approximately
1,600 holders of LSAI's Common Stock.
LSAI has never paid a cash dividend on its Common Stock. 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. LSAI's future earnings and
cash flow currently are dependent principally upon the operating results of LSI
and such dependency may continue indefinitely in the future, even following
expansion of LSAI's operations through acquisitions as anticipated. No
dividends may be paid on the Common Stock of LSAI until all dividends then due
on the Series I Cumulative Convertible Preferred Stock of LSAI have been paid.
As of December 31, 1994, the cumulative dividends in arrears were $11,404.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
PLAN OF OPERATION
The Company's plan of operation for the next 12 months is focused on growth
through (i) the acquisition and consolidation of companies and the assets of
companies providing drug testing services compatible with and comparable to
those provided by LSI, (ii) expansion of its client base with focus in
particular on the institutional and private employers, (iii) increased emphasis
on providing client services and (iv) improvement of operating efficiencies.
See "Item 1. Description of Business--Growth Strategy."
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RESULTS OF OPERATIONS
The following table sets forth selected results of operations for the
fiscal years ended December 31, 1997, 1996 and 1995, which are derived from the
audited consolidated financial statements of the Company appearing elsewhere in
this Report. The results of operations for the periods presented are not
necessarily indicative of the Company's future operations.
<TABLE>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997
------------------- ------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $6,925,716 100.0% $8,726,799 100.0% $12,836,953 100.0%
Cost of laboratory services 3,246,470 46.9% 3,816,114 43.7% 5,828,665 45.4%
---------- ----- ---------- ----- ----------- -----
Gross profit 3,679,246 53.1% 4,910,685 56.3% 7,008,288 54.6%
---------- ----- ---------- ----- ----------- -----
Operating expenses:
Selling 561,470 8.1% 601,945 6.9% 654,284 5.0%
General and administrative 2,157,410 31.2% 2,442,602 28.0% 3,230,117 25.2%
Depreciation and
amortization 232,535 3.3% 504,123 5.8% 690,268 5.4%
Asset impairment -- --% 124,531 1.4% -- --%
---------- ----- ---------- ----- ----------- -----
Total operating expenses 2,951,415 42.6% 3,673,201 42.1% 4,574,669 35.6%
---------- ----- ---------- ----- ----------- -----
727,831 10.5% 1,237,484 14.2% 2,433,619 19.0%
Other income (expense) 421,134 6.1% (21,808) .3% (151,252) 1.2%
---------- ----- ---------- ----- ----------- -----
Income from continuing
operations before income taxes 1,148,965 16.6% 1,215,676 13.9% 2,282,367 17.8%
Income tax expense 474,405 6.9% 527,171 6.0% 953,264 7.4%
---------- ----- ---------- ----- ----------- -----
Income from continuing operations 674,560 9.7% 688,505 7.9% 1,329,103 10.4%
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) $ 674,560 9.7% $ (585,711) 6.7% $ 1,329,103 10.4%
---------- ----- ---------- ----- ----------- -----
---------- ----- ---------- ----- ----------- -----
</TABLE>
During each of the fiscal years ended December 31, 1997 and 1996, LSI
experienced a two percent and 4.7 percent decrease in the price per specimen,
respectively, compared to the preceding fiscal year, 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 price decline per specimen
will not further decline during 1998 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 each of the fiscal years ended December 31, 1997
and 1996, the number of specimens analyzed increased 51.6 percent and 34.5
percent, respectively, compared to the preceding fiscal year ended.
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 basic 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
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average number of common shares and common share equivalents used
to compute basic earnings per share. See "Item 1. Description of
Business--Background--NPLI Acquisition."
Through the Company's acquisition strategy, management anticipates,
although there can be no assurance, that the consolidation and assimilation
of the operations associated with additional companies or the assets of
forensic drug testing companies that may be acquired will result in increased
testing volume with minimal additional indirect specimen processing cost,
resulting in increased profitability from operations. See "Item 1.
Description of Business--Growth Strategy." In the event the Company fails to
make acquisitions which contribute to the profitability of the Company, LSI
and LSAI 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.
COMPARISON OF FISCAL 1997 AND 1996
Revenues increased $4,110,154 to $12,836,953 in 1997 from $8,726,799 in
1996, an increase of 47.1 percent. The increase in revenues was due to a 51.6
percent increase in the number of specimens analyzed during 1997 as compared to
1996, although partially offset by a decrease of two percent in the average
price per specimen. The increase in number of specimens analyzed was
attributable to the PLL Asset Purchase and Accu-Path Asset Purchase as well as
the obtaining of additional accounts through LSI's normal sales and marketing
efforts. Because the increase in the number of specimens analyzed during 1995
was in part due to factors beyond the control of LSI, i.e., improved economy and
new business starts, there is no assurance that the increase in the volume of
specimens analyzed will increase or such volume will be maintained in future
periods of operations. 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 1998 which will directly impact profitability. See
"Item 1. Description of Business--Competition." Cost of laboratory services
increased $2,012,551 from $3,816,114 in 1996 to $5,828,665 in 1997, an increase
of 52.7 percent. This increase was primarily due to the increased volume of
specimen testing and increased as a percentage of revenues by 1.7 percent.
Gross profit on revenues decreased as a percentage of revenues from 56.3 percent
in 1996 to 54.6 percent in 1997.
Operating expenses increased $901,468 from $3,673,201 in 1996 to $4,574,669
in 1997, an increase of 24.5 percent, but decreased as a percentage of revenues
from 42.1 percent to 35.6 percent. The increase in operating expenses was
attributable to the increase in general and administrative expenses of $787,515,
selling expense of $52,339, and depreciation and amortization of $186,145. The
Company did not recognize an asset impairment in 1997, while during 1996 the
Company recognized an asset impairment of $124,531, which was attributable
primarily to the write-down, to the estimated fair market value, of LSI's former
laboratory facilities which are held for sale as of the date of this Report.
The increase in general and administrative expenses was principally due to the
increase in executive officer compensation of LSAI and bonuses for certain key
employees of LSI and increased overhead as a result of the PLL Asset Purchase
and the Accu-Path Asset Purchase. The increase in selling expenses was due to
the addition of two sales representatives and increased personnel to assist in
maintaining forensic drug testing customers obtained in connection with the PLL
Asset Purchase and the Accu-Path Asset Purchase. Depreciation increased due to
the acquisition of new laboratory equipment in 1997 and the acquisition and
renovation of LSI laboratory and office facilities, and amortization increased
due to the amortization of the customer list and goodwill acquired in
connection with the PLL Asset Purchase and the Accu-Path Asset Purchase.
Interest expense increased $163,248 from $67,185 in 1996 to $230,433 in
1997, a 243 percent increase. The increase in interest expense was the result
of the effect of a full year of a capital lease agreement, entered into in
February 1996, for certain laboratory equipment and the increase in long-term
debt associated with the acquisition and renovation of LSI's current laboratory
and office facilities, and the PLL Acquisition. Interest income increased from
$41,208 in 1996 to $78,035 in 1997, a 89.4 percent increase. The increase
resulted from an increase in cash equivalents held for investment attributable
to cash flows from operations and the net proceeds from the issuance of Common
Stock in connection with the Warrant Redemption Offering. See "Item 1.
Description of Business--Background--Warrant Redemption Offering." Other income
decreased from $4,169 in 1996 to $1,146 during 1997. Income from continuing
operations, after provision for income taxes, increased $640,598 from $688,505
in 1996 to $1,329,103 in 1997, a 93 percent increase. Income per share of
common stock from continuing operations on a basic basis was $.36 ($.31 per
share on a diluted basis) in 1997, compared to net income per share of common
stock on a basic basis of $.21 ($.17 per share on a diluted basis) in 1996.
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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. Because the increase in the number of
specimens analyzed during 1995 was in part due to factors beyond the control of
LSI, i.e., improved economy and new business starts, there is no assurance that
the increase in the volume of specimens analyzed will increase or such volume
will be maintained in future periods of operations. 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. 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 February 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 as of the date of this
Report.
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 basic basis was $.21 ($.17 per share on a diluted basis) in 1996, compared
to net income per share of common stock on a basic basis of $.20 ($.17 per share
on a 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 basic
basis was $.18 and $.15 per share of common stock on a diluted basis.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
The Company has historically used options to retain and compensate its
officers, directors, employees and others. During 1997, 1996 and 1995, the
Company granted 590,000 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 1997 had an estimated fair
value at the date of grant of the options of $473,958, 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 net
pro forma income of $1,053,706 ($.29 per common share on a basic basis and $.24
per common share on a diluted basis) for the year
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ended December 31, 1997, and had net pro forma loss of $673,516 ($.20 per
common share on a basic basis and $.17 per common share on a diluted basis)
for the year ended December 31, 1996.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The Company has numerous computer systems which were developed employing
two digit year date format rather than four digit date format. Where date logic
requires the year 2000 or beyond, such data structures may produce inaccurate
results. Management has implemented a program to comply with year 2000
requirements on a system-by-system basis. The program includes extensive
systems testing and is expected to be completed in 1998, at which time the
Company's computer systems will be year 2000 compliant. Each of the systems has
a solution that is potentially unique and often dependent on third-party
software and developers. A failure of the Company to ensure that its computer
systems are year 2000 compliant could have a material adverse effect on the
Company's operations.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
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 effective 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 Enterprise 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
effective 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 and additional acquisitions.
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 income taxes from continuing operations on pretax income
were based on the effective combined federal and state graduated corporate
income tax rates of approximately 42 percent in 1997 and 43 percent for 1996,
and were $953,264 and $527,171 for the years ended December 31, 1997 and 1996,
respectively.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its growth from bank borrowings and
the sale of equity securities. Net cash provided by operating activities
totaled $1,654,806 and $472,801 during the years ended December 31, 1997 and
1996, respectively. As of December 31, 1997, the Company had working capital of
$3,305,983, compared to working capital of $1,002,712 at December 31, 1996.
During October 1997, the Company redeemed its outstanding 1994 Warrants and in
connection therewith issued 1,440,580 shares of its Common Stock and received
net proceeds of $2,470,951. In addition, 30,000 of the Underwriter's Warrants
were exercised for the purchase 30,000 units (60,000 shares of Common Stock) and
the Company received net proceeds of $216,000. See "Item 1. Description of
Business--Background--Warrant Redemption Offering." At December 31, 1997, the
Company had not expended the net proceeds, all of which were held in short-term
investments. In the event the Company's revenues increase as anticipated by
management, 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
$2,863,639 at December 31, 1997) and borrowings. The increase in cash used in
operations will principally be due to the timing differential between Company's
payment for materials and services to its suppliers and employee work force, and
the time at which the Company receives payment from its customers.
On January 9, 1997, LSI entered in to a loan agreement with Hibernia
National Bank (the "Bank") which established a credit facility comprised of a
five-year term loan of up to $1,700,000 and a one-year revolving loan of
$250,000 to be used for the acquisition of Pathology Laboratories Limited. As
of December 31, 1998, the outstanding principal amount of the five-year term
loan was $1,388,333. 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 December 31, 1997) and the term
loan bears interest at such rate plus one-half percent. The loan is secured by
the accounts receivable, intangible assets, and by a mortgage on the building
owned by LSI, and is guaranteed by LSAI. The loan agreement contains various
covenants, including certain financial ratios, all of which the Company was in
full compliance with as of December 31, 1997.
FUTURE OPERATIONS AND LIQUIDITY
In connection with the Peterson Share Exchange, LSI issued to MBf USA, its
former parent, the MBf Promissory Note (in the principal amount of $353,123,
providing for interest at seven percent per annum). See "Item 1. Description of
Business--Background--LSI Acquisition." The MBf Promissory Note is secured by
substantially all of the assets of LSI and becomes due February 23, 1999. On
March 10, 1998, the MBf Promissory Note was paid in full for $315,000.
Through its acquisition strategy, management of the Company intends to
continue its growth through the acquisition of drug testing companies and the
assets of such companies, and assimilation of the acquired drug testing
operations and assets with and into LSI, to obtain increased testing volume with
minimal additional specimen processing cost, resulting in increased
profitability and cash flows. See "Item 1. Description of Business--Growth
Strategy." 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 the Company, there can be no assurance of such
profitability and positive cash flows. 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, LSI and LSAI 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.
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 $59,750, 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
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<PAGE>
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. As of December 31,
1997, the outstanding capital lease obligation was $442,567.
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 percent per annum. See "Item 2. Description of Property." As of
December 31, 1997, the outstanding principal amount of such loan was $697,101.
On January 31, 1997, the Company acquired from Pathology Laboratories,
Ltd. ("PLL") certain intangible assets pursuant to an Asset Purchase Agreement
dated January 31, 1997 (the "Purchase Agreement"). See "Item 1. Description of
Business--Background--PLL Asset Purchase." 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. See "Item 2. Description of Property." Furthermore, the
Company made installment payments to PLL in 1997 which aggregated $733,568 and
made a final installment payment of $42,033 during January 1998. The
installment payments were based on gross revenues directly attributable to each
customer comprising the customer base of PLL for the year ending January 31,
1998, in excess of $1,600,000.
As of the date of this Report, other than as described above, the Company
does not have any significant future capital commitments. The Company
anticipates that existing cash and cash equivalent balances, short-term
investments and funds to be generated from future operations will be sufficient
to fund operations and budgeted capital expenditures of the Company through
1998.
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, PLL Asset Purchase and Accu-Path 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 December 31, 1997, the
unamortized portion of the goodwill and the customer lists was $2,316,302 and
$4,587,814, 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 "Item 1. Description of 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.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The response to this Item is set forth herein in a separate section of this
report, appearing on page F-2 through F-21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements of the type required to be reported under
this Item between management of the Company and its independent accountants
during 1997 and 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth certain information with respect to each
executive officer and director of LSAI and LSI. Directors are generally elected
at the annual shareholders' meeting and hold office until the next annual
shareholders' meeting and until their successors are elected and qualified.
Executive officers are elected by the Board of Directors and serve at its
discretion. LSAI's Bylaws authorize the Board of Directors to be constituted of
not less than one and such number as the Board of Directors may from time to
time determine by resolution or election. The Board currently consists of seven
members.
<TABLE>
NAME AGE POSITION WITH LSAI POSITION WITH LSI
---- --- ------------------------ -----------------------------
<S> <C> <C> <C>
John Simonelli 51 Chairman of the Board,
Chief Executive Officer,
Secretary, and Director
Larry E. Howell 51 President and Chief
Operating Officer, and
Director
Arthur R. Peterson, Jr.(1) 52 Treasurer and Director President and Chief Executive
Officer, and Director
Robert A. Gardebled, Jr.(2) 33 Director Controller, Secretary and
Director
Jerome P. Welch(1)(2) 60 Director --
Michael E. Dunn(1)(2) 51 Director --
</TABLE>
- --------------------
(1) Member of the Compensation Committee.
(2) Member of Audit Committee.
The executive officers of LSI devote their full-time to LSI's business,
while Messrs. Simonelli and Howell will devote such time to the business and
affairs of LSAI as may be required, but not less than 50 percent of their time
will 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 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
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<PAGE>
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, 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 in connection with the LSI Acquisition. 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 in
connection with the LSI Acquisition. 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 in August 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 in August 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 &
Cunningham, 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 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.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
company's directors and officers, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10 percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by it during the year ended December 31, 1997, and written representations that
no other reports were required, the Company believes that each
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<PAGE>
person who, at any time during such year, was a director, officer or
beneficial owner of more than 10 percent of the Company's Common Stock
complied with all Section 16(a) filing requirements during such fiscal year,
except that five reports covering the three purchase and two sale
transactions were filed late by Jerome P. Welch.
ITEM 10. 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 1997 received
compensation in excess of $100,000.
OFFICER COMPENSATION TABLE
<TABLE>
ANNUAL COMPENSATION
--------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- --------------------------- ---- --------- --------- ---------------
<S> <C> <C> <C> <C>
John Simonelli 1997 $112,500 $ 72,000 $13,088
Chief Executive Officer of LSAI 1996 100,000 -- 12,600
1995 75,000 -- 12,000
Larry E. Howell 1997 $112,500 $ 72,000 $14,501
President and Chief Operating 1996 100,000 -- 14,100
Officer of LSAI 1995 75,000 -- 12,000
Arthur R. Peterson, Jr. 1997 $125,000 $122,000 $22,124
Treasurer of LSAI and Chief Executive 1996 120,133 50,000 21,700
Officer of LSI 1995 100,000 76,956 16,000
</TABLE>
- ------------------------
(1) Dollar value of base salary (both cash and non-cash) earned during the
year.
(2) Dollar value of bonus (both cash and non-cash) 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 1997 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 1997.
<TABLE>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE AT
--------------------------------------------------------- ASSUMED RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
NUMBER OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
OF OPTIONS TO EMPLOYEES BASE PRICE -----------------------------
NAME GRANTED 1997 PER SHARE EXPIRATION DATE FIVE PERCENT TEN PERCENT
- ---- ---------- --------------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
John Simonelli 100,000 29.4% $3.18 October 1, 2007 $517,988 $824,810
Larry E. Howell 100,000 29.4% $3.18 October 1, 2007 $517,988 $824,810
Arthur R. Peterson, Jr. 100,000 29.4% $3.18 October 1, 2007 $517,988 $824,810
</TABLE>
- ------------------------
(1) On March 28, 1997, the Company issued to the holders of options previously
granted under the Laboratory Specialists of America, Inc. 1994 Stock Option
Plan (the "1994 Stock Option Plan") options in replacement and modification
of the terms of options previously granted under the 1994 Plan in 1995 and
1996. Each of the named executive officers received 60,000
replacement-modified options, each exercisable for the purchase of one
share of Common Stock for $2.00 on or before March 28, 2007. Such
replacement-modified options, for purposes of this table have been
considered granted in 1995 and 1996 and not as having been granted in 1997.
If such options were considered granted in 1997, with respect to each
named executive officer, such options would have potential realizable
value, assuming five and 10 percent price appreciation, of $325,779 and
518,748, respectively.
(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
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<PAGE>
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 to the number and value of options held
by the named executive officers at the end of 1997. During 1997, there were
no options to purchase LSAI's Common Stock exercised by the named executive
officers.
<TABLE>
NUMBER OF OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AS OF DECEMBER 31, 1997 OPTIONS AS OF DECEMBER 31, 1997(1)
-------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
John Simonelli 60,000 100,000 $157,800 $145,000
Larry E. Howell 60,000 100,000 157,800 145,000
Arthur R. Peterson, Jr. 60,000 100,000 157,800 145,000
</TABLE>
- ------------------------
(1) The closing sale price of the Common Stock as quoted on Nasdaq SmallCap
Market on December 31, 1997, was $4.63. Value is calculated on the basis
of the difference between the option exercise price and $4.63 multiplied
by the number of shares of Common Stock underlying the option.
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 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 out-of-pocket
expenses incurred in attending meetings of directors and committees on which
they serve. During 1997, the Board of Directors of LSAI held one meeting, at
which all directors were present in person or participated by telephonic
communications, except Michael E. Dunn. The directors of LSAI did not
receive any compensation nor was any compensation accrued during 1997.
EMPLOYMENT ARRANGEMENTS
LSAI has employment agreements with Messrs. Simonelli and Howell, which
were amended and restated on September 26, 1997, each of which provides,
among other things, (i) a five-year term commencing April 15, 1996, which is
automatically extended an additional year for each year of service under the
agreement, (ii) an annual base salary of $112,500, (iii) bonuses at the
discretion of the Board of Directors, but not in excess of 10 percent of the
net income of LSAI, (iv) eligibility for stock options under LSAI's stock
option plans, (v) health and disability insurance benefits and life
insurance, (vi) an automobile allowance, and (vii) benefits consistent with
similar executive employment 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.
LSI has an employment agreement with Mr. Peterson, which was amended and
restated on September 26, 1997, and which provides, among other things, (i) a
four-year term commencing April 15, 1996, which is automatically extended an
additional year for each year of service under the agreement, (ii) an annual
base salary of $125,000, (iii) annual bonuses equal to the lesser of $50,000
or 10 percent of the net income of LSAI before provision for income taxes,
(iv) eligibility for stock options under LSAI's stock option plans, (v)
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, (vi) an automobile allowance, and (vii) 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 LSI.
Furthermore, on November 20, 1997, LSI entered into an Employment
Severance Agreement with Robert A. Gardebled, Jr. which remains in effect
during the period Mr. Gardebled remains employed by LSI. This agreement
obligates LSI to pay Mr. Gardebled 12 months of compensation in the event of
and following his employment termination by LSI other than for cause (I.E. a
good faith determination by the Board of Directors of LSI of the misconduct
or willful and material breach of the agreement in the performance of
services). Termination (other than with cause) includes the termination of
employment by LSI or Mr. Gardebled's resignation upon the occurrence of a
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<PAGE>
"change in control." "Change in control" generally includes (i) any person
or group that becomes the beneficial owner of shares of LSI (which would
include the Common Stock of LSAI) or of proxies or other rights pertaining to
LSI (including LSAI) which carry 25 percent or more of the total number of
votes for the election of the Board of Directors of LSI (including LSAI),
(ii) a merger or consolidation, (iii) the sale or a business combination,
lease or disposition of all or substantially all of the assets of LSI, or
(iv) during a 24 month period a majority of the members of LSI's Board of
Directors cease to constitute a majority of the members of the Board.
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.
1994 STOCK OPTION PLAN
LSAI established the Laboratory Specialists of America, Inc. 1994 Stock
Option Plan (the "1994 Stock Option Plan" or the "Plan") in May 1994. The
Plan was amended and restated on October 30, 1996.
The Plan provides for the issuance of incentive stock options ("ISO
Options") with or without stock appreciation rights ("SARs") and nonincentive
stock options ("NSO Options") with or without SARs to 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 Report, NSO Options to purchase 235,000
shares (exercisable on or before March 28, 2007) at an exercise price of
$2.00 per share have been granted under the Plan, of which 7,500 NSO Options
have been exercised through January 1998. The outstanding NSO Options were
granted on March 28, 1997, in replacement of the then outstanding NSO Options
which consisted of 50,000 (exercisable on or before July 20, 2005), and
185,000 shares (exercisable after April 30, 1997 and on or before October 30,
2006) of Common Stock at an exercise price of $3.00 and $2.75 per share,
respectively, were outstanding. No ISO Options 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 Option 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 permit
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 (within three years of such termination) all or any part of the
shares of Common Stock subject to Options on the date of termination.
-21-
<PAGE>
1997 NON-QUALIFIED STOCK OPTION PLAN
LSAI established the Laboratory Specialists of America, Inc. 1997
Non-Qualified Stock Option Plan (the "1997 Plan") in October 1997. The 1997
Plan provides for the grant of non-qualified stock options ("Options"), with
stock appreciation rights ("SARs") to employees, directors, independent
contractors and consultants of the Company. The total number of shares of
Common Stock authorized and reserved for issuance under the 1997 Plan is
400,000. As of the date of this Report, Options to purchase 340,000 shares
(exercisable after March 1, 1998 and on or before October 1, 2007) at an
exercise price of $3.18 per share have been granted under the 1997 Plan, of
which none have been exercised. The outstanding NSO Options were granted on
March 28, 1997, in replacement of the then outstanding NSO Options which
consisted of 50,000 (exercisable on or before July 20, 2005), and 185,000
shares (exercisable after April 30, 1997 and on or before October 30, 2006)
of Common Stock at an exercise price of $3.00 and $2.75 per share,
respectively, were outstanding.
The Board of Directors (the "Board") administers the Plan and the
authority to interpret and construe the Plan, and determine all questions
arising under the Plan and any agreement made pursuant to the Plan. Options
under the 1997 Plan may be granted only to persons ("Eligible Persons") who
at the time of grant are directors, executive officers, key employees and
independent contractors and consultants of the Company and its subsidiaries.
The Board has have the power where consistent with the general purpose and
intent of the 1997 Plan to (i) modify the requirements of the Plan to conform
with the law or to meet special circumstances not anticipated or covered in
the Plan, (ii) suspend or discontinue the Plan, (iii) establish policies, and
(iv) adopt rules and regulations and prescribe forms for carrying out the
purposes and provisions of the Plan. The Options are granted pursuant to the
provisions of stock option agreements (the "Stock Option Agreements"). The
form and provisions of the stock option agreements are determined by the
Board. A majority of the members of the Board shall constitute a quorum, and
an act of the majority of the members of the Board present at any meeting at
which a quorum is present shall be the act of the Board. Unless otherwise
provided in the Plan, the Board has the authority to interpret and construe
the Plan, and determine all questions arising under the Plan and any
agreement made pursuant to the Plan. Any interpretation, decision or
determination made by the Board shall be final, binding and conclusive upon
the participants and the Company.
The terms and conditions of the Options granted to each participant will
be set forth in the Stock Option Agreement evidencing the grant of such
Options. Options may be granted by the Board on terms and conditions
determined solely by the Board. No Option shall be exercisable more than 10
years after the date of grant. The maximum number of shares of stock for
which an Eligible Person may be granted Options in any calendar year may not
exceed 25 percent of the aggregate number of shares of stock with respect to
which Options may be granted under the 1997 Plan. The exercise prices of
Options are determined by the Board, but in no event may such price be less
than 85 percent of the fair market value of the stock on the date of grant.
Options granted are not transferable except by will or by the laws of descent
and distribution or with the consent of the Company. No Option under the
Plan may be granted after October 1, 2007.
Options may be exercisable only by the Option holder ("Participant")
while serving as a director of the Company or a subsidiary or while actively
employed as an employee, an independent contractor or a consultant by the
Company or a subsidiary, except that (i) any such Option granted and which is
otherwise exercisable, may be exercised by the personal representative of a
deceased Participant within 12 months after the death of such Participant
(but not beyond the exercise period of such Option), (ii) if a Participant is
terminated as a director, an employee, an independent contractor or a
consultant of the Company or a subsidiary on account of (A) retirement, such
Participant may exercise any Option which is otherwise exercisable at any
time within three months of such date of termination, or (B) a disability,
such Participant may exercise any Option which is otherwise exercisable at
any time within 12 months of such date of termination. If a Participant dies
during the applicable three-month or 12-month period following the date of
such Participant's retirement or termination on account of disability, the
rights of the personal representative of such deceased Participant as such
relate to any Options granted to such deceased Participant shall have similar
rights to exercise the Options and during the remainder of the three-month or
12-month period.
The Board, in its sole discretion, may permit a Participant who is
terminated as a non-employee director, an employee, an independent contractor
or a consultant due to retirement or disability, or upon the occurrence of
special circumstances (as determined by the Board), or the personal
representative of a deceased Participant to exercise and purchase (within
three years of such termination) all or any part of the shares subject to
Option on the date of termination.
STOCK APPRECIATION RIGHTS
The Board may also grant SARs to Eligible Persons in connection with Options
granted under the Plan. SARs terminate at such time as the Board determines
and are exercisable only upon the exercise of the related Option.
Upon the exercise of a SAR, the holder is entitled to receive the excess
amount of the fair market value of the Stock, as of the date of exercise, for
which the SAR is exercised over the exercise price of the Option. The
Eligible Person may request the method and combination of payment upon the
exercise of a SAR; however, the Board has the final authority to determine
whether the SAR shall be paid in cash or shares of stock or both. An amount
equal to the income tax resulting to the Company on the exercise of the SAR
is required to be paid to the Company at the time of exercise by the Eligible
Person who exercises.
Upon the exercise of an Option, the Option exercise must be paid in full, in
cash or in Common Stock or a combination of cash and Common Stock in the
event that the purchase is pursuant to exercise of rights under an SAR which
is attached to an Option and which is exercisable on the date of exercise of
the Option.
Subject to the foregoing, Options are exercisable only by participants who
are directors, actively employed as employees, independent contractors or
consultants by the Company or a subsidiary of the Company, except that
Options may, with the consent of the Board, be exercised at any time within
three years after the participant's retirement, death, disability or the
occurrence of other special circumstances as determined by the Board, but in
no event beyond the expiration date of the Option. If a participant's
services as a director, employment as an employee, independent contractor or
a consultant by the Company or its subsidiary terminates for any reason other
than death, disability or retirement, any Option granted to such participant
immediately terminates, unless permitted to be exercised by the Board in its
sole discretion. Options are not transferable except by will or by the laws
of descent and distribution. Compliance with Section 16(a) of the Securities
Exchange Act of 1934
The Company's Directors, Executive Officers and shareholders who beneficially
own more than 10 percent of the Common Stock are required to file with the
Securities and Exchange Commission and provide the Company with copies of the
initial reports of ownership and reports of changes in ownership of Common
Stock. Specific due date
CERTAIN LEGAL PROCEEDINGS
On September 28, 1990, the Securities and Exchange Commission (the
"Commission") filed a civil action against John Simonelli, Chairman and Chief
Executive Officer of LSAI, alleging violations of (i) Sections 13(d) and
16(a) (which require that officers, directors and certain shareholders file
securities ownership reports with the Commission) and (ii) Section 10(b) and
Rule 10b-6 (which, in general, proscribe affiliates of issuers from
purchasing securities during a distribution) of or promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
alleged violations, which occurred at various times from February 1985
through September 1987, pertained to Mr. Simonelli's purchase of securities
of an issuer unrelated to LSAI and LSI, and the reporting of ownership of
such securities. On the same day, Mr. Simonelli, without admitting or
denying any of the Commission's allegations, agreed to make restitution
payment to Unico, Inc. (formerly CMS Advertising, Inc.), the issuer of the
securities, and consented to a permanent injunction, pursuant to which Mr.
Simonelli was permanently enjoined from violating the foregoing sections of
and rule promulgated under the Exchange Act. See "--Directors and Executive
Officers," above.
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.
-22-
<PAGE>
The Certificate and Bylaws of LSAI provide that LSAI shall indemnify all
directors and officers of LSAI to the full extent permitted by the Oklahoma
General Corporation Act. Under such provisions, any director or officer, who
in his capacity as such, is made or threatened to be made, a party to any
suit or proceeding, may be indemnified if the Board of Directors determines
such director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of LSAI. The
Certificate and Bylaws of LSAI 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
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table presents certain information as to the beneficial
ownership of LSAI's Common Stock as of March 25, 1998, and the beneficial
ownership of the Common Stock of (i) each person who is known to LSAI to be
the beneficial owner of more than five percent thereof, (ii) each current
director and executive officer of LSAI, and (iii) all current executive
officers and directors as a group, together with their percentage holdings of
the outstanding shares. All persons listed have sole voting and investment
power with respect to their shares unless otherwise indicated, and there is
no family relationship between the executive officers and directors of LSAI.
<TABLE>
COMMON STOCK
-----------------------------
SHARES PERCENT OF
BENEFICIALLY SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNERSHIP
- ------------------------------------ ------------ ----------
<S> <C> <C>
Arthur R. Peterson, Jr.(1)
1111 Newton Street
Gretna, Louisiana 70053 650,000 12.8%
John Simonelli(1)
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102 360,000 7.1%
Larry E. Howell(1)
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102 360,000 7.1%
Robert A. Gardebled, Jr.(2) 75,000 1.5%
Jerome P. Welch(3) -- -- %
Michael E. Dunn(3) -- -- %
Executive Officers and Directors as a group
(six persons) 1,465,000 26.8%
</TABLE>
- ------------------------------------------------
(1) The number and percent of shares includes stock options for the purchase
of 160,000 shares of Common Stock, of which 100,000 are exercisable after
April 1, 1998.
(2) The number and percent of shares includes stock options exercisable for
the purchase of 50,000 shares of Common Stock, of which 25,000 are
exercisable after April 1, 1998.
(3) Each named Director holds stock options for the purchase of 10,000 shares
of Common Stock, of which 5,000 are exercisable after April 1, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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
and may result in conflicts of interest between the Company 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.
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
-23-
<PAGE>
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, LSAI paid Unico, pursuant to the sublease, aggregate monthly
rent of $6,000.
During 1997 and 1996, Michael E. Dunn, a Director of the Company, was
President, a Director and a shareholder of Dunn Swan & Cunningham. During
1997 and 1996, LSAI paid Dunn Swan & Cunningham, A Professional Corporation,
$143,785 and $27,525, respectively, for services rendered and $20,374 and
$3,576.91, respectively, in reimbursement of expenses advanced on behalf of
LSAI. In addition, Michael E. Dunn received $10,000 for legal services
rendered during 1997 on behalf of LSAI.
On March 28, 1997, the Company issued to each of Jerome P. Welch,
Michael E. Dunn and Harry Gray Browne, M.D. (a former Director), stock
options exercisable for the purchase of 5,000 shares of Common Stock in
replacement of options previously granted in 1995. The replacement options
effectively reduced the exercise price of options granted in 1995 from $3.00
to $2.00 and extended the exercise period to March 28, 2007. In addition, on
October 1, 1997, the Company issued to each of Jerome P. Welch and Michael E.
Dunn stock options pursuant to the 1997 Plan to purchase 5,000 shares of LSAI
Common Stock at $3.18 per share, which will become exercisable after April 1,
1998 and until October 1, 2007. See "Item 10. Executive Compensation--1997
Non-Qualified Stock Option Plan."
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
2.1 The Asset Purchase Agreement between the Registrant and
Pathology Laboratories, Ltd., dated January 31, 1997.(1)
2.2 Amendment to Asset Purchase Agreement between Registrant and
Pathology Laboratories, Ltd., dated July 30, 1997.(2)
2.3 Settlement Agreement and General Release by and between
Registrant, National Psychopharmacology Laboratory, Inc.,
Kenneth O. Jobson and Haroutune K. Dekirmenjian, dated August
25, 1997.(2)
2.4 The Asset Purchase Agreement between the Registrant and
Accu-Path Medical Laboratory, Inc., dated December 1, 1997.
3.1 The Registrant's Certificate of Incorporation.(3)
3.2 The Registrant's Bylaws.(3)
4.1 Form of Certificate of Common Stock of the Registrant.(4)
4.2 Form of 1994 Warrant.(4)
4.3 Form of Warrant Agreement Between the Registrant and Liberty
Bank and Trust Company of Oklahoma City, N.A., dated
September 27, 1994.(4)
4.4 Form of Representative's Warrants.(4)
4.5 Laboratory Specialists of America, Inc. 1994 Stock Option Plan,
as amended and restated October 30, 1996.(3)
-24-
<PAGE>
4.6 Form of Warrant for Purchase of Common Stock issued to Barber &
Bronson, Incorporated and its designees.(2)
10.1 Employment Agreement with John Simonelli, as amended and restated
September 26, 1997.
10.2 Employment Agreement with Larry E. Howell, as amended and
restated September 26, 1997.
10.3 Employment Agreement between Arthur R. Peterson, Jr. and
Laboratory Specialists, Inc.,as amended and restated September
26, 1997.
10.4 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated July 2, 1997.(5)
10.5 Promissory Note issued by Laboratory Specialists, Inc. to
Hibernia National Bank, dated July 2, 1997.(5)
10.6 Investment Banking Agreement between Registrant and Barber &
Bronson, Incorporated, dated June 5, 1997.(2)
10.7 Employment Severance Agreement between Robert A. Gardebled, Jr.
and Laboratory Specialists, Inc., dated November 20, 1997.
21.1 Subsidiaries of Registrant.(2)
27 Financial Data Schedule.
- -----------------------------
(1) Incorporated by reference to Form 10-QSB Quarterly Report for the quarterly
period ended March 31, 1996. as filed with the Commission on May 9, 1997.
(2) Incorporated by reference to Amendment No. 1 to Form SB-2 Registration
Statement No. 333-30997, as filed with the Commission on September 5, 1997.
(3) Incorporated by reference to Form SB-2 Registration Statement No. 333-30997
as filed with the Commission on July 10, 1997.
(4) 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.
(5) Incorporated by reference to Form 10-QSB Quarterly Report for the quarter
ended June 30, 1997, as filed with the Commission on August 14, 1997.
(b) REPORTS ON FORM 8-K.
On December 15, 1994, Registrant filed Form 8-K, which was amended by filing
of Amendment No. 1 to Form 8-K/A on March 29, 1994 (the "Amendment"), with
the Commission reporting, under Item 2. Acquisition or Disposition of
Assets, the purchase by Registrant of certain assets from National Drug
Assessment Corporation. See "Item 1. Description of Business--Background--
NDAC Asset Purchase" of this Report. The date of the Form-8-K is December 1,
1994. The Amendment included under (a) Financial Statements and Exhibits of
Item 7. Financial Statements and Exhibits of the Form 8-K, the following
financial statements of National Drug Assessment Corporation:
- -- Report of Independent Public Accountants.
- -- Statements of Revenues and Expenses Excluding Income Taxes for the Nine
Months Ended September 30, 1994 and for the Year Ended December 31, 1993.
- -- Notes to Financial Statements for September 30, 1994 and December 31, 1993.
The Amendment included under (b) Pro Forma Financial Information of Item 7.
Financial Statements and Exhibits of the Form 8-K, the following financial
statements of the Registrant:
- -- Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1994.
- -- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1993.
- -- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Nine Months Ended September 30, 1994.
- -- Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
During the last quarter of 1997, the Company did not file any reports on
Form 8-K.
-25-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LABORATORY SPECIALISTS OF AMERICA, INC.
(Registrant)
By: /S/ JOHN SIMONELLI
-------------------------------------------
John Simonelli, Chief Executive Officer
Date: March 27, 1998
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/S/ JOHN SIMONELLI Chief Executive Officer, March 27, 1998
- ---------------------------- Secretary and Director
John Simonelli
/S/ LARRY E. HOWELL President, Chief Operating March 27, 1998
- ---------------------------- Officer, and Director
Larry E. Howell
/S/ ARTHUR R. PETERSON, JR. Treasurer and Director March 27, 1998
- ----------------------------
Arthur R. Peterson, Jr.
/S/ ROBERT A. GARDEBLED, JR. Director March 27, 1998
- ----------------------------
Robert A. Gardebled, Jr.
/S/ JEROME P. WELCH Director March 27, 1998
- ----------------------------
Jerome P. Welch
/S/ MICHAEL E. DUNN Director March 27, 1998
- ----------------------------
Michael E. Dunn
-26-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC.:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets, December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
F-1
<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, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
March 6, 1998
F-2
<PAGE>
Page 1 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,863,639 $ 727,381
Accounts receivable, net of allowance of
$568,237 in 1997 and $597,499 in 1996 2,262,990 1,696,744
Income tax refund receivable 190,498 312,664
Inventories 109,929 99,754
Prepaid expenses and other 115,219 146,859
Deferred tax asset 160,709 211,078
----------- ----------
Total current assets 5,702,984 3,194,480
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,123,909 in 1997 and $900,948 in 1996 2,376,885 1,592,599
----------- ----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $272,148
in 1997 and $171,355 in 1996 2,316,302 2,663,850
Customer lists, net of accumulated amortization of $518,105
in 1997 and $216,429 in 1996 4,587,814 1,863,061
Deferred costs 32,595 80,818
----------- ----------
Total other assets 6,936,711 4,607,729
----------- ----------
Total assets $15,016,580 $9,394,808
----------- ----------
----------- ----------
</TABLE>
F-3
<PAGE>
Page 2 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
----------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 742,292 $ 521,705
Accrued payroll expenses 411,364 300,103
Accrued customer list installment payments 510,345 -
Other accrued expenses 78,491 57,310
Short-term debt - 410,293
Current portion of long-term debt 527,696 118,085
Obligations related to discontinued operation 126,813 784,272
----------- ----------
Total current liabilities 2,397,001 2,191,768
----------- ----------
LONG-TERM DEBT, net of current portion 2,353,428 1,245,690
----------- ----------
DEFERRED INCOME TAXES 359,848 307,100
COMMITMENTS AND CONTINGENCIES(Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares
authorized, 4,924,818 shares issued and outstanding in 1997
and 3,313,405 shares issued and outstanding in 1996 4,925 3,313
Paid in capital in excess of par 8,291,365 5,366,027
Retained earnings 1,610,013 280,910
----------- ----------
Total stockholders' equity 9,906,303 5,650,250
----------- ----------
Total liabilities and stockholders' equity $15,016,580 $9,394,808
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
F-4
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES $12,836,953 $8,726,799 $6,925,716
COST OF LABORATORY SERVICES 5,828,665 3,816,114 3,246,470
----------- ---------- ----------
Gross profit 7,008,288 4,910,685 3,679,246
----------- ---------- ----------
OPERATING EXPENSES:
Selling 654,284 601,945 561,470
General and administrative 3,230,117 2,442,602 2,157,410
Depreciation and amortization 690,268 504,123 232,535
Asset impairment - 124,531 -
----------- ---------- ----------
Total operating expenses 4,574,669 3,673,201 2,951,415
----------- ---------- ----------
OTHER (EXPENSE) INCOME:
Interest expense (230,433) (67,185) (29,651)
Interest income 78,035 41,208 126,939
Other income 1,146 4,169 323,846
----------- ---------- ----------
Total other (expense) income (151,252) (21,808) 421,134
----------- ---------- ----------
Income from continuing operations before income taxes 2,282,367 1,215,676 1,148,965
INCOME TAX EXPENSE 953,264 527,171 474,405
----------- ---------- ----------
Income from continuing operations 1,329,103 688,505 674,560
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 income (loss) 1,329,103 (585,711) 674,560
DIVIDENDS ON PREFERRED STOCK - - 13,344
----------- ---------- ----------
Net income (loss) available to common stockholders $ 1,329,103 $ (585,711) $ 661,216
----------- ---------- ----------
----------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common stock shares outstanding 3,693,146 3,309,594 3,298,405
----------- ---------- ----------
----------- ---------- ----------
Continuing operations $ 0.36 $ 0.21 $ 0.20
Discontinued operation - (0.39) -
----------- ---------- ----------
Total $ 0.36 $ (0.18) $ 0.20
----------- ---------- ----------
----------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common stock shares and common
stock equivalents outstanding 4,325,618 3,954,787 3,843,391
----------- ---------- ----------
----------- ---------- ----------
Continuing operations $ 0.31 $ 0.17 $ 0.17
Discontinued operation - (0.32) -
----------- ---------- ----------
Total $ 0.31 $ (0.15) $ 0.17
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Preferred stock, $0.001 par value, $1 stated value:
Balance, beginning of period $ - $ - $ 300,000
Redemption of stock (Note 5) - - (300,000)
---------- ---------- ----------
Balance, end of period - - -
---------- ---------- ----------
Common stock, $0.001 par value:
Balance, beginning of period 3,313 3,298 3,298
Exercise of common stock warrants (Note 11) 1,501 - -
Issuance of stock in connection with the settlement
of a note payable (Note 7) 103 - -
Other issuance of stock 8 15 -
---------- ---------- ----------
Balance, end of period 4,925 3,313 3,298
---------- ---------- ----------
Paid in capital in excess of par:
Balance, beginning of period 5,366,027 5,341,667 5,341,667
Exercise of common stock warrants (Note 11) 2,677,950 - -
Issuance of stock in connection with the settlement
of a note payable (Note 7) 232,396 - -
Other issuance of stock 14,992 24,360 -
---------- ---------- ----------
Balance, end of period 8,291,365 5,366,027 5,341,667
---------- ---------- ----------
Retained earnings:
Balance, beginning of period 280,910 866,621 205,405
Net income (loss) 1,329,103 (585,711) 674,560
Preferred stock dividends - - (13,344)
---------- ---------- ----------
Balance, end of period 1,610,013 280,910 866,621
---------- ---------- ----------
Total stockholders' equity $9,906,303 $5,650,250 $6,211,586
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,329,103 $ (585,711) $ 674,560
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 690,268 550,933 232,535
Provision for bad debts and other 40,000 446,087 84,246
Gain on sales of assets - (50,000) -
Deferred income taxes 103,117 (744,936) (18,694)
Asset impairment - 174,531 -
Disposal of clinical business - 1,263,000 -
Impact of changes in assets and liabilities-
Accounts receivable (606,246) (411,079) (222,300)
Income tax refund receivable 275,139 (54,939) 8,600
Inventories (10,175) 43,582 (3,745)
Prepaid expenses and other 17,342 64,182 (13,045)
Accounts payable and accrued expenses (183,742) (222,849) (7,682)
------------ ------------ ------------
Net cash provided by operating activities 1,654,806 472,801 734,475
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,038,561) (127,915) (211,886)
Proceeds from sales of assets - 50,000 -
Purchase of PLL customer list (2,406,593) - -
Purchase of Accu-Path customer list (101,018) - -
Purchase of NPLI stock, net of cash acquired - (1,022,597) -
Acquisition costs (98,569) (301,816) (101,826)
------------ ------------ ------------
Net cash used in investing activities (3,644,741) (1,402,328) (313,712)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid - - (24,748)
Redemption of preferred stock - - (300,000)
Warrant offering costs - - (38,821)
Net proceeds from exercise of warrants and stock options 2,733,272 - -
Payments on short-term debt (91,833) (598,515) -
Payments on long-term debt (902,651) (155,628) (90,585)
Proceeds from long-term borrowings, net of loan
origination fees 2,387,405 - -
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,126,193 (754,143) (454,154)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,136,258 (1,683,670) (33,391)
CASH AND CASH EQUIVALENTS, beginning of period 727,381 2,411,051 2,444,442
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,863,639 $ 727,381 $ 2,411,051
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 218,298 $ 112,698 $ 29,651
------------ ------------ ------------
------------ ------------ ------------
Cash paid during the period for income taxes $ 823,000 $ 631,564 $ 480,405
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. GENERAL:
Laboratory Specialists of America, Inc. (the "Company" or "LSAI"), an
Oklahoma corporation, was organized in March 1994. Effective July 8, 1994,
and January 2, 1996, respectively, LSAI acquired all of the capital stock of
Laboratory Specialists, Inc. ("LSI"), a Louisiana corporation, and National
Psychopharmacology Laboratory, Inc. ("NPLI"), a Tennessee corporation, and
LSI and NPLI became wholly owned subsidiaries 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. See Note 3 for a discussion of NPLI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all subsidiary
companies. All material intercompany transactions have been eliminated.
EARNINGS PER COMMON SHARE
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," during 1997 and
restated all previously presented amounts in conformity with SFAS No. 128.
Basic earnings per common share includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common stock shares outstanding for the period. Diluted earnings per common
share is computed by dividing income available to common stockholders by the
weighted-average number of common stock shares and common stock equivalents
outstanding which includes the dilutive impact of a convertible note payable
and outstanding warrants and options using the treasury stock method.
F-8
<PAGE>
The following table summarizes the calculation of basic earnings per common
share and diluted earnings per common share:
<TABLE>
For the Year Ended December 31,
------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ --------------------
Income Shares Income Income Shares Income
(Numer- (Denomi- (Numer- (Denomi- (Numer- (Denomi-
ator) nator) ator) nator) ator) nator)
--------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations $1,329,103 $688,505 $674,560
Less- Preferred stock dividends - - 13,344
---------- -------- --------
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations
available to common stockholders 1,329,103 3,693,146 688,505 3,309,594 661,216 3,298,405
Per Common Share Amount $0.36 $0.21 $0.20
----- ----- -----
----- ----- -----
DILUTED EARNINGS PER COMMON SHARE
Effect of dilutive securities:
Convertible note payable - 67,662 - 154,303 - -
Warrants - 460,226 - 484,286 - 541,809
Options - 104,584 - 6,604 - 3,177
----------- --------- -------- ---------- -------- ----------
Income from continuing operations
available to common stockholders
plus assumed conversions $1,329,103 4,325,618 $688,505 $3,954,787 $661,216 $3,843,391
----------- --------- -------- ---------- -------- ----------
----------- --------- -------- ---------- -------- ----------
Per Common Share Amount $0.31 $0.17 $0.17
----- ----- -----
----- ----- -----
</TABLE>
During 1997, 66,000 warrants to purchase two shares of common stock at $7.20
per warrant were outstanding but were not included in the computation of
diluted earnings per common share because the warrants' exercise price was
greater than the average market price of the common shares. Of these warrants,
30,000 were exercised to purchase 60,000 shares of common stock in November
1997, and the common shares issued are included as outstanding for the period
from exercise through December 31, 1997, in both the basic earnings per common
share and diluted earnings per common share calculations. The remaining 36,000
warrants, which expire on October 10, 1999, were outstanding at the end of 1997
(see Note 11).
CASH AND CASH EQUIVALENTS
Cash equivalents consist of all highly liquid debt instruments with an initial
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 or market, using the
first-in, first-out method.
F-9
<PAGE>
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>
Estimated
Useful Lives 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Land N/A $ 169,353 $ 29,353
Building and improvements 7 - 40 Years 1,457,097 867,110
Equipment 5 - 12 Years 1,765,377 1,492,633
Vehicles 5 Years 32,419 32,419
Furniture and fixtures 5 - 10 Years 76,548 72,032
----------- ----------
3,500,794 2,493,547
Less- Accumulated depreciation and
amortization (1,123,909) (900,948)
----------- ----------
$ 2,376,885 $1,592,599
----------- ----------
----------- ----------
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This standard requires that long-lived assets, certain
identifiable intangibles and goodwill related to those assets be reviewed for
impairment by asset group for which the lowest level of independent cash flows
can be identified. The adoption of SFAS No. 121 in 1996 resulted in no
adjustment to the consolidated financial statements of the Company. However,
during the fourth quarter of 1996, the Company made a decision to hold for sale
a former laboratory building, which resulted in an impairment of approximately
$111,000 being recorded, which reduced the net book value of the building to
$225,000. The impairment is included in "Asset Impairment" in the accompanying
consolidated income statement.
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.
F-10
<PAGE>
DEFERRED COSTS
At December 31, 1997, deferred costs of $32,595 related to loan origination
fees for two notes payable to a bank which were issued during 1997. These
costs are being amortized over the related lives of the associated notes
payable. Deferred costs at December 31, 1996, included $38,821 of legal and
accounting expenses incurred in connection with the registration of the
Company's outstanding warrants (see Note 11), $33,523 related to construction
in progress, and $8,474 other. In 1997, the deferred registration costs were
recorded as a reduction of the proceeds from the exercise of the warrants.
Also in 1997, the Company transferred the construction in progress to property,
plant and equipment and began depreciating the costs when the related building
was placed in use.
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 10).
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.
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 PSYCHOPHARMACOLOGY LABORATORY, INC.
On January 2, 1996, the Company acquired all of the issued and outstanding
capital stock (the "NPLI Stock") of 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 (the "NPLI Acquisition"). NPLI was 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,
the Company (i) agreed to pay $1,585,000 for the NPLI Stock of which $1,075,000
was paid at closing to the shareholders of NPLI (the "NPLI Shareholders"), and
two unsecured promissory notes, with an aggregate adjusted face value of
$510,000, were issued and delivered to the NPLI Shareholders, (ii) 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.
F-11
<PAGE>
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 consolidated 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, except per-
share amounts):
<TABLE>
(Unaudited)
-----------
<S> <C>
Revenues $ 8,626
Net income from continuing operations $ 851
Basic earnings per common share from continuing operations $ 0.26
Diluted earnings per common share from continuing operations $ 0.22
</TABLE>
PATHOLOGY LABORATORIES, LTD.
On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement dated
January 31, 1997. 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, 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 agreed 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 ninety percent of gross revenues directly
attributable to each customer comprising the customer base of PLL for the year
ending January 31, 1998, exceeding $1,600,000. Excluding the obligations
assumed under the lease, the Company has estimated the total purchase price
will be $2,560,000, which was allocated entirely to the customer list to be
amortized over 15 years. In the accompanying consolidated balance sheet at
December 31, 1997, the Company has $250,345 accrued for the remainder of the
estimated purchase price as "accrued customer list installment payments." The
initial purchase price of $1,600,000 was financed with additional long-term
bank indebtedness. The Company consolidated the drug testing services with
LSI's laboratory in March 1997.
Assuming the acquisition had occurred at the beginning of 1996, the unaudited
consolidated pro forma results of operations for the year ended December 31,
1996, are as follows (in thousands of dollars, except per-share amounts):
F-12
<PAGE>
<TABLE>
(Unaudited)
-----------
<S> <C>
Revenues $ 11,287
Net income from continuing operations $ 1,093
Basic earnings per common share from continuing operations $ 0.33
Diluted earnings per common share from continuing operations $ 0.28
</TABLE>
ACCU-PATH MEDICAL LABORATORIES, INC.
On December 1, 1997, the Company acquired from Accu-Path Medical Laboratories,
Inc. ("Accu-Path") certain intangible assets pursuant to an Asset Purchase
Agreement dated December 1, 1997. Accu-Path is a privately held corporation.
The assets purchased included the forensic drug testing customer list of Accu-
Path, all contracts and contract rights for the providing of drug testing
services, and certain of the assets owned by Accu-Path used in connection with
the Accu-Path office in Ruston, Louisiana. The purchase price for these assets
was established as 180% of the collected and collectible forensic drug testing
customer list revenues during the period from June 1998 through November 1998.
The Company paid $100,000 at closing and will pay within 30 days following the
end of each three-month period after closing, 50% of the forensic testing
revenue for each of the first three quarters. The remaining purchase price
balance will be paid through four quarterly installment payments with the first
of such payments due 30 days following the end of the first twelve-month
anniversary date of the acquisition. The Company has estimated the total
purchase price will be $360,000, which was allocated entirely to the customer
list to be amortized over 15 years. In the accompanying consolidated balance
sheet at December 31, 1997, the Company has $260,000 accrued for the remainder
of the estimated purchase price as "accrued customer list installment
payments." The Company consolidated the drug testing services with LSI's
laboratory in December 1997. Had the acquisition occurred at the beginning of
1997, the Company's results of operations for the year ended December 31, 1997,
would not have been materially different from those presented in the
accompanying consolidated statement of income.
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. TRANSACTIONS WITH RELATED PARTIES:
During the years 1997, 1996 and 1995, LSAI incurred approximately $170,000,
$30,000 and $130,000, respectively, for legal services rendered by a director
of the Company who also serves as legal counsel for the Company. Management
believes that the amounts incurred approximate those which would have been paid
to unrelated parties for the same services.
In 1994, LSI issued a note payable in the amount of $353,123 to MBf USA, Inc.
("MBf") in connection with LSI's President and former owner, Arthur R.
Peterson, Jr.'s acquisition of LSI's common stock. Peterson later 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. 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.
F-13
<PAGE>
6. 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 borrowings were made against the
line of credit during 1997, and no balance was outstanding as of December 31,
1997.
7. DEBT:
Short-term debt at December 31, 1996, consisted of notes 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 did not issue and deliver these
shares to the former shareholders during 1996, based upon certain
representations made by the NPLI Shareholders which the Company believed to
have been misleading and false at the closing of the NPLI Acquisition. In
August 1997, 103,333 shares of stock were issued to the NPLI shareholders to
settle the note payable. The issuance of these shares of common stock has been
excluded from the accompanying consolidated statement of cash flows as it is a
non-cash transaction. The remaining short-term debt at December 31, 1996, of
$75,833 related to the note payable for NPLI Goodwill (see Note 3), was paid in
1997.
Long-term debt consists of the following at December 31, 1997 and 1996:
<TABLE>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to MBf, due February 1999, interest rate 7%,
collateralized by substantially all of the assets of LSI
(see Note 5) $ 353,123 $ 353,123
Note payable for purchase of laboratory building - 450,000
Capital lease agreement with Boehringer-Mannheim Corporation 442,567 560,652
Note payable to a bank bearing interest at 8.65%, with
principal and interest payable monthly through June 2002
and the balance of principal and interest due in a balloon
payment in July 2002, collateralized by substantially all
of the assets of LSI 697,101 -
Term loan with a bank bearing interest at the prime rate plus
0.5% (9.0% at December 31, 1997), with principal and interest
payable monthly through January 2002, collateralized by
substantially all of the assets of LSI 1,388,333 -
----------- -----------
Total long-term debt 2,881,124 1,363,775
----------- -----------
Less- Current portion (527,696) (118,085)
----------- -----------
$ 2,353,428 $ 1,245,690
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
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 in
June 1997, with no stated interest rate. This was a noncash transaction and
was excluded from the accompanying 1996 consolidated statement of cash flows.
In 1996, this note payable to the seller was 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.
Upon maturity in 1997, the note was refinanced through a note payable to a
bank.
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 statements of income. The total
monthly payment through November 1996 was $46,740. The agreement was amended
during December 1996, due to increased drug testing volumes and the new monthly
payment became $59,750, with $13,223 allocated to the principal and interest of
the capital lease obligation, and the remaining cost allocated to the cost of
laboratory supplies. In July 1997, due to further increases in drug testing
volumes, the original lease term was extended from five years to six years and
additional equipment was added. The total monthly payment and capital lease
obligation did not change as a result of this amendment, and the portion of the
monthly payment which is allocated to the principal and interest of the capital
lease obligation during the first five years of the agreement will be treated
as equipment rental expense during the sixth year. The future minimum lease
payments related to this obligation are as follows:
<TABLE>
Capital Operating
---------- -----------
<S> <C> <C>
1998 $ 158,670 $ 558,330
1999 158,670 558,330
2000 158,670 558,330
2001 26,446 690,555
2002 - 119,500
---------- -----------
502,456 2,485,045
Less- Interest on capital lease obligation 59,889 -
---------- -----------
Total future minimum lease payments $ 442,567 $ 2,485,045
---------- -----------
---------- -----------
</TABLE>
8. INCOME TAXES:
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.
F-15
<PAGE>
The 1997, 1996 and 1995 provision (benefit) for income taxes on income from
continuing operations is summarized below:
<TABLE>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
U.S. Federal-
Current $690,916 $ 581,467 $390,008
Deferred 57,829 (166,115) (8,735)
-------- --------- --------
748,745 415,352 381,273
State 204,519 111,819 93,132
-------- --------- --------
Total $953,264 $ 527,171 $474,405
-------- --------- --------
-------- --------- --------
</TABLE>
The results of the discontinued operation for the year ended December 31,
1996, include a tax benefit of $747,324.
Deferred tax liabilities (assets) at December 31, 1997 and 1996, are composed
of the following:
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
Net current deferred tax asset:
Allowance for doubtful accounts $(133,660) $(134,273)
Accrued liabilities (58,564) (105,180)
Deferred taxable revenue, short-term 4,848 28,375
Customer list, net of amortization, short-term 26,667 -
--------- ---------
(160,709) (211,078)
--------- ---------
Net non-current deferred tax liability:
Accelerated depreciation 42,515 (69,748)
Customer list, net of amortization, long-term 317,333 372,000
Deferred taxable revenue, long-term - 4,848
--------- ---------
359,848 307,100
--------- ---------
Total deferred taxes $ 199,139 $ 96,022
--------- ---------
--------- ---------
</TABLE>
In the following table, the U.S. Federal income tax rate is reconciled to the
Company's 1997, 1996 and 1995 effective tax rates from continuing operations
for income as reflected in the consolidated statements of income.
<TABLE>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate 34.0% 34.0% 34.0%
Increases resulting from-
State income taxes 6.1 6.1 5.4
Goodwill amortization 1.5 2.9 1.2
Other 0.2 0.4 0.7
---- ---- ----
41.8% 43.4% 41.3%
---- ---- ----
---- ---- ----
</TABLE>
F-16
<PAGE>
9. 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
itself 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 on 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 its Chief
Executive Officer which provide, among other things, the following: (i) a
term of four years from April 16, 1996, which automatically extends one
additional year after each year of service; (ii) a base salary of $112,500
each; (iii) bonuses at the discretion of the Board of Directors not to exceed
10 percent of the net income of LSAI; (iv) eligibility for stock options
under LSAI's stock option plans (see Note 10); and (v) health and disability
insurance benefits and life insurance of $500,000. Subsequent to December
31, 1997, these agreements were verbally amended to increase the base salary
to $114,750 each. 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 employment agreement with its President which provides,
among other things, the following: (i) a term of four years from April 16,
1996, which automatically extends one additional year after each year of
service; (ii) a base salary of $125,000, (iii) a bonus equal to 10 percent of
the pre-tax income of LSAI, not to exceed $50,000; (iv) eligibility for stock
options under LSAI's stock option plans (see Note 10); and (v) health and
disability insurance benefits and life insurance of $1,000,000. Subsequent
to December 31, 1997, this agreement was verbally amended to increase the
base salary to $127,500. The agreement requires the President to devote his
full time and attention to the business of LSI.
F-17
<PAGE>
LSI has verbal employment agreements with five key employees which provide,
among other things, the following: (i) bonuses equal to one percent of the
pre-tax income of LSI or equal to one percent of the net income of LSAI; (ii)
other bonuses at the discretion of the Board of Directors; (iii) eligibility
for stock options under LSAI's stock option plans (see Note 10); and (iv)
eligibility for health, disability and life insurance benefits on the same
terms as other employees. Additionally, LSI has a written employment
severance agreement with one of these employees providing for salary
continuation for a period of twelve months upon termination for any reason
other than cause. The agreements require the five key employees to devote
their full time and attention to the business of LSI.
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.
10. STOCK OPTION PLANS:
LSAI established the 1994 Stock Option Plan (the "1994 Plan") on May 10,
1994. On October 30, 1996, the 1994 Plan was amended, and the total number of
shares of common stock authorized and reserved for issuance was increased
from 225,000 to 425,000. The 1994 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.
On October 1, 1997, LSAI established the 1997 Non-Qualified Stock Option Plan
(the "1997 Plan"), with 400,000 shares of common stock authorized to be
granted. The 1997 Plan provides for the issuance of non-qualified stock
options, with stock appreciation rights attached, to directors, executive
officers, key employees and independent contractors and consultants of the
Company and its subsidiaries.
The Board of Directors interprets both Plans and establishes certain
committees to administer the Plans. 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. Under both Plans, 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% 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
generally 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.
F-18
<PAGE>
The following table shows the activity for options issued under the Plans as
well as other options issued:
<TABLE>
1994 Plan
and Other Options Issued 1997 Plan
-------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Price Exercise Price
Options Per Option Options Per Option
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balance outstanding December 31, 1994 - - - -
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 cancelled (250,000) 2.82 - -
Options granted 250,000 2.00 340,000 3.18
Options exercised (7,500) 2.00 - -
-------- -------
Balance outstanding December 31, 1997 302,500 2.20 340,000 3.18
-------- -------
-------- -------
Options exercisable-
December 31, 1995 10,000 3.00 - -
December 31, 1996 125,000 3.00 - -
December 31, 1997 302,500 2.20 - -
</TABLE>
Following is the range of exercise prices, the weighted-average remaining
life of all stock options outstanding at December 31, 1997, and the
weighted-average price within each price range of those options outstanding
and those options exercisable at December 31, 1997.
<TABLE>
Options Exercisable at
Options Outstanding at December 31, 1997 December 31, 1997
- --------------------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Price Contractual Exercise Price Exercise Price
Options Per Option Life (Years) Per Option Options Per Option
------- -------------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
242,500 $2.00 9.3 $2.00 242,500 $2.00
60,000 3.00 2.9 3.00 60,000 3.00
340,000 3.18 9.8 3.18 - -
------- -------
642,500 2.00-3.18 8.9 2.72 302,500 2.20
------- -------
------- -------
</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 plans under the optional
intrinsic value method of APB No. 25, whereby no compensation expense is
recognized for fixed-price stock options with a grant price equal to or in
excess of the fair market value of the underlying stock at the grant date. Had
compensation expense been determined in accordance with SFAS No. 123, the
estimated weighted-average, grant-date fair value would have been $0.94, $1.14
and $1.23 per option
F-19
<PAGE>
for those options granted in 1997, 1996 and 1995, respectively, and the
resulting compensation expense would have reduced net income and 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>
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Net income (loss) available for
common stockholders:
As reported $1,329,103 $(585,711) $661,216
Pro forma 1,053,706 (673,516) 614,771
Earnings (loss) per share:
Basic, as reported $ 0.36 $ (0.18) $ 0.20
Diluted, as reported 0.31 (0.15) 0.17
Basic, pro forma 0.29 (0.20) 0.19
Diluted, pro forma 0.24 (0.17) 0.16
</TABLE>
The fair value of each option granted in 1997, 1996 and 1995 was estimated as
of the grant date using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 5 5 5
Risk-free interest rate 6% 6% 6%
Expected dividend yield - - -
Expected volatility 38% 35% 35%
</TABLE>
11. COMMON STOCK WARRANTS:
In connection with the Company's public offering on October 11, 1994, the
Company issued 660,000 warrants. No warrants had been exercised at December
31, 1996. Until April 15, 1997, each warrant could be exercised to purchase
two shares of common stock for $3.50 per share. After April 15, 1997, each
warrant could be exercised to purchase two shares of common stock for $2.00
per share. On September 3, 1997, LSAI gave notice to the holders of these
warrants of the Company's election to redeem the outstanding warrants at
$0.01 each on October 14, 1997, unless extended, at the sole discretion of
the Company, to a date not later than November 7, 1997 (the "Warrant
Redemption"). As a result, 658,290 of the warrants were exercised in
September and October 1997, and the remaining 1,710 warrants were redeemed.
As a portion of the public offering underwriting compensation, the Company also
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
(the "Underwriter Warrants"). The warrants included within each unit were
exercisable under the same terms as the warrants issued in connection with the
public offering as described above. As a result of the Warrant Redemption,
62,000 of these warrants were exercised for $0.12 per warrant plus $2.00 per
share in September and October 1997, and the remaining 4,000 warrants were
redeemed. After the Warrant Redemption, the holders of the Underwriter
Warrants continue to have the right to exercise the Underwriter Warrants with
respect to the two shares of common stock comprising the unit for $7.20. In
November 1997, 30,000 of the Underwriter Warrants were exercised with respect
to the two shares of common stock comprising the unit for $7.20. The
F-20
<PAGE>
remaining 36,000 of the Underwriter Warrants with respect to the two shares
of common stock had not been exercised and were outstanding at December 31,
1997. The proceeds from the exercise of all warrants during 1997 are
included in "net proceeds from exercise of warrants and stock options" in the
accompanying consolidated statement of cash flows and was approximately $2.7
million, net of commissions and other offering expenses.
In connection with the Warrant Redemption, LSAI issued warrants to purchase
144,058 shares of common stock to various investment bankers as a portion of
their compensation for serving as managers of the Warrant Redemption and
certain other services. These warrants have an exercise price per share of
$2.20 and expire on October 14, 2000. Both the number of shares and the
exercise price per share are subject to adjustment under certain
circumstances. The value of these warrants, recognized as compensation paid
to the investment bankers for services provided, was treated as a reduction
in the recognized net proceeds to the Company from the Warrant Redemption.
The value of the outstanding warrants is included in paid in capital in
excess of par and entirely offsets the recognized compensatory value of the
warrants, resulting in no net effect on stockholders' equity.
F-21
<PAGE>
EXHIBIT 2.4
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
this 1st day of December, 1997, by and between ACCU-PATH MEDICAL LABORATORY,
INC., an Arkansas corporation ("ACCU-PATH"), and LABORATORY SPECIALISTS OF
AMERICA, INC., an Oklahoma corporation ("LSAI").
R E C I T A L S
1. ACCU-PATH and LSAI are each engaged in the providing of forensic drug
testing services to corporate and institutional customers.
2. LSAI desires to purchase from ACCU-PATH and ACCU-PATH desires to sell
to LSAI certain assets of ACCU-PATH, principally the forensic drug testing
customer base of ACCU-PATH and certain of the assets related thereto, and in
connection with such purchase the assumption of the operations by LSAI of the
Ruston, Louisiana, office of ACCU-PATH.
3. ACCU-PATH and LSAI desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated under this Agreement and to prescribe various conditions precedent
to such transactions and payment and delivery of the consideration for purchase
of the assets of ACCU-PATH.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein set forth, the parties to this Agreement have agreed, and
hereby agree, subject to the terms and conditions hereinafter set forth, as
follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Certain terms which are used primarily in individual
sections of this Agreement are defined when used in such sections. Other terms
used frequently throughout this Agreement are set forth below and have the
following meanings:
CLOSING: The consummation of the transactions contemplated by Section 2.1
hereof.
CLOSING DATE: The date on which the Closing shall occur which shall be
December 31, 1997, or such other date mutually agreed upon by the parties.
FORENSIC TESTING REVENUES: Determined in accordance with generally accepted
accounting principles, the sum of (i) the gross revenue directly attributable
to the ACCU-PATH Assets and (ii) the sales price of any of the ACCU-PATH Assets
sold by LSAI. Gross revenue is defined as total revenues billed by LSAI less
discounts and pass through billings. Pass through billings is
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 1
<PAGE>
defined as any charges billed to LSAI by third parties, other than ACCU-PATH,
which are then billed by LSAI to customers for (1) the collection of
specimens and (2) the Medical Review Officer charges for review of specimens.
LEGAL REQUIREMENTS: Any law, statute, ordinance, decree, final order, final
judgment, rule or regulation of (including without limitation the terms of any
license, certificate, franchise or permit issued by) the United States, any
state, commonwealth, territory or possession thereof and any political or
judicial subdivision or instrumentality of the foregoing, including without
limitation, courts, departments, commissions, boards, bureaus or agencies.
LSAI: Laboratory Specialists of America, Inc., an Oklahoma corporation.
ACCU-PATH: Accu-Path Medical Laboratory, Ins., an Arkansas corporation.
ACCU-PATH ASSETS: The assets of ACCU-PATH as defined in Section 2.1 hereof and
as more specifically identified on SCHEDULE 2.1.1, attached hereto.
OKLAHOMA LAW: The laws of the State of Oklahoma.
1.2 INTERPRETATION. The words "hereof," "herein" and "hereunder" and
words of similar import, when used in this Agreement, shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
Article, section, subsection and paragraph references in this Agreement are to
articles, sections, subsections and paragraphs of this Agreement, unless
otherwise specified. The article, section and other headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement. The Exhibit and all Schedules referred to
herein are annexed hereto and incorporated herein by reference. The meanings
given to terms defined herein shall be equally applicable to both the singular
and plural forms of such terms.
ARTICLE II
ASSET PURCHASE
2.1 PURCHASE AND SALE OF ACCU-PATH ASSETS. At the Closing, upon the
terms and subject to the conditions set forth in this Agreement, ACCU-PATH
shall sell, assign, convey, set over, transfer and deliver to LSAI, and LSAI
shall purchase, acquire and accept all right, title and interest of ACCU-PATH
in and to the forensic drug testing customer base (the "Customer Base"), all
contracts and contract rights for the providing of drug testing services
related thereto, and certain of the assets owned by ACCU-PATH used in
connection with the ACCU-PATH office in Ruston, Louisiana, as more specifically
described in SCHEDULE 2.1.1, hereto (the "ACCU-PATH Assets"), free and clear
of any lien, charge, claim, pledge, security interest or other encumbrance of
any type or kind whatsoever, against receipt of the consideration paid and
delivered by LSAI pursuant to Section 2.2 hereof. ACCU-PATH has not received
any written or
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 2
<PAGE>
verbal indication that any client a part of the Customer Base intents to
cease doing business with or materially diminish the amount of business that
it is now doing with ACCU-PATH or after the Closing with LSAI.
Except as provided below, following the Closing, ACCU-PATH shall deliver
to LSAI all records, files, instruments, correspondence and other documents
possessed by ACCU-PATH relating to the clients included in the Customer Base,
including, without limitation, information concerning pricing, service
requirements, sales billing, accounts receivable aging, information pertinent
to the process of reporting test results to or invoicing any clients forming a
part of the Customer Base, utilization and composite reports and all other data
and information in the possessions of ACCU-PATH related to the Customer Base
and reasonably requested by LSAI. Notwithstanding the foregoing, ACCU-PATH
shall not be obligated to deliver to LSAI the following types of records and
files: Test Requisitions, patient test reports, or laboratory testing data.
Provided, however, that ACCU-PATH shall, upon request, have reasonable and
prompt access to any and all records, files, instruments, correspondence and
other documents concerning any of the assets that have not been delivered,
including, without limitation, records and files pertaining to any client or
clients on which are a part of the Customer Base or to any patients of such
clients. If requested, ACCU-PATH shall provide to LSAI true and complete
copies of such records, files correspondence, instruments and other documents.
ACCU-PATH shall retain for a period of time not less than the maximum
applicable document retention requirement, all test request forms, patient test
results, laboratory testing data, and other medical and patient data,
information, records and specimens. ACCU-PATH shall retain all other records,
files, correspondence, instruments and other documents relating to the ACCU-
PATH Assets for a period of at least one year following the Closing. ACCU-
PATH's obligations herein to provide access to and copies of documents and to
maintain records as required herein shall survive the Closing.
Following the Closing, LSAI shall assume all operations of the ACCU-PATH
office located at 1004 Center Street, Ruston, Louisiana, including assumption
of the lease associated with such office operations, as described in SCHEDULE
2.1.3, hereto.
Following the closing, employment shall be offered to the current
personnel of ACCU-PATH listed on SCHEDULE 2.1.2, hereto on terms and conditions
agreed to by LSAI and such personnel. Persons listed on SCHEDULE 2.1.2, hired
by LSAI within three months after the Closing shall be credited with their
seniority and levels of benefits under the benefit programs and employment
policies of LSAI as they may be modified by LSAI from time to time. LSAI shall
also reimburse the cost of COBRA health care coverage for the persons listed on
SCHEDULE 2.1.2, hired by LSAI for the first 90 day period of their employment
by LSAI to such persons. LSAI shall not be responsible for any accrued
payments or benefits pertaining to any such employee as a result of such
employee's employment with ACCU-PATH, including, without limitation, any
accrued wages, sick or vacation pay. In the event that any such person elects
not to become an employee of LSAI, then LSAI shall have no obligation to ACCU-
PATH with respect to such person and ACCU-PATH shall indemnify LSAI against any
liability on account of any termination of such person by ACCU-PATH.
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 3
<PAGE>
2.2 PURCHASE PRICE OF ACCU-PATH ASSETS. In consideration for the ACCU-
PATH Assets to be sold, assigned, conveyed, transferred and delivered to LSAI
pursuant to Section 2.1 hereof, LSAI shall pay to ACCU-PATH an amount equal to
180% of the collected and collectible Forensic Testing Revenues, during the
seventh (7th) through twelfth (12th) months following consummation and closing
of the purchase of the ACCU-PATH Assets by LSAI (the "Purchase Price").
2.3 PAYMENT OF PURCHASE PRICE FOR ACCU-PATH ASSETS. LSAI shall pay the
Purchase Price to ACCU-PATH as follows: (I) upon consummation and at closing
of the Asset Purchase, One Hundred Thousand Dollars ($100,000) in immediately
available funds, (ii) thirty (30) days following the end of each of the first
three (3), three (3) calendar month periods ("Quarterly") following the date of
consummation and closing of the Assets Purchase an amount equal to 50% of the
Forensic Testing Revenues for each respective Quarterly period, and (iii) the
balance of the Purchase Price shall be paid in four (4) equal Quarterly
payments with the first of such payments due thirty (30) days following the end
of the first twelve (12) months anniversary date of the consummation and
closing of the purchase of the ACCU-PATH Assets by LSAI.
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 ACCU-
PATH purchased as a portion of the ACCU-PATH Assets.
Forensic Testing Revenues shall be reduced by the amount of any billing
which is not collectible as a result of the failure to assign, or to obtain the
prior consent to any assignment by ACCU-PATH of any agreement for drug testing
services between ACCU-PATH and clients in the Customer Base.
For 12 months following the Closing, LSAI shall make no material change in
the provision of services or charges for services to the accounts constituting
the Customer Base without giving 5 days prior notice by facsimile to Accu-Path.
For purposes of this provision, material change is defined as any change
reasonable likely to cause a change in Net Revenue of more than $1,000 per
month in forensic drug testing revenues from the clients in the Customer Base.
2.4 CLOSING. Subject to the terms and conditions hereof, the Closing
shall take place at the offices of Dunn, Swan, & Cunningham 2800 Oklahoma
Tower, 210 Park Avenue, Oklahoma City, Oklahoma, or at such other place as the
parties hereto shall agree.
2.5 NO ASSUMPTION OF LIABILITIES. In connection with the purchase of the
ACCU-PATH Assets and consummation of the transactions contemplated under this
Agreement, except with respect to the lease agreements described on SCHEDULE
2.1.3 hereto, LSAI shall not nor shall any provision of this Agreement be
construed to cause LSAI to, assume or become liable for any
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 4
<PAGE>
liability, obligation, performance, duty, debt, lien or any other claim of
any kind or nature of ACCU-PATH, and ACCU-PATH hereby acknowledges that it
shall remain liable for all of its liabilities, obligations, performances,
duties, debts, liens or any other claim of any kind or nature which arise
prior to the Closing, including without limitation the obligation of
ACCU-PATH to maintain any and all records and information required to be
maintained and the continuing obligation to maintain all urine samples in a
frozen state in accordance with the regulations of the Substance Abuse and
Mental Health Services Administration.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LSAI
LSAI hereby represents and warrants to ACCU-PATH as follows:
3.1 ORGANIZATION, GOOD STANDING, POWER, ETC. LSAI is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Oklahoma and has all requisite corporate power and authority to own, operate
and lease its properties and assets and to carry on its business as
contemplated following the Closing. LSAI has furnished to ACCU-PATH true,
correct and complete copies of its Certificate of Incorporation and Bylaws, as
amended and supplemented to the date hereof.
3.2 AUTHORIZATION OF AGREEMENT. LSAI has all requisite corporate power
and authority to enter into and perform all of its obligations under this
Agreement. The execution and delivery of this Agreement by LSAI and the
consummation by LSAI of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of LSAI. This
Agreement has been duly executed and delivered by LSAI, and constitutes the
legal, valid and binding obligation of LSAI, enforceable against LSAI in
accordance with its terms, except as enforceability may be limited by (i) any
applicable bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally, and (ii) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
3.3 NO CONFLICTING AGREEMENTS. To the best of the knowledge of LSAI,
neither the execution and delivery of this Agreement by LSAI nor the
consummation of the transactions contemplated hereby, will (a) violate or
conflict with any provision of the Certificate of Incorporation or Bylaws of
LSAI, as currently in effect; (b) violate or conflict with any provision of any
law, rule, regulation, order, permit, certificate, writ, judgment, injunction,
decree, determination, award or other decision of any governmental authority,
other regulatory or self-regulatory body or association or arbitrator binding
upon LSAI or any of its properties or assets; (c) result in a breach of or
constitute a default under (or with notice or lapse of time or both result in a
breach of or constitute a default under), or give rise to a right of
termination, cancellation, acceleration or repurchase of any obligation or a
right of first refusal with respect to any material property or asset or a loss
of a material benefit or the imposition of a material penalty under, any of the
terms, conditions or provisions of (i) any mortgage, indenture, loan or
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 5
<PAGE>
credit agreement or any other agreement or instrument evidencing indebtedness
for money borrowed to which LSAI is a party or by which LSAI or any of its
properties or assets is bound or affected, or (ii) any lease, license,
tariff, contract or other agreement or instrument to which LSAI is a party
or by which LSAI or any of its properties or assets is bound or affected; or
(d) result in, or require, the creation or imposition of any mortgage, deed
of trust, pledge, lien, security interest or other charge or encumbrance of
any nature upon or with respect to any of the properties or assets now or
hereafter owned by LSAI.
3.4 CONSENTS AND APPROVALS. No consent, approval, order, certificate or
authorization of, or registration, declaration or filing with, any governmental
authority or other third party is required by or with respect to LSAI in
connection with the execution and delivery of this Agreement by LSAI or the
consummation by LSAI of the transactions contemplated hereby.
3.5 CONTRACTS. Other than this Agreement and the commitments
contemplated herein, LSAI is not a party to any material agreements, contracts,
guarantees and commitments pursuant to which LSAI or any of its properties or
assets are or will be bound and which involve in each case aggregate future
payments in an aggregate amount which is material.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACCU-PATH
ACCU-PATH hereby represents and warrants to LSAI as follows:
4.1 ORGANIZATION, GOOD STANDING, POWER, ETC. ACCU-PATH is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of Arkansas and has all requisite corporate power and authority to own,
operate and lease its properties and assets and to carry on its business as now
being conducted. ACCU-PATH is duly qualified to do business and is in good
standing in the state of Lousiana.
4.2 AUTHORIZATION OF AGREEMENT. ACCU-PATH has all requisite power and
authority to enter into and perform all of its obligations under this
Agreement. The execution and delivery of this Agreement by ACCU-PATH and the
consummation by ACCU-PATH of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of ACCU-PATH.
This Agreement has been duly executed and delivered by ACCU-PATH, and
constitutes the legal, valid and binding obligation of ACCU-PATH, enforceable
against ACCU-PATH in accordance with the terms of this Agreement, except as
enforceability may be limited by (a) any applicable bankruptcy, insolvency,
reorganization or other law relating to or affecting creditors' rights
generally, and (b) general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.3 NO CONFLICTING AGREEMENTS. To the best of the knowledge of ACCU-
PATH,
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neither the execution and delivery of this Agreement by ACCU-PATH, nor the
consummation of the transactions contemplated hereby, will (a) violate or
conflict with any provision of the Certificate of Incorporation or By-laws of
ACCU-PATH, as currently in effect; (b) violate or conflict with any provision
of any law, rule, regulation, order, permit, certificate, writ, judgment,
injunction, decree, determination, award or other decision of any
governmental authority, other regulatory or self-regulatory body or
association or arbitrator binding upon ACCU-PATH or any of its properties or
assets; (c) result in a breach of or constitute a default under (or with
notice or lapse of time or both result in a breach of or constitute a default
under), or give rise to a right of termination, cancellation, acceleration or
repurchase of any obligation or a right of first refusal with respect to any
material property or asset or a loss of a material benefit or the imposition
of a material penalty under, any of the terms, conditions or provisions of
(i) any mortgage, indenture, loan or credit agreement or any other agreement
or instrument evidencing indebtedness for money borrowed to which ACCU-PATH
is a party or by which ACCU-PATH or any of the ACCU-PATH Assets is bound or
affected, or (ii) any lease, license, tariff, contract or other agreement or
instrument to which ACCU-PATH is a party or by which ACCU-PATH or any of the
ACCU-PATH Assets is bound or affected; or (d) result in, or require, the
creation or imposition of any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance of any nature upon or with respect to
any of the ACCU-PATH Assets.
4.4 CONSENTS AND APPROVALS. Except as provided on SCHEDULE 4.4.1, no
consent, approval, order or authorization of, or registration, declaration or
filing with, any governmental authority or other third party is required by or
with respect to ACCU-PATH in connection with the execution and delivery of this
Agreement by ACCU-PATH, or the consummation by ACCU-PATH of the transactions
contemplated hereby.
4.5 FINANCIAL STATEMENTS. ACCU-PATH has delivered to LSAI certain
financial reports of its forensic drug testing operations and will deliver
audited balance sheets and income statements of such forensic drug testing
operations as of December 31, 1995, and December 31, 1996, in order to meet
LSAI's SEC reporting requirements (the "ACCU-PATH Financial Statements"). Each
ACCU-PATH Financial Statement (and the notes relating thereto) were or shall be
prepared in accordance with generally accepted accounting principles
consistently applied and fairly presents the financial condition of the
forensic drug testing operations of ACCU-PATH as of the date thereof and the
related results of operations and cash flows of the forensic drug testing
operations of ACCU-PATH for and during the periods covered thereby.
4.6 INDEBTEDNESS. ACCU-PATH is not in default in any material respect
under any note, mortgage, indenture, security agreement or other obligation or
instrument for or relating to any borrowing effected by ACCU-PATH, related to
the ACCU-PATH Assets and there has not occurred any event which, with or
without the giving of notice or the lapse of time or both, would constitute
such a default.
4.7 TITLE TO THE ACCU-PATH ASSETS; ABSENCE OF LIENS AND ENCUMBRANCES. At
the Closing ACCU-PATH shall hold good and defensible title to the ACCU-PATH
Assets, free and clear of all mortgages, liens, pledges, charges and
encumbrances of any nature whatsoever.
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4.8 LITIGATION. (i) There is no claim, action, suit, proceeding,
arbitration, investigation or inquiry ("proceeding") before any governmental
authority or arbitrator, now pending or threatened against, relating to or
affecting ACCU-PATH and/or the ACCU-PATH Assets or business of ACCU-PATH or
that questions the validity of this Agreement or affects the transactions
contemplated herein, and there is no basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry.
(ii) ACCU-PATH has not been permanently or temporarily enjoined or
prohibited by order, judgment or decree of any governmental authority or
arbitrator from engaging in or continuing any conduct or practice in connection
with the business engaged in by ACCU-PATH or which would prevent or hinder the
sale, assignment, conveyance, setting over, transfer and delivery of the ACCU-
PATH Assets by ACCU-PATH to LSAI of all right, title and interest of ACCU-PATH
in and to the ACCU-PATH Assets free and clear of all mortgages, liens, pledges,
charges and encumbrances of any nature whatsoever, as contemplated hereunder.
(iii) There is not in existence any order, judgment or decree of
any governmental authority or arbitrator (other than general industry orders)
enjoining or prohibiting ACCU-PATH from taking, or requiring ACCU-PATH to take,
any action of any kind or to which ACCU-PATH or any of the ACCU-PATH Assets,
are subject or bound.
(iv) ACCU-PATH is not in default in any respect under any Legal
Requirement or any order, writ, injunction or decree of any governmental
authority or arbitrator which would prevent or hinder the sale, assignment,
conveyance, setting over, transfer and delivery of the ACCU-PATH Assets by ACCU-
PATH to LSAI of all right, title and interest of ACCU-PATH in and to the ACCU-
PATH Assets free and clear of all mortgages, liens, pledges, charges and
encumbrances of any nature whatsoever, as contemplated hereunder.
4.9 COMPLIANCE WITH LAWS. To the best of the knowledge of ACCU-PATH, it
is in compliance with all Legal Requirements applicable to any of its
properties or assets including the ACCU-PATH Assets and/or the ownership,
operation or use thereof, and ACCU-PATH has not received notice of any
noncompliance or alleged noncompliance with any Legal Requirement relating or
applicable to any of its properties or assets including the ACCU-PATH Assets or
to the operation of its business.
4.10 COLLECTIVE BARGAINING AGREEMENT. Neither ACCU-PATH nor the ACCU-PATH
employees described in SCHEDULE 2.1.2, are parties to or covered under any
collective bargaining agreement or any written employment contract other than
those set forth on SCHEDULE 4.10, HERETO. Further, ACCU-PATH has provided to
LSAI copies of all of its written employment policies and employee manuals.
4.11 FULL DISCLOSURE. No representation, covenant or warranty by ACCU-
PATH contained in this Agreement and no written information or agreements
furnished or to be furnished to LSAI by ACCU-PATH pursuant hereto or in
connection with the transactions
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contemplated hereby, contains or will contain any untrue statement of a
material fact, or omits or will omit to contain a material fact necessary in
order to make the statements and information contained herein or therein, in
light of the circumstances under which they were made, not misleading.
ARTICLE V
COVENANTS OF ACCU-PATH
ACCU-PATH covenants and agrees with LSAI that, at all times between the
date hereof and the Closing, ACCU-PATH will comply with all covenants and
provisions of this Article V, except to the extent LSAI may otherwise consent
in writing or to the extent otherwise expressly required or permitted by this
Agreement.
5.1 APPROVALS. ACCU-PATH will (i) take all reasonable steps and use all
reasonable efforts necessary or desirable to recommend the granting of and to
obtain, as promptly as practicable, all approvals, authorizations and
clearances of governmental authorities and of third parties, required of it to
consummate the transactions contemplated hereby, (ii) provide such other
information and communications to such governmental authorities as LSAI or such
authorities may reasonably request, and (iii) cooperate with LSAI in obtaining,
as promptly as practicable, all approvals, authorizations and clearances of
governmental authorities required of LSAI to consummate the transactions
contemplated hereby.
5.2 INVESTIGATION BY LSAI. ACCU-PATH will provide LSAI, its counsel,
accountants, and other representatives with reasonable access (at the sole
cost, risk and expense of LSAI), upon prior notice and during normal business
hours, to all facilities, officers, directors, employees, agents, accountants,
assets, properties, books and records of ACCU-PATH as they pertain to forensic
drug testing operations. ACCU-PATH will furnish to LSAI and such other persons
during such period all such other information and data concerning the business,
operations and affairs of ACCU-PATH pertaining to forensic drug testing
operations or the transactions contemplated hereby as LSAI or any of such other
persons reasonably may request. LSAI hereby agrees to indemnify and hold ACCU-
PATH harmless from all claims, losses or damages arising out of exercise of
such information access rights pursuant to this Section 5.2.
5.3 NO NEGOTIATIONS. Except as contemplated in this Agreement, ACCU-PATH
will not take (or permit any other person acting for or on behalf of ACCU-PATH
to take), directly or indirectly, any action to (i) seek or encourage any offer
or proposal from any person to acquire any of the ACCU-PATH Assets or any
interest therein with respect to forensic drug testing, (ii) merge, consolidate
or combine, or permit any other person to merge, consolidate or combine, with
ACCU-PATH, (iii) liquidate, dissolve or reorganize ACCU-PATH, (iv) acquire or
transfer any of the ACCU-PATH Assets or any interests therein, other than in
the ordinary course of business; or (v) reach any agreement or understanding
(regardless of whether such agreement or understanding is absolute, revocable,
contingent or conditional) for, or otherwise to attempt to consummate, any such
acquisition, transfer, merger, consolidation, combination, liquidation,
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dissolution or reorganization.
5.4 CONDUCT OF BUSINESS. ACCU-PATH will conduct its business related to
the ACCU-PATH Assets only in the ordinary course and consistent with past
practices. Without limiting the generality of the foregoing:
(i) ACCU-PATH will maintain its books and records related to the
operation of the ACCU-PATH Assets in the usual manner and consistent with past
practices and customs, and will not permit a material change in any operational
or financial reporting or accounting practice or policy of ACCU-PATH or in any
assumption underlying such a practice or policy.
(ii) ACCU-PATH will (A) prepare properly and file duly and timely all
reports and all tax returns required to be filed with governmental authorities
with respect to its business, operations or affairs, and (B) pay duly and fully
all taxes indicated by such tax returns or otherwise levied or assessed upon it
or any of its assets and properties, and withhold or collect and pay to the
proper taxing authorities or reserve for such payment all taxes that it is
required to so withhold or collect and pay, unless such Taxes are being
contested in good faith.
(iii) ACCU-PATH (A) will not convey, encumber, mortgage, pledge or
dispose of any portion of the ACCU-PATH Assets, (B) will use its best efforts
to conduct its business in the ordinary course in a prudent and diligent manner
in accordance with industry standards, (C) will promptly notify LSAI in writing
of the receipt of any written notice or written claim of default or breach by
ACCU-PATH or of any termination or cancellation, or written threat of
termination or cancellation, of any contracts or agreements, including without
limitation any contracts or agreement with ACCU-PATH's customers comprising a
part of the Customer Base, (D) will promptly notify LSAI in writing of the loss
or suspension of any certification, which would have a material adverse effect
upon ACCU-PATH and its operations, including without limitation, loss or
suspension of certification by the National Institute on Drug Abuse.
5.5 NO DISTRIBUTIONS. ACCU-PATH will not make any distributions of the
ACCU-PATH Assets, to its shareholders.
5.6 NO DISPOSAL OF ACCU-PATH ASSETS. Except as contemplated in this
Agreement, ACCU-PATH will not (a) dispose of or assign any of the ACCU-PATH
Assets or permit any of the ACCU-PATH Assets to be subjected to any liens, or
(b) sell any portion of the ACCU-PATH Assets to any third party.
5.7 CONTRACTS. ACCU-PATH will not enter into any contract for the
providing of drug testing services, except contracts entered into in the
ordinary course of business consistent with past practices.
5.8 NOTICE AND CURE. ACCU-PATH will notify LSAI promptly in writing of,
and contemporaneously will provide LSAI with true, complete and correct copies
of, any and all information or documents relating to, and will use all
reasonable efforts to cure prior to the
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Closing, any event, transaction or circumstance occurring after the date of
this Agreement that results in or will result in any covenant or agreement of
ACCU-PATH being breached under this Agreement, or that renders or will render
untrue any representation or warranty of ACCU-PATH contained in this
Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. ACCU-PATH also will use all reasonable efforts
to cure, at the earliest practicable date and before the Closing, any
violation or breach of any representation, warranty, covenant or agreement
made by ACCU-PATH in this Agreement.
5.9 AGREEMENTS AND COVENANTS. ACCU-PATH will not make any commitment,
either in writing or orally, which would violate any of the provisions set
forth in this Article V.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PARTIES
Notwithstanding any other provision of this Agreement, the obligation of
ACCU-PATH, on the one hand, and LSAI, on the other hand, to consummate the
transactions contemplated hereby shall be subject to the fulfillment, prior to
or at the Closing, of each of the following conditions precedent, any one of
which may be waived by such entity:
6.1 CONSENTS AND APPROVALS. All approvals of and consents by all
governmental authorities and other persons, and all permits by and all filings
with and submissions to all such governmental authorities and other persons as
may be required for the consummation of the transactions contemplated by this
Agreement, shall have been obtained or made and reasonably satisfactory
evidence thereof shall have been received and any waiting period, if
applicable, shall have expired.
6.2 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, ACCU-PATH or any of their respective
directors or officers, any action, suit or proceeding by or before any
governmental authority that would restrain, prohibit or invalidate, or result
in the payment of substantial damages in respect of, any transaction
contemplated by this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF ACCU-PATH
Notwithstanding any other provision of this Agreement, the obligations of
ACCU-PATH to consummate the transactions contemplated hereby shall be subject
to the fulfillment prior to or at the Closing, of each of the following
conditions precedent, any of which may be waived by ACCU-PATH:
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7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of LSAI set forth in Article III above shall be true and correct as
of the date of this Agreement and as of the Closing, with the same effect as
though such representations had been made at and as of the Closing.
7.2 PERFORMANCE OF COVENANTS, AGREEMENTS AND CONDITIONS. LSAI shall have
duly performed, complied with and satisfied in all material respects all
covenants, agreements and conditions required by this Agreement to be
performed, complied with or satisfied by it at or prior to the Closing.
7.2 AUTHORIZATION OF AGREEMENT. ACCU-PATH shall have received a
certificate from the corporate secretary of LSAI certifying a copy of all
corporate actions required for the execution and delivery of this Agreement and
the performance of all of their obligation hereunder.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF LSAI
Notwithstanding any other provision of this Agreement, the obligations of
LSAI to consummate the transactions contemplated hereunder shall be subject to
the fulfillment, prior to or at the Closing, of each of the following
conditions precedent, any of which may be waived by LSAI:
8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in Article IV above shall be true and correct as of the
date of this Agreement and as of the Closing, with the same effect as though
such representations and warranties had been made at and as of the Closing.
8.2 PERFORMANCE OF COVENANTS, AGREEMENTS AND CONDITIONS. ACCU-PATH
shall have duly performed, complied with and satisfied all covenants,
agreements and conditions required by this Agreement to be performed, complied
with or satisfied by ACCU-PATH, at or prior to the Closing.
8.3 OFFICERS' CERTIFICATES, ETC. LSAI shall have received a certificate,
dated the date of the Closing and signed by the Chief Executive Officer or
President of ACCU-PATH to the effect set forth in Sections 8.1 and 8.2 above.
8.4 OPINION OF COUNSEL FOR ACCU-PATH. LSAI shall have received an
opinion, dated the date of the Closing, of counsel for ACCU-PATH, in form and
substance satisfactory to LSAI covering the subjects set forth in Sections 4.1,
4.2, 4.7, and 4.9 hereof. In rendering such opinion, counsel may rely to the
extent specified therein on certificates of representatives of
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ACCU-PATH and public officials.
8.5 NO ADVERSE CHANGE. No material adverse change shall have occurred in
the business, prospects, operations, properties or financial condition of ACCU-
PATH operations of the Ruston, Louisiana office since December 31, 1996.
8.6 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, ACCU-PATH, or any of their respective
directors or officers, any action, suit or proceeding by or before any
governmental authority that would prohibit LSAI's ownership of all of the ACCU-
PATH Assets
8.7 DUE DILIGENCE. LSAI shall have performed and completed its due
diligence to verify, to its satisfaction, the existence of the Forensic Testing
Revenue Base of ACCU-PATH as represented. Such due diligence shall be
completed no later than December 15, 1997.
ARTICLE IX
ACCU-PATH'S NON-COMPETITION AGREEMENTS
9.1 ACCU-PATH'S AGREEMENT NOT TO COMPETE. For a period of five years
after the Closing Date, ACCU-PATH agrees that it will not directly or
indirectly: (i) engage or become interested in, whether as a partner, owner,
stockholder (other than a less than 2% interest in a corporation having
securities listed for trading on a national securities exchange), investor,
lender, provider of services, whether alone or in association with others, any
business that offers, forensic drug testing services ("Testing Services") to
any client included in the Customer Base, including without limitation Testing
Services referred by any physician associated with a client; (ii) induce or
attempt to induce any client included in the Customer Base to reduce its use of
the forensic services of LSAI.
9.2 CONFIDENTIAL INFORMATION. ACCU-PATH acknowledges that it has and may
continue to have access to and the use of confidential materials and
information and trade secrets concerning the ACCU-PATH Assets (including
without limitation the identity of and other information concerning clients
included in the Customer Base). ACCU-PATH shall not use, for itself or others,
or divulge or convey to any other, except as required to fulfill the
obligations of this Agreement, any secret or confidential information,
knowledge or data related to the ACCU-PATH Assets or LSAI or to the clients or
customers, or former clients or customers, of LSAI. Such information,
knowledge or data includes, but is not limited to, secret or confidential
matters not published or generally known in the industry, pricing information,
service requirements, sales, profits, costs or market.
9.3 REMEDIES. ACCU-PATH acknowledges and agrees that the provisions of
this Article IX are necessary to protect all of the ACCU-PATH Assets being
acquired by LSAI and in no way impose a significant hardship or prevents ACCU-
PATH from earning a livelihood. In the event that this Article IX or any other
portion thereof shall be determined by any court of
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competent jurisdiction to be unenforceable by reason of its extending for too
great a period of time or over too great a range of activities, it shall be
interpreted to extend only over the maximum time period and range of
activities as to which it may be enforceable. ACCU-PATH recognizes and
acknowledges that in the event of ACCU-PATH's failure to comply with any of
the covenants contained in this Article IX, it may be impossible to measure
in money the damages to LSAI or its successor and that in the event of such a
failure, LSAI or its successor may not have an adequate remedy at law. It is
therefore agreed that LSAI or its successor, in addition to any other rights
or remedies which it may have, shall be entitled to immediate injunctive
relief to enforce such covenants, and that if any action or proceeding is
brought in equity to enforce the same, ACCU-PATH will not urge as a defense,
that there is an adequate remedy at law.
ARTICLE X
TERMINATION AND AMENDMENTS
10.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing, as follows:
(i) by mutual consent of LSAI and ACCU-PATH;
(ii) by either LSAI or ACCU-PATH in the event the Closing shall not have
been consummated on or before February 28, 1997; or
(iii) by either LSAI or ACCU-PATH if there shall have been entered or
rendered against LSAI, ACCU-PATH, or any of their respective directors or
officers in any action or proceeding referred to in Sections 6.2, or 8.6 hereof
an injunction or a final judgment having one of the effects specified in such
Sections.
10.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either LSAI or ACCU-PATH, as provided in Section 10.1 hereof, this Agreement
shall forthwith become void and there shall be no obligation or liability on
the part of LSAI, ACCU-PATH or their respective officers, directors or
shareholders, except as stated in Section 12.8 hereof; provided, however, that
such limitation shall not apply in the event of a willful breach by LSAI or
ACCU-PATH of any of their respective material covenants contained herein in
which case the non-breaching party shall be entitled to recover from the
breaching party all out-of-pocket costs (including without limitation
reasonable attorney fees' and expenses) which the non-breaching party has
incurred in connection herewith.
10.3 AMENDMENT. This Agreement may be amended by the parties hereto, at
any time prior to the Closing. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
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ARTICLE XI
SURVIVAL OF PROVISIONS; REMEDIES; INDEMNIFICATION
11.1 SURVIVAL. The representations, warranties, covenants and agreements
respectively made by LSAI and ACCU-PATH in this Agreement, in the Schedules
hereto, or on any certificate delivered pursuant to the provisions hereof shall
not survive, other than those set forth in Sections 2.1, 4.9, 11.3, 12.2 , and
Article IX hereof, and shall terminate upon, the Closing, and neither LSAI nor
ACCU-PATH or any of their respective officers, directors or shareholders shall
be under any liability whatsoever, with respect to such representation,
warranty, covenant or agreement which does not survive the Closing. The
representations, warranties, covenants and agreements set forth in Sections
2.1, 4.9, 11.3, 12.2, and Article IX hereof shall survive the Closing and
consummation of the transactions contemplated hereby. The parties hereto
acknowledge that the representations and warranties contained in this
Agreement, other than those set forth in 2.1, 4.9, and Article IX hereof, are
included solely for purposes of Articles VII and VIII hereof and are not
intended to and shall not in any way give rise to any liability, claim, action
or cause of action on the part of any party hereof on account of breach of any
such representation or warranty. The parties hereto further acknowledge that
they may, after the Closing, discover facts in addition to or different from
those which they believed to be true at the Closing relating to the
representations, warranties, covenants and agreements made by the other party
to this Agreement. Notwithstanding the foregoing, except as otherwise
specifically agreed to in writing by the parties hereto, each of the parties
hereto hereby releases the other party at and effective as of the Closing from
any and all claims, liabilities, actions, and causes of action, of whatever
nature, kind or description known or unknown, direct or indirect, fixed or
contingent, in law or equity, arising under or relating to any representations,
warranties, covenants or agreements made by the other parties in this Agreement
(other than those set forth in Sections 2.1, 4.9, 11.3, 12.2, and Article IX
hereof).
11.2 AVAILABLE REMEDIES. Each party expressly agrees that, consistent
with its intention and agreement to be bound by the terms of this Agreement and
to consummate the transactions contemplated hereby, subject only to the
satisfaction of conditions precedent, the remedy of specific performance shall
be available to a non-breaching and non-defaulting party to enforce performance
of this Agreement by a breaching or defaulting party, including, without
limitation, to require the consummation of the Closing.
11.3 INDEMNITY. (i) ACCU-PATH, in addition to the remedies accorded the
parties in Section 11.2 hereof, agrees to indemnify and hold LSAI harmless from
and against any and all claims, actions, causes of action, damages, costs and
expenses, including without limitation attorneys' fees, arising from or
relating to a breach by ACCU-PATH of the representations and warranties set
forth in Article IV, hereof.
(ii) LSAI, in addition to the remedies accorded the parties in Section
11.2 hereof, agrees to indemnify and hold ACCU-PATH harmless from and against
any and all claims, actions, causes of action, damages, costs and expenses,
including without limitation attorneys' fees arising from or relating to a
breach by LSAI of the representations and warranties set froth in
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Article III, hereof.
ARTICLE XII
MISCELLANEOUS
12.1 EXPENSES. LSAI will pay its own costs and expenses, and ACCU-PATH
will pay own costs and expenses, incurred in connection with this Agreement and
the transactions contemplated hereby, including without limitation fees and
expenses of counsel, irrespective of when incurred and regardless of whether
this transaction is consummated.
12.2 FINDER'S FEE'S. Each of LSAI , on the one hand, and ACCU-PATH, on
the other, represent to the other that no finder's or fee or commission will be
owed to any party in connection with the transactions contemplated herein.
12.3 NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed to have been given when
delivered personally, or on the next day after being sent by facsimile
transmission or a nationally recognized overnight delivery service, or on the
third (3rd) day after being sent by registered or certified mail (return
receipt requested), postage prepaid to the parties to this Agreement at the
following addresses or at such other address for a party as shall be specified
by like notice:
If to LSAI:
Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102
Attention: John Simonelli
Facsimile: (405) 949-1787
With a copy to:
Michael E. Dunn, Esq.
Dunn, Swan, & Cunningham
2800 First Oklahoma Tower
Oklahoma City, Oklahoma 73102-5604
Facsimile: (405) 235-9605
If to ACCU-PATH:
ACCU-PATH MEDICAL LABORATORY, INC.,
430 W. Oak Street
El Dorado, Arkansas 71730
Attention: Dr. Wayne G. Elliott
12.4 ENTIRE AGREEMENT. This Agreement (including the Exhibit and
Schedules hereto
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AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 16
<PAGE>
and the documents and instruments referred to herein) constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, written and oral.
12.5 BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Neither this Agreement nor any right,
remedy, obligation or liability hereunder or by reason hereof shall be
assignable by any of the parties to this Agreement without the prior written
consent of the others. Nothing expressed or implied in this Agreement is
intended to or shall be construed to give any person other than the parties to
this Agreement or their respective successors or permitted assigns any legal or
equitable right, remedy or claim under or in respect of this Agreement, it
being the intention of the parties to this Agreement that this Agreement shall
be for the sole and exclusive benefit of the parties hereto or such successors
or assigns and for the benefit of no other person.
12.6 WAIVER. Any term or provision of this Agreement may be waived in
writing at any time by LSAI, if it is entitled to the benefits thereof, or by
ACCU-PATH, if it is entitled to the benefits thereof. No such waiver shall,
unless explicitly stated, be a continuing waiver. No failure to exercise or
delay in exercising any right hereunder shall constitute a waiver thereof.
12.7 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Mississippi applicable to contracts
made and to be performed within that State.
12.8 CONFIDENTIALITY. Prior to the consummation of the transactions
contemplated herein, ACCU-PATH and LSAI shall each keep confidential, and not
disclose to any third party, information it may obtain hereunder about the
other; provided, however, that this restriction shall not apply to information
which (a) is now in or may hereafter enter the public domain without breach of
this covenant, (b) was already in the possession of ACCU-PATH or LSAI, as the
case may be, prior to receipt from the other, (c) is lawfully received by ACCU-
PATH or LSAI, as the case may be, from an unrelated third party after receipt
of the same from the other, (d) ACCU-PATH or LSAI, as the case may be, is
required by law to disclose, or (e) ACCU-PATH or LSAI, as the case may be,
discloses to independent consultants or financial institutions, provided there
are restrictions prohibiting further dissemination of such information by any
such consultant or financial institution. If the transactions contemplated
herein are not consummated, each of ACCU-PATH and LSAI shall return to the
other all data obtained hereunder.
12.9 PUBLICITY. All press releases and other publicity concerning the
transactions contemplated herein shall be jointly planned and coordinated by
and between ACCU-PATH and LSAI. Neither party shall act unilaterally in this
regard without the prior written approval of the other, except to the extent
required by law.
12.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be a
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 17
<PAGE>
single agreement.
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement 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
"ACCU-PATH" ACCU-PATH MEDICAL
LABORATORY, INC.
By: /s/ Dr. Wayne G. Elliott
--------------------------------
Dr. Wayne G. Elliott
Chief Executive Officer
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 18
<PAGE>
LIST OF SCHEDULES
Schedule 2.1.1 Description of ACCU-PATH Forensic Drug Testing Customer
List and assets owned and used by ACCU-PATH in connection
with the Ruston, Louisiana office of ACCU-PATH.
Schedule 2.1.2 List of Employees to be hired by LSAI.
Schedule 2.1.3 Description of Leases to be Assumed.
Schedule 4.4.1 List of required consents or releases needed by ACCU-PATH.
ASSET PURCHASE AGREEMENT BETWEEN ACCU-PATH MEDICAL LABATORY, INC.
AND LABORATORY SPECIALISTS OF AMERICA, INC. PAGE 19
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
(Amended and Restated)
THIS EMPLOYMENT AGREEMENT (this "Agreement"), shall be effective the
15th day of April, 1994, by and between Laboratory Specialists of America,
Inc. (the "Company"), an Oklahoma corporation, and John Simonelli, an
individual ("Simonelli").
WHEREAS, the parties hereto entered into this Employment Agreement on
April 15, 1994, which was amended and restated on September 9, 1994, and
April 23, 1996;
WHEREAS, the parties have determined that it is in the best interest of
the Company that this Agreement be further amended to extend the term of this
Agreement, effective as of the date hereof;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow
to be performed on the part of the respective parties hereto, and in
consideration of the mutuality thereof, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Simonelli,
and Simonelli hereby agrees to serve the Company, during the period beginning
on April 15, 1996 and ending on April 15, 2000 (the "Period of Employment"),
or on such earlier date as provided in Sections 4 and 5 hereof; provided,
however, that the Period of Employment shall be extended an additional one
year period to next April 15 immediately following the end of each full year
of employment with the Company that Simonelli completes pursuant to and
accordance with this Agreement.
2. DUTIES. Substantially all of the duties and responsibilities of
Simonelli, subject to such travel as the duties of Simonelli hereunder may
reasonably require, shall be performed by Simonelli at and from the corporate
offices of the Company in Oklahoma City, Oklahoma.
2.1 During the Employment Period, Simonelli shall devote such time,
attention, skill, energy and best efforts to the duties assigned to him
from time to time by management and/or the Board of Directors of the
Company, and shall, but without obligation hereunder, serve the Company in
the executive officer positions to which he may be elected or appointed by
the Board of Directors of the Company, subject to acceptance by Simonelli
of such executive officer position or positions. Notwithstanding the
foregoing, Simonelli shall be required to devote not less than 50 percent
of his full business time, attention, skill, energy and efforts to the
performance of his duties hereunder; provided, however, that Simonelli may
engage in any other employment or pursuit of other endeavors which does not
conflict with his ability to perform his duties to the business interests
of the Company, provided that such other employment or pursuit of other
endeavors does not violate the duty of loyalty and care which Simonelli has
to the Company by reason of this Agreement or in his capacity as an
executive officer of the Company.
2.2 As an employee of the Company, Simonelli shall be subject to the
overall supervision and instructions of management of the Company and, if
applicable, that are associated with the executive officer position or
positions held by Simonelli which shall be subject to the overall
supervision and instructions of the Board of Directors to the Company.
3. COMPENSATION AND OTHER BENEFITS. During the Employment Period, the
Company shall pay or provide to Simonelli and Simonelli shall be entitled to
receive or have maintained for his benefit, the following:
3.1 Effective April 15, 1996, the Company shall compensate Simonelli
for the services to be rendered by him hereunder at the rate of one hundred
twelve thousand five hundred dollars ($112,500) per year, payable in equal
semi-monthly installments on the first and fifteen day of each month,
commencing on May 1, 1996.
EMPLOYMENT AGREEMENT PAGE 1
<PAGE>
3.2 From time to time the Company may pay cash bonuses (but not in
excess of 10 percent of the net income of the Company during the applicable
fiscal year of the Company determined in accordance with generally accepted
accounting principles) or grant stock options to its executive officers as
determined by the Board of Directors (or the Compensation Committee
established by the Board of Directors). To the extent that bonuses or
stock options are paid or granted by the Board of Directors to its
executive officers, Simonelli shall be deemed to be a member of the bonus
group or group to which stock options are granted, and his bonus or stock
option grants shall be determined in the same manner as are the bonuses or
stock option grants of other executives in the group.
3.3 Simonelli is hereby authorized to incur reasonable expenses for
the promotion of the Company's business, including entertainment, travel
and similar expenses, and he shall be reimbursed therefore by the Company
upon his presentation of itemized accounts of such expenditures.
3.4 The Company shall provide to Simonelli health and disability
insurance benefits comparable to those provided to the executive officers
of the Company either as a group or individually.
3.5 Simonelli shall be entitled to reasonable periods of vacation
with pay in each year, and reasonable periods of sick leave with pay
commensurate with his position, in accordance with Company policy as
established by the Board of Directors.
3.6 The Company shall provide to Simonelli and maintain insurance, at
the Company's cost and expense, covering the life of Simonelli in the face
amount of five hundred thousand dollars ($500,000), the proceeds of which
shall be payable to such beneficiary that Simonelli shall designate or in
the event of failure to designate a named beneficiary shall be payable to
the estate of Simonelli.
3.7 The Company shall pay to Simonelli an automobile allowance of
five hundred dollars ($500) per month, payable on the fifteen day of each
month while employed pursuant to this Agreement, and shall provide at the
sole cost and expense of the Company a mobile phone to assist Simonelli in
the performance of his duties and responsibilities as an employee and, if
applicable, executive officer of the Company.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Simonelli is unable, because of physical or mental illness
or disability, to render services of the character contemplated hereby and
that such disability reasonably may be expected to be permanent or to
continue for a period of at least six (6) consecutive months (or for
shorter periods totaling more than six (6) months during any period of
eighteen (18) consecutive months), in such event the Board of Directors of
the Company may elect to terminate the employment of Simonelli hereunder
upon written notice by the Company to Simonelli effective on the next first
or fifteenth day of the month following the date of such notice. At any
time and upon reasonable request therefor by the Company, Simonelli shall
submit to medical examination by a physician designated by the Company in
Oklahoma City, Oklahoma, for the purpose of determining the existence,
nature and extent of any such disability. In the event the Board of
Directors elects to terminate the employment of Simonelli pursuant to this
Section 4.1, Simonelli shall be entitled to receive any amount of
compensation determined pursuant to Section 3.1 up to the date of the
termination of the employment of Simonelli payable on the dates established
pursuant to Section 3.1.
4.2 In the event Simonelli shall die during the Employment Period,
this Agreement shall terminate effective on the next first or fifteenth day
of the month following the date of death, and the Company shall pay to the
spouse of Simonelli, or if unmarried at the time of his death, to the
estate of Simonelli, the compensation payable to Simonelli pursuant to
Section 3.1 for a period of three (3) months following the effective date
of termination of this Agreement pursuant to this Section 4.2, payable on
the dates provided for such compensation payment thereunder.
EMPLOYMENT AGREEMENT PAGE 2
<PAGE>
4.3 In the event of termination of this Agreement pursuant to Section
4.1 and/or Section 4.2 of this Agreement, Simonelli (or his spouse or if
unmarried on the date of his death his estate) shall be entitled to receive
accrued and unpaid expense reimbursements, automobile allowance and any
unpaid bonus amounts awarded to Simonelli prior to such termination and
stock option grants awarded to Simonelli prior to such termination
exercisable in accordance with the terms of such stock option grants.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Simonelli is guilty of gross negligence
or fraud materially injurious to the Company, the Company may terminate this
Agreement, and all obligations hereunder shall thereupon terminate.
6. NON-COMPETITION. During the Employment Period, or, if longer, the
period of employment of Simonelli by the Company, Simonelli will not engage
in competition with the Company, either directly or indirectly, in any manner
or capacity as an employee or executive officer of a competitor company in
any phase of the business carried on by the Company at any time.
7. CONFIDENTIALITY. During the Employment Period, or, if longer, the
period of employment of Simonelli by the Company, and for a period of three
(3) years thereafter, Simonelli will not divulge to anyone, other than the
Company or persons designated by the Company in writing, any confidential
material information directly or indirectly useful in any aspect of the
business of the Company or any of its subsidiaries, as conducted from time to
time, as to which Simonelli is now, or at any time during employment shall
become, informed and which is not then generally known to the public or
recognized as standard practice.
8. CERTAIN PROVISIONS TO SURVIVE TERMINATION; ETC. Notwithstanding any
termination of his employment under this Agreement, Simonelli, in
consideration of his employment hereunder to the date of such termination,
shall remain bound by the provisions of Section 6 and 7, and consequently, in
addition to all other remedies that may be available to it, the Company shall
be entitled to injunctive relief for any actual or threatened violation of
such Sections.
9. NON-ASSIGNABILITY. Neither party hereto shall have the right to
assign this Agreement or any rights or obligations hereunder without the
written consent of the other party.
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitration
proceedings shall be conducted in Oklahoma City, Oklahoma unless otherwise
agreed by the parties hereto. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 10 shall be construed so as to deny the Company the right and power
to seek and obtain injunctive relief in a court of equity for any breach or
threatened breach by Simonelli of any of his covenants contained in Sections
6 and 7 hereof.
11. NOTICE. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given forty-eight (48)
hours after depositing in the United States mail, certified mail, postage
prepaid, addressed to the party to receive such notice at the address set
forth hereinbelow or such other address as either party may give to the other
in writing pursuant to written notice pursuant to this Section:
If to Simonelli: Mr. John Simonelli
1101-A Sovereign Row
Oklahoma City, Oklahoma 73108
If to the Company: Laboratory Specialists of America, Inc.
1101-A Sovereign Row
Oklahoma City, Oklahoma 73108
Attention: Larry E. Howell
EMPLOYMENT AGREEMENT PAGE 3
<PAGE>
12. GENERAL. The terms and provisions herein contained (i) constitute
the entire Agreement between the Company and Simonelli with respect to the
subject matter hereof, (ii) may be amended or modified only by a written
instrument executed by the parties hereto, and (iii) shall be construed and
enforced in accordance with the laws in effect in the State of Oklahoma
without regard to its conflicts of law provisions. Failure by a party hereto
to require performance of any provision of this Agreement shall not affect,
impair or waive such party's right to require full performance at any time
thereafter.
It is acknowledged that the furniture, equipment and artwork in the
corporate offices of the Company in Oklahoma City, Oklahoma are the property
of Larry E. Howell and Simonelli.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as amended and restated, on the 26th day of September, 1997, with
an effective date of the 15th day of April, 1996.
"Company" LABORATORY SPECIALISTS OF AMERICA, INC.
By: /S/ LARRY E. HOWELL
---------------------------------------
Larry E. Howell, President
"Simonelli" /S/ JOHN SIMONELLI
---------------------------------------
John Simonelli
EMPLOYMENT AGREEMENT PAGE 4
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
(Amended and Restated)
THIS EMPLOYMENT AGREEMENT (this "Agreement"), shall be effective the
15th day of April, 1994, by and between Laboratory Specialists of America,
Inc. (the "Company"), an Oklahoma corporation, and Larry E. Howell, an
individual ("Howell").
WHEREAS, the parties hereto entered into this Employment Agreement on
April 15, 1994, which was amended and restated on September 9, 1994, and
April 23, 1996;
WHEREAS, the parties have determined that it is in the best interest of
the Company that this Agreement be further amended to extend the term of this
Agreement, effective as of April 15, 1996;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow
to be performed on the part of the respective parties hereto, and in
consideration of the mutuality thereof, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Howell, and
Howell hereby agrees to serve the Company, during the period beginning on
April 15, 1996, and ending on April 15, 2000 (the "Employment Period"), or on
such earlier date as provided in Sections 4 and 5 hereof; provided, however,
that the Period of Employment shall be extended an additional one year period
to next April 15 immediately following the end of each full year of
employment with the Company that Howell completes pursuant to and accordance
with this Agreement.
2. DUTIES. Substantially all of the duties and responsibilities of
Howell, subject to such travel as the duties of Howell hereunder may
reasonably require, shall be performed by Howell at and from the corporate
offices of the Company in Oklahoma City, Oklahoma.
2.1 During the Employment Period, Howell shall devote such time,
attention, skill, energy and best efforts to the duties assigned to him
from time to time by management and/or the Board of Directors of the
Company, and shall, but without obligation hereunder, serve the Company in
the executive officer positions to which he may be elected or appointed by
the Board of Directors of the Company, subject to acceptance by Howell of
such executive officer position or positions. Notwithstanding the
foregoing, Howell shall be required to devote not less than 50 percent of
his full business time, attention, skill, energy and efforts to the
performance of his duties hereunder; provided, however, that Howell may
engage in any other employment or pursuit of other endeavors which does not
conflict with his ability to perform his duties to the business interests
of the Company, provided that such other employment or pursuit of other
endeavors does not violate the duty of loyalty and care which Howell has to
the Company by reason of this Agreement or in his capacity as an executive
officer of the Company.
2.2 As an employee of the Company, Howell shall be subject to the
overall supervision and instructions of management of the Company and, if
applicable, that are associated with the executive officer position or
positions held by Howell which shall be subject to the overall supervision
and instructions of the Board of Directors to the Company.
3. COMPENSATION AND OTHER BENEFITS. During the Employment Period, the
Company shall pay or provide to Howell and Howell shall be entitled to
receive or have maintained for his benefit, the following:
3.1 Effective April 15, 1996, the Company shall compensate Howell for
the services to be rendered by him hereunder at the rate of one hundred
twelve thousand five hundred dollars ($112,500) per year, payable in equal
semi-monthly installments on the first and fifteen day of each month,
commencing on May 1, 1996.
EMPLOYMENT AGREEMENT PAGE 1
<PAGE>
3.2 From time to time the Company may pay cash bonuses (but not in
excess of 10 percent of the net income of the Company during the applicable
fiscal year of the Company determined in accordance with generally accepted
accounting principles) or grant stock options to its executive officers as
determined by the Board of Directors (or the Compensation Committee
established by the Board of Directors). To the extent that bonuses or
stock options are paid or granted by the Board of Directors to its
executive officers, Howell shall be deemed to be a member of the bonus
group or group to which stock options are granted, and his bonus or stock
option grants shall be determined in the same manner as are the bonuses or
stock option grants of other executives in the group.
3.3 Howell is hereby authorized to incur reasonable expenses for the
promotion of the Company's business, including entertainment, travel and
similar expenses, and he shall be reimbursed therefore by the Company upon
his presentation of itemized accounts of such expenditures.
3.4 The Company shall provide to Howell health and disability
insurance benefits comparable to those provided to the executive officers
of the Company either as a group or individually.
3.5 Howell shall be entitled to reasonable periods of vacation with
pay in each year, and reasonable periods of sick leave with pay
commensurate with his position, in accordance with Company policy as
established by the Board of Directors.
3.6 The Company shall provide to Howell and maintain insurance, at
the Company's cost and expense, covering the life of Howell in the face
amount of five hundred thousand dollars ($500,000), the proceeds of which
shall be payable to such beneficiary that Howell shall designate or in the
event of failure to designate a named beneficiary shall be payable to the
estate of Howell.
3.7 The Company shall pay to Howell an automobile allowance of five
hundred dollars ($500) per month, payable on the fifteen day of each month
while employed pursuant to this Agreement, and shall provide at the sole
cost and expense of the Company a mobile phone to assist Howell in the
performance of his duties and responsibilities as an employee and, if
applicable, executive officer of the Company.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Howell is unable, because of physical or mental illness or
disability, to render services of the character contemplated hereby and
that such disability reasonably may be expected to be permanent or to
continue for a period of at least six (6) consecutive months (or for
shorter periods totaling more than six (6) months during any period of
eighteen (18) consecutive months), in such event the Board of Directors of
the Company may elect to terminate the employment of Howell hereunder upon
written notice by the Company to Howell effective on the next first or
fifteenth day of the month following the date of such notice. At any time
and upon reasonable request therefor by the Company, Howell shall submit to
medical examination by a physician designated by the Company in Oklahoma
City, Oklahoma, for the purpose of determining the existence, nature and
extent of any such disability. In the event the Board of Directors elects
to terminate the employment of Howell pursuant to this Section 4.1, Howell
shall be entitled to receive any amount of compensation determined pursuant
to Section 3.1 up to the date of the termination of the employment of
Howell payable on the dates established pursuant to Section 3.1.
4.2 In the event Howell shall die during the Employment Period, this
Agreement shall terminate effective on the next first or fifteenth day of
the month following the date of death, and the Company shall pay to the
spouse of Howell, or if unmarried at the time of his death, to the estate
of Howell, the compensation payable to Howell pursuant to Section 3.1 for a
period of three (3) months following the effective date of termination of
this Agreement pursuant to this Section 4.2, payable on the dates provided
for such compensation payment thereunder.
EMPLOYMENT AGREEMENT PAGE 2
<PAGE>
4.3 In the event of termination of this Agreement pursuant to Section
4.1 and/or Section 4.2 of this Agreement, Howell (or his spouse or if
unmarried on the date of his death his estate) shall be entitled to receive
accrued and unpaid expense reimbursements, automobile allowance and any
unpaid bonus amounts awarded to Howell prior to such termination and stock
option grants awarded to Howell prior to such termination exercisable in
accordance with the terms of such stock option grants.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Howell is guilty of gross negligence or
fraud materially injurious to the Company, the Company may terminate this
Agreement, and all obligations hereunder shall thereupon terminate.
6. NON-COMPETITION. During the Employment Period, or, if longer, the
period of employment of Howell by the Company, Howell will not engage in
competition with the Company, either directly or indirectly, in any manner or
capacity as an employee or executive officer of a competitor company in any
phase of the business carried on by the Company at any time.
7. CONFIDENTIALITY. During the Employment Period, or, if longer, the
period of employment of Howell by the Company, and for a period of three (3)
years thereafter, Howell will not divulge to anyone, other than the Company
or persons designated by the Company in writing, any confidential material
information directly or indirectly useful in any aspect of the business of
the Company or any of its subsidiaries, as conducted from time to time, as to
which Howell is now, or at any time during employment shall become, informed
and which is not then generally known to the public or recognized as standard
practice.
8. CERTAIN PROVISIONS TO SURVIVE TERMINATION; ETC. Notwithstanding any
termination of his employment under this Agreement, Howell, in consideration
of his employment hereunder to the date of such termination, shall remain
bound by the provisions of Section 6 and 7, and consequently, in addition to
all other remedies that may be available to it, the Company shall be entitled
to injunctive relief for any actual or threatened violation of such Sections.
9. NON-ASSIGNABILITY. Neither party hereto shall have the right to
assign this Agreement or any rights or obligations hereunder without the
written consent of the other party.
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitration
proceedings shall be conducted in Oklahoma City, Oklahoma unless otherwise
agreed by the parties hereto. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 10 shall be construed so as to deny the Company the right and power
to seek and obtain injunctive relief in a court of equity for any breach or
threatened breach by Howell of any of his covenants contained in Sections 6
and 7 hereof.
11. NOTICE. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given forty-eight (48)
hours after depositing in the United States mail, certified mail, postage
prepaid, addressed to the party to receive such notice at the address set
forth hereinbelow or such other address as either party may give to the other
in writing pursuant to written notice pursuant to this Section:
If to Howell: Mr. Larry E. Howell
1101-A Sovereign Row
Oklahoma City, Oklahoma 73108
If to the Company: Laboratory Specialists of America, Inc.
1101-A Sovereign Row
Oklahoma City, Oklahoma 73108
Attention: John Simonelli
EMPLOYMENT AGREEMENT PAGE 3
<PAGE>
12. GENERAL. The terms and provisions herein contained (i) constitute
the entire Agreement between the Company and Howell with respect to the
subject matter hereof, (ii) may be amended or modified only by a written
instrument executed by the parties hereto, and (iii) shall be construed and
enforced in accordance with the laws in effect in the State of Oklahoma
without regard to its conflicts of law provisions. Failure by a party hereto
to require performance of any provision of this Agreement shall not affect,
impair or waive such party's right to require full performance at any time
thereafter.
It is acknowledged that the furniture, equipment and artwork in the
corporate offices of the Company in Oklahoma City, Oklahoma are the property
of John Simonelli and Howell.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as amended and restated, on the 26th day of September, 1997, with
an effective date of the 15th day of April, 1996.
"Company" LABORATORY SPECIALISTS OF AMERICA, INC.
By: /S/ JOHN SIMONELLI
------------------------------------------
John Simonelli, Chief Executive Officer
"Howell" /S/ LARRY E. HOWELL
----------------------------------------------
Larry E. Howell
EMPLOYMENT AGREEMENT PAGE 4
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
(Amended and Restated)
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated this 26th day of
September, 1997 (the "date hereof"), with an effective date of the 15th day
of April, 1996 (the "effective date"), by and between Laboratory Specialists,
Inc. (the "Company"), a Louisiana corporation, and Arthur R. Peterson, Jr.,
an individual ("Peterson").
WHEREAS, the parties hereto entered into this Employment Agreement on
April 23, 1996;
WHEREAS, the parties have determined that it is in the best interest of
the Company that this Agreement be further amended to extend the term of this
Agreement, effective as of the date hereof;
WHEREAS, Peterson is currently serving as President and Chief Executive
Officer of the Company;
WHEREAS, the Company is a wholly-owned subsidiary of Laboratory
Specialists of America, Inc., of which Peterson is currently serving as
Treasurer;
WHEREAS, the Company desires to obtain the services of Peterson on a
full-time basis in order to preserve the continuation of the operations of
the Company with its suppliers, customers and others, and Peterson desires to
render such services to the Company;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow
to be performed on the part of the respective parties hereto, and in
consideration of the mutuality thereof, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Peterson,
and Peterson hereby agrees to serve the Company, during the period beginning
on April 15, 1996 and ending on April 15, 2000 (the "Period of Employment"),
or on such earlier date as provided in Sections 4 and 5 hereof; provided,
however, that the Period of Employment shall be extended an additional one
year period to next April 15 immediately following the end of each full year
of employment with the Company that Peterson completes pursuant to and
accordance with this Agreement.
2. DUTIES. Substantially all of the duties and responsibilities of
Peterson, subject to such travel as the duties of Peterson hereunder may
reasonably require, shall be performed by Peterson at and from the corporate
offices of the Company in Belle Chasse, Louisiana.
2.1 During the Period of Employment, Peterson shall serve as
President and Chief Executive Officer of the Company and shall devote his
full time, attention, skill, energy and best efforts to the duties assigned
to him from time to time by management and/or the Board of Directors of the
Company, and shall, but without obligation hereunder, serve the Company in
such additional executive officer positions to which he may be elected or
appointed by the Board of Directors of the Company, subject to acceptance
by Peterson of such additional executive officer position or positions.
Notwithstanding the foregoing, Peterson may engage in any other pursuit or
endeavor which does not conflict with his ability to perform his duties to
the business interests of the Company, provided that such other pursuit or
endeavors does not violate the duty of loyalty and care which Peterson has
to the Company by reason of this Agreement or in his capacity as an
executive officer of the Company.
2.2 As an employee of the Company, Peterson shall be subject to the
overall supervision and instructions of management of the Company and, if
applicable, that are associated with the executive officer position or
positions held by Peterson which shall be subject to the overall
supervision and instructions of the Board of Directors to the Company.
3. COMPENSATION AND OTHER BENEFITS. During the Employment Period, the
Company shall pay or provide to Peterson and Peterson shall be entitled to
receive or have maintained for his benefit, the following:
EMPLOYMENT AGREEMENT PAGE 1
<PAGE>
3.1 Commencing on the effective date, the Company shall compensate
Peterson for the services to rendered by him hereunder at the rate of one
hundred twenty-five thousand dollars ($125,000) per year, payable in equal
semi-monthly installments on the first and fifteen day of each month,
commencing on May 1, 1996.
3.2 In addition to the compensation payable to Peterson pursuant to
Section 3.1 hereof, within 90 days following the end of each fiscal year of
Laboratory Specialists of America, Inc. ending during the Employment
Period, the Company shall pay Peterson a bonus equal to the lesser of (i)
$50,000 or (ii) 10 percent of the net income of Laboratory Specialists of
America, Inc. before provision for income taxes determined in accordance
with generally accepted accounting principles as reflected on the audited
financial statements of Laboratory Specialists of America, Inc. for the
immediately preceding fiscal year. The bonus payable pursuant to this
Section 3.2 shall be deemed earned by Peterson as of the end of each such
fiscal year of Laboratory Specialists of America, Inc. for all intents and
purposes, including for federal income tax purposes, notwithstanding
termination of the employment of Peterson on or after the end of such
fiscal year of Laboratory Specialists of America, Inc. To the extent that
stock options are granted by the Board of Directors of Laboratory
Specialists of America, Inc. to its executive officers, Peterson shall be
deemed to be a member of the group to which stock options are granted, and
his stock option grants shall be determined in the same manner as are the
stock option grants of other executives in the group.
3.3 Peterson is hereby authorized to incur reasonable expenses for
the promotion of the Company's business, including entertainment, travel
and similar expenses, and he shall be reimbursed therefore by the Company
upon his presentation of itemized accounts of such expenditures.
3.4 The Company shall provide to Peterson health and disability
insurance benefits comparable to those provided to the executive officers
of the Company either as a group or individually.
3.5 Peterson shall be entitled to reasonable periods of vacation with
pay in each year, and reasonable periods of sick leave with pay
commensurate with his position, in accordance with Company policy as
established by the Board of Directors.
3.6 The Company shall provide to Peterson and maintain insurance, at
the Company's cost and expense, covering the life of Peterson in the face
amount of one million dollars ($1,000,000), the proceeds of which shall be
payable to such beneficiary that Peterson shall designate or in the event
of failure to designate a named beneficiary shall be payable to the estate
of Peterson.
3.7 The Company shall pay to Peterson an automobile allowance of five
hundred dollars ($500) per month, payable on the fifteen day of each month
while employed pursuant to this Agreement, and shall provide at the sole
cost and expense of the Company a mobile phone to assist Peterson in the
performance of his duties and responsibilities as an employee and, if
applicable, executive officer of the Company.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Peterson is unable, because of physical or mental illness
or disability, to render services of the character contemplated hereby and
that such disability reasonably may be expected to be permanent or to
continue for a period of at least six (6) consecutive months (or for
shorter periods totaling more than six (6) months during any period of
eighteen (18) consecutive months), in such event the Board of Directors of
the Company may elect to terminate the employment of Peterson hereunder
upon written notice by the Company to Peterson effective on the next first
or fifteenth day of the month following the date of such notice. At any
time and upon reasonable request therefor by the Company, Peterson shall
submit to medical examination by a physician designated by the Company in
New Orleans, Louisiana, for the purpose of determining the existence,
nature and extent of any such disability. In the event the Board of
Directors elects to terminate the employment of Peterson pursuant to this
Section 4.1, Peterson shall be entitled to receive any amount of
compensation
EMPLOYMENT AGREEMENT PAGE 2
<PAGE>
determined pursuant to Section 3.1 hereof up to the date of the termination
of the employment of Peterson payable on the dates established pursuant to
Section 3.1 hereof.
4.2 In the event Peterson shall die during the Employment Period,
this Agreement shall terminate effective on the next first or fifteenth day
of the month following the date of death, and the Company shall pay to the
spouse of Peterson, or if unmarried at the time of his death, to the estate
of Peterson, the compensation payable to Peterson pursuant to Section 3.1
hereof for a period of three (3) months following the effective date of
termination of this Agreement pursuant to this Section 4.2, payable on the
dates provided for such compensation payment thereunder.
4.3 In the event of termination of this Agreement pursuant to Section
4.1 and/or Section 4.2 of this Agreement, Peterson (or his spouse or if
unmarried on the date of his death his estate) shall be entitled to receive
accrued and unpaid expense reimbursements, automobile allowance and any
unpaid bonus amounts awarded to Peterson prior to such termination and
stock option grants awarded to Peterson prior to such termination
exercisable in accordance with the terms of such stock option grants.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Peterson is guilty of gross negligence
or fraud materially injurious to the Company, the Company may terminate this
Agreement, and all obligations hereunder shall thereupon terminate.
6. NON-COMPETITION. During the Employment Period, or, if longer, the
period of employment of Peterson by the Company, Peterson will not engage in
competition with the Company, either directly or indirectly, in any manner or
capacity as an employee or executive officer of a competitor company in any
phase of the business carried on by the Company at any time.
7. CONFIDENTIALITY. During the Employment Period, or, if longer, the
period of employment of Peterson by the Company, and for a period of three
(3) years thereafter, Peterson will not divulge to anyone, other than the
Company or persons designated by the Company in writing, any confidential
material information directly or indirectly useful in any aspect of the
business of the Company or any of its subsidiaries, as conducted from time to
time, as to which Peterson is now, or at any time during employment shall
become, informed and which is not then generally known to the public or
recognized as standard practice.
8. CERTAIN PROVISIONS TO SURVIVE TERMINATION; ETC. Notwithstanding any
termination of his employment under this Agreement, Peterson, in
consideration of his employment hereunder to the date of such termination,
shall remain bound by the provisions of Section 6 and 7 hereof, and
consequently, in addition to all other remedies that may be available to it,
the Company shall be entitled to injunctive relief for any actual or
threatened violation of such Sections.
9. NON-ASSIGNABILITY. Neither party hereto shall have the right to
assign this Agreement or any rights or obligations hereunder without the
written consent of the other party.
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitration
proceedings shall be conducted in New Orleans, Louisiana, unless otherwise
agreed by the parties hereto. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 10 hereof shall be construed so as to deny the Company the right and
power to seek and obtain injunctive relief in a court of equity for any
breach or threatened breach by Peterson of any of his covenants contained in
Sections 6 and 7 hereof.
11. NOTICE. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given forty-eight (48)
hours after depositing in the United States mail, certified mail, postage
prepaid, addressed to the party to receive such notice at the address set
forth hereinbelow or such other address as either party may give to the other
in writing pursuant to written notice pursuant to this Section:
EMPLOYMENT AGREEMENT PAGE 3
<PAGE>
If to Peterson: (PERSONAL AND CONFIDENTIAL)
Mr. Arthur R. Peterson, Jr.
113 Jarrell Drive
Belle Chasse, Louisiana 70037
If to the Company: Laboratory Specialists, Inc.
113 Jarrell Drive
Belle Chasse, Louisiana 70037
12. GENERAL. The terms and provisions herein contained (i) constitute
the entire Agreement between the Company and Peterson with respect to the
subject matter hereof, (ii) may be amended or modified only by a written
instrument executed by the parties hereto, and (iii) shall be construed and
enforced in accordance with the laws in effect in the State of Louisiana
without regard to its conflicts of law provisions. Failure by a party hereto
to require performance of any provision of this Agreement shall not affect,
impair or waive such party's right to require full performance at any time
thereafter.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as amended and restated, on the 26th day of September, 1997, with
an effective date of the 15th day of April, 1996.
"Company" LABORATORY SPECIALISTS, INC.
By: /S/ LARRY E. HOWELL
--------------------------------------
Larry E. Howell, Vice President
"Peterson" /S/ ARTHUR R. PETERSON, JR.
-------------------------------------------
Arthur R. Peterson, Jr.
EMPLOYMENT AGREEMENT PAGE 4
<PAGE>
EXHIBIT 10.7
EMPLOYMENT SEVERANCE AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), effective the 20th day of
November, 1997, by and between Laboratory Specialists, Inc. (the "Company"), a
Louisiana corporation, and Robert A. Gardebled, Jr., an individual ("Employee").
WITNESSETH:
WHEREAS, Employee is employed by the Company and serves as Controller and
Secretary of the Company; and
WHEREAS, the Company and Employee desire to enter into an employment
severance agreement on the terms and conditions hereinafter provided;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow to
be performed on the part of the respective parties hereto, and in consideration
of the mutuality thereof, the parties hereto agree as follows:
1. TERM. This Agreement shall remain in effect during the period Employee
remains employed by the Company.
2. EMPLOYMENT TERMINATION. In the event of a termination (as defined
below) of Employee's employment with the Company, the Company shall pay or
provide the following:
2.1 CONTINUATION OF REGULAR COMPENSATION. The Company shall pay to
Employee the regular compensation payments for a period of 12 months
following termination of Employee's employment with the Company at the
salary rate of regular compensation paid to Employee immediately prior to
the termination.
2.2 TERMINATION DEFINED. The term "termination" shall mean
termination by the Company of the employment of Employee with the Company
for any reason other than cause (as defined below), or resignation of
Employee upon the occurrence of a "change in control" (as defined below).
The term "cause" means gross misconduct or willful and material breach of
this Agreement by Employee. For purposes of this Agreement, each of the
following specified events shall be deemed a "change of control": (i) any
third person, including a "group" as defined in Sections 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended, becomes the
beneficial owner of shares of the Company or of proxies or other rights
pertaining to the Company which carry 25 percent or more of the total
number of votes for the election of the Board of Directors of the Company
or with respect to a merger, consolidation or sale; (ii) as result of, or
in connection with, any cash tender offer, merger, or other business
combination of the foregoing, the persons who were directors of the Company
immediately prior to such event cease to constitute a majority of the Board
of Directors of the Company; (iii) the approval of an agreement providing
either for a transaction or series of transactions by which the Company
will cease to be an independent publicly-owned company or for a sale, lease
or other disposition of all or substantially all of the assets of the
Company; or (iv) following any public offering of securities of the Company
during any period of 24 consecutive months as a result of which the persons
who were members of the Company's Board of Directors at the commencement of
the period cease for any reason to constitute a majority of the Company's
Board of Directors.
EMPLOYMENT SEVERANCE AGREEMENT PAGE 1
<PAGE>
3. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Employee is guilty of willful misconduct
or gross negligence in the performance of the services contemplated by this
Agreement, the Company shall have the right, by resolution unanimously adopted
by all members (other than Employee) of the Board of Directors of the Company,
to terminate this Agreement at the end of any month by giving not less than 60
days' prior written notice to Employee of its election to so terminate this
Agreement, and all obligations hereunder shall thereupon terminate thereafter.
4. NON-ASSIGNABILITY. Neither party hereto shall have the right to assign
this Agreement or any rights or obligations hereunder without the written
consent of the other party.
5. NOTICE. All notices required or permitted to be given hereunder shall
be in writing and shall be deemed to have been given forty-eight (48) hours
after depositing in the United States mail, certified mail, postage prepaid,
addressed to the party to receive such notice at the address set forth
hereinbelow or such other address as either party may give to the other in
writing pursuant to written notice pursuant to this Section:
If to Employee: Mr. Robert A. Gardebled, Jr.
If to the Company: Laboratory Specialists, Inc.
113 Jarrell Drive
Belle Chasse, Louisiana 70037
Attention: Mr. Arthur R. Peterson, Jr.
6. GENERAL. The terms and provisions herein contained (i) may be amended
or modified only by a written instrument executed by the parties hereto, and
(ii) shall be construed and enforced in accordance with the laws in effect in
the State of Louisiana without regard to its conflicts of law provisions.
Failure by a party hereto to require performance of any provision of this
Agreement shall not affect, impair or waive such party's right to require full
performance at any time thereafter.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the 20th day of November, 1997.
"Company" LABORATORY SPECIALISTS, INC.
By: /S/ARTHUR R. PETERSON, JR.
---------------------------------------------------
Arthur R. Peterson, Jr., Chief Executive Officer
"Employee /S/ROBERT A. GARDEBLED, JR.
------------------------------------------------------
Robert A. Gardebled, Jr.
EMPLOYMENT SEVERANCE AGREEMENT PAGE 2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,863,639
<SECURITIES> 0
<RECEIVABLES> 2,831,227
<ALLOWANCES> 568,237
<INVENTORY> 109,929
<CURRENT-ASSETS> 5,702,984
<PP&E> 3,500,794
<DEPRECIATION> 1,123,909
<TOTAL-ASSETS> 15,016,580
<CURRENT-LIABILITIES> 2,397,001
<BONDS> 2,353,428
0
0
<COMMON> 4,925
<OTHER-SE> 9,901,378
<TOTAL-LIABILITY-AND-EQUITY> 15,016,580
<SALES> 0
<TOTAL-REVENUES> 12,836,953
<CGS> 0
<TOTAL-COSTS> 5,828,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40,000
<INTEREST-EXPENSE> 230,433
<INCOME-PRETAX> 2,282,367
<INCOME-TAX> 953,264
<INCOME-CONTINUING> 1,329,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,329,103
<EPS-PRIMARY> .36
<EPS-DILUTED> .31
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 2,411,051 727,381 884,795 781,218
911,857
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 1,188,023 2,294,243 2,338,045 2,513,220
2,613,352
<ALLOWANCES> 91,546 597,499 353,546 347,875
336,368
<INVENTORY> 87,542 99,754 148,877 137,731
116,445
<CURRENT-ASSETS> 3,842,187 3,194,480 3,194,198 3,256,473
3,460,192
<PP&E> 1,730,219 2,493,547 2,470,511 2,480,103
2,347,014
<DEPRECIATION> 899,559 900,948 952,203 1,016,247
922,877
<TOTAL-ASSETS> 7,319,036 9,394,808 10,795,465 10,712,509
10,960,070
<CURRENT-LIABILITIES> 713,369 2,191,768 2,125,250 1,814,417
1,825,593
<BONDS> 353,123 1,245,690 1,201,128 1,195,792
1,148,482
0 0 0 0
0
0 0 0 0
0
<COMMON> 3,298 3,313 3,298 3,313
3,313
<OTHER-SE> 6,208,288 5,616,937 6,410,534 6,643,732
6,927,427
<TOTAL-LIABILITY-AND-EQUITY> 7,319,036 9,394,808 10,795,465 10,712,509
10,960,070
<SALES> 0 0 0 0
0
<TOTAL-REVENUES> 6,925,716 8,726,799 1,948,536 4,239,707
6,532,412
<CGS> 0 0 0 0
0
<TOTAL-COSTS> 3,246,470 3,816,114 840,161 1,856,534
2,816,344
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 49,721 446,087 12,000 24,000
80,000
<INTEREST-EXPENSE> 29,651 67,185 10,493 29,325
49,384
<INCOME-PRETAX> 1,148,965 1,215,676 343,932 706,482
1,178,531
<INCOME-TAX> 474,405 527,171 141,686 295,398
483,752
<INCOME-CONTINUING> 674,560 688,505 202,246 411,084
694,779
<DISCONTINUED> 0 1,274,216 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 661,216 (585,711) 202,246 411,084
694,779
<EPS-PRIMARY> .20 (.18) .06 .12
.21
<EPS-DILUTED> .17 (.15) .06 .12
.21
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 643,413 703,157 595,195
<SECURITIES> 0 0 0
<RECEIVABLES> 2,595,007 2,921,914 3,210,534
<ALLOWANCES> 627,499 637,499 614,673
<INVENTORY> 116,143 75,370 110,913
<CURRENT-ASSETS> 3,209,457 3,424,243 4,154,442
<PP&E> 2,744,502 3,008,739 3,375,730
<DEPRECIATION> 954,510 1,024,749 1,040,240
<TOTAL-ASSETS> 12,143,307 12,457,386 13,326,905
<CURRENT-LIABILITIES> 3,433,953 3,476,066 3,212,664
<BONDS> 2,518,000 2,401,354 2,491,780
0 0 0
0 0 0
<COMMON> 3,313 3,313 3,694
<OTHER-SE> 5,880,941 6,269,553 7,311,667
<TOTAL-LIABILITY-AND-EQUITY> 12,143,307 12,457,386 13,326,908
<SALES> 0 0 0
<TOTAL-REVENUES> 2,587,222 6,010,982 9,549,032
<CGS> 0 0 0
<TOTAL-COSTS> 1,186,084 2,659,857 4,246,113
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 30,000 40,000 40,000
<INTEREST-EXPENSE> 36,876 90,484 152,467
<INCOME-PRETAX> 407,624 1,071,859 1,857,508
<INCOME-TAX> 173,621 449,243 773,923
<INCOME-CONTINUING> 234,003 622,616 1,083,585
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 234,003 622,616 1,083,585
<EPS-PRIMARY> .07 .19 .33
<EPS-DILUTED> .06 .16 .28
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