<PAGE>
As filed with the Securities and Exchange Commission on , 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LABORATORY SPECIALISTS OF AMERICA, INC.
(Name of small business issuer in its charter)
OKLAHOMA 8734 73-1451065
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
101 PARK AVENUE, SUITE 810 JOHN SIMONELLI, CHIEF EXECUTIVE OFFICER
OKLAHOMA CITY, OKLAHOMA 73102 LABORATORY SPECIALISTS OF AMERICA, INC.
(405) 232-9800 101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-9800
(Address and telephone number, (Name, address and telephone number,
including area code, of registrant's of agent for service)
principal executive offices)
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Copies To:
MICHAEL E. DUNN, ESQ.
DUNN SWAN & CUNNINGHAM
2800 OKLAHOMA TOWER
210 PARK AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604
Telephone: 405/235-8318
Facsimile: 405/235-9605
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE MAXIMUM OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock . . . . . . . . . . . . . . . . . 661,128 $4.69(1) $3,100,691 $ 915
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Common Stock(2)(3) . . . . . . . . . . . .. .. 55,522 $5.40 $ 299,819 $ 89
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Total . . . . . . . . . . . . . . . . . . . $3,400,510 $1,004
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</TABLE>
(1) The Offering Price Per Share has been estimated and the registration fee
has been computed pursuant to Rule 457(c) on the basis of the average of
the closing bid and asked prices of the Common Stock as quoted on Nasdaq
SmallCap Market on June 30, 1998, which was $4.69 per share.
(2) The Common Stock underlying the warrants exercisable at $5.40 per share
of Common Stock.
(3) Pursuant to Rule 416, includes such indeterminate number of additional
securities as may be required for issuance on exercise of warrants as a
result of adjustment in the number of securities issuable on such
exercise by reason of anti-dilution provisions of such warrants.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 2, 1998 PROSPECTUS
LABORATORY SPECIALISTS OF AMERICA, INC.
716,650 SHARES OF COMMON STOCK
Of the 716,650 shares of Common Stock being offered (the "Offering"),
55,522 shares are being offered by Laboratory Specialists of America, Inc.
(the "Company" or "LABZ") to the holders of certain warrants (the "Jesup &
Lamont Group Warrants") for sale and issuance upon exercise of the Jesup &
Lamont Group Warrants. Furthermore, 661,128 shares are being offered for
resale by the holders thereof. The Company will not receive any part of the
proceeds from the resale of the Common Stock by the holders thereof (the
"Selling Shareholders"). See "Description of Securities--Jesup & Lamont
Warrants" and "Selling Shareholders."
The Common Stock is quoted on Nasdaq SmallCap Market under the symbols
LABZ. On June 30, 1998, the closing sale price of the Common Stock was $4.69.
------------------------
SEE "RISK FACTORS," BEGINNING AT PAGE 6, FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT
IN THE UNITS AND COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS PROCEEDS TO
PRICE TO DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS COMPANY SHAREHOLDERS
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Per share underlying Jesup & Lamont
Group Warrants . . . . . . . . . . . . . . . . . . . $5.40 -- $5.40(1) $ --
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Per share . . . . . . . . . . . . . . . . . . . . . . . . $4.69 -- -- $ 4.69
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Total . . . . . . . . . . . . . . . . . . . . . . . . . . -- $299,819 $3,100,690(2)
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</TABLE>
(1) Proceeds to the Company assumes exercise of the Jesup & Lamont Group
Warrants in full at the Price to Public, before deducting offering
expenses payable by the Company estimated to be $28,500. See "Use of
Proceeds."
(2) The Company will not receive any of the Proceeds to the Selling
Shareholders.
It is expected that delivery of the certificates representing the Common
Stock will be made as promptly as practicable following exercise of the Jesup
and Lamont Warrants and payment of the exercise price. See "Description of
Securities--Jesup & Lamont Group Warrants."
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements under the captions "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus and the
documents incorporated herein by reference constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategies that involve risks and uncertainties. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. See
"Risk Factors." As a result of the foregoing and other factors, no assurance
can be given as to future results, levels of activity and achievements and
neither the Company nor any other person assumes responsibility for the
accuracy and completeness of these statements.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (herein,
together with all amendments thereto, the "Registration Statement"), of which
this Prospectus constitutes a part, under the Securities Act of 1933, as
amended (the "1933 Act"), with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., with respect to the securities offered by
this Prospectus. As permitted by the rules and regulations of the Commission,
this Prospectus, filed as part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and in
the exhibits thereto. The statements contained in this Prospectus as to the
contents of any contract or other document referenced herein are not
necessarily complete, and in each instance, if the contract or document was
filed as an exhibit, reference is hereby made to the copy of the contract or
other document filed as an exhibit to the Registration Statement and each
such statement is qualified in all respects by such reference. The
Registration Statement (including the exhibits thereto) may be inspected at
the office of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004, and at the regional offices of the Commission at
7 World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits and schedules thereto may be obtained
from the Commission at such offices, upon payment of prescribed rates. In
addition, the Registration Statements and certain other filings, including
annual and quarterly reports, made with the Commission through its Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the World Wide Web on the
Internet, located at http://www.sec.gov. The Registration Statement,
including all exhibits thereto and amendments thereof, has been filed with
the Commission through EDGAR. The Company will provide without charge to each
person who receives this Prospectus, upon written or oral request, a copy of
any information incorporated by reference in this Prospectus (excluding
exhibits to information incorporated by reference unless such exhibits are
themselves specifically incorporated by reference). Such requests should be
directed to Laboratory Specialists of America, Inc. at 101 Park Avenue, Suite
810, Oklahoma City, Oklahoma 73102, telephone: (405) 232-9800.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act") as a "small
business issuer" as defined under Regulation S-B promulgated under the 1933
Act. In accordance with the 1934 Act, the Company files reports and other
information with the Commission (File No. 33-25701), and such reports and
other information can be inspected and copied at, and copies of such
materials can be obtained at prescribed rates from, the Public Reference
Section of the Commission in Washington, D.C.
The Company distributes to its shareholders annual reports containing
financial statements audited by its independent public accountants and, upon
request, quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information. Such requests should
be directed to Laboratory Specialists of America, Inc. at 101 Park Avenue,
Suite 810, Oklahoma City, Oklahoma 73102, telephone: (405) 232-9800.
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<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES IN THIS PROSPECTUS TO THE COMPANY ARE TO LABORATORY SPECIALISTS OF
AMERICA, INC., AN OKLAHOMA CORPORATION ("LABZ"), AND ITS WHOLLY-OWNED
SUBSIDIARIES, LABORATORY SPECIALISTS, INC., A LOUISIANA CORPORATION ("LSI")
AND NATIONAL PSYCHOPHARMACOLOGY LABORATORY, INC., A TENNESSEE CORPORATION
("NPLI"). EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS
PROSPECTUS GIVES EFFECT TO THE SALE AND ISSUANCE BY THE COMPANY OF 555,222
SHARES OF COMMON STOCK TO THE SELLING SHAREHOLDERS PURSUANT TO AN OFFERING
THAT CLOSED ON JUNE 4, 1998, AND THE RECEIPT OF ESTIMATED NET PROCEEDS OF
$2,285,600 (THE "1998 PRIVATE OFFERING"), (ii) THE EXERCISE OF STOCK OPTIONS
FOR THE PURCHASE OF 108,406 SHARES OF COMMON STOCK DURING APRIL AND JUNE
1998, AND (iii) THE EXERCISE OF CERTAIN WARRANTS FOR THE PURCHASE OF 4,000
SHARES OF COMMON STOCK ON APRIL 27 , 1998, BUT DOES NOT GIVE EFFECT TO (i)
EXERCISE OF THE JESUP & LAMONT GROUP WARRANTS, (ii) THE PURCHASE OF CERTAIN
INTANGIBLE ASSETS OF HARRISON LABORATORIES, INC. ON MAY 1, 1998, AND TOXWORX
LABORATORIES, INC. ON JULY 1, 1998. SEE "THE COMPANY--BACKGROUND--1998
PRIVATE OFFERING," "--HLI ASSET PURCHASE," AND "--TLI ASSET PURCHASE."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH IN
"RISK FACTORS." ALL REFERENCES IN THIS PROSPECTUS TO FISCAL YEARS ARE TO THE
COMPANY'S FISCAL YEAR ENDED DECEMBER 31 OF EACH YEAR.
THE COMPANY
The Company through LSI, its wholly-owned subsidiary, owns and operates
an independent drug testing laboratory providing drug testing services to
corporate and institutional customers seeking to detect, both on a pre- and
post-employment basis, and deter the use of illegal drugs. LSI's laboratory
is certified by the Substance Abuse and Mental Health Services Administration
("SAMHSA"), a federal agency and regulatory successor to the National
Institute on Drug Abuse ("NIDA"), to conduct drug testing using procedures
required for legal defensibility of test results. See "Risk Factors--Effect
of Loss or Suspension of Laboratory Certification" and
"Business--Certification and Government Regulation." The drug testing
procedures provide accurate and reliable testing and a secure chain-of-
custody for each specimen from its collection to the reporting of the test
results. The test results are reported to the customer for its use in
screening of prospective employees and, to an increasing extent, testing of
employees in order to maintain safety standards especially with respect to
safety-sensitive jobs such as trucking, aviation, public transportation,
railroads and pipelines. LSI tests for drugs of abuse, including cocaine,
methamphetamine, heroin, PCP, marijuana and alcohol, primarily by urinalysis.
In conjunction with the drug testing services, LSI offers a range of services
which are customized to assist customers in implementing cost-effective drug
testing programs. See "Business."
The market for drug testing services has grown rapidly in recent years
as a result of heightened public awareness of the national drug abuse
problem. Concerns about drug abuse have generated a broad base of government
and private sector initiatives, including federal regulations mandating drug
testing under certain circumstances and a significant increase in the number
of companies that have instituted drug testing programs. Certain regulations
of the Department of Transportation, which became effective in 1995,
increased the number of workers required to be tested for drug abuse in
safety-sensitive jobs, including trucking, public transportation, aviation,
railroads and pipelines. Under these regulations, it is estimated that
approximately 7.5 million workers are required to be tested each year. The
actual number of workers to be tested in 1997, however, is estimated to have
been approximately 20 million, representing a market size for drug testing of
approximately $625 million.
The Company has grown and intends to continue to generate growth
principally through the acquisition of additional established drug testing
companies and the assets of companies engaged in the drug testing business.
The Company expects to utilize, in part, the proceeds of the Offering to
further implement this acquisition strategy. See "The Company--Background"
and "Business--Growth Strategy."
The Company's principal executive offices are located at 101 Park
Avenue, Suite 810, Oklahoma City, Oklahoma 73102, and its telephone number is
(405) 232-9800. The executive offices and laboratory of LSI 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.
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<PAGE>
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THE OFFERING
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Common Stock offered:
By the Company..................................... 55,522 shares offered to the holders and in connection with the
exercise of the Jesup & Lamont Group Warrants (and the resale by
such holders as some of the Selling Shareholders of such shares of
Common Stock). Each of the Jesup & Lamont Group Warrants
entitles the holder to purchase one share of Common Stock at $5.40
at any time each on or before June 3, 2003. See "Description of
Securities--Jesup & Lamont Group Warrants."
By the Selling Shareholders......................... 661,128 shares.
Common Stock outstanding.............................. 5,602,446 shares of Common Stock as of the date of this Prospectus;
5,657,968 after completion of the Offering (1), assuming
exercise in full of the Jesup & Lamont Group Warrants.
Net proceeds to the Company
indeterminable..................................... $271,319 (after deduction of estimated expenses of the Offering of
$28,500) estimated net proceeds in the event the Jesup & Lamont
Group Warrants are exercised in full. There is no assurance that
any portion of the Jesup & Lamont Group Warrants will be
exercised; therefore, the net proceeds to the Company are not
determinable as of the date of this Prospectus. The Company will
not receive any part of the proceeds from resale of shares by the
Selling Shareholders.
Use of proceeds....................................... The reduction of indebtedness, possibly acquisition of established
drug testing companies, and working capital. See "Use of
Proceeds."
Consequences to Non-Exercising
Warrant Holders..................................... In the event the holders fail to exercise any of the Jesup & Lamont
Group Warrants on or before June 3, 2003, such warrants will
expire without any further obligation on the part of LABZ.
Delivery of Securities............................ The Company will deliver the certificates for the shares of
Common Stock issuable upon proper exercise of all or any portion
of the Jesup & Lamont Group Warrants as promptly as practicable
after exercise.
Additional Information............................ The Company may be contacted at the address and telephone
number set forth on the back cover of this Prospectus. See
"Additional Information."
Nasdaq SmallCap Market System symbol: Common Stock................................................LABZ
</TABLE>
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(1) Excludes (i) outstanding stock options and warrants on the date of
this Prospectus to purchase 262,058 shares of Common Stock at a
weighted average exercise price of $2.72 per share and (ii) the
outstanding stock options granted under the Laboratory Specialists of
America, Inc. 1994 Stock Option Plan (the "1994 Option Plan") and the
Laboratory Specialists of America, Inc. 1997 Non-Qualified Stock Option
Plan (the "1997 Option Plan") exercisable for the purchase of 85,000
shares of Common Stock, and (iii) other stock options exercisable for the
purchase of 15,000 shares of Common Stock. See "Management--1994 Stock
Option Plan" and "--1997 Non-Qualified Stock Option Plan," and "Description
of Securities--Outstanding Stock Options and Other Warrants."
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<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary financial and operating
information of the Company for the fiscal years ended December 31, 1997 and
1996, the three months ended March 31, 1998 and 1997. See "Selected Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The financial information presented for the three
months ended March 31, 1998 and 1997, are derived from the unaudited
financial statements of the Company appearing elsewhere in this Prospectus.
In the opinion of management, the financial information presented for the
three months ended March 31, 1998 and 1997, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. The following information should be read in
conjunction with the consolidated financial statements and the related notes
thereto of the Company, and other information relating to the Company
presented elsewhere in this Prospectus. The results of operations during
fiscal years and periods presented are not necessarily indicative of the
Company's future operations.
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FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
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1997 1996 1998 1997
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STATEMENT OF INCOME DATA:
Revenues.................................................. $12,836,953 $8,726,799 $3,571,608 $2,587,222
Cost of laboratory services............................... 5,828,665 3,816,114 1,675,281 1,186,084
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Gross profit.............................................. 7,008,288 4,910,685 1,896,327 1,401,138
Operating expenses........................................ 4,574,669 3,673,201 1,241,786 968,594
Other income (expense).................................... (151,252) (21,808) 30,956 432,544
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Income from continuing operations
before income taxes................................... 2,282,367 1,215,676 685,497 407,624
Income tax expense........................................ 953,264 527,171 283,937 173,621
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Income from continuing operations......................... 1,329,103 688,505 401,560 234,003
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Loss from operations of discontinued
clinical business, net of tax benefit................. -- (500,636) -- --
Loss on disposal of clinical business,
net of tax benefit.................................... -- (773,580) -- --
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Net income (loss)......................................... $ 1,329,103 $ (585,711) $ 401,560 $ 234,003
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Basic earnings per common share:
Weighted average number of common
stock and common stock equivalents
outstanding....................................... 3,693,146 3,309,594 4,925,485 3,313,405
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Continuing operations................................. $ .36 $ .21 $ .08 $ .07
Discontinued operation................................ -- (.39) -- --
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Total............................................. $ .36 $ (.18) $ .08 $ .07
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Diluted earnings per common share:
Weighted average number of common
stock and common stock equivalents
outstanding....................................... 4,325,618 3,954,787 5,288,380 3,891,723
----------- ---------- ---------- ----------
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Continuing operations................................. $ .31 $ .17 $ .08 $ .06
Discontinued operation................................ -- (.32) -- --
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Total............................................. $ .31 $ (.15) $ .08 $ .06
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</TABLE>
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<CAPTION>
DECEMBER 31, MARCH 31,
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1997 1996 1998
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BALANCE SHEET DATA(1)
Current assets................................................. $ 5,702,984 $ 3,194,480 $ 5,936,802
Working capital................................................ 3,305,983 1,002,712 3,603,129
Total assets................................................... 15,016,580 9,394,808 14,897,338
Current debt obligations....................................... 654,509 1,312,650 926,177
Long-term debt, net of current portion......................... 2,353,428 1,245,690 1,865,954
Stockholders' equity........................................... 9,906,303 5,650,250 10,337,863
</TABLE>
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(1) Gives no effect to exercise of the Jesup & Lamont Group Warrants and
other outstanding stock options and warrants. See "Description of
Securities--Outstanding Stock Options and Other Warrants."
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<PAGE>
RISK FACTORS
THE PURCHASE OF THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE
IN THIS PROSPECTUS, THE FOLLOWING FACTORS RELATING TO THE COMPANY AND THE
OFFERING SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY.
MANAGEMENT'S DISCRETION OVER APPLICATION OF PROCEEDS. The Company will
allocate the estimated net proceeds of the Offering, which are $271,319,
assuming exercise of the Jesup & Lamont Group Warrants in full (although
there is no assurance that any portion of such warrants will be exercised) to
general corporate purposes, including repayment of indebtedness, acquisitions
and working capital. It is currently anticipated that estimated net proceeds
will be utilized to pay the Company's installment bank loan that is secured
by the Company's recently acquired and renovated building in which LSI's
laboratory is currently located. See"Use of Proceeds." The application of the
net proceeds of the Offering will be in the sole discretion of management of
the Company. Individual shareholders will have no control over decisions
regarding the application or use of the net proceeds of the Offering.
NON-SPECIFIC ACQUISITION STRATEGY. As part of its business strategy, the
Company has grown and intends to continue to generate its growth principally
through the acquisition of additional complementary drug testing laboratories
and assets, and intermediate drug testing service providers. These
acquisitions, if any, could be completed through the issuance of Common Stock
or Preferred Stock of LABZ, utilization of available cash equivalents,
possibly proceeds of the Offering (if any), borrowings or other sources of
equity capital. The non-specific nature of the acquisitions makes an
estimation of the amount to be allocated to acquisitions from these sources
not determinable or subject to estimation at the date of this Prospectus. The
Company's growth strategy has and will continue to require expanded customer
services and support, increased personnel, expanded operational and financial
systems and implementation of control procedures. There can be no assurance
that the Company will be able to manage expanded operations effectively.
Furthermore, failure to implement financial and other systems and to add
control procedures could have a material adverse impact on the Company's
results of operations and financial condition. Although the Company has
completed six acquisitions in expansion of the Company's drug testing
operations, since December 1994 (see "The Company--Background"), as of the
date of this Prospectus, the Company has not entered into any agreements or
commitments regarding any additional acquisitions, and there can be no
assurance that additional acquisitions will be consummated. The Company's
shareholders will, in all likelihood, not be afforded the opportunity to
approve the terms of any such acquisitions because the Board of Directors
will, in most cases, have the authority to consummate an acquisition without
shareholder approval. Shareholders will also not have an opportunity to
review the financial statements of an acquisition candidate, except where
shareholder approval is required.
The Company's acquisitions involve a number of risks including the
diversion of management's attention to the assimilation of the acquired
companies, adverse short-term effects on the Company's results of operations,
the amortization of acquired intangible assets, the possibility that the
acquired company or assets will not contribute to the Company's business,
profitability and cash flows as expected, as well as the acquisition of
operations other than legally defensible ("forensic") drug testing which may
be discontinued or disposed of at a loss. See "Business--Growth Strategy."
COMPETITION AMONG DRUG TESTING PROVIDERS. Drug testing laboratories
compete primarily on the basis of price per specimen, technical superiority,
and customer service. The price per specimen is an important factor in
obtaining and maintaining customers, as well as maintaining profitability
from operations. Competitive pricing by drug testing providers has resulted
in a decline in the price per specimen tested during recent years. The
average price per specimen obtained by the Company during each of the years
ended December 31, 1997 and December 31, 1996, declined 2.0 percent and 4.7
percent, respectively, compared to the preceding year, principally due to
increased price competition among providers of drug testing services. There
is no assurance that such price declines will not continue in 1998 and
thereafter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations." The Company believes LSI
competes favorably in each of these categories. LSI competes with a variety
and number of companies offering forensic drug testing services including
national laboratory chains, independent national drug testing laboratories
and numerous regional and local laboratories, many of which have greater
financial resources than the Company. In addition, some potential customers
of LSI operate their own drug testing facilities or may develop such
facilities in the future. Further, LSI competes in certain areas of the
market with companies that offer hand-held devices and on-site equipment that
can be used to screen for the presence of drugs, although without forensic
results. See "Business--Competition."
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<PAGE>
EFFECT OF LOSS OR SUSPENSION OF LABORATORY CERTIFICATION. LSI's
laboratory is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), the College of American
Pathologist ("CAP"), as well as eight state and local jurisdictions. SAMHSA
is a federal regulatory agency charged with the responsibility and authority
to license laboratories performing drug testing services for the federal
government and its agencies and federally regulated industries, such as the
Department of Transportation, Department of Defense, etc. SAMHSA inspects,
monitors and certifies laboratories that perform drug testing services under
specific mandated guidelines. In order to obtain certification a laboratory
must apply for certification, meet certain minimum facility requirements and
then successfully complete a series of proficiency tests, which takes
approximately 12 months to complete. CAP is a private organization which
primarily focuses on the safety of working conditions in laboratories.
Certification by SAMHSA is essential to LSI's business because some of
its customers are required to use SAMHSA certified laboratories and many of
its customers look to such certification as an indication of reliability and
accuracy of tests. In order to remain certified, LSI is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements to which LSI is subject could result in suspension
or loss of certification. Such suspension or loss of certification could have
a material adverse effect on LSI and LABZ. NIDA suspended LSI's certification
from January 24 to April 26, 1990, citing LSI's alleged failure to conform to
NIDA regulations concerning certain operating procedures and failure to
segregate the processing of specimens from those specimens that were not
being processed in accordance with NIDA regulations. Laboratory remodeling
was necessary to effect the required division of specimen processing. Upon
LSI's compliance with NIDA regulations and reinspection by NIDA, the
suspension was lifted. Many of LSI's competitors are also certified by one or
more certifying bodies in addition to SAMHSA and CAP. See
"Business--Certification and Government Regulation."
HISTORY OF LOSSES. During 1996, the Company sustained a net loss of
$585,711 on pretax income from operations of $1,215,676. The loss resulted
from the discontinuance and disposal of the former clinical testings and
analysis operations conducted by NPLI acquired in January 1996, and which
generated a loss of $1,274,216. The Company's income from continuing
operations for 1996 was $688,505. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Although currently the
Company only conducts forensic drug testing (and such operations have been
historically profitable), there can be no assurance that the Company will not
sustain losses from operations in the future, including losses from
operations acquired in connection with the Company's acquisition-growth
strategy and that may be subsequently discontinued. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Business--Growth Strategy."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operations are affected
by decreases in the price per specimen tested principally due to increased
price competition amongst providers of drug testing services, the price per
specimen being an important factor in obtaining and maintaining customers.
During each of the years ended December 31, 1997 and 1996, and the three
months ended March 31, 1998, the price per specimen decreased 2.0 percent,
4.7 percent and 4.0 percent, respectively, compared to the preceding year or
the same period in the preceding year, principally due to increased price
competition among providers of drug testing services. There can be no
assurance that the price decline per specimen will not further decline during
1998 and thereafter. The Company's operations are affected by general
economic conditions, as well as seasonal trends, to which drug testing
laboratories are generally subject. Recessionary periods generally result in
fewer new employee hires, and, therefore, may lead to fewer pre-employment
drug tests for customers. Budget cuts at the federal, state or local
government level may reduce business from LSI's institutional and
governmental customers. Because expenses associated with maintaining LSI's
testing work force are relatively fixed over the short term, LSI's margins
tend to increase in periods of higher testing volume and decrease in periods
of lower testing volume. These effects are not always readily predictable
because of the effect and timing of the startup of new business and other
factors, such as timing and amount of general and administrative expense
increases and price increases of laboratory supplies, most of which are not
within the control of the Company. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Results of Operations."
POTENTIAL LIABILITIES; LIMITED INSURANCE COVERAGE. Employees of LSI,
like those of all companies that provide drug testing services dealing with
urine analysis specimens, may be exposed to risks of urine-borne infections,
possibly including infection from AIDS and hepatitis, if appropriate
laboratory practices are not followed. Although
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no infections of these types have been reported in LSI's history, no
assurance can be provided that such infections will not occur in the future.
In the ordinary course of its business, LSI from time to time is sued by
individuals who have tested positive for drugs of abuse. To date, LSI has not
experienced any material liability related to these claims, although there
can be no assurance that LSI will not at some time in the future experience
significant liability in connection with these types of claims, in which
event, any such legal actions could have a material adverse effect on the
Company's financial condition and results of operations.
Although LSI presently is covered by malpractice and general liability
insurance, there can be no assurance that the insurance coverage will provide
sufficient funds to satisfy any judgments which could be entered against LSI
or the Company in the future or that liability insurance in such amounts will
be available or affordable in the future. In addition, there can be no
assurance that all of the activities encompassed within the Company's
business are covered under LSI's or the Company's insurance policies. The
lack of such coverage could have a material adverse effect on the Company's
financial condition and results of operations. Moreover, although the Company
maintains casualty and business interruption insurance and has taken what it
believes to be adequate safeguards, the catastrophic loss of the Company's
laboratory facility could have a material adverse effect on the continued
growth of the Company in a manner which would not be compensated fully by
insurance. See "Business--Insurance Coverage."
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent in
part on its key management and technical personnel. Although LABZ and LSI
have employment contracts with certain of their key employees, each such
contract may be terminated by the employee and the loss of one or more key
employees could have a material adverse effect on the Company. The Company
does not maintain for the benefit of the Company life or disability insurance
covering the executive officers of the Company, and the loss of one or more
of the executive officers due to death or disability could have a material
adverse effect on the Company. The Company believes that its future success
depends in part upon the continued ability to attract, retain and motivate
additional highly skilled personnel. See "Business-- Employees" and
"Management-- Directors and Executive Officers," "--Employment Arrangements"
and "--Key-Man Life and Disability Insurance."
EFFECTS OF ADVERSE JUDICIAL DECISIONS AND GOVERNMENT POLICY ON FORENSIC
DRUG TESTING. State and federal courts have generally permitted the use of
drug testing under certain circumstances and using certain kinds of
procedures, generally those imposed by SAMHSA regulations. However,
challenges to drug testing programs are raised from time to time by
employees, unions and other groups in litigation on constitutional, privacy
and other grounds. In addition, laws in a number of states regulate the
circumstances under which employers may test employees and the procedures
under which such tests must be conducted. Although the Company believes that,
to date, no such legislation or law has had a material adverse impact upon
its business, new court and administrative decisions, legislation or
policies, that restrict the use of drug testing could have a material effect
on the Company. See "Business--Certification and Government Regulation."
RISKS ASSOCIATED WITH HAZARDOUS MATERIALS. LSI's drug testing activities
involve the use of certain hazardous materials and chemicals. The hazardous
material and chemical waste of LSI's laboratory operations are disposed of by
an independent third party based upon procedures and methods that are
believed to be in compliance with applicable federal, state and local
regulations and laws. Although the Company believes that its safety
procedures for handling and disposing of such materials and chemicals comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials and chemicals cannot
be completely eliminated. In the event of such an accident or improper
disposal by the third party of the materials or chemicals, the Company could
be held liable for any damages that result and any such liability could
exceed the resources of the Company. See "Business--Environmental Matters."
NASDAQ SMALLCAP MARKET DELISTING. The Company's Common Stock is included
on the Nasdaq SmallCap Market. Continued inclusion of the Common Stock on
Nasdaq SmallCap Market is subject to certain conditions, generally including
the Common Stock having a certain minimum bid price per share, the Company
having certain minimum levels of assets, stockholders' equity, number of
shareholders, and number of outstanding publicly held shares of Common Stock.
In the event such minimum requirements for inclusion are not met, the Common
Stock will be delisted and no longer included on the Nasdaq SmallCap Market,
would then be traded in the over-the-counter market, and may become subject
to the "penny stock" trading rules. The over-the-counter market is
characterized as volatile in that securities traded in such market are
subject to substantial and sudden price increases and decreases and at times
price (bid and asked) information for such securities may not be available.
In addition, when there are two
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or less market makers (a dealer holding itself out as ready to buy and sell
the securities on a regular basis), there is a risk that the dealer or group
of dealers may control the market in the security and set prices that are not
based on competitive forces, possibly resulting in the available offered
price being substantially below the quoted bid price. See "Price Range of
Common Stock and Warrants; Dividends--Penny Stock Trading Rules."
PENNY STOCK TRADING RULES. In the event such minimum requirements for
inclusion on Nasdaq SmallCap Market are not met, the Common Stock will be
delisted and no longer included on the Nasdaq SmallCap Market and would then
be traded in the over-the-counter market, and may become subject to the
"penny stock" trading rules. The penny stock trading rules impose additional
duties and responsibilities upon broker-dealers and salespersons effecting
purchase and sale transactions in common stock and other equity securities,
including determination of the purchaser's investment suitability, delivery
of certain information and disclosures to the purchaser, and receipt of a
specific purchase agreement from the purchaser prior to effecting the
purchase transaction. In the event the Common Stock becomes subject to the
penny stock trading rules, compliance with such trading rules will affect the
ability to resell the Common Stock principally because of the additional
duties and responsibilities imposed upon the broker-dealers and salespersons
recommending and effecting sale and purchase transactions in Common Stock. In
addition, many broker-dealers will not effect transactions in penny stocks,
except on an unsolicited basis, in order to avoid compliance with the penny
stock trading rules. In the event the Common Stock becomes subject to the
penny stock trading rules, such rules may materially limit or restrict the
ability of a holder to resell the Common Stock, and the liquidity typically
associated with other publicly traded equity securities may not exist or be
materially restricted. See "Price Range of Common Stock and Warrants;
Dividends--Penny Stock Trading Rules."
POSSIBLE ADVERSE EFFECT OF FUTURE SALE OF RESTRICTED SHARES ON MARKET
PRICE OF COMMON STOCK. Sales of substantial amounts of the Common Stock in
the public market following completion of the Offering could adversely affect
the market price of the Common Stock. At the date of this Prospectus, 1,020,706
shares of LABZ's outstanding Common Stock held by officers and directors of the
Company are subject to the resale limitations under Rule 144 as promulgated
by the Commission pursuant to the 1933 Act, of which 105,906 shares are being
offered for resale pursuant to the Offering. The resale limitations of Rule 144
generally provide that beneficial owners of shares who are affiliates
(officers, directors or other control persons) or have held such shares for
one year but less than two years may sell within a three-month period a
number of shares not exceeding one percent of the total outstanding shares or
the average trading volume of the shares during the four calendar weeks
preceding such sale. Future sales of substantial amounts of Common Stock in
the public market following the Offering could adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale."
EFFECT OF SECURITIES ISSUABLE UPON EXERCISE OF OUTSTANDING WARRANTS AND
STOCK OPTIONS. In addition to the Jesup & Lamont Group Warrants, as of the
date of this Prospectus, there are outstanding stock options and warrants
exercisable for the purchase of 347,058 shares of Common Stock. See
"Description of Securities--Outstanding Stock Options and Other Warrants."
During the term of the outstanding warrants and stock options, the holders
thereof are given the opportunity to profit from a rise in the market price
of the Common Stock, and the exercise of the such warrants or option may
dilute the net book value per share of Common Stock at the time of exercise.
The existence of the outstanding warrants and stock option may adversely
affect the terms on which the Company may obtain additional equity financing
in the future. Furthermore, the holders are likely to exercise their such
warrants and stock options at a time when the Company would otherwise be able
to obtain capital on terms more favorable than could be obtained through the
exercise of such warrants.
ABSENCE OF DIVIDENDS. The Company has never paid cash dividends and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company intends to retain profits, if any, to fund
growth and expansion in the future. See "Price Range of Common Stock;
Dividends."
POSSIBLE EFFECT OF ANTI-TAKEOVER PROVISIONS ON MARKET PRICE OF COMMON
STOCK. Provisions of LABZ's Certificate of Incorporation and the Oklahoma
General Corporation Act may make it difficult to effect a change in control
of LABZ and replace incumbent management, and such provisions could limit the
price investors might be willing to pay in the future for shares of Common
Stock. See "Description of Securities--Anti-Takeover Provisions." The
Certificate of Incorporation authorizes the issuance of Preferred Stock in
classes or series, and the Board of Directors to set and determine voting,
redemption and conversion rights and other rights related to such class or
series of Preferred Stock, which in some circumstances, the Preferred Stock
could be issued and have the effect of preventing a merger, tender offer or
other takeover attempt which the Company's Board of Directors opposes. At
some time in
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the future, the Company may become subject to the anti-takeover provisions of
the Oklahoma General Corporation Act, which in such case and in some
circumstances may discourage a person from making a control share acquisition
(generally an acquisition of voting stock having more than 20 percent of all
voting power in the election of directors) without shareholder approval. See
"Description of Securities--Anti-Takeover Provisions."
THE COMPANY
Laboratory Specialists of America, Inc. (the "Company" or "LABZ"),
through its wholly-owned subsidiary Laboratory Specialists, Inc. ("LSI"),
owns and operates a laboratory providing drug testing services to corporate
and institutional customers seeking to detect and deter the use of illegal
drugs. The drug testing market currently is in an expansion mode in part due
to the adoptions of additional Department of Transportation regulations,
which became effective in 1995, that substantially expanded the regulations
mandating random drug testing of workers, especially in safety-sensitive
jobs, such as trucking, aviation, railroads and pipelines. Under these
amended regulations, 50 percent of transportation workers (mass-transit
workers and interstate truckers and bus drivers) are required to be tested
annually. It is expected that 7.5 million workers will be required to undergo
drug testing each year, up from 3.5 million workers in years prior to 1995.
In addition, testing is on the rise generally as more companies test job
applicants and employees. Since 1987, the number of companies with drug
testing programs has more than tripled. Government data indicates that drug
abuse costs American business $100 billion annually in lost productivity,
increased accidents, absenteeism, medical claims and employee theft.
In the 1970s, drug testing was limited largely to criminal justice
agencies and drug treatment programs. In the 1980s, however, increased
awareness of the drug abuse problem and its consequences led to increased
drug testing in the workplace. Since a 1986 Executive Order by President
Reagan, there has been a broad base of governmental and private sector
initiatives, including federal regulations mandating drug testing in certain
circumstances. There has been a significant increase in the number of
companies which have instituted drug testing programs. It is estimated that
approximately 20 million U.S. workers were tested for drug use in 1997.
LSI is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), to conduct drug testing using
legally defensible (forensic) procedures required for legal defensibility of
test results. The essential elements of these procedures are a secure
chain-of-custody for each specimen from its collection to the reporting of
test results and accurate and reliable testing in which a second independent
test is performed to confirm each positive test result. The drug testing
services offered by LSI also include assisting customers with the development
of drug testing programs, training customer personnel, managing specimen
collection, arranging for transportation of specimens to LSI's laboratory,
identifying trends in local and national drug use, interpreting test results
and providing expert testimony concerning challenged test results. All of
these services are customized to the individual needs of the customers to
assist in the implementation and cost-effective maintenance of test programs.
More than 70,000 urine specimens are currently analyzed by LSI monthly
for corporate and institutional employers. LSI's customers use drug testing
principally as a part of their hiring decisions in order to reduce costs
associated with drug abuse in the workplace. In addition, an increasing
number of customers test employees in safety- sensitive positions on a
periodic or random basis and test other employees upon reasonable suspicion
of drug abuse.
LABZ was incorporated in Oklahoma on March 24, 1994, and its executive
offices are located at 101 Park Avenue, Suite 810, Oklahoma City, Oklahoma
73102 with a telephone number of (405) 232-9800. LSI was organized in 1978.
LSI's executive offices and laboratory are located at 1111 Newton Street,
Gretna, Louisiana 70053, which is near New Orleans, and its telephone numbers
are (504) 361-8989 and (800) 433-3823.
BACKGROUND
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
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Promissory Note bears interest at the rate of seven percent per annum and
becomes due and payable on February 23, 1999. The acquisition of the LSI
common stock by Mr. Peterson was accounted for under the purchase method of
accounting. The purchase price exceeded the fair market value of the net
tangible assets of LSI by approximately $1,565,000 and represented a material
payment for goodwill, an intangible asset, which is being amortized 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 LABZ, and MBf USA exchanged the LSI Preferred Stock for 239,405
shares of Common Stock of LABZ (the "LSI Acquisition"). As a result of the
LSI Acquisition, LSI became a wholly-owned subsidiary of LABZ on July 8,
1994. The LSI Acquisition was accounted for as a reverse acquisition of LABZ
by LSI. On July 10, 1995, the Series I Preferred Stock was redeemed by LABZ
in full and ceased to be issued and outstanding.
PRIVATE PLACEMENT AND PRIOR OPERATIONS OF LABZ. Prior to the LSI
Acquisition, the operations of LABZ 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 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 Barron Chase
Group Warrants exercisable for the purchase of 66,000 units for $7.32 per
unit on or before October 11, 1999. As of the date of this Prospectus, the
outstanding Barron Chase Group Warrants are exercisable for the purchase of
36,000 Units (72,000 shares of Common Stock).
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, LABZ 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 NPLI 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
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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.
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, LABZ 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, LABZ (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, LABZ 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 LABZ of $2,470,951 (the "Warrant
Redemption Offering"). For services performed, LABZ 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, (the
"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.
HLI ASSET PURCHASE. On May 1, 1998, the Company acquired from Harrison
Laboratories, Inc. ("HLI") a customer list pursuant to an Asset Purchase
Agreement, dated April 13, 1998 (the "HLI Asset Purchase"). In connection
with the HLI Asset Purchase, the Company (i) paid $500,000 at closing and
agreed to pay on or before May 30, 1999, an amount equal to the revenues
attributable to the customer list during the one-year period ending April 30,
1999, in excess of $500,000, (ii) assumed HLI's obligations under a five-year
lease with Linc Quantum Analytics Inc., dated November 11, 1997, and acquired
the related equipment, and (iii) entered into a three-year employment
agreement with the principal shareholder of HLI as a sales representative,
providing for a based salary of $50,000 per year, monthly bonuses equal to
3.5 percent of revenues attributable to the customer list, and other
benefits. The purchase price of the customer list was recorded as an
intangible asset, which is being amortized over 15 years.
1998 PRIVATE OFFERING. On June 4, 1998, LABZ completed the offering of
555,222 shares of Common Stock for estimated net proceeds of $2,285,600 (the
"1998 Private Offering"). Furthermore, LABZ paid Jesup & Lamont Securities
Corporation (the "Jesup & Lamont") a placement fee of $174,650 and issued the
Jesup & Lamont Group Warrants to Jesup & Lamont and its designees. In
connection with the 1998 Private Offering, LABZ agreed to (i) file a
registration statement under the 1933 Act with respect to the Common Stock
offered and underlying the Jesup & Lamont Group Warrants within 30 days of
termination of such offering, (ii) obtain effectiveness of such registration
statement within 90 days following such termination or within five days of
the clearance by the Commission to allow acceleration of effectiveness, and
(iii) maintain the effectiveness of the registration statement for a minimum
of two years. A penalty, in the form of warrants representing five percent
the shares of Common Stock sold pursuant to the
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1998 Private Offering applies for each 30-day period in which LABZ fails to
file or obtain effectiveness of the registration statement. Pursuant to such
agreement, LABZ has filed the Registration Statement of which this Prospectus
is a part. See "Description of Securities--Jesup & Lamont Group Warrants."
TLI ASSET PURCHASE. On July 1, 1998, the Company acquired the customer
list and other intangible assets of TOXWORX Laboratories, Inc. (the "TLI
Asset Purchase") for $2.4 million pursuant to an Asset Purchase Agreement
date June 8, 1998. The purchase price of the customer list and other
intangible assets acquired was recorded as intangible assets which are being
amortized over 15 years.
USE OF PROCEEDS
The net proceeds of the Offering to be received by the Company will be
dependent upon the number of shares of Common Stock purchased pursuant to
exercise of the Jesup & Lamont Group Warrants. In the event the Jesup &
Lamont Group Warrants are exercised in full, the estimated net proceeds to
the Company, after deduction of estimated commissions and other offering
costs of $28,500, will be $271,319. However, there is no assurance that any
portion of the Jesup & Lamont Group Warrants will be exercised; therefore,
the proceeds of the Offering are not determinable as of the date of this
Prospectus. Pending use, the net proceeds will be invested by the Company in
investment grade, short-term, interest-bearing securities. It is anticipated
that the Company will expend the net proceeds of the Offering, assuming
exercise of the Jesup & Lamont Group Warrants in full, in repayment of LSI's
installment bank loan which was obtained on July 2, 1997, and secured by
LSI's recently acquired and renovated building in which the laboratory
facilities of LSI are currently located. This installment bank loan is
payable in 36 monthly principal and interest payments of approximately
$9,800, followed by 23 monthly principal and interest payments of
approximately $6,000, with a final payment becoming due on July 2, 2002, of
approximately $484,700. As of March 31, 1998, the outstanding principal
amount of this loan was $682,650, which bore interest at 8.65 percent per
annum. See "Business--Properties."
With respect to the repayment of all or a portion of the outstanding
borrowings under LSI's installment loan indebtedness, the Company or LSI may
reborrow such amounts under such loans for general corporate purposes,
including working capital and acquisitions in the Company's current and
related business area. See "Business--Growth Strategy."
The Company's business plan contemplates acquisitions of companies and
the assets of companies engaged in the providing of drug testing services
compatible with, or complementary to, the Company's business. As of the date
of this Prospectus, the Company has not entered into any definitive
agreements or commitments with respect to any additional acquisitions, and
there can be no assurance that any additional acquisitions will be
consummated. The amount of net proceeds expended with respect to an
acquisition will be determined by the Board of Directors of LABZ, and, in
most cases, it is anticipated that each acquisition will be consummated
without approval by the shareholders of LABZ. The amount, if any, of net
proceeds of the Offering and the current available cash equivalents to be
utilized in the consummation of any acquisition cannot be determined at the
date of this Prospectus; however, in the event LABZ enters into any binding
commitments or definitive agreements with respect to an acquisition, this
Prospectus will be appropriately supplemented or amended. It is anticipated
by management of LABZ that the acquisitions funded with the net proceeds of
the Offering, assuming exercise of the Jesup & Lamont Group Warrants in full,
and the available cash equivalents of the Company, will be completed within
three years after completion of the Offering. In the event the net proceeds
of the Offering, if any, and the available cash equivalents of the Company
are not sufficient to complete an acquisition, additional sums will be drawn
from the earnings of the Company, if any, and thereafter from borrowings or
other sources of equity capital. See "Risk Factors--Non-Specific Acquisition
Strategy."
-13-
<PAGE>
SELLING SHAREHOLDERS
The following table presents certain information as to the holders of
shares of Common Stock being offered for resale (the "Selling Shareholders"),
their ownership of Common Stock as of the date of this Prospectus, as
adjusted to give effect to exercise of the Jesup & Lamont Group Warrants in
full, together with the percentage holdings of the outstanding shares of
Common Stock, and, as adjusted, after giving effect to the Offering. Other
than John Simonelli, Larry E. Howell and Arthur R. Peterson, Jr., each of
whom is an executive officer and director of the Company, each of the Selling
Shareholders has not held any position or office or had any other material
relationship with the Company or its affiliates during the past three years,
other than in connection with the 1998 Private Offering.
<TABLE>
<CAPTION>
COMMON STOCK OWNED
AFTER THE OFFERING(1)
---------------------
COMMON STOCK COMMON STOCK NUMBER
BENEFICIALLY SHARES OF PERCENT
SELLING SHAREHOLDER OWNED OFFERED(1) SHARES OWNED
- ------------------- ------------ ------------ --------- -------
<S> <C> <C> <C> <C>
Arthur R. Peterson, Jr. . . . . . . . . . . . . . 525,472 35,472 490,000 8.7%
John Simonelli . . . . . . . . . . . . . . . . . . 235,217 35,217 200,000 3.5%
Larry E. Howell. . . . . . . . . . . . . . . . . . 235,217 35,217 200,000 3.5%
Special Situations Private Equity Fund, LP . . . . 222,222 222,222 -- --
Pequot Scout Fund, LP. . . . . . . . . . . . . . . 200,000 200,000 -- --
Alfred Aysseh. . . . . . . . . . . . . . . . . . . 40,000 40,000 -- --
OT Finance SA. . . . . . . . . . . . . . . . . . . 15,000 15,000 -- --
KDP Enterprises. . . . . . . . . . . . . . . . . . 10,000 10,000 -- --
Metropolis Equity Fund . . . . . . . . . . . . . . 10,000 10,000 -- --
Alain Aysseh . . . . . . . . . . . . . . . . . . . 10,000 10,000 -- --
George H. Levine . . . . . . . . . . . . . . . . . 10,000 10,000 -- --
Merl Trust . . . . . . . . . . . . . . . . . . . . 7,000 7,000 -- --
Ralph Mandarino. . . . . . . . . . . . . . . . . . 5,000 5,000 -- --
David Herzog . . . . . . . . . . . . . . . . . . . 5,000 5,000 -- --
The Lucien I. Levy Revocable Living Trust. . . . . 5,000 5,000 -- --
Elvire Levy. . . . . . . . . . . . . . . . . . . . 5,000 5,000 -- --
William H. Duling and Susan E. Duling. . . . . . . 5,000 5,000 -- --
Michele Spycher. . . . . . . . . . . . . . . . . . 3,000 3,000 -- --
Julis O. Luck. . . . . . . . . . . . . . . . . . . 2,000 2,000 -- --
Paul S. Vanderwerf . . . . . . . . . . . . . . . . 1,000 1,000 -- --
</TABLE>
- ------------------------
(1) Assumes exercise of the Jesup & Lamont Group Warrants in full and the
issuance of 55,522 shares of Common Stock.
With respect to the shares of Common Stock offered for resale, other
than those shares offered by Messrs. Peterson, Simonelli and Howell, the
Company agreed to pay and bear the cost of registering such Common Stock in
connection in connection with the 1998 Private Offering. See "The
Company--Background--1998 Private Offering." With respect to the shares of
Common Stock offered for resale by Messrs. Peterson, Simonelli and Howell,
each has agreed to bear and pay the incremental cost of registration which is
approximately $49.
-14-
<PAGE>
PRICE RANGE OF COMMON STOCK; DIVIDENDS
The Company's Common Stock is traded in the over-the-counter market and
is quoted on Nasdaq SmallCap 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 SmallCap Market
of the Common Stock. The bid quotations reflect inter-dealer prices without
adjustment for retail markups, markdowns or commissions and may not reflect
actual transactions.
<TABLE>
<CAPTION>
CLOSING BID
--------------------
COMMON STOCK
--------------------
QUARTER ENDED HIGH LOW
- ------------- ------ -----
<S> <C> <C>
June 30, 1998. . . . . . . . . . . . . $5.31 $4.31
March 31, 1998 . . . . . . . . . . . . 5.13 4.13
December 31, 1997. . . . . . . . . . . $6.19 $3.16
September 30, 1997 . . . . . . . . . . 3.69 2.56
June 30, 1997. . . . . . . . . . . . . 2.88 2.13
March 31, 1997 . . . . . . . . . . . . 3.13 2.25
December 31, 1996. . . . . . . . . . . $3.26 $2.56
September 30, 1996 . . . . . . . . . . 3.38 2.38
June 30, 1996. . . . . . . . . . . . . 3.69 3.00
March 31, 1996 . . . . . . . . . . . . 4.00 2.88
December 31, 1995. . . . . . . . . . . $3.75 $2.88
September 30, 1995 . . . . . . . . . . 4.00 2.88
June 30, 1995. . . . . . . . . . . . . 3.63 3.13
March 31, 1995 . . . . . . . . . . . . 3.44 3.00
</TABLE>
On June 30, 1998, the closing sale price of the Common Stock, as quoted
on Nasdaq SmallCap Market, was $4.69. On June 30, 1998, there were
approximately 1,600 holders of LABZ's Common Stock.
LABZ has never paid a cash dividend on its Common Stock. LABZ's dividend
policy is to retain its earnings to support the expansion of its operations.
The Board of Directors of LABZ 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, LABZ's financial condition and
other factors deemed relevant by the Board of Directors.
NASDAQ SMALLCAP MARKET DELISTING; PENNY STOCK TRADING RULES
The Company's Common Stock is included on the Nasdaq SmallCap Market.
Continued inclusion of the Common Stock on Nasdaq SmallCap Market is subject
to certain conditions, generally including the Common Stock having a certain
minimum bid price per share, the Company having certain minimum levels of
assets, stockholders' equity, number of shareholders, and number of
outstanding publicly held shares of Common Stock. In the event such minimum
requirements for inclusion are not met, the Common Stock will be delisted and
no longer included on the Nasdaq SmallCap Market and would then be traded in
the over-the-counter market and may become subject to the "penny stock"
trading rules.
The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers recommending the purchase of a penny
stock (by a purchaser that is not an accredited investor as defined by Rule
501(a) promulgated by the Commission under the 1933 Act) or the sale of a
penny stock. Among such duties and responsibilities, with respect to a
purchaser who has not previously had an established account with the
broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience, and
investment objectives and (ii) make a reasonable determination that
transactions in the penny stock are suitable for the purchaser and the
purchaser (or his independent adviser in such transactions) has sufficient
knowledge and experience in financial matters and may be reasonably capable
of evaluating the risks of such transactions, followed by receipt of a
manually signed written statement which sets forth the basis for such
determination and which informs the purchaser that it is unlawful to
effectuate a transaction in the penny stock without first obtaining a written
agreement to the
-15-
<PAGE>
transaction. Furthermore, until the purchaser becomes an established customer
(I.E., having had an account with the dealer for at least one year or, the
dealer had effected three sales or more of penny stocks on three or more
different days involving three or more different issuers), the broker-dealer
must obtain from the purchaser a written agreement to purchase the penny
stock which sets forth the identity and number of shares or units of the
security to be purchased prior to confirmation of the purchase. A dealer is
obligated to provide certain information disclosures to the purchaser of a
penny stock, including (i) a generic risk disclosure document which is
required to be delivered to the purchaser before the initial transaction in a
penny stock, (ii) a transaction-related disclosure prior to effecting a
transaction in the penny stock (I.E., confirmation of the transaction)
containing bid and asked information related to the penny stock and the
dealer's and salesperson's compensation (I.E., commissions, commission
equivalents, markups and markdowns) in connection with the transaction, and
(iii) the purchaser-customer must be furnished account statements, generally
on a monthly basis, which include prescribed information relating to market
and price information concerning the penny stocks held in the customer's
account. The penny stock trading rules do not apply to those transactions in
which a broker-dealer or salesperson does not make any purchase or sale
recommendation to the purchaser or seller of the penny stock.
Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock by a holder principally because
of the additional duties and responsibilities imposed upon the broker-dealers
and salespersons recommending and effecting sale and purchase transactions in
such securities. In addition, many broker-dealers will not effect
transactions in penny stocks, except on an unsolicited basis, in order to
avoid compliance with the penny stock trading rules. The penny stock trading
rules consequently may materially limit or restrict the liquidity typically
associated with other publicly traded equity securities. In this connection,
the holder of Common Stock may be unable to obtain on resale the quoted bid
price because a dealer or group of dealers may control the market in such
securities and may set prices that are not based on competitive forces.
Furthermore, at times there may be a lack of bid quotes which may mean that
the market among dealers is not active, in which case a holder of Common
Stock may be unable to sell such securities. Because market quotations in the
over-the-counter market are often subject to negotiation among dealers and
often differ from the price at which transactions in securities are effected,
the bid and asked quotations of the Common Stock may not be reliable.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. This table should be read in conjunction with the audited
consolidated financial statements and notes thereto of the Company appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1998(1)
-----------
<S> <C>
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $926,177
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . 1,865,954
Stockholders' equity:
Preferred Stock, $.001 par value, 10,000,000 authorized; none outstanding. . . . . . . --
Common Stock, $.001 par value, 20,000,000 shares authorized;
4,934,818 shares issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . 4,935
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . 8,321,355
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,011,573
-----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,337,863
-----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,129,994
-----------
-----------
</TABLE>
- ------------------------
(1) Gives no effect to (i) the 1998 Private Offering, (ii) the exercise of
stock options and warrants after March 31, 1998, (iii) the exercise of
the Jesup & Lamont Group Warrants, (iv) the exercise of the
outstanding stock options granted under the 1994 Option Plan and the
1997 Option Plan exercisable for the purchase of 85,000 shares of
Common Stock, and (iv) the exercise of other outstanding stock options
and warrants exercisable for the purchase of 262,058 shares of Common
Stock. See "Management--1994 Stock Option Plan" and
-16-
<PAGE>
"--1997 Non-Qualified Stock Option Plan," and "Description of
Securities--Outstanding Stock Options and Other Warrants."
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the consolidated financial statements
and related notes of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein. The
selected financial information presented below is not necessarily indicative of
the future results of operations or financial performance of the Company. The
selected financial information as of and for the years ended December 31, 1997
and 1996, is derived from the Company's audited financial statements which are
presented elsewhere in this Prospectus. The selected financial information
presented as of and for the three months ended March 31, 1998 and 1997, is
derived from the unaudited financial statements of the Company which are
presented elsewhere in this Prospectus. In the opinion of management of the
Company, the unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31 , MARCH 31,
------------------------- --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . $12,836,953 $8,726,799 $3,571,608 $2,587,222
Cost of laboratory services . . . . . . . . . . . 5,828,665 3,816,114 1,675,281 1,186,084
----------- ---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . 7,008,288 4,910,685 1,896,327 1,401,138
Operating expenses:
Selling expenses. . . . . . . . . . . . . . . . 654,284 601,945 196,414 132,129
General and administrative. . . . . . . . . . . 3,230,117 2,442,602 853,028 695,616
Depreciation and amortization . . . . . . . . . 690,268 504,123 192,344 140,849
Asset impairment. . . . . . . . . . . . . . . . -- 124,531 -- --
----------- ---------- ---------- ----------
Total operating expenses. . . . . . . . . . . 4,574,669 3,673,201 1,241,786 968,594
----------- ---------- ---------- ----------
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . (230,433) (67,185) (46,144) (36,876)
Interest income . . . . . . . . . . . . . . . . 78,035 41,208 37,167 11,653
Other income. . . . . . . . . . . . . . . . . . 1,146 4,169 39,933 303
----------- ---------- ---------- ----------
Total other (expense) income. . . . . . . . . (151,252) (21,808) 30,956 (24,920)
----------- ---------- ---------- ----------
Income from operations before income taxes. . 2,282,367 1,215,676 685,497 407,624
Income tax expense. . . . . . . . . . . . . . . . 953,264 527,171 283,937 173,621
----------- ---------- ---------- ----------
Income from continuing operations . . . . . . 1,329,103 688,505 401,560 234,003
Discontinued Operations:
Loss from operations of discontinued clinical
business, net of tax benefit. . . . . . . . . -- (500,636) -- --
Loss on disposal of clinical business, net of
tax benefit. . . . . . . . . . . . . . . . . . -- (773,580) -- --
----------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . 1,329,103 (585,711) 401,560 234,003
Dividend on preferred stock(1). . . . . . . . . . -- -- -- --
----------- ---------- ---------- ----------
Net income (loss) available for common
stockholders . . . . . . . . . . . . . . . . . . $1,329,103 $(585,711) $401,560 $234,003
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Basic earnings per common share:
Weighted average number of common stock
shares outstanding. . . . . . . . . . . . . . 3,693,146 3,309,594 4,925,485 3,313,405
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations . . . . . . . . . . . . $.36 $.21 $.08 $.07
Discontinued operation. . . . . . . . . . . . -- (.39) -- --
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . $.36 $(.18) $.08 $.07
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average number of common stock and
common stock equivalents outstanding. . . . . 4,325,618 3,954,787 5,288,380 3,891,723
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations . . . . . . . . . . . . $.31 $.17 $.08 $.06
Discontinued operation. . . . . . . . . . . . -- (.32) -- --
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . $.31 $(.15) $.08 $.06
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
CASH FLOW DATA:
Net cash provided by operating activities . . . . $1,654,806 $472,801 $762,426 $392,623
Net cash used in investing activities . . . . . . (3,644,741) (1,402,328) (89,631) (2,060,922)
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31 , MARCH 31,
------------------------- --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . . 4,126,193 (754,143) (415,474) 1,584,331
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1996 1998
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (1):
Current assets. . . . . . . . . . . . . . . . . . $ 5,702,984 $ 3,194,480 $ 5,936,802
Working capital . . . . . . . . . . . . . . . . . 3,305,983 1,002,712 3,603,129
Total assets. . . . . . . . . . . . . . . . . . . 15,016,580 9,394,808 14,897,338
Current debt obligations. . . . . . . . . . . . . 654,509 1,312,650 926,177
Long-term debt, net of current portion. . . . . . 2,353,428 1,245,690 1,865,954
Stockholders' equity. . . . . . . . . . . . . . . 9,906,303 5,650,250 10,337,863
</TABLE>
- ------------------------
(1) Gives no effect to (i) the 1998 Private Offering, (ii) the exercise of
stock options and warrants after March 31, 1998, (iii) the exercise of the
Jesup & Lamont Group Warrants, (ii) the exercise of the outstanding stock
options granted under the 1994 Option Plan and the 1997 Option Plan
exercisable for the purchase of 85,000 shares of Common Stock, and (iv)
the exercise of other outstanding stock options and warrants exercisable
for the purchase of 262,058 shares of Common Stock. See "Management--1994
Stock Option Plan" and "--1997 Non-Qualified Stock Option Plan," and
"Description of Securities--Outstanding Stock Options and Other Warrants."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO OF THE COMPANY AND "SELECTED FINANCIAL
INFORMATION" APPEARING ELSEWHERE IN THIS PROSPECTUS.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i) the
fiscal years ended December 31, 1997 and 1996, and (ii) the three months ended
March 31, 1998 and 1997, which are derived from the consolidated financial
statements of the Company appearing elsewhere in this Prospectus. The results of
operations for the years and periods presented are not necessarily indicative of
the Company's future operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------- ------------------------------------------
1997 1996 1998 1997
---------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ---------- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . $12,836,953 100.0% $8,726,799 100.0% $3,571,608 100.0% $2,587,222 100.0%
Cost of laboratory services . . . . 5,828,665 45.4% 3,816,114 43.7% 1,675,281 46.9% 1,186,084 45.9%
----------- ------ ---------- ------ ---------- ------ ---------- ------
Gross profit. . . . . . . . . . . . 7,008,288 54.6% 4,910,685 56.3% 1,896,327 53.1% 1,401,138 54.1%
----------- ------ ---------- ------ ---------- ------ ---------- ------
Operating expenses:
Selling . . . . . . . . . . . . . 654,284 5.0% 601,945 6.9% 196,414 5.5% 132,129 5.1%
General and administrative. . . . 3,230,117 25.2% 2,442,602 28.0% 853,028 23.9% 695,616 26.9%
Depreciation and
amortization . . . . . . . . . . 690,268 5.4% 504,123 5.8% 192,344 5.4% 140,849 5.4%
Asset impairment. . . . . . . . . -- -- % 124,531 1.4% -- 0.0% -- 0.0%
. ----------- ------ ---------- ------ ---------- ------ ---------- ------
Total operating expenses. . . . . . 4,574,669 35.6% 3,673,201 42.1% 1,241,786 34.8% 968,594 37.4%
. ----------- ------ ---------- ------ ---------- ------ ---------- ------
. 2,433,619 19.0% 1,237,484 14.2% 654,541 18.3% 432,544 16.7%
Other income (expense). . . . . . . (151,252) 1.2% (21,808) .3% 30,956 .9% (24,920) 1.0%
. ----------- ------ ---------- ------ ---------- ------ ---------- ------
Income from continuing
operations before income
taxes . . . . . . . . . . . . . 2,282,367 17.8% 1,215,676 13.9% 685,497 19.2% 407,624 15.7%
Income tax expense. . . . . . . . . 953,264 7.4% 527,171 6.0% 283,937 8.0% 173,621 6.7%
. ----------- ------ ---------- ------ ---------- ------ ---------- ------
Income from continuing
operations. . . . . . . . . . . . 1,329,103 10.4% 688,505 7.9% 401,560 11.2% 234,003 9.0%
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) . . . . . . . . . $ 1,329,103 10.4% $ (585,711) 6.7% $401,560 11.2% $ 234,003 9.0%
. ----------- ------ ---------- ------ ---------- ------ ---------- ------
. ----------- ------ ---------- ------ ---------- ------ ---------- ------
Basic earnings per common share:
-18-
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------- ------------------------------------------
1997 1996 1998 1997
---------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ---------- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average number of
common stock shares
outstanding. . . . . . . . . . 3,693,146 3,309,594 4,925,485 3,313,405
----------- -----------
----------- -----------
Continuing operations . . . . . .36 .21 $.08 $.07
Discontinued operation. . . . . -- (.39) -- --
----------- ----------- ----------- -----------
Total . . . . . . . . . . . $.31 $(.18) $.08 $.07
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per
common share:
Weighted average number
of common stock and common
stock equivalents
outstanding . . . . . . . . . 4,325,618 3,954,787 5,288,380 3,891,723
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Continuing operations . . . . . .31 .17 $.08 $.06
Discontinued operation. . . . . -- (.32) -- --
----------- ----------- ----------- -----------
Total . . . . . . . . . . . $.31 $(.15) $.08 $.06
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
During each of the fiscal years ended December 31, 1997 and 1996, and the
three months ended March 31, 1998, LSI experienced a 2.0 percent, 4.7 percent
and 4.0 percent decrease in the price per specimen, respectively, compared to
the preceding fiscal year or the same period in the preceding 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, and the three months ended March 31, 1998, the
number of specimens analyzed increased 51.6 percent, 34.5 percent and 44.2
percent, respectively, compared to the preceding fiscal year ended or the same
period in the preceding year.
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 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 average number of common shares used to
compute basic earnings per share. See "Business--Background--NPLI
Acquisition."
Through its acquisition strategy, management of the Company anticipates,
although there can be no assurance, that the consolidation and assimilation of
the operations associated with the additional companies acquired, if any, will
result in increased testing volume with minimal indirect additional specimen
processing cost, resulting in increased profitability and cash flows. See
"Business--Growth Strategy." In the event the Company fails to make
acquisitions which contribute to the profitability, the Company may be required
to reduce general and administrative expenses.
COMPARISON OF THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Revenues increased to $3,571,608 in the three months ended March 31, 1998
(the "1998 Interim Period"), from $2,587,222 in the three months ended March 31,
1997 (the "1997 Interim Period"), an increase of 38.0 percent. The increase in
revenues was due to a 44.2 percent increase in the number of specimens analyzed
during the 1998 Interim Period as compared to the 1997 Interim Period, although
partially offset by a decrease of 4.0 percent in the average price per specimen.
The increase in number of specimens analyzed was attributable to the purchase of
customer lists and other assets of Pathology Laboratories, Ltd. (the "PLL Asset
Purchase") and Accu-Path Medical Laboratory, Inc.
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(the "Accu-Path Asset Purchase") as well as LSI's normal sales and marketing
efforts. The decrease in the average price per specimen was principally due to
increased price competition among providers of drug testing services, price per
specimen being an important factor in obtaining and maintaining clients.
Cost of revenues increased $489,197 from $1,186,084 in the 1997 Interim
Period to $1,675,281 in 1998 Interim Period, an increase of 41.2 percent.
Gross profit on revenues decreased as a percentage of revenues from 54.1 percent
in the 1997 Interim Period to 53.1 percent in 1998 Interim Period. The decrease
was primarily due to the decrease in the price per specimen. In addition, a key
laboratory position was added in early 1998 resulting in increased salaries.
Operating expenses increased from $968,594 in the 1997 Interim Period to
$1,241,786 in the 1998 Interim Period, an increase of 28.2 percent, and
decreased as a percentage of revenues from 37.4 percent to 34.8 percent. The
increase in operating expenses for the Interim Period was attributable to
increases in selling expenses of $64,285, general and administrative expenses of
$157,412 and depreciation and amortization of $51,495. The increase in general
and administrative expenses was principally a result of (i) an increase in
executive officer compensation, (ii) the addition of several key positions at
LSI and (iii) the addition of certain overhead costs associated with the PLL
Asset Purchase and Accu-Path Asset Purchase. The increase in selling expenses
was due to several additions to the sales force during 1997, to assist in
maintaining forensic clients acquired in the PLL Asset Purchase and Accu-Path
Asset Purchase as well as generate additional business in other areas of the
country. Depreciation increased due to the renovation of the new laboratory and
purchase of additional equipment at LSI, while amortization increased due to the
PLL Asset Purchase and Accu-Path Asset Purchase and the amortization of the
acquired customer lists.
Income from operations increased from $432,544 in the 1997 Interim Period
to $654,541 in the 1998 Interim Period, a 51.3 percent increase and increased
from 16.7 percent of revenues in the 1997 Interim Period to 18.3 percent of
revenues in the 1998 Interim Period.
Interest expense increased from $36,876 in the 1997 Interim Period to
$46,144 in 1998 Interim Period, a 25.1 percent increase. The increase in
interest expense is a result of a capital lease agreement for certain laboratory
equipment entered into late in the first quarter of 1996 and the bank loans
associated with the PLL Asset Purchase and the purchase and renovation of the
new laboratory building. Interest income increased from $11,653 in the 1997
Interim Period to $37,167 in the 1998 Interim Period. Other income increased
from $303 in the 1997 Interim Period to $39,933 in the 1998 Interim Period. Net
income, after provision for income taxes, increased from $234,003 in the 1997
Interim Period to $401,560 in the 1998 Interim Period, a 71.6 percent increase.
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. 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 "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
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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 "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.
COMPARISON OF FISCAL 1996 AND 1995
Revenues increased to $8,726,799 in 1996 from $6,925,716 in 1995, an
increase of 26 percent. The increase in revenues was due to a 34.5 percent
increase in the number of specimens analyzed during 1996 as compared to 1995,
although partially offset by a decrease of 4.7 percent in the average price per
specimen. The increase in number of specimens analyzed was attributable to the
NPLI Acquisition as well as the obtaining of additional accounts through LSI's
normal sales and marketing efforts. The decrease in the average price per
specimen was principally due to increased price competition among providers of
drug testing services, price per specimen being the most important factor in
obtaining and maintaining clients. 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
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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 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 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
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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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $762,426 in the
three months ended March 31, 1998, and $392,623 in the three months ended March
31, 1997. As of March 31, 1998, LSAI had working capital of $3,603,129,
compared to working capital of $3,305,983, at December 31, 1997. In the event
the Company's revenues increase as anticipated by management of the Company, the
Company's working capital requirements will also increase and such requirements
may exceed the net cash provided by operating activities and require that cash
be used in operating activities from sources other than operations, including
the available cash and cash equivalents (which were $3,120,960 at March 31,
1998) 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 June 4, 1998, LABZ completed
the offering of 555,222 shares of Common Stock for estimated net proceeds of
$2,285,600 pursuant to the 1998 Private Offering. On July 1, 1998 the Company
completed the TLI Asset Purchase. The $2.4 million purchase price was paid
from the proceeds of the 1998 Private Offering. See "The Company--Background--
1998 Private Offering and "--TLI Asset Purchase."
FUTURE OPERATIONS AND LIQUIDITY
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
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 March 31, 1998,
the outstanding capital lease obligation was $411,545.
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 PLL Asset Purchase. As of March 31, 1998, the
outstanding principal amount of the five-year term loan was $1,303,333.
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 March 31, 1998) 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
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LSAI. The loan agreement contains various covenants, including certain
financial ratios, all of which the Company was in full compliance with as of
March 31, 1998.
On July 2, 1997, LSI entered into a loan agreement with the bank for a term
loan in the principal amount of $720,000, to refinance the building in which
LSI's laboratory and offices are relocated. 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. As of March 31, 1998, the
outstanding principal balance amount of such loan was approximately $682,650.
On December 1, 1997, the Company completed the Accu-Path Asset Purchase
pursuant to an Asset Purchase Agreement. Pursuant to the Asset Purchase
Agreement, the Company agreed to pay 180 percent of the forensic testing
revenues during the period from June through November, 1998 as follows: (i)
$100,000 paid at closing, (ii) an amount equal to 50 percent of the forensic
testing revenues for each of the first three quarters, to be paid 30 days
following the end of each quarter, and (iii) the balance to be paid in four
quarterly installments with the first payment due March 1, 1999. The estimated
gross revenues attributable to this customer base was approximately $400,000.
As of March 31, 1998, no installment payments have been made related to the
Accu-Path Asset Purchase.
On May 1, 1998, the Company acquired from HLI, certain intangible assets
pursuant to an Asset Purchase Agreement dated April 13, 1998 (the "HLI Asset
Purchase"). Pursuant to the HLI Asset Purchase the Company (i) paid $500,000 at
closing, (ii) assumed the obligations of HLI under a certain capital lease,
dated November 11, 1997, which requires 60 monthly base payments of $6,137, and
(iii) is required to make a final payment, on or before, June 1, 1999, in an
amount equal to 100 percent of the gross revenues directly attributable to each
customer comprising the customer base of HLI for the year ended April 30, 1999,
exceeding $533,000. The estimated gross revenues attributable to the customer
base, for the year ended December 31, 1997, was approximately $1,300,000. As of
March 31, 1998, no installment payments have been made related to the HLI Asset
Purchase.
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 "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.
As of the date of this Prospectus, other than as described above, the
Company does not have any significant future capital commitments. The Company
anticipates that existing cash 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 its various acquisitions (see "The
Company--Background"), the Company recorded goodwill and customer lists, which
are being amortized on a straight-line basis over periods of 15 to 40 years (the
estimated period that the Company will be benefitted by such assets),
respectively. At March 31, 1998, the unamortized portion of the goodwill and
the
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customer lists was $2,291,956 and $4,296,908, 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
"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 or increased
amortization amount will either increase such losses from operations or further
reduce profitability.
BUSINESS
The Company, through LSI, its wholly-owned subsidiary, owns and operates a
laboratory providing drug testing services to corporate and institutional
customers seeking to detect and deter the use of illegal drugs. LSI's
laboratory is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA") , a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), to conduct drug testing using
procedures required for legal defensibility ("forensic") of test results. These
procedures provide reliable and accurate test results and a secure
chain-of-custody for each specimen from its collection to the reporting of the
test results. LSI tests for a number of drugs of abuse, including cocaine,
methamphetamine, heroin, PCP, marijuana and alcohol, primarily by urinalysis.
In addition to forensic drug testing, LSI offers a range of services which are
customized to assist customers in implementing cost-effective drug testing
programs. LSI's high volume customers have enabled it to develop cost-efficient
means of delivering its services while maintaining forensic testing standards.
INDUSTRY BACKGROUND
The Office of National Drug Control Policy estimates that Americans spend
more than $40 billion a year on illegal drugs. A NIDA 1990 National Survey
concluded that 12.9 million Americans had used illegal drugs in the one-month
period prior to the survey, including an estimated 10.2 million who had used
marijuana and 1.6 million who had used cocaine. This study also estimated that
1.6 million Americans had used heroin in their lifetime. In addition, law
enforcement data indicate that drugs are involved in a majority of the nation's
violent crimes and that more than 60 percent of arrestees in 1990 had illegal
drugs in their bodies. Government data indicate that drug abuse costs American
business $100 billion annually in lost productivity, increased accidents,
absenteeism, medical claims and employee theft.
In the 1970s, drug testing was limited largely to criminal justice agencies
and drug treatment programs. In the 1980s, however, increased awareness of the
drug abuse problem and its consequences led to increased drug testing in the
workplace. This, in turn, led to litigation which has settled many of the
formerly open legal and constitutional questions on drug testing. These court
decisions, generally favoring properly implemented drug testing programs, have
reinforced the acceptance of drug testing in the workplace. In 1986, President
Reagan signed an Executive Order which mandated drug testing for many key
federal employees, and there are now comprehensive federal regulations for drug
testing by many agencies. In the private sector, the number of the nations 200
largest corporations screening applicants and employees for drug use rose from
three percent to 98 percent from 1983 to 1991, according to the Institute for a
Drug Free Workplace. Furthermore, the Department of Transportation adopted
additional regulations, which became effective in 1995, that substantially
expanded the former regulations which mandated random drug testing of workers,
especially in such safety-sensitive jobs such as trucking, aviation,
transportation, railroads and
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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 1, 1998, there were approximately 74 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 key elements
discussed below.
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. During the last four years, the Company
has completed five acquisitions. See "The Company--Background." In connection
with NPLI Acquisition, the Company acquired, in addition to the drug testing
operations, the clinical testing and analysis operation conducted by NPLI.
After several attempts to sell the clinical testing and analysis operation of
NPLI, the Company discontinued the clinical testing and analysis operation in
the fourth quarter of 1996. This resulted in a net loss from discontinued
operation of $500,636 and a net loss on disposal of the clinical business of
$773,580. See "Management's Discussion and Analysis Financial Condition and
Results of Operations--Results of Operations."
The principal objective of the Company's acquisition strategy is to acquire
companies that, through the consolidation and assimilation of the operations of
drug testing companies acquired with and into the operations of LSI, will result
in increased testing volume with minimal additional specimen processing cost,
resulting in increased profitability and cash flows. Although the Company will
not consummate an acquisition unless, at the time of the acquisition, it is
anticipated that such acquisition will contribute to the profitability and
provide positive cash flows from operations following consolidation and
assimilation of the operations of the acquired company with those of LSI, there
can be no assurance of such increased profitability and positive cash flows, as
well as operations other than forensic drug testing may be acquired, which may
be discontinued or disposed of at a loss. In the event the Company fails to
make acquisitions which contribute to the profitability of the Company and
provide positive cash flows to the Company, the Company may be required to
reduce general and administrative expenses, possibly including consolidation of
Company operations into the offices of LSI and reduction of management
compensation, and may be required to utilize borrowings to fund negative cash
flows from operations until such reductions of general and administrative
expenses are achieved. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Future Operations and Liquidity."
In selecting companies for acquisition, the various criteria that will be
considered include (i) the ability to consolidate and assimilate the operations
of the acquisition target with and into those of LSI with the objective of
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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 LABZ, (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 LABZ, cash acquisitions utilizing available cash and cash
equivalents, borrowings or other sources of equity capital. The non-specific
nature of the acquisitions makes an estimation of amount to be allocated to
acquisitions from these sources impossible to estimate or determine at the date
of this Prospectus. LABZ'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 LABZ will be able to manage expanded operations effectively and
efficiently. LABZ'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.
LABZ's shareholders will, in all likelihood, not be afforded the
opportunity to approve the terms of any such acquisitions because the Board of
Directors will, in most cases, have the authority to consummate acquisitions
without shareholder approval. Shareholders will also not have an opportunity,
prior to consummation of an acquisition, to review the financial statements of
an acquisition candidate, except where shareholder approval is required.
EXPANDING ITS CLIENT BASE. LSI intends to continue to compete aggressively
for clients, with a greater emphasis on potential clients currently served by
competitors. In this effort, LSI intends to focus in particular on the
institutional and private employers, where LSI believes demand for drug testing
services is the greatest and the average price per specimen historically has
been higher. LSI also is targeting numerous moderate volume clients which have
yet to implement drug testing programs.
EMPHASIZING CLIENT SERVICE. SAMHSA certification requirements have
established a quality baseline for forensic drug testing. As a result, it has
become increasingly difficult for laboratories to differentiate their drug
testing services on the basis of quality. LSI has chosen to differentiate
itself by providing drug testing services, customized to address each client's
needs including assisting clients with the development of drug testing programs,
training client personnel, managing specimen collection, arranging for
transportation of specimens to LSI's laboratory, identifying trends in local and
national drug use, interpreting test results and providing expert testimony
concerning challenged test results. Unlike most of LSI's competitors, LSI
specializes in drug testing, and, through specialization, LSI believes that its
customer services equal or exceed those provided by its competitors.
IMPROVING OPERATING EFFICIENCIES. LSI believes that price continues to be
an important factor in obtaining new clients and maintaining current clients.
LSI intends to continue focusing on being a low-cost provider by improving the
efficiency of both its laboratory operations and customer services. Achievement
of improved efficiency is primarily a function of increased specimen testing
volume. Increased specimen testing volume reduces the cost per specimen tested
because of the somewhat fixed nature of general and administrative costs and
permits LSI to obtain volume purchase price concessions from its vendors which
also lower the direct cost per specimen tested. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations."
DRUG TESTING OPERATIONS
The essential elements of legally defensible (forensic) drug testing are a
secure chain-of-custody for each specimen from its collection to the reporting
of test results, and accurate and reliable testing in which a second independent
test is performed to confirm each positive test result. LSI carefully controls
each step of the testing process by following detailed written procedures and by
using the specific forensic testing methods required for legal defensibility of
results. LSI tests for drugs of abuse, including cocaine, methamphetamine,
heroin, PCP, marijuana
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<PAGE>
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 include those discussed
below.
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 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.
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<PAGE>
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 LABZ. 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 not experienced any material liability
related to these claims, although there can be no assurance that LSI will not at
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<PAGE>
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations." The Company believes that LSI competes favorably in each of these
categories. LSI competes with three types of companies which offer forensic
drug testing services, I.E., national SAMHSA laboratory chains such as
Smith-Kline Beecham Clinical Laboratories and Laboratory Corporation of America,
regional SAMHSA laboratories such as LabOne, Inc. and Clinical Reference Lab and
companies providing on site screening devices. Many of these competitors have
greater financial resources than the Company. In addition, some clients and
potential clients of LSI operate their own drug testing facilities, or may
develop such facilities in the future.
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.
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 LABZ 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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<PAGE>
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 March 31, 1998, LABZ 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. LABZ considers its and LSI's relations with their employees to be
good.
PROPERTIES
LABZ 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. LABZ 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 (see "The Company--Background--
PLL Asset Purchase"), the Company assumed the obligations of Pathology
Laboratories Limited ("PLL") under a certain Lease between Edith Schlien and
PLL, dated September 16, 1996, covering approximately 2,500 square feet of
office space located in Greenville, South Carolina. This lease requires
monthly base rental payments of $2,083, and will expire on September 16, 1999.
LITIGATION
LABZ 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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<PAGE>
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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
executive officer and director of LABZ 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. LABZ's Bylaws authorize the Board of Directors to be constituted of
not less than one and such number as the Board of Directors may from time to
time determine by resolution or election. The Board currently consists of six
members.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH LABZ POSITION WITH LSI AND NPLI
- ------------------------------------ --- ------------------------------- -------------------------------
<S> <C> <C> <C>
John Simonelli. . . . . . . . . . . . . . . . . . . 50 Chairman of the Board, Chief
Executive Officer, Secretary,
and Director
Larry E. Howell. . . . . . . . . . . . . . . . . . 50 President and Chief Operating Vice President and Director
Officer, and Director
Arthur R. Peterson, Jr. . . . . . . . . . . . . . . 51 Treasurer and Director President and Chief Executive
Officer, and Director
Robert A. Gardebled, Jr. . . . . . . . . . . . . . 32 Director Controller, Secretary and
Director
Jerome P. Welch . . . . . . . . . . . . . . . . . . 59 Director --
Michael E. Dunn . . . . . . . . . . . . . . . . . . 51 Director --
</TABLE>
The executive officers of LSI devote their full-time to LSI's business,
while Messrs. Simonelli and Howell devote such time to the business and affairs
of LABZ as may be required, but not less than 50 percent of their time is and
will continue to be devoted to the business and affairs of LABZ.
The following is a brief description of the business background of the
executive officers and directors of LABZ:
JOHN SIMONELLI is Chairman of the Board, Chief Executive Officer, Secretary
and a Director of LABZ. 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 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
LABZ. 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
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<PAGE>
Screens, Inc.), a publicly-held company engaged in the medical products and
services industry, from February 1988 through June 1992. From June 1986 to
April 1988, Mr. Howell served first as Vice President and than as President and
Chief Operating Officer of Unico, Inc. (formerly CMS Advertising, Inc.), a
publicly-held company engaged in the franchising of cooperative direct mail
advertising businesses. Since January 1982, Mr. Howell as the sole proprietor
of Howell and Associates, Inc. provides consulting services principally related
to corporate acquisitions and mergers.
ARTHUR R. PETERSON, JR. was elected Treasurer and a Director of LABZ in
July 1994. Mr. Peterson founded LSI in 1978 and served as its President and
Chief Executive Officer and a Director from inception. From March 1989 until
April 1994, he served as a Director of MBf USA, Inc. (formerly American Drug
Screens, Inc.), a publicly held company in the medical products and services
industry and former parent of LSI. Prior to 1978, Mr. Peterson was Chairman of
the Board and Chief Executive Officer of Clinical Laboratories of La., Inc., a
company he founded which served the medical community in clinical studies.
ROBERT A. GARDEBLED, JR. was elected a Director of LABZ in July 1994.
Since July 1989, he has served as an assistant to the President and was elected
Controller of LSI and in connection with the LSI Acquisition, he was elected
Secretary of LSI. From July 1991 until April 1994, Mr. Gardebled served as a
Director of MBf USA, Inc. (formerly American Drug Screens, Inc.), a publicly
held company in the medical products and services industry and former parent of
LSI. Prior to joining LSI, he was a Production Manager for Halter Yachts, Inc.,
a Louisiana ship building company.
JEROME P. WELCH was elected a Director of LABZ on August 26, 1994. Mr.
Welch is President of Prospect Publishers, Inc., a publisher of literary
hardback anthologies and newsletters. From May 1990 through June 1992, he
served as a Director and in July 1990 was elected Secretary of MBf USA, Inc.
(formerly American Drug Screens, Inc.), a publicly-held company engaged in the
medical products and services industry. From July 1988 to January 1990, Mr.
Welch served as President of Simon & Schuster Supplementary Publishers, a
subsidiary of Paramount Communications, Inc. and was Senior Vice President and
Publisher of McGraw Hill Educational Publishing from July 1987 to July 1988.
MICHAEL E. DUNN was elected a Director of LABZ on August 26, 1994. Since
April 1980 to January 1995, he was a member, shareholder and director of the law
firm of Zrenda Dunn & Swan, A Professional Corporation (formerly Bright Zrenda &
Dunn), in Oklahoma City, Oklahoma, and President from April 1992 until January
1995. Mr. Dunn has been a member, shareholder and the President of Dunn & Swan,
A Professional Corporation, since February 28, 1995. He has been the owner of
the Woodlake Racquet Club, a recreational athletic club, since 1981. Mr. Dunn
was graduated from the University of Oklahoma College of Law in 1972, and holds
a Bachelor of Science in Accounting and pursued graduate studies at the
University of Oklahoma.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
total cash compensation, paid or accrued, of the President and Chief Executive
Officer of LABZ and each of the executive officers that during 1996 received
compensation in excess of $100,000.
OFFICER COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
John Simonelli . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . $112,500 $72,000 $13,088
Chief Executive Officer of LABZ 1996 . . . . 100,000 -- 12,600
1995 . . . . 75,000 -- 12,000
Larry E. Howell . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . $112,500 $72,000 $14,501
President and Chief Operating Officer of LABZ 1996 . . . . 100,000 -- 14,100
1995 . . . . 75,000 -- 12,000
Arthur R. Peterson, Jr. . . . . . . . . . . . . . . . . . . . . 1997 . . . . $125,000 $122,000 $22,124
Treasurer of LABZ 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.
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<PAGE>
(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>
<CAPTION>
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 IN 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 Option 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 LABZ'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 LABZ's Common Stock and overall stock market conditions.
There can be no assurance that the potential values reflected in this table
will be achieved. All amounts have been rounded to the nearest whole
dollar amount.
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number and value of
options held by the named executive officers at the end of 1997. During 1997,
there were no options to purchase LABZ's Common Stock exercised by the named
executive officers.
<TABLE>
<CAPTION>
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 LABZ that are employees of LABZ 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
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<PAGE>
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 LABZ held one meeting, at which all directors were present in
person or participated by telephonic communications, except Michael E. Dunn.
The directors of LABZ did not receive any compensation nor was any compensation
accrued during 1997.
EMPLOYMENT ARRANGEMENTS
LABZ 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 LABZ, (iv) eligibility for stock options under LABZ'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 LABZ. The agreements also restrict the employee's right to
participate in other activities outside of LABZ to the extent such activities
conflict with the employee's ability to perform his duties and that would
violate his duty and loyalty to LABZ.
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 LABZ before provision for income taxes, (iv)
eligibility for stock options under LABZ'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 "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 LABZ)
or of proxies or other rights pertaining to LSI (including LABZ) which carry 25
percent or more of the total number of votes for the election of the Board of
Directors of LSI (including LABZ), (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 LABZ and LSI may be
terminated by LABZ 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 LABZ or LSI.
1994 STOCK OPTION PLAN
LABZ 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 Prospectus, 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
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<PAGE>
granted under the Plan, of which 190,000 NSO Options have been exercised. 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.
1997 NON-QUALIFIED STOCK OPTION PLAN
LABZ established the Laboratory Specialists of America, Inc. 1997
Non-Qualified Stock Option Plan (the "1997 Option Plan") in October 1997. The
1997 Option 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
Option Plan is 400,000. As of the date of this Prospectus, Options to purchase
340,000 shares (exercisable on or before October 1, 2007) at an exercise price
of $3.18 per share have been granted under the 1997 Option Plan, of which
300,000 Options have been exercised.
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
Option 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.
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 Option 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
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<PAGE>
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.
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 LABZ 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 LABZ 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 LABZ 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.
The Certificate and Bylaws of LABZ provide that LABZ shall indemnify all
directors and officers of LABZ 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 LABZ. The Certificate and
Bylaws of LABZ 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 LABZ pursuant to the foregoing provisions, or
otherwise, LABZ 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.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between LSI
and LABZ 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
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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, LABZ's offices located at 1101-A Sovereign Row in Oklahoma
City were subleased from Unico, Inc. ("Unico") on a month-to-month basis
currently for $1,500 per month, and the lessors of such premises to Unico
include Messrs. Simonelli and Howell, who are officers and directors of LABZ.
Messrs Simonelli and Howell own, in the aggregate, a 50 percent undivided
interest in such premises, and are former directors of Unico. During 1996, LABZ
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, LABZ 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 LABZ. In
addition, Michael E. Dunn received $10,000 for legal services rendered during
1997 on behalf of LABZ.
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 Option Plan to purchase 5,000 shares of LABZ Common Stock
at $3.18 per share, which will expire October 1, 2007. See "Management--1997
Non-Qualified Stock Option Plan."
The Board of Directors of LABZ believes that the terms of the transactions
described above were at least as favorable as could be obtained from
unaffiliated third parties. LABZ 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
LABZ 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Common Stock as of the date of this Prospectus, and the
beneficial ownership of the Common Stock, as adjusted to give effect to the
Offering (assuming exercise of the Jesup & Lamont Group Warrants in full), of
(i) each person who is known to LABZ to be the beneficial owner of more than
five percent thereof, (ii) each director and executive officer of LABZ, and
(iii) all executive officers and directors as a group, together with their
percentage holdings of the outstanding shares, and, as adjusted, after giving
effect to the Offering. All persons listed have sole voting and investment
power with respect to their shares unless otherwise indicated, and there are no
family relationships between the executive officers and directors of LABZ.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- NUMBER OF ------------------------
NUMBER OF PERCENT SHARES BEING NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) PERCENT(2) OFFERED SHARES(1) PERCENT(2)
- ------------------------------------ ------------ ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Arthur R. Peterson, Jr.(3)................................ 525,472 9.4% 35,472 490,000 8.7%
John Simonelli............................................ 235,217 4.2% 35,217 200,000 3.5%
Larry E. Howell........................................... 235,217 4.2% 35,217 200,000 3.5%
Robert A. Gardebled, Jr.(4)............................... 75,000 1.3% -- 75,000 1.3%
Jerome P. Welch(5)........................................ 10,000 .2% -- 10,000 .2%
Michael E. Dunn(5)........................................ 10,000 .2% -- 10,000 .2%
Executive Officers and Directors as a group
(six persons)(6)....................................... 1,090,906 19.2% 105,906 985,000 17.2%
</TABLE>
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<PAGE>
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them within 60 days are treated as outstanding for
determining the amount and percentage of Common Stock owned by such person.
To the Company's knowledge, each named person has sole voting and sole
investment power with respect to the shares shown except as noted, subject
to community property laws, where applicable.
(2) Rounded to the nearest one-tenth of one percent, based upon 5,602,446
shares of Common Stock outstanding before the Offering and 5,657,968
shares of Common Stock after the Offering, assuming exercise of the
Jesup & Lamont Group Warrants in full and assuming no exercise of
outstanding stock options and other warrants. See "Description of
Securities--Jesup & Lamont Group Warrants," and "--Outstanding Stock
Options and Other Warrants."
(3) The business address of the named person is 1111 Newton Street, Gretna,
Louisiana 70053.
(4) The number and each percent of shares include stock options exercisable for
the purchase of 50,000 shares of Common Stock.
(5) The number of shares and each percent include exercisable stock options to
purchase 10,000 shares of Common Stock.
(6) The number and each percent of shares include exercisable stock options to
purchase 70,000 shares of Common Stock.
DESCRIPTION OF SECURITIES
Pursuant to its Certificate of Incorporation, LABZ is currently authorized
to issue up to 30,000,000 shares of capital stock, consisting of 20,000,000
shares of Common Stock, $.001 par value ("Common Stock"), and 10,000,000 shares
of Preferred Stock, $.001 par value ("Preferred Stock"), of which 300,000 shares
were designated by the Board of Directors as the Series I Cumulative Convertible
Preferred Stock (the "Series I Preferred Stock"). The Series I Preferred Stock
was redeemed in full on July 10, 1995, at the aggregate stated value of $300,000
and ceased to be issued and outstanding. The Offering consists of (i) 55,522
shares of Common Stock which are being offered in the event of exercise of the
Jesup & Lamont Group Warrants at $5.40 per share, and (ii) the resale of
661,128 shares of Common Stock by the Selling Shareholders. After giving
effect to the Offering and assuming full exercise of the Jesup & Lamont Group
Warrants, the issued and outstanding capital stock of LABZ will consist of
5,657,968 shares of Common Stock, assuming the outstanding stock options and
other warrants are not exercised. See "--Common Stock, "--Jesup & Lamont Group
Warrants" and "--Outstanding Stock Options and Other Warrants."
The following description of certain matters relating to the capital stock
and the Jesup & Lamont Group Warrants is a summary and is qualified in its
entirety by the provisions of LABZ's Certificate of Incorporation and the
Warrant Certificates evidencing the Jesup & Lamont Group Warrants, all of which
are either incorporated by reference or included as exhibits to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
COMMON STOCK
Pursuant to its Certificate of Incorporation, LABZ is authorized to issue
up to 20,000,000 shares of Common Stock. The holders of outstanding shares of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of assets legally
available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that may be outstanding. In the event of
liquidation, dissolution and winding-up of LABZ, the holders of outstanding
Common Stock are entitled to share ratably in all assets available for
distribution to the Common Stock shareholders after payment of all liabilities
of LABZ, subject to the prior distribution rights of the holders of any
Preferred Stock that may be outstanding at that time. Holders of outstanding
Common Stock are entitled to one vote per share on matters submitted to a vote
by the Common Stock shareholders of LABZ. The Common Stock has no preemptive
rights and no subscription, redemption or conversion privileges. The Common
Stock does not have cumulative voting rights, which means that holders of a
majority of shares voting for the election of directors can elect all members of
the Board of Directors subject to election.
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<PAGE>
In general, a majority vote of shares represented at a meeting of Common Stock
shareholders at which a quorum (a majority of the outstanding shares of Common
Stock) is present is sufficient for all actions that require the vote or
concurrence of shareholders, subject to and possibly in connection with the
voting rights of the holders of any Preferred Stock that from time to time may
be outstanding and entitled to vote with the holders of the Common Stock. Upon
issuance of the Common Stock pursuant to exercise of the Jesup & Lamont Group
Warrants, all of the outstanding shares of Common Stock will be fully paid and
nonassessable.
JESUP & LAMONT GROUP WARRANTS
In connection with the 1998 Private Offering, LABZ issued the Jesup &
Lamont Group Warrants (as evidenced by each of the Warrant Certificates, dated
June 4, 1998) to Jesup & Lamont and its assigns to purchase 55,522 shares of
Common Stock at an exercise price of $5.40 per share. The Jesup & Lamont Group
Warrants are exercisable at any time during the five-year period ending June 3,
2003. The number and kind of securities or other property for which the Jesup &
Lamont Group Warrants are exercisable are subject to adjustments in certain
events, such as mergers, reorganizations or stock splits, to prevent dilution.
During the term of the Jesup & Lamont Group Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock. LABZ may find it more difficult to raise additional equity capital while
the Jesup & Lamont Group Warrants are outstanding. At any time at which the
Jesup & Lamont Group Warrants are likely to be exercised, LABZ will probably be
able to obtain additional equity capital on more favorable terms. LABZ has
registered the shares of Common Stock underlying the Jesup & Lamont Group
Warrants under the 1933 Act pursuant to the Registration Statement of which this
Prospectus is a portion and has agreed, at its expense, to maintain such
registration in force until June 4, 2004. The Jesup & Lamont Group Warrants are
not redeemable by LABZ.
The Jesup & Lamont Group Warrants may be exercised by presentation and
surrender of the Jesup & Lamont Group Warrant to LABZ at its principal office
accompanied by the duly executed Warrant Exercise Form annexed to the Jesup &
Lamont Group Warrant and payment, in cash, certified or official bank check
payable to Laboratory Specialists of America, Inc. in the amount of the
exercise price of the number of shares of Common Stock being purchased. The
Jesup & Lamont Group Warrants contain net issuance provisions permitting the
holder thereof to elect to exercise such warrant in whole or in part and
instruct LABZ to withhold from the shares of Common Stock issuable upon
exercise, a number of shares, valued at the current fair market value on the
date of exercise, to pay the exercise price. Such net exercise provision has
the effect of requiring LABZ to issue shares of Common Stock without a
corresponding increase in capital. A net exercise of the Jesup & Lamont Group
Warrants will have the same dilutive effect on the interests of the
shareholders of LABZ as would a cash exercise. Upon exercise, LABZ will
deliver to the holder of the Jesup & Lamont Group Warrant one or more
certificates evidencing the Common Stock. In the event the exercise is in
part only, LABZ will promptly execute and deliver a new Jesup & Lamont Group
Warrant evidencing the rights of the holder to purchase the balance of the
shares of Common Stock purchasable pursuant to the Jesup & Lamont Group
Warrant.
The Jesup & Lamont Group Warrants may be assigned by surrender of the Jesup
& Lamont Group Warrants to the Company at its principal office. In such event,
LABZ will, without charge, execute and deliver a new warrant certificate in the
name of the assignee. The Jesup & Lamont Group Warrants may be divided or
combined with other Jesup & Lamont Group Warrants.
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, LABZ has an authorized class
of Preferred Stock of 10,000,000 shares, $.001 par value, of which 300,000
shares were designated the Series I Preferred Stock. On July 10, 1995, the
Series I Preferred Stock was redeemed in full at the aggregated stated value of
$300,000 and thereafter there were no shares of Preferred Stock issued and
outstanding. The Preferred Stock may be issued from time to time in one or more
series, and the Board of Directors of LABZ, without further approval of its
shareholders, is authorized to fix the relative rights, preferences, privileges
and restrictions applicable to each series of Preferred Stock. Management of
LABZ believes that having such a class of Preferred Stock provides LABZ with
greater flexibility in financing, acquisitions and other corporate activities.
While there are no current plans, commitments or understandings, written or
oral, to issue any additional shares of Preferred Stock, in the event of any
issuance, the holders of Common Stock will not have any preemptive or similar
rights to acquire any of such Preferred Stock.
The Board of Directors has the authority to issue shares of Preferred Stock
and to determine its rights and preferences to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend
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<PAGE>
payments and payments upon liquidation and could have the effect of delaying,
deferring or preventing a change in control of LABZ.
OUTSTANDING STOCK OPTIONS AND OTHER WARRANTS
The Board of Directors is authorized to issue options and other
stock purchase rights pursuant to The Laboratory Specialists of America, Inc.
1994 Stock Option Plan (the "1994 Plan") and the Laboratory Specialists of
America, Inc 1997 Non-Qualified Stock Option Plan (the "1997 Plan"). The
aggregate number of shares of Common Stock authorized and reserved for
issuance under the 1994 Plan and 1997 Plan is 825,000. See "Management--1994
Stock Option Plan" and "--1997 Non-Qualified Stock Option Plan." As of the
date of this Prospectus, (i) there are stock options outstanding under the
1994 Plan exercisable, on or before March 28, 2007, for the purchase of
45,000 shares of Common Stock at $2.00 per share and (ii) there are stock
options outstanding under the 1997 Plan exercisable, on or before October 1,
2007, for the purchase 40,000 shares at $3.18 per share. In addition,
stock options have been granted to the three non-employee directors of LABZ,
exercisable for the purchase of 15,000 shares of Common Stock at $2.00 per
share, on or before March 28, 2007. See "Certain Transaction."
Furthermore, the Company has outstanding warrants and other stock options
exercisable for the purchase of 262,058 shares of Common Stock at $2.20 to $3.60
per share (with a weighted average exercise price of $2.72), expiring October
11, 1999 through February 14, 2001. The Company has filed and maintains, at its
expense, a registration statement (Registration No. 333-30997) for the
registration of the Common Stock underlying such warrants and stock options.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation of LABZ and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions include availability of
authorized but unissued Common Stock and Preferred Stock.
COMMON AND PREFERRED STOCK. The Certificate of Incorporation authorizes
the issuance of Common Stock and Preferred Stock in classes, and the Board of
Directors to set and determine the voting rights, redemption rights, conversion
rights and other rights relating to such class of Common Stock or Preferred
Stock, and to issue such stock in either private or public transactions. In
some circumstances, the Common Stock or Preferred Stock could be issued and have
the effect of preventing a merger, tender offer or other takeover attempt which
the LABZ's Board of Directors opposes.
OKLAHOMA ANTI-TAKEOVER STATUTE. LABZ is subject to Sections 1145 through
1155 of the Oklahoma General Corporation Act (the "anti-takeover provisions").
In general, shares ("interested shares") of voting stock acquired (within the
meaning of a "control share acquisition" under the anti-takeover provisions)
become nonvoting stock for a period of three years following such control share
acquisition, unless a majority of the holders of non-interested shares approve a
resolution reinstating the interested shares with the same voting rights that
such shares had before such interested shares became control shares. Any person
("acquiring person") who proposes to make a control share acquisition may, at
the person's election, and any acquiring person who has made a control share
acquisition is required to deliver an acquiring person statement to the
corporation at its principal office setting forth (i) the identity of the
acquiring person, (ii) the number of shares owned, directly or indirectly, the
acquisition date and price at which the shares were or are to be acquired, (iii)
the voting power the acquiring person would be entitled but for the
anti-takeover provisions, (iv) the form of resolution to be considered by the
shareholders to approve reinstatement of voting rights with respect to the
shares acquired, and (v) in the event the control share acquisition has not been
consummated, a description in reasonable detail of the terms of the proposed
control share acquisition and representations, together with a statement in
reasonable detail of the facts upon which they are based, that the proposed
control share acquisition, if consummated, will not be contrary to law, and that
the acquiring person has the financial capacity to make the proposed control
share acquisition. The corporation is required to present to the next annual
meeting of the shareholders the reinstatement of voting rights with respect to
the control shares that resulted in the control share acquisition, unless the
acquiring person requests a special meeting of shareholders for such purpose and
undertakes
-41-
<PAGE>
to pay the costs and expenses of such special meeting within 10 days thereafter.
In the event voting rights of control shares acquired in a control share
acquisition are reinstated in full and the acquiring person has acquired control
shares with a majority or more of all voting power, all shareholders of the
corporation have dissenters' rights entitling them to receive the fair value of
their shares which will not be less than the highest price paid per share by the
acquiring person in the control share acquisition.
Within the meaning of the anti-takeover provisions, "control share
acquisition" means the acquisition by any person (including persons acting as a
group) of ownership of, or the power to direct the exercise of voting power with
respect to, control shares (generally shares having more than 20 percent of all
voting power in the election of directors of a publicly held corporation), other
than an acquisition (and then only if made in good faith and not for the purpose
of circumventing the anti-takeover provisions) (i) pursuant to the laws of
descent and distribution, (ii) pursuant to the satisfaction of a pledge or other
security interest, (iii) pursuant to an agreement of merger, consolidation, or
share acquisition to which the corporation is a party and is effected in
compliance with certain Sections of the Oklahoma General Corporation Act, (iv)
by a donee receiving the shares pursuant to an inter vivos gift, (v) by a person
of additional shares within the range of voting power for which such person has
received approval pursuant to a resolution by the majority of the holders of
non-interested shares, (vi) an increase in voting power resulting from any
action taken by the corporation, provided the person whose voting power is
thereby affected is not an affiliate of the corporation, (vii) pursuant to proxy
solicitation under and in accordance with the Exchange Act or the laws of
Oklahoma, (viii) pursuant to transfer between or among immediate family members,
or between or among persons under direct common control, or (ix) from any person
whose previous acquisition of shares did not constitute a control share
acquisition, provided the acquisition does not result in the acquiring person
holding voting power within a higher range of voting power than that of the
person from whom the control shares were acquired.
TRANSFER AGENT AND WARRANT AGENT
UMB Oklahoma Bank is the registrar and transfer agent for the Common Stock,
whose mailing address is Post Office Box 82427, Oklahoma City, Oklahoma 73148.
The Company is the transfer agent of the Jesup & Lamont Group Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, LABZ has 5,602,446 shares of Common
Stock outstanding. Upon completion of the Offering (assuming exercise of the
Jesup & Lamont Group Warrants in full and assuming no exercise of the
outstanding stock options and other warrants), LABZ will have outstanding
5,657,968 shares of Common Stock and an aggregate of 357,058 outstanding
stock options and warrants exercisable for the purchase of Common Stock. See
"Description of Securities--Outstanding Stock Options and Other Warrants."
No prediction can be made as to the effect, if any, that future sales or the
availability of shares for sale will have on the market price of the Common
Stock prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock of LABZ in the public market could adversely affect
the prevailing market price of the Common Stock and could impair LABZ's
ability to raise capital through sales of its equity securities.
The 666,650 shares of Common Stock offered in the Offering will be
immediately eligible for resale in the public market without restriction or
further registration under the 1933 Act, except for shares purchased by an
"affiliate" (as that term is defined under the 1933 Act) of LABZ, which will
be subject to the resale limitations of Rule 144 promulgated under the 1933
Act. In addition, there are 915,000 shares of Common Stock outstanding held
by the executive officers and directors of the Company which are subject to
the resale limitations of Rule 144 promulgated under 1933 Act described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of LABZ's Common Stock or (ii) an
amount equal to the average weekly reported volume of trading in such shares
during the four calendar weeks preceding the date on which notice of such sale
is filed with the Commission. Sales under Rule 144 are also subject to certain
manner of sale limitations, notice requirements and the availability of current
public
-42-
<PAGE>
information about LABZ. Shares of Common Stock properly sold in reliance on
Rule 144 are thereafter freely tradable without restrictions or registration
under the 1933 Act, unless thereafter held by an affiliate of LABZ. In
addition, affiliates of LABZ must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of Common Stock which are not restricted shares within the meaning
of Rule 144 (such as shares of Common Stock acquired by affiliates of LABZ in
the Offering). As defined in Rule 144, an "affiliate" of an issuer is a person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such issuer. If two years have
elapsed since the later of the date of any acquisition of Restricted Shares from
LABZ or from any affiliate of LABZ, and the acquiror or subsequent holder
thereof is deemed not to have been an affiliate of LABZ at any time during the
90 days preceding a sale, such person would be entitled to sell such shares in
the public market pursuant to Rule 144(k) without regard to volume limitations,
manner of sale restrictions, or public information or notice requirements.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances permits qualified institutional buyers, as defined in the Rule, to
more easily acquire and sell "restricted securities." The Company is unable to
predict the effect that Rule 144A will have on the prevailing market price of
LABZ's Common Stock due to the recent adoption of the Rule.
PLAN OF DISTRIBUTION
The Common Stock issuable upon exercise of the Jesup & Lamont Group
Warrants is being offered on a best efforts basis by the Company and its
officers and directors, without their receipt of or entitlement to commissions,
selling fees or direct or indirect remuneration. From the proceeds of the
Offering received by the Company, the costs (which are estimated to be $28,500)
incurred with respect to the Offering will be paid by the Company. Offers by
the Company will be limited to the holders of the Jesup & Lamont Group
Warrants. The Common Stock offered by the Selling Shareholders pursuant to the
Offering is being offered on a best efforts basis by the respective Selling
Shareholders.
LEGAL MATTERS
The validity of issuance of the shares of Common Stock and Units offered
hereby and certain other legal matters in connection with the Offering will be
passed upon for LABZ by its counsel, Dunn Swan & Cunningham, A Professional
Corporation, of Oklahoma City, Oklahoma.
EXPERTS
The financial statements of the Company included in this Prospectus and
Registration Statement to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
-43-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC.:
Consolidated Balance Sheets December 31, 1997
and March 31, 1998 (Unaudited). . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income (Unaudited) Three Months
Ended March 31, 1997 and 1998 . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 and 1998. . . . . . . . . . . F-5
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . F-6
Report of Independent Public Accountants . . . . . . . . . . . . . . F-8
Consolidated Balance Sheets, December 31, 1997 and 1996. . . . . . . F-9
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . F-11
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995. . . . . . . . . . F-12
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . F-13
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-14
F-1
<PAGE>
Page 1 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . $ 2,863,639 $ 3,120,960
Accounts receivable, net of allowances
of $568,237 in 1997 and $558,485 in 1998. 2,262,990 2,413,563
Income tax refund receivable. . . . . . . . 190,498 --
Inventories . . . . . . . . . . . . . . . . 109,929 70,911
Prepaid expenses and other. . . . . . . . . 115,219 170,659
Deferred tax asset. . . . . . . . . . . . . 160,709 160,709
------------ ------------
Total current assets. . . . . . . . . . . 5,702,984 5,936,802
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $1,123,909
in 1997 and $1,194,023 in 1998. . . . . . . 2,376,885 2,340,997
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$272,148 in 1997 and $296,494 in 1998 . . 2,316,302 2,291,956
Customer list, net of accumulated
amortization of $518,105 in 1997, and
$603,240 in 1998. . . . . . . . . . . . . 4,587,814 4,296,908
Deferred costs. . . . . . . . . . . . . . . 32,595 30,675
------------ ------------
Total other assets. . . . . . . . . . . . 6,936,711 6,619,539
------------ ------------
Total assets. . . . . . . . . . . . . . . $ 15,016,580 $ 14,897,338
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
<PAGE>
Page 2 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . $ 742,292 $ 799,836
Accrued income tax. . . . . . . . . . . . . -- 93,439
Accrued payroll . . . . . . . . . . . . . . 411,364 459,856
Accrued expenses. . . . . . . . . . . . . . 78,491 54,365
Accrued customer list installment payments. 510,345 260,000
Obligations from discontinued operations. . 126,813 134,604
Current portion of long-term debt.. . . . . 527,696 531,573
------------ ------------
Total current liabilities . . . . . . . . 2,397,001 2,333,673
------------ ------------
LONG-TERM DEBT, net of current portion. . . . 2,353,428 1,865,954
------------ ------------
DEFERRED INCOME TAXES . . . . . . . . . . . . 359,848 359,848
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000
shares authorized, 4,924,818 shares
issued and outstanding at 12/31/97 and
4,934,818 shares issues and outstanding
at 3/31/98 . . . . . . . . . . . . . . . . 4,925 4,935
Paid in capital in excess of par,
common stock. . . . . . . . . . . . . . . . 8,291,365 8,321,355
Retained earnings . . . . . . . . . . . . . . 1,610,013 2,011,573
------------ ------------
Total stockholders' equity. . . . . . . . 9,906,303 10,337,863
------------ ------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . $ 15,016,580 $ 14,897,338
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-3
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES. . . . . . . . . . . . . . . . . . . $ 2,587,222 $ 3,571,608
COST OF LABORATORY SERVICES . . . . . . . . . 1,186,084 1,675,281
------------ ------------
Gross profit. . . . . . . . . . . . . . . . 1,401,138 1,896,327
------------ ------------
OPERATING EXPENSES:
Selling . . . . . . . . . . . . . . . . . . 132,129 196,414
General and administrative. . . . . . . . . 695,616 853,028
Depreciation and amortization . . . . . . . 140,849 192,344
------------ ------------
Total operating expenses. . . . . . . . . 968,594 1,241,786
------------ ------------
Income from operations. . . . . . . . . . 432,544 654,541
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . (36,876) (46,144)
Interest income . . . . . . . . . . . . . . 11,653 37,167
Other income. . . . . . . . . . . . . . . . 303 39,933
------------ ------------
Total other income (expense). . . . . . . (24,920) 30,956
------------ ------------
Income before income taxes. . . . . . . . 407,624 685,497
INCOME TAX EXPENSE. . . . . . . . . . . . . . 173,621 283,937
------------ ------------
Net income available to common
stockholders. . . . . . . . . . . . . . $ 234,003 $ 401,560
------------ ------------
------------ ------------
BASIC EARNINGS PER SHARE:
Weighted Average Number Of Common Stock
Shares Outstanding. . . . . . . . . . . . . 3,313,405 4,925,485
------------ ------------
------------ ------------
Earnings Per Common Stock Share . . . . . . $ .07 $ .08
------------ ------------
------------ ------------
DILUTED EARNINGS PER SHARE:
Weighted Average Number Of Common Stock and
Common Stock Equivalents Outstanding. . . . 3,891,723 5,288,380
------------ ------------
------------ ------------
Earnings Per Common Stock and Common
Stock Equivalents . . . . . . . . . . . . $ .06 $ .08
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . $ 234,003 $ 401,560
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation and amortization. . . . . . . 140,849 192,344
Provision for bad debts. . . . . . . . . . 30,000 --
Gain from extinguishment of long-term debt -- (38,121)
Impact of changes in assets and liabilities:
Accounts receivable . . . . . . . . . . (300,764) (150,573)
Income tax refund receivable. . . . . . 173,621 190,498
Inventories . . . . . . . . . . . . . . (16,389) 39,018
Prepaid expenses and other. . . . . . . 290 (55,440)
Income tax payable. . . . . . . . . . . -- 93,439
Accounts payable and accrued expenses. . 131,013 89,701
------------ ------------
Net cash provided by operating activities. 392,623 762,426
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . (217,431) (46,977)
Purchase of PLL Customer List . . . . . . . . (1,650,433) (42,033)
Purchase of Accu-Path Customer List . . . . . -- (2,541)
Acquisition costs . . . . . . . . . . . . . . (193,058) 1,920
------------ ------------
Net cash used in investing activities. . . (2,060,922) (89,631)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term debt . . . . . . . . . (11,666) --
Payments on long-term debt. . . . . . . . . . (85,312) (445,474)
Proceeds from long-term borrowings. . . . . . 1,681,309 --
Proceeds from exercise of warrants and
stock options. . . . . . . . . . . . . . . . -- 30,000
------------ ------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . 1,584,331 (415,474)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . (83,968) 257,321
------------ ------------
CASH AND CASH EQUIVALENTS, beginning
of period. . . . . . . . . . . . . . . . . . . 727,381 2,863,639
------------ ------------
CASH AND CASH EQUIVALENTS, end of period. . . . $ 643,413 $ 3,120,960
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest . . . $ 36,876 $ 58,279
------------ ------------
------------ ------------
Cash paid during the period for taxes . . . . $ -- $ --
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998, IS UNAUDITED.)
1. GENERAL
The consolidated financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation. These financial statements have not been audited by an
independent accountant. The consolidated balance sheet at December 31,
1997, has been derived from the audited consolidated balance sheet of the
Company.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the
disclosures are adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Annual
Report on Form 10-KSB filed by the Company with the Securities and Exchange
Commission on March 27, 1998. The financial data for the interim periods
presented may not necessarily reflect the results to be expected for the
full year.
2. EARNINGS PER COMMON SHARE
Both Basic and Diluted Earnings per common share were computed using the
weighted average number of common shares outstanding after adding the
dilutive effect, if any, of the conversion of stock options, outstanding
warrants and contingent shares.
3. GOODWILL AND CUSTOMER LIST
Goodwill and customer lists are being amortized on a straight-line basis
over twenty to forty years and fifteen years, respectively. The Company
continually evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of goodwill and customer lists
may warrant revision or that the remaining unamortized balance of goodwill
or customer lists may not be recoverable. When factors, such as operating
losses, loss of customers, loss or suspension for an extended period of
laboratory certification, or changes in the drug testing industry, if
present, indicate that goodwill or customer lists should be evaluated for
possible impairment, the Company uses an estimate of the related
undiscounted cash flows over the remaining life of the goodwill or customer
lists in measuring whether the goodwill and the customer lists are
recoverable. Although management believes that goodwill and the customer
lists are currently recoverable over the respective remaining amortization
periods, it is possible, due to a change in circumstances, that the
carrying value could become impaired in the future. Such impairment could
have a material adverse effect on the results of operations in a particular
reporting period.
4. CONTINGENT LIABILITIES
Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse or who allege that
improper analysis has been performed, generally arising from Laboratory
Specialists, Inc.'s, the company's wholly owned subsidiary ("LSI"), alleged
failure to properly administer drug urinalysis tests. LSI is currently a
defendant in several such lawsuits. Based upon prior successful defense of
similar-type lawsuits, the Company believes it has valid defenses to each
of such lawsuits, and intends to vigorously defend in such actions.
Although LSI maintains insurance protection against such liability, and
LSI's insurance carriers have assumed the defense of LSI in connection
with certain actions, the extent of such insurance coverage is limited,
both in terms of types of risks covered by the policies and the amount of
coverage. In the opinion of the Company's management and it's legal
counsel, these suits and claims should not result in judgments or
settlements which would have a material adverse effect on the
F-6
<PAGE>
Company's results of operations or financial position. Although LSI has
not experienced any material liability related to such claims, there can be
no assurance that LSI, and possibly LSAI, will not at some time in the
future experience significant liability in connection with such claims and
such liability may exceed the extent of such insurance coverage, both in
terms of risks covered by the policies and the amount of coverage, which
could have a material adverse effect upon the results of operations and
financial condition of the Company.
5. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the purchase of certain assets of Pathology
Laboratories, Ltd. ("PLL"), LSI recorded a liability of $960,000 based
upon estimated future quarterly payments. As of March 31, 1998, total
payments of $751,688 were recorded as reductions in the liability owed to
PLL for the four installments. The remaining balance of the liability,
approximately $208,312, was recorded as a reduction in the carrying value
of the PLL customer list.
In connection with the purchase of certain assets of Accu-Path Medical
Laboratory, Inc. ("Accu-Path") Purchase, LSI recorded a liability of
$260,000 based upon estimated future quarterly payments. As of March 31,
1998, no payments have been made toward the liability with Accu-Path.
A capital lease obligation of approximately $650,000 was incurred when LSI
entered into an agreement with a vendor in 1996 to buy equipment and
certain lab supplies at a fixed price per drug screen performed. The
minimum monthly amount under the agreement was approximately $47,000 in
1996 and increased to approximately $60,000 in 1997, with approximately
$13,000 per month allocated to the principal and interest of the capital
lease obligation, and the remaining cost being allocated to the cost of
laboratory supplies. The agreement resulted in LSI recording approximately
$650,000 in additional equipment, with an equal amount of capital lease
obligation recorded as long-term debt obligation payable over five years.
The above transactions, except the monthly payment to the vendor and the
reductions in the liability owed to PLL and Accu-Path, are non-cash
transactions and have been excluded from the accompanying statements of
cash flows.
6. SUBSEQUENT EVENTS
On May 1, 1998, the Company acquired from Harrison Laboratories, Inc.
("HLI"), a Texas corporation, certain intangible assets pursuant to an
Asset Purchase Agreement dated April 13, 1998, ("HLI Asset Purchase"). The
assets purchased included the customer list of HLI and certain other
intangible assets. Pursuant to the HLI Asset Purchase, the Company (i)
paid $500,000 at closing, (ii) assumed the obligations of HLI under a
certain capital lease, dated November 11, 1997, which requires 60 monthly
base payments of $6,137, and (iii) is required to make a final payment, on
or before June 1, 1999, in an amount equal to 100 percent of the gross
revenues directly attributable to each customer comprising the customer
base of HLI for the year ended April 30, 1999, exceeding $533,000.
On June 4, 1998, the Company completed a private offering of 555,222
shares of its common stock. The net proceeds of this offering were
approximately $2,285,600. In part for services provided, the Company
sold to Jesup & Lamont Securities Corporation warrants exercisable on
or before June 3, 2003, for the purchase of 55,522 shares of the
Company's common stock for $5.40 per share. The Company agreed to
register and maintain the registration of the shares of common stock
sold pursuant to the offering and those shares underlying the warrants
at the Company's cost and expense. In the event the Company fails to
file a registration statement registering such shares of common stock
on or before July 4, 1998 and obtain effectiveness of such registration
statement on or before September 2, 1998, the Company agreed to issue
warrants to the purchasers of the common stock, exercisable for the
purchase of 10% of the number of shares purchased for each 30-day
period that the Company fails to file or obtain effectiveness of such
registration statement.
On July 1, 1998, the Company acquired the customer list and certain
other intangible assets of TOXWORX Laboratories, Inc. for $2,400,000
pursuant to an Asset Purchase Agreement dated June 8, 1998.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Laboratory Specialists of America, Inc.:
We have audited the accompanying consolidated balance sheets of Laboratory
Specialists of America, Inc. (an Oklahoma corporation) and subsidiaries as of
December 31, 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-8
<PAGE>
Page 1 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
ASSETS
------
<S> <C> <C>
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-9
<PAGE>
Page 2 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
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-10
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
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-11
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
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-12
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
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-13
<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.
The following table summarizes the calculation of basic earnings per common
share and diluted earnings per common share:
F-14
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- --------------------
INCOME SHARES INCOME SHARES INCOME SHARES
(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.
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:
F-15
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
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.
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
F-16
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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.
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):
(UNAUDITED)
<TABLE>
<S> <C>
Revenues......................................... $8,626
Net income from continuing operations............ $851
</TABLE>
F-17
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
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):
<TABLE>
<CAPTION>
(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."
F-18
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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.
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>
<CAPTION>
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
</TABLE>
F-19
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C> <C>
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>
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>
<CAPTION>
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:
F-20
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Prior to 1995, the Company had no material differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
except for certain goodwill which is not deductible for tax purposes, and
treated as a permanent difference.
The 1997, 1996 and 1995 provision (benefit) for income taxes on income from
continuing operations is summarized below:
<TABLE>
<CAPTION>
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>
<CAPTION>
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>
<CAPTION>
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>
9. COMMITMENTS AND CONTINGENCIES:
F-21
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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.
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
F-22
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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-23
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The following table shows the activity for options issued under the Plans as
well as other options issued:
<TABLE>
<CAPTION>
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>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICE CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
OPTIONS PER OPTION LIFE (YEARS) PER OPTION OPTIONS PER OPTION
------- ---------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
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,
F-24
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
the estimated weighted-average, grant-date fair value would have been $0.94,
$1.14 and $1.23 per option 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>
<CAPTION>
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>
<CAPTION>
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
F-25
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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 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-26
<PAGE>
- ----------------------------------------------------------------
- ----------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................... 3
Risk Factors............................................... 6
The Company................................................ 10
Use of Proceeds............................................ 13
Selling Shareholders....................................... 14
Price Range of Common Stock; Dividends..................... 15
Capitalization............................................. 16
Selected Financial Information............................. 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............................. 18
Business................................................... 25
Management................................................. 32
Certain Transactions....................................... 37
Security Ownership of Certain
Beneficial Owners and Management....................... 38
Description of Securities.................................. 39
Shares Eligible for Future Sale............................ 40
Plan of Distribution....................................... 43
Legal Matters.............................................. 43
Experts.................................................... 43
Index to Financial Statements.............................. F-1
</TABLE>
------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
716,650
SHARES
COMMON STOCK
LABORATORY SPECIALISTS
OF AMERICA, INC.
------------
PROSPECTUS
------------
Any requests for information concerning the Offering
may be made by calling the Company's office at (405)
232-9800 or by writing to Laboratory Specialists of
America, Inc., 101 Park Avenue, Suite 810, Oklahoma
City, Oklahoma 73102, Attention: Larry E. Howell.
-----------
, 1998
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1031 of the Oklahoma General Corporation Act permits (and
Registrant's Certificate of Incorporation and Bylaws, which are incorporated by
reference herein, authorize) indemnification of directors and officers of
Registrant and officers and directors of another corporation, partnership, joint
venture, trust or other enterprise who serve at the request of Registrant,
against expenses, including attorneys fees, judgments, fines and amount paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding in which such person is a party by reason of such
person being or having been a director or officer of Registrant or at the
request of Registrant, if he conducted himself in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Registrant,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. Registrant may not indemnify an officer or
a director with respect to any claim, issue or matter as to which such officer
or director shall have been adjudged to be liable to Registrant, unless and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper. To
the extent that an officer or director is successful on the merits or otherwise
in defense on the merits or otherwise in defense of any action, suit or
proceeding with respect to which such person is entitled to indemnification, or
in defense of any claim, issue or matter therein, such person is entitled to be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection therewith.
The circumstances under which indemnification is granted with an action
brought on behalf of Registrant are generally the same as those set forth above;
however, expenses incurred by an officer or a director in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
final disposition upon receipt of an undertaking by or on behalf of such officer
or director to repay such amount if it is ultimately determined that such
officer or director is not entitled to indemnification by Registrant.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act of 1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
S.E.C. Registration Fees. . . . . . . . . . . . . . . . . . $
N.A.S.D. Filing Fees. . . . . . . . . . . . . . . . . . . .
*State Securities Laws (Blue Sky) Legal Fees. . . . . . . . 5,000.00
*State Securities Laws Filing Fees. . . . . . . . . . . . . 2,000.00
*Printing and Engraving . . . . . . . . . . . . . . . . . . 1,000.00
*Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . 15,100.00
*Accounting Fees and Expenses . . . . . . . . . . . . . . . 5,000.00
*Transfer and Warrant Agent's Fees. . . . . . . . . . . . . 200.00
*Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . 200.00
--------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $28,500.00
--------------
--------------
</TABLE>
- ----------------------------------------
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to the Stock Purchase Agreement with National Psychopharmacology
Laboratory, Inc., Haroutune K. Dekirmenjian and Kenneth O. Jobson, dated January
1, 1996, and the Settlement Agreement and General Release, Registrant issued
103,333 shares of Common Stock to Haroutune K. Dekirmenjian and Kenneth O.
Jobson on August 25, 1997.
II-1
<PAGE>
On June 4, 1998, Registrant sold (i) warrants to Jesup & Lamont Securities
Corporations for net proceeds to Registrant of $55, such warrants are
exercisable for the purchase of 55,522 shares of Registrant's common stock, and
(ii) 555,222 shares of Registrant's Common Stock, to the following persons:
<TABLE>
<CAPTION>
PURCHASE NUMBER OF
DATE OF PRICE PER SHARES NET
NAME PURCHASE SHARE PURCHASED PROCEEDS(1)
- ----- -------- --------- --------- -----------
<S> <C> <C> <C> <C>
Special Situations Private Equity Fund, LP . 6/4/98 $4.50 222,222 $929,999
Pequot Scout Fund, LP . . . . . . . . . . . . 6/4/98 4.50 200,000 837,000
Julius O. Luck . . . . . . . . . . . . . . . 6/4/98 4.50 2,000 8,370
Paul S. Vanderwerf . . . . . . . . . . . . . 6/4/98 4.50 1,000 4,058
KDP Enterprises . . . . . . . . . . . . . . . 6/4/98 4.50 10,000 41,850
Metropolis Equity Fund . . . . . . . . . . . 6/4/98 4.50 10,000 41,850
Ralph Mandarino . . . . . . . . . . . . . . . 6/4/98 4.50 5,000 20,925
David Herzog . . . . . . . . . . . . . . . . 6/4/98 4.50 5,000 20,925
Alfred Aysseh . . . . . . . . . . . . . . . . 6/4/98 4.50 40,000 167,400
Alain Aysseh . . . . . . . . . . . . . . . . 6/4/98 4.50 10,000 41,850
OT Finance SA . . . . . . . . . . . . . . . . 6/4/98 4.50 15,000 62,775
Merl Trust . . . . . . . . . . . . . . . . . 6/4/98 4.50 7,000 29,295
The Lucien I. Levy Revocable Living Trust . . 6/4/98 4.50 5,000 20,925
Elvire Levy . . . . . . . . . . . . . . . . . 6/4/98 4.50 5,000 20,925
Michele Spycher . . . . . . . . . . . . . . . 6/4/98 4.50 3,000 12,555
William H. Duling and Susan E. Duling . . . . 6/4/98 4.50 5,000 20,925
</TABLE>
- ------------------------
(1) Commissions equal to seven percent of the Purchase Price Per Share were
paid to Jesup & Lamont Securities Corporation.
Registrant relied on Rule 506, Rule 144A and Section 4(2) of the Securities
Act of 1933 for exemption from the registration requirements of such Act. Each
investor was furnished information concerning the operations of Registrant, and
each had the opportunity to verify the information supplied. Additionally,
Registrant obtained a signed representation from each of the foregoing persons
in connection with the purchase of the Common Stock of his, her or its intent to
acquire such Common Stock for the purpose of investment only, and not with a
view toward the subsequent distribution thereof; each of the certificates
representing the Common Stock of Registrant was stamped with a legend
restricting transfer of the securities represented thereby, and Registrant
issued stop transfer instructions to UMB Bank Oklahoma, the Transfer Agent for
the Common Stock of the Company, concerning all certificates representing the
Common Stock held by the aforementioned shareholders of Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
-----------
2.1 Form of Warrant Certificate evidencing warrants sold to
Jesup & Lamont Securities Corporation, dated June 4, 1988.
2.2 The Registration Rights Agreement with Jesup & Lamont Securities
Corporation and the Selling Shareholders identified in the Prospectus,
dated June 4, 1998. (9)
2.3 The Selling Agreement with Jesup & Lamont Securities Corporation,
dated June 4, 1988. (9)
II-2
<PAGE>
3.1 Registrant's Certificate of Incorporation.(3)
3.2 Registrant's Bylaws.(3)
4.1 Form of Certificate of Common Stock of Registrant.(6)
4.2 Laboratory Specialists of America, Inc. 1994 Stock Option Plan, as
amended and restated October 30, 1996.(3)
4.3 Laboratory Specialists of America, Inc. 1997 Non-Qualified Stock
Option Plan.
4.4 Form of Warrant for Purchase of Common Stock issued to Barber &
Bronson, Incorporated and its designees.(2)
4.5 Common Stock Purchase Warrant issued to The Equity Group, Inc.,
dated December 1, 1995.(2)
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities covered
by this Registration Statement.(2)
10.1 The Asset Purchase Agreement between the Registrant and Pathology
Laboratories, Ltd., dated January 31, 1997.(1)
10.2 Amendment to Asset Purchase Agreement between Registrant and
Pathology Laboratories, Ltd., dated July 30, 1997.(2)
10.3 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)
10.4 The Asset Purchase Agreement between the Registrant and Accu-Path
Medical Laboratory, Inc., dated December 1, 1997.(7)
10.8 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated July 2, 1997.(5)
10.9 Promissory Note issued by Laboratory Specialists, Inc. to Hibernia
National Bank, dated July 2, 1997.(5)
10.10 Employment Agreement with John Simonelli, as amended and restated
September 26, 1997. (6)
10.11 Employment Agreement with Larry E. Howell, as amended and restated
September 26, 1997.(6)
10.12 Employment Agreement between Arthur R. Peterson, Jr. and Laboratory
Specialists, Inc.,as amended and restated September 26, 1997.(6)
10.13 Investment Banking Agreement between Registrant and Barber &
Bronson, Incorporated, dated June 5, 1997.(2)
10.14 Employment Severance Agreement between Robert A. Gardebled, Jr. and
Laboratory Specialists, Inc., dated November 20, 1997. (7)
10.15 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated January 9, 1997.(8)
II-3
<PAGE>
10.16 Promissory Note issued by Laboratory Specialists, Inc. to Hibernia
National Bank, dated January 9, 1997. (8)
10.17 The Asset Purchase Agreement between Registrant, Laboratory
Specialists, Inc., and Harrison Laboratories, Inc., dated April 13,
1998.
10.18 Employment Agreement between Roy D. Harrison, Laboratory
Specialists, Inc., and Registrant.
10.19 The Asset Purchase Agreement between Registrant, TOXWORX
Laboratories, Inc. and Kingsley Labrosse, dated June 8, 1998.
21.1 Subsidiaries of Registrant.(2)
23.1 Consent of Arthur Andersen LLP, dated July 2, 1998.
23.2 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated July 1, 1998.
25.1 Power of Attorney of John Simonelli, dated July 1, 1997.
25.2 Power of Attorney of Larry E. Howell, dated July 1, 1997.
25.3 Power of Attorney of Arthur R. Peterson, Jr., dated July 1, 1997.
25.4 Power of Attorney of Robert A. Gardebled, Jr., dated July 1, 1997.
25.5 Power of Attorney of Jerome P. Welch, dated July 1, 1997.
25.6 Power of Attorney of Michael E. Dunn,dated July 1, 1997.
- ------------------------------------------------------
(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.
(6) Incorporated by reference to Form 10-QSB Quarterly Report for the quarter
ended September 30, 1997, as filed with the Commission on , 1997.
(7) Incorporated by reference to Form 10-KSB Annual Report for the year ended
December 31, 1997, as filed with the Commission on April 29, 1998.
(8) Incorporated by reference to Form 10-QSB Quarterly Report for the quarter
ended March 31, 1998, as filed with the Commission on ,
1997.
(9) To be furnished by amendment.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement; and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of Registrant pursuant to the foregoing provisions,
or otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by Registrant of expenses incurred or paid by a
director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f) RULE 430A.
Registrant hereby undertakes that it will (i) for determining any liability
under the Securities Act, treat the information omitted from the form of
prospectus filed as a part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by Registrant under
Rule 424(b)(1), or (4) or 497(h) under the Securities Act as a part of this
Registration Statement as of the time the Commission declared it effective,
and (ii) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Oklahoma
City, State of Oklahoma, on the 2nd day of July, 1998.
LABORATORY SPECIALISTS OF AMERICA, INC.
(Registrant)
By: /S/LARRY E. HOWELL
Larry E. Howell, President
---------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/JOHN SIMONELLI Chairman of the Board, Chief July 2, 1998
John Simonelli Executive Officer, Secretary
- ------------------------------ and Director
/S/LARRY E. HOWELL President and Chief Operating July 2, 1998
Larry E. Howell Officer and Director
- ------------------------------
/S/ARTHUR R. PETERSON, JR. Treasurer and Director July 2, 1998
Arthur R. Peterson, Jr.
- ------------------------------
/S/ROBERT A. GARDEBLED, JR. Director July 2, 1998
Robert A. Gardebled, Jr.
- ------------------------------
/S/MICHAEL E. DUNN Director July 2, 1998
Michael E. Dunn
- ------------------------------
/S/JEROME P. WELCH Director July 2, 1998
Jerome P. Welch
- ------------------------------
</TABLE>
II-6
<PAGE>
EXHIBIT 2.1
VOID AFTER 5:00 P.M. EASTERN STANDARD TIME, ON JUNE 3, 2003
NEITHER THIS WARRANT NOT THE WARRANT STOCK HAS BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE COMPANY WILL NOT TRANSFER THIS WARRANT OR THE
WARRANT STOCK UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH
WARRANT OR SUCH WARRANT STOCK, AS THE CASE MAY BE, UNDER THE SECURITIES ACT
OF 1933; AS AMENDED AND APPLICABLE STATES SECURITIES LAWS, (ii) IT FIRST
RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR
ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER
IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND
UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS VALIDLY
MADE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
Warrant No. No. 1 55,522 Warrants
LABORATORY SPECIALISTS OF AMERICA, INC.
(an Oklahoma corporation)
Warrant Certificate to Purchase One Share
of Common Stock,
$.001 par value per share
FOR VALUE RECEIVED, LABORATORY SPECIALISTS OF AMERICA, INC. (the
"Company"), an Oklahoma corporation, hereby certifies that Jesup & Lamont
Securities Corporation, or assigns ("Holder"), is the owner of the number of
Common Stock Purchase Warrants (the "Warrants") specified above. This
Warrant is being issued pursuant to the terms of a Selling Agreement, dated
June 4, 1998, between the Company and Jesup & Lamont Securities Corporation
(the "Placement Agent") in connection with a Private Placement of Common
Stock (the "Private Placement"), as more fully described in a confidential
Private Placement Offering Circular, dated April 24, 1998 as amended or
supplemented (the "Memorandum"). One (1) Warrant initially entitles the
Holder to purchase, subject to the provisions of this Warrant, one (1) fully
paid and nonassessable share of Common Stock, $.001 par value, of the Company
from the Company at anytime, or from time to time, during the period
commencing on the date hereof and expiring at 5:00 p.m. Eastern Standard
Time, on June 3, 2003 ("Expiration Date"), at a price of $5.40 per share
("Exercise Price"), which is 120% of the offering price per share of Common
Stock in the Private Placement, subject to adjustment in accordance with
Section 6 of this Warrant Certificate. Payment of the Exercise Price may be
made in cash, by official bank or certified check made payable to the Company
or by the surrender of such number of shares of Common Stock issuable upon
the exercise of this Warrant, which Common Stock shall be valued at the
closing price per share of the Common Stock on the last trading day prior to
the date upon which this Warrant shall be exercised, or if the Common Stock
is then not publicly traded, the price determined in good faith by the Board
of Directors of the Company.
The term "Common Stock" means the Common Stock, par value $.001 per
share, of the Company as constituted on June 4, 1998 ("Base Date"), together
with any other equity securities that may be issued by the Company in respect
thereof or in substitution therefor. The number of shares of Common Stock to
be received upon the exercise of this Warrant may be adjusted from time to
time as hereinafter set forth. The shares of Common Stock deliverable or
delivered upon such exercise, as adjusted from time to time, are hereinafter
referred to as "Warrant Stock."
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft destruction or mutilation of this Warrant certificate, and
(in the case of loss, theft or destruction) of satisfactory indemnification,
and
1
<PAGE>
upon surrender and cancellation of this Warrant certificate, if mutilated,
the Company shall execute and deliver a new Warrant certificate of like tenor
and date.
SECTION 1. EXERCISE OF WARRANT This Warrant may be exercised, subject to
the requirements set forth below, in whole or in part, at any time during the
period commencing on the date hereof and expiring at 5:00 p.m. Eastern
Standard Time on the Expiration Date set forth above, or, if such day is a
day on which banking institutions in New York are authorized by law to close,
then on the next succeeding day that shall not be such a day, by presentation
and surrender of this Warrant certificate to the Company at its principal
office, with the Warrant Exercise Form attached hereto duly executed and
accompanied by payment of the aggregate Exercise Price (if applicable) for
the number of shares specified in such form and instruments of transfer if
appropriate, duly executed by the Holder. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant
certificate for cancellation, execute and deliver a new Warrant certificate
evidencing the rights of the Holder thereof to purchase the balance of the
shares purchasable hereunder. Upon receipt by the Company of this Warrant
certificate, together with the Exercise Price (if applicable), at its office,
in proper form for exercise as described above, together with an agreement to
comply with the restrictions on transfer and related covenants contained
herein and a representation as to investment intent and any other matter
required by counsel to the Company, signed by the Holder (and if other than
the original Holder accompanied by proof, satisfactory to counsel for the
Company, of the right of such person or persons to exercise the Warrant), the
Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, even if the stock transfer books of the
Company shall then be closed or certificates representing such shares of
Common Stock shall not have been delivered to the Holder. The Holder shall
pay any and all documentary stamp or similar issue or transfer taxes payable
in respect of the issue or delivery of shares of Common Stock on exercise of
this Warrant. The Company shall promptly thereafter issue certificate(s)
evidencing the Common Stock so purchased.
SECTION 2. RESERVATION OF SHARES. The Company shall reserve for issuance
and delivery upon exercise of this Warrant all shares of Common Stock or
other shares of capital stock of the Company (and other securities) from time
to time receivable upon exercise of this Warrant. All such shares (and other
securities) shall be duly authorized and, when issued upon exercise, shall be
validly issued, fully paid and non-assessable.
SECTION 3. NO FRACTIONAL SHARES. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant, but the Company shall pay the Holder an amount equal to the fair
market value of such fractional share of Common Stock in lieu of each
fraction of a share otherwise called for upon any exercise of this Warrant.
For purposes of this Warrant, the fair market value of a share of Common
Stock shall equal the closing sale price (or if not available the average of
the closing bid and asked prices) on the business day prior to exercise of
this Warrant or, if the Common Stock is then not publicly traded, then the
price determined in good faith by the Board of Directors of the Company.
SECTION 4. TRANSFER.
4.1 SECURITIES LAWS. Neither this Warrant nor the Warrant Stock has
been registered un the Securities Act of 1933, as amended (the "Act"). The
Company will not transfer this Warrant or the Warrant Stock unless (i) there
is an effective registration covering such Warrant or Warrant Stock, as the
case may be, under the Act and applicable states securities laws, (ii) it
first receives a letter from an attorney, acceptable to the Company's Board
of Directors or its agents, stating that in the opinion of the attorney the
proposed transfer is exempt from registration under the Act and under all
applicable state securities laws, or (iii) the transfer is made pursuant to
Rule 144 under the Act.
4.2 CONDITIONS TO TRANSFER. Prior to any such proposed transfer, and
as a condition thereto, if such transfer is not made pursuant to an effective
registration statement under the Act, the Holder will, if requested by the
Company, deliver to the Company (i) an investment convenant signed by the
proposed transferee, (ii) an agreement
2
<PAGE>
by such transferee that the restrictive investment legend set forth above be
placed on the certificate or certificates representing the securities
acquired by such transferee, (iii) an agreement by such transferee that the
Company may place a "stop transfer order" with its transfer agent or
registrar, and (iv) an agreement by the transferee to indemnify the Company
to the same extent as set forth in the next succeeding paragraph.
4.3 INDEMNITY. The Holder acknowledges that the Holder understands the
meaning and legal consequences of this Section 4, and the Holder hereby
agrees to indemnify and hold harmless the Company, its representatives and
each officer and director thereof from and against any and all loss, damage
or liability (including all attorney's fees and costs incurred in enforcing
this indemnity provision) due to or arising out of (a) any transfer of any of
this Warrant or the Warrant Stock in violation of the Act, the Securities
Exchange Act of 1934, as amended or the rules and regulations promulgated
under either of such acts, (b) any transfer of this Warrant or any of the
Warrant Stock not in accordance with this Warrant or (c) any untrue statement
or omission to state any material fact in connection with the investment
representations or with respect to the facts and representations supplied by
the Holder to counsel to the Company upon which its opinion as to proposed
transfer shall have been based.
4.4 ASSIGNMENT AND TRANSFER. Except as specifically restricted hereby,
this Warrant and the Warrant Stock issued may be transferred by the Holder in
whole or in part at any time or from time to time. Upon surrender of this
Warrant certificate to the Company or at the office of its stock transfer
agent, if any, with the Assignment Form annexed hereto duly executed and
funds sufficient to pay any transfer tax, and upon compliance with the
foregoing provisions, the Company shall without charge, execute and deliver a
new Warrant certificate in the name of the assignee named on such instrument
of assignment, and this Warrant certificate shall promptly be canceled. An
assignment, transfer, pledge, hypothecation or other disposition of this
Warrant attempted contrary to the provisions of this Warrant, or any levy of
execution, attachment or other process attempted upon this Warrant, shall be
null and void and without effect.
SECTION 5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof,
be entitled to any rights of a stockholder in the Company, either at law or
in equity, and the rights of the Holder are limited to those expressed in
this Warrant.
SECTION 6. ANTI-DILUTION PROVISIONS.
6.1 STOCK SPLITS, DIVIDENDS, DISTRIBUTIONS OR SUBDIVISIONS.
6.1.1 If the Company shall at any time subdivide its
outstanding shares of Common Stock (or other securities at the time
receivable upon the exercise of the Warrant) by recapitalization,
reclassification or split-up thereof, or if the Company shall declare a stock
dividend or distribute shares of Common Stock to its stockholders, the number
of shares of Common Stock subject to this Warrant immediately prior to such
subdivision shall be proportionately increased, and if the Company shall at
any time combine the outstanding shares of Common Stock by recapitalization,
reclassification, reverse stock split, or combination thereof, the number of
shares of Common Stock subject to this Warrant immediately prior to such
combination shall be proportionately decreased. Any such adjustment and
adjustment to the Exercise Price pursuant to this Section 6 shall be
effective at the close of business on the effective date of such subdivision
or combination or if any adjustment is the result of a stock dividend or
distribution then the effective date for such adjustment based thereon shall
be the record date therefor.
6.1.2 Whenever the number of shares of Common Stock purchasable
upon the exercise of this Warrant is adjusted, as provided in this Section 6,
the Exercise Price shall be adjusted to the nearest cent by multiplying such
Exercise Price immediately prior to such adjustment by a fraction (x) the
numerator of which shall be the number of shares of Common Stock purchasable
upon the exercise immediately prior to such adjustment, and (y) the
denominator of which shall be the number of shares of Common Stock so
purchasable immediately thereafter.
6.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, OR
CONVEYANCE. In case of any reorganization of the Company (or any other
corporation, the securities of which are at the time receivable on the
exercise of this
3
<PAGE>
Warrant) after the Base Date or in case after such date the Company (or any
such other corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then, and in each such case, the Holder of this Warrant upon the
exercise as provided in Section 1 at any time after the consummation of such
reorganization, consolidation, merger or conveyance, shall be entitled to
receive in lieu of the securities and property receivable upon the exercise
of this Warrant prior to such consummation, the securities or property to
which such Holder would have been entitled upon such consummation if such
Holder had exercised this Warrant immediately prior thereto; in each such
case, the terms of this Warrant shall be applicable to the securities or
property received upon the exercise of this Warrant after such consummation.
6.3 CERTIFICATE AS TO ADJUSTMENTS. In each case of an adjustment in
the number of shares of Common Stock receivable on the exercise of this
Warrant, the Company at its expense shall promptly compute such adjustment in
accordance with the terms of the Warrant and prepare a certificate executed
by an officer of the Company setting forth such adjustment and showing the
facts upon which such adjustment is based. The Company shall forthwith mail
a copy of each such certificate to each Holder.
6.4 NOTICES OF RECORD DATE, ETC.
6.4.1 The Company shall take a record of the holders of its Common
Stock (or other securities at the time receivable upon the exercise of the
Warrant) for the purpose of entitling them to receive any dividend (other
than a cash dividend at the same rate as the rate of the last cash dividend
theretofore paid) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any other securities, or
to receive any other rights; or
6.4.2 In case of any voluntary or involuntary dissolution,
liquidation or winding-up of the Company, then, and in each such case, the
Company shall mail or cause to be mailed to each Holder a notice specifying,
as the case may be, (A) the date on which a record is to be taken for the
purpose of such dividend, distribution or right, and stating the amount and
character of such dividend, distribution or right, or (B) the date on which
such reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if
any, to be fixed, as to which the holders of record of Common Stock (or such
other securities at the time receivable upon the exercise of this Warrant)
shall be entitled to exchange their shares of Common Stock (or such other
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be mailed at least
twenty (20) days prior to the date therein specified, and this Warrant may be
exercised prior to said date during the term of the Warrant.
SECTION 7. LEGEND AND STOP TRANSFER ORDERS. Unless the Shares of Warrant
Stock have been registered under the Act, upon exercise of any of this
Warrant and the issuance of any of the shares of Warrant Stock, the Company
shall instruct its transfer agent, if any, to enter stop transfer orders with
respect to such shares, and all certificates representing shares of Warrant
Stock shall bear on the face thereof substantially the following legend,
insofar as is consistent with Oklahoma law:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"). The Company will not transfer the securities
represented by this certificate unless (i) there is an effective
registration covering such securities under the Act and all
applicable state securities laws, (ii) it first receives a
letter from an attorney, acceptable to the board of directors or
its agents, stating that in the opinion of the attorney the
proposed transfer is exempt from registration under the Act and
under all applicable state securities laws, or (iii) the
transfer is validly made pursuant to Rule 144 under the Act.
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SECTION 8. REGISTRATION. The Company has agreed to use its best efforts
to file a registration statement with the Securities and Exchange Commission
to register the Warrant Stock within 30 days following the closing of the
Private Placement in connection with this Warrant was sold and as
specifically set forth in the Registration Rights Agreement, dated as of the
date hereof, by and among the Company, the Placement Agent and each purchaser
of common stock in the Private Placement, the terms and provisions of which
are incorporated by reference and made a part hereof.
SECTION 9. OFFICER'S CERTIFICATE. Whenever the number or kind of
securities purchasable upon exercise of this Warrant or the Exercise Price
shall be adjusted as required by the provisions hereof, the Company shall
forthwith file with its Secretary or Assistant Secretary at its principal
office and with its stock transfer agent, if any, an officer's certificate
showing the adjusted number of kind of securities purchasable upon exercise
of this Warrant and the adjusted Exercise Price determined as herein provided
and setting forth in reasonable detail such facts as shall be necessary to
show the reason for and the manner of computing such adjustments. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the Holder and the Company shall, forthwith after each such
adjustment, mail by certified mail a copy of such certificate to the Holder.
SECTION 10. NOTICE. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be mailed by certified
mail, return receipt requested, or delivered against receipt, if to the
Holder at the following address;
Jesup & Lamont Securities Corporation
650 Fifth Avenue, 3rd Floor
New York, New York 10017
Attention: Howard R. Curd, President
and if to the Company, at its principal office. Any notice or other
communication given by certified mail shall be deemed given at the time of
certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof.
SECTION 11. BINDING EFFECT. The provisions of this Warrant shall be binding
upon and inure to the benefit of (1) the parties hereto, (2) the successors
and assigns of the Company, (3) if the Holder is a corporation, partnership,
or other business entity, the successors and assignees of the Holder, and (4)
if the Holder is a natural person, the assignees, heirs, and personal
representative of the Holder.
SECTION 12. PRONOUNS. Any masculine personal pronoun shall be considered to
mean the corresponding feminine or neuter personal pronoun, as the context
required.
Date: June 4, 1998
LABORATORY SPECIALISTS OF AMERICA, INC.
an Oklahoma corporation
By:/s/JOHN SIMONELLI
-----------------
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WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing ____________ shares of Common Stock of LABORATORY
SPECIALISTS OF AMERICA, INC. and hereby makes payment of [$___________ , cash
or certified or bank check] [such number of shares of Common Stock issuable
upon the exercise of this Warrant, such shares to be valued in accordance with
the terms of the Warrant Certificates] in payment therefor.
- ------------------------------ ------------------------------
Date Signature
------------------------------
Signature (if jointly held)
Corporation, dated June 4, 1988.
<PAGE>
EXHIBIT 4.9
LABORATORY SPECIALISTS OF AMERICA, INC.
1997 NON-QUALIFIED STOCK OPTION PLAN
ARTICLE I
GENERAL PROVISIONS
On October 1, 1997, Laboratory Specialists of America, Inc. (the
"Company") adopted the Laboratory Specialists of America, Inc. 1997
Non-Qualified Stock Option Plan (the "Plan").
1.1 PURPOSE. The purpose of the Plan shall be to attract, retain and
motivate directors, executive officers, key employees and independent
contractors and consultants of the Company and its subsidiaries ("Eligible
Persons") by way of granting (i) non-qualified stock options ("Stock
Options") with stock appreciation rights attached ("Stock Option SARs"). For
the purpose of this Plan, Stock Option SARs are sometimes herein called
"SARs." The Stock Options to be granted are intended to be "non-qualified
stock options" as described in Sections 83 and 421 of the Internal Revenue
Code of 1986, as amended (the "Code"). Furthermore, under the Plan, the
terms "parent" and "subsidiary" shall have the same meaning as set forth in
Subsections (e) and (f) of Section 425 of the Code unless the context herein
clearly indicates to the contrary.
1.2 GENERAL. The terms and provisions of this Article I shall be
applicable to Stock Options and SARs unless the context herein clearly
indicates to the contrary.
1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors (the "Board") of the Company.
1.3.1 BOARD ADMINISTRATION. The Board shall have the power where
consistent with the general purpose and intent of the Plan to (i) modify
the requirements of the Plan to conform with the law or to meet special
circumstances not anticipated or covered in the Plan, (ii) suspend or
discontinue the Plan, (iii) establish policies, and (iv) adopt rules and
regulations and prescribe forms for carrying out the purposes and
provisions of the Plan including the form of any "stock option agreements"
("Stock Option Agreements").
1.3.2 PLAN INTERPRETATION. Unless otherwise provided in the Plan,
the Board shall have the authority to interpret and construe the Plan, and
determine all questions arising under the Plan and any agreement made
pursuant to the Plan. Any interpretation, decision or determination made
by the Board shall be final, binding and conclusive.
1.3.3 SELECTION OF PARTICIPANTS. In designating and selecting
Eligible Persons ("Participants") for participation in the Plan, the Board
may consult with and give consideration to the recommendations and
criticisms submitted by appropriate managerial and executive officers of
the Company. The Board also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and
potential contributions to the success of the Company and such other
factors as the Board shall deem relevant in connection with accomplishing
the purpose of the Plan.
1.4 SHARES SUBJECT TO THE PLAN. Shares of stock ("Stock") covered by
Stock Options and SARs shall consist of 400,000 shares of the Common Stock,
$.001 par value, of the Company, subject to adjustment pursuant to Section
1.7 of the Plan, which may be either authorized and unissued shares or
treasury shares, as determined in the sole discretion of the Board. If any
Option for shares of Stock, granted to a Participant lapses, or is otherwise
terminated, the Board may grant Stock Options and SARs for such shares of
Stock to other Participants. However, Stock Options and SARs shall not be
granted again for shares of Stock which have been (i) subject to SARs which
are surrendered
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in exchange for cash or shares of Stock issued pursuant to the exercise of
SARs as provided in Article II hereof and (ii) shares withheld for tax
withholding requirements.
1.5 PARTICIPATION IN THE PLAN. The Board shall determine from time to
time those Eligible Persons who are to be granted Stock Options and SARs and
the number of shares of Stock covered thereby. The maximum number of shares
of Stock for which employee-Directors may be granted Stock Options in any
calendar year shall not exceed 25 percent of the aggregate number of shares
of Stock with respect to which Options may be granted under the Plan.
1.6 DETERMINATION OF FAIR MARKET VALUE. As used in the Plan, "fair
market value" shall mean on any particular day (i) if the Stock is listed or
admitted for trading on any national securities exchange or the SmallCap
Market System or the National Market System of Nasdaq Stock Market, Inc.
("Nasdaq"), the last sale price, or if no sale occurred, the mean between the
closing high bid and low asked quotations, for such day of the Stock, (ii) if
Stock is not traded on any national securities exchange but is quoted on an
automated quotation system or any similar system of automated dissemination
of quotations or securities prices in common use, the mean between the
closing high bid and low asked quotations for such day of the Stock on such
system, (iii) if neither clause (i) nor (ii) is applicable, the mean between
the high bid and low asked quotations for the Stock as reported by the
National Daily Quotation Bureau, Incorporated if at least two securities
dealers have inserted both bid and asked quotations for shares of the Stock
on at least five (5) of the ten (10) preceding days, (iv) in lieu of the
above, if actual transactions in the shares of Stock are reported on a
consolidated transaction reporting system, the last sale price of the shares
of Stock on such system or, (v) if none of the conditions set forth above is
met, the fair market value of shares of Stock as determined by the Board.
Provided, however, for purposes of determining "fair market value" of the
Common Stock of the Company, such value shall be determined without regard to
any restriction other than a restriction which will never lapse.
1.7 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The grants of Stock
Options shall in no way affect the right of the Company to adjust,
reclassify, reorganize or otherwise change its capital or business structure
or to merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its assets or business. The aggregate number of shares of Stock
under Stock Options granted under the Plan, the Option Price and the total
number of shares of Stock which may be purchased by a Participant on exercise
of a Stock Option shall be appropriately adjusted by the Board to reflect any
recapitalization, stock split, merger, consolidation, reorganization,
combination, liquidation, stock dividend or similar transaction involving the
Company. Provided, however, and notwithstanding the foregoing, (i) a
dissolution or liquidation of the Company, (ii) a merger or consolidation in
which the Company is not the surviving or the resulting corporation or (iii)
a reverse merger in which the Company is the surviving entity but in which
the securities possessing more than 50 percent of the total combined voting
power of the Company's outstanding securities are transferred to a person or
persons different from those who held such securities immediately prior to
the merger (collectively referred to herein as a "Corporate Transaction"),
shall cause the Plan and any Stock Option or SAR granted thereunder, to
terminate upon the effective date of such dissolution, liquidation, merger or
consolidation, subject to Section 1.21 of the Plan. Provided, further, that
for the purposes of this Section 1.7, if any merger, consolidation or
combination occurs in which the Company is not the surviving corporation and
is the result of a mere change in the identity, form or place of organization
of the Company accomplished in accordance with Section 368(a)(1)(F) of the
Code, then, such event will not cause a termination of the Plan. Appropriate
adjustment may also be made by the Board in the terms of a SAR to reflect any
of the foregoing changes.
1.8 AMENDMENT AND TERMINATION OF THE PLAN. The Plan shall terminate at
midnight, October 1, 2007, but prior thereto may be altered, changed,
modified, amended or terminated by written amendment approved by the Board.
Provided, that no action of the Board may amend the Plan in any manner which
would impair the applicability of Rule 16b-3 under the Securities Exchange
Act of 1934, as amended, to the Plan. Except as provided in this Article I,
no amendment, modification or termination of the Plan shall in any manner
adversely affect any Stock Option or SAR theretofore granted under the Plan
without the consent of the affected Participant.
1.9 EFFECTIVE DATE. The Plan shall be effective October 1, 1997 (the
"Effective Date").
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1.10 SECURITIES LAW REQUIREMENTS. The Company shall have the right,
but not the obligation to cause the shares of Stock issuable upon exercise of
the Options to be registered under the Securities Act of 1933, as amended
(the "Securities Act") or the securities laws of any state or jurisdiction.
1.10.1 RESTRICTIONS ON TRANSFERABILITY AND LEGEND ON CERTIFICATES.
As a condition precedent to the grant of any Stock Option or the issuance
or transfer of shares pursuant to the exercise of any Stock Option, the
Company may require the Participant or holder to take any reasonable
action to meet such requirements or to obtain such approvals. The Company
shall have the right to restrict the transferability of shares of Stock
issued or transferred upon exercise of the Stock Options in such manner as
it deems necessary or appropriate to insure the availability of any
exemption from registration under the Securities Act and any other
applicable securities laws or regulations that may be available, including
the endorsement with a legend reading as follows:
The shares of Common Stock evidenced by this certificate
have been issued to the registered owner in reliance upon
written representations that these shares have been
purchased solely for investment purposes. These shares
may not be sold, transferred or assigned unless in the
opinion of the Company and its legal counsel such sale,
transfer or assignment will not be in violation of the
Securities Act of 1933, as amended, and the rules and
regulations thereunder.
1.10.2 REGISTRATION STATEMENT. If a registration statement covering
the shares of Stock issuable upon exercise of the Stock Options granted
under the Plan is filed under the Securities Act, and is declared
effective the Securities and Exchange Commission, the provisions of
Section 1.10.1 shall terminate during the period of time that such
registration statement, as periodically amended, remains effective.
1.11 SEPARATE CERTIFICATES. Separate certificates representing the
Common Stock of the Company to be delivered to a Participant upon the
exercise of any Stock Option and SAR will be issued to such Participant.
1.12 PAYMENT FOR STOCK; RECEIPT OF STOCK OR CASH IN LIEU OF PAYMENT.
1.12.1 PAYMENT FOR STOCK. Payment for shares of Stock purchased
under this Plan shall be made (i) in full and in cash or check made
payable to the Company or (ii) may also be made in Common Stock of the
Company held for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at fair market value on the date of
exercise of the Option, or (iii) a combination of cash and Common Stock of
the Company. In the event that Common Stock of the Company is utilized
in consideration for the purchase of Stock upon the exercise of an Option,
such Common Stock shall be valued at the "fair market value" as defined in
Section 1.6 of the Plan.
1.12.2 RECEIPT OF STOCK IN LIEU OF CASH PAYMENT. Furthermore, a
Participant may exercise an Option without payment of the Option Price in
the event that the exercise is pursuant to rights under an SAR attached to
the Option and such SAR is exercisable on the date of exercise of the
Stock Option to which it is attached. In the event a Stock Option with an
SAR attached is exercised without payment of the Option Price in cash or
by check or Common Stock of the Company, the Participant shall be entitled
to receive either (i) a cash payment from the Company equal to the excess
of the total fair market value of the shares of Stock on such date as
determined with respect to which the Stock Option is being exercised over
the total cash Option Price of such shares of Stock as set forth in the
Stock Option SAR or (ii) that number of whole shares of Stock as is
determined by dividing (A) an amount equal to the fair market value per
share of Stock on the date of exercise into (B) an amount equal to the
excess of the total fair market value of the shares of Stock on such date
with respect to which the Stock Option SAR is being exercised over the
total cash Option Price of such shares of Stock as set forth in the Stock
Option SAR, and fractional shares will be rounded to the next lowest
number and the Participant will receive cash in lieu thereof.
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1.13 INCURRENCE OF DISABILITY AND RETIREMENT. A Participant shall be
deemed to have terminated his employment as an employee, his independent
contractor arrangement or consulting arrangement with the Company and
incurred a disability ("Disability") if such Participant suffers a physical
or mental condition which, in the judgment of the Board, totally and
permanently prevents a Participant from engaging in any substantial gainful
employment with or the providing of services or consulting for the Company or
a subsidiary. A Participant shall be deemed to have terminated employment as
an employee, independent contractor or a consultant due to retirement
("Retirement") if such Participant ceases to be an employee, independent
contractor or a consultant of the Company or its subsidiary, without cause,
after attaining the age of 55.
1.14 STOCK OPTIONS GRANTED SEPARATELY. Because the Board is authorized
to grant Stock Options and SARs to Participants, the grant thereof and Stock
Option Agreements relating thereto will be made separately and totally
independent of each other.
1.15 GRANTS OF OPTIONS AND STOCK OPTION AGREEMENT. Each Stock Option
and Stock Option SAR granted under this Plan shall be evidenced by the
minutes of a meeting of the Board or by the written consent of the Board and
by a written Stock Option Agreement effective on the date of grant and
executed by the Company and the Participant. Each Stock Option and Stock
Option SAR granted hereunder shall contain such terms, restrictions and
conditions as the Board may determine, which terms, restrictions and
conditions may or may not be the same in each case.
1.16 USE OF PROCEEDS. The proceeds received by the Company from the
sale of Stock pursuant to the exercise of Stock Options granted under the
Plan shall be added to the Company's general funds and used for general
corporate purposes.
1.17 NON-TRANSFERABILITY OF OPTIONS. Except as otherwise herein
provided, any Stock Option or Stock Option SAR granted shall not be
transferable otherwise than by will or the laws of descent and distribution
or with the consent of the Company, and the Stock Option and Stock Option SAR
may be exercised, during the lifetime of the Participant, only by him. More
particularly (but without limiting the generality of the foregoing), the
Stock Option and Stock Option SAR may not be assigned, transferred (except as
provided above), pledged or hypothecated in any way, shall not be assignable
by operation of law and shall not be subject to execution, attachment, or
similar process. Any attempted assignment, transfer, pledge, hypothecation,
or other disposition of the Stock Option or Stock Option SAR contrary to the
provisions hereof shall be null and void and without effect.
1.18 ADDITIONAL DOCUMENTS ON DEATH OF PARTICIPANT. No transfer of a
Stock Option or Stock Option SAR by the Participant by will or the laws of
descent and distribution shall be effective to bind the Company unless the
Company shall have been furnished with written notice and an unauthenticated
copy of the will and/or such other evidence as the Board may deem necessary
to establish the validity of the transfer and the acceptance by the successor
to the Stock Option or Stock Option SAR of the terms and conditions of such
Stock Option or Stock Option SAR.
1.19 CHANGES IN EMPLOYMENT. So long as the Participant shall continue
to be a director, an employee, an independent contractor or a consultant of
the Company or any one of its subsidiaries, any Stock Option or Stock Option
SAR granted to such Participant shall not be affected by any change of duties
or position. Nothing in the Plan or in any Stock Option Agreement which
relates to the Plan shall confer upon any Participant any right to continue
as a director or in the employ as an employee, independent contractor or
consultant of the Company or of any of its subsidiaries, or interfere in any
way with the right of the Company or any of its subsidiaries to terminate
such Participant as a director, employee or independent contractor or
consultant at any time.
1.20 SHAREHOLDER RIGHTS. No Participant shall have a right as a
shareholder with respect to any shares of Stock subject to a Stock Option or
Stock Option SAR prior to the purchase of such shares of Stock by exercise of
the Stock Option or Stock Option SAR.
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1.21 RIGHT TO EXERCISE UPON COMPANY CEASING TO EXIST. In the event of
a Corporate Transaction, the Participant shall have the right immediately
prior to consummation of the Corporate Transaction to exercise, in whole or
in part, such Participant's then remaining Stock Options and Stock Option
SARs whether or not then exercisable, but limited to that number of shares
that can be acquired without causing the Participant to have an "excess
parachute payment" as determined under Section 280G of the Code determined by
taking into account all of Participant's "parachute payments" determined
under Section 280G of the Code. Provided, the foregoing notwithstanding,
after the Participant has been afforded the opportunity to exercise his then
remaining Stock Options and Stock Option SARs as provided in this Section
1.21, and to the extent such Stock Options and Stock Option SARs are not
timely exercised as provided in this Section 1.21, then, the terms and
provisions of this Plan and any Stock Option Agreement will thereafter
continue in effect, and the Participant will be entitled to exercise any such
remaining and unexercised Options in accordance with the terms and provisions
of this Plan and such Stock Option Agreement as such Stock Options and Stock
Option SARs thereafter become exercisable. Provided further, that for the
purposes of this Section 1.21, if any merger, consolidation or combination
occurs in which the Company is not the surviving corporation and is the
result of a mere change in the identity, form, or place of organization of
the Company accomplished in accordance with Section 368(a)(1)(F) of the Code,
then, such event shall not cause an acceleration of the exercisability of any
such Stock Options and Stock Option SARs granted hereunder.
1.22 ASSUMPTION OF OUTSTANDING STOCK OPTIONS AND STOCK OPTION SARS. Any
successor to the Company succeeding to, or assigned the business of, the
Company as the result of or in connection with a corporate merger,
consolidation, combination, reorganization, dissolution or liquidation
transaction shall assume all Stock Options and Stock Option SARs outstanding
under the Plan or issue new Stock Options and Stock Option SARs in place of
outstanding Stock Options and/or Stock Option SARs under the Plan.
1.23 TAX WITHHOLDINGS. The Company's obligation to deliver Stock upon
the exercise of Stock Options or Stock Option SARs under the Plan shall be
subject to the satisfaction of all applicable federal, state and local income
tax withholding requirements. The Board may in its discretion and in
accordance with the provisions of Section 1.23 and such supplemental rules as
the Board may from time to time adopt, provide any or all holders of Stock
Options or Stock Option SARs with the right to use shares of Stock in
satisfaction of all or part of the federal, state and local income tax
liabilities incurred by such holders in connection with the exercise of their
Stock Options or Stock Option SARs ("Taxes"). Such right may be provided to
any such holders of Stock Options or Stock Option SARs in either or both of
the following methods: (i) the holder of a Stock Option or Stock Option SAR
may be provided with the election, which may be subject to approval by the
Board, to have the Company withhold, from the Stock otherwise issuable upon
exercise of such Stock Option or Stock Option SAR, a portion of those shares
of Stock with an aggregate fair market value equal to the percentage (not to
exceed 100 percent) of the applicable Taxes designated by the holder of the
Options, and/or (ii) the Board may, in its discretion, provide the holder of
the Stock Options or Stock Option SARs with the election to deliver to the
Company, at the time the Stock Option or Stock Option SAR is exercised, one
or more shares of Stock previously acquired by such holder (other than
pursuant to the transaction triggering the Taxes) with an aggregate fair
market value equal to the percentage (not to exceed 100 percent) of the Taxes
incurred in connection with such Stock Option or Stock Option SAR exercise
designated by such holder.
1.24 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Oklahoma.
ARTICLE II
TERMS OF STOCK OPTIONS AND EXERCISE
2.1 GENERAL TERMS.
2.1.1 GRANT AND TERMS FOR STOCK OPTIONS. Stock Options and Stock
Option SARs shall be granted by the Board on the following terms and
conditions: No Stock Options and Stock Option SARs shall be
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exercisable more than 10 years after the date of grant. Subject to such
limitation, the Board shall have the discretion to fix the period (the
"Option Period") during which any Stock Option or Stock Option SAR may be
exercised. Stock Options and Stock Option SARs granted shall not be
transferable except by will or by the laws of descent and distribution or
with the consent of the Company. Stock Options and Stock Option SARs shall
be exercisable only by the 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 Stock Option granted and which is otherwise
exercisable, may be exercised by the personal representative of a deceased
Participant within 12 months after the death of such Participant (but not
beyond the Option Period of such Stock Option), (ii) if a Participant is
terminated as a Director, an employee, an independent contractor or a
consultant of the Company or a subsidiary on account of Retirement, such
Participant may exercise any Stock Option which is otherwise exercisable
at any time within three months of such date of termination, or (iii) if a
Participant is terminated as a Director, as an employee, an independent
contractor or a consultant of the Company or a subsidiary on account of
incurring a Disability, such Participant may exercise any Stock Option
which is otherwise exercisable at any time within 12 months of such date
of termination. If a Participant should die during the applicable three-
month or 12-month period following the date of such Participant's
Retirement or termination on account of Disability, the rights of the
personal representative of such deceased Participant as such relate to any
Stock Options and Stock Option SARs granted to such deceased Participant
shall be governed in accordance with Subsection 2.1.1(i) of this Article
II.
2.1.2 OPTION PRICE. The option price ("Option Price") for shares of
Stock subject to Stock Options and Stock Option SARs shall be determined
by the Board, but in no event shall such Option Price be less than 85
percent of the fair market value of the Stock on the date of grant.
2.1.3 ACCELERATION OF OTHERWISE UNEXERCISABLE STOCK OPTION ON
RETIREMENT, DEATH, DISABILITY OR OTHER SPECIAL CIRCUMSTANCES. The Board,
in its sole discretion, may permit (i) a Participant who is terminated as
a Director, an employee, an independent contractor or a consultant due to
Retirement or Disability, (ii) the personal representative of a deceased
Participant, or (iii) any other Participant who is terminated as a
Director, an employee, an independent contractor or a consultant upon the
occurrence of special circumstances (as determined by the Board), to
exercise and purchase (within three years of such date of such
Participant's termination) all or any part of the shares subject to Stock
Options and Stock Option SARs on the date of the Participant's
termination, Retirement, Disability, death, or as the Board otherwise so
determines, notwithstanding that all installments, if any, with respect to
such Stock Option or Stock Option SAR, had not accrued on such termination
date.
2.1.4 NUMBER OF STOCK OPTIONS GRANTED. Participants may be granted
more than one Stock Option and Stock Option SAR. In making any such
determination, the Board shall obtain the advice and recommendation of the
officers of the Company or a subsidiary which have supervisory authority
over such Participants. The granting of a Stock Option or Stock Option
SAR under the Plan shall not affect any outstanding Stock Options or Stock
Option SARs previously granted to a Participant under the Plan.
2.1.5 NOTICE OF EXERCISE STOCK OPTION. Upon exercise of a Stock
Option or Stock Option SAR, a Participant shall give written notice to the
Secretary of the Company, or other officer designated by the Board, at the
Company's main office in Oklahoma City, Oklahoma. No Stock shall be
issued to any Participant until the Company receives full payment for the
Stock purchased, if applicable, and any required Taxes as provided in the
Plan and the Stock Option Agreement.
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ARTICLE III
SARS
3.1 GENERAL TERMS.
3.1.1 GRANT AND TERMS OF SARS. The Board grant SARs to Participants
in connection with Stock Options granted under the Plan. SARs shall
terminate at such time as the Board determines and shall be exercised only
upon surrender of the related Stock Option and only to the extent that the
related Stock Option (or the portion thereof as to which the SAR is
exercisable) is exercised. SARs may be exercised only by the Participant
while a director, an employee, an independent contractor or a consultant
of the Company or a subsidiary except that (i) any SARs previously granted
to a Participant which are otherwise exercisable may be exercised, with
the approval of the Board, by the personal representative of a deceased
Participant (but not beyond the expiration date of such SAR), and (ii) if
a Participant is terminated as a director, an employee, an independent
contractor or a consultant of the Company or a subsidiary, as the case may
be, on account of Retirement or Disability, such Participant may exercise
any SARs which are otherwise exercisable, with the approval of the Board,
anytime within three months of the date of the termination by Retirement
or within 12 months of termination by Disability. If a Participant should
die during the applicable three-month period following the date of such
Participant's Retirement or during the applicable 12 month period
following the date of termination on account of Disability, the rights of
the personal representative of such deceased Participant as such relate to
any SARs granted to such deceased Participant shall be governed in
accordance with (i) of the second sentence of this Subsection 3.1.1. The
applicable SAR shall (i) terminate upon the termination of the underlying
Stock Option (ii) only be transferable at the same time and under the same
conditions as the underlying Stock Option is transferable, (iii) only be
exercised when the underlying Stock Option is exercised, and (iv) may be
exercised only if there is a positive spread between the Option Price and
the fair market value of the Stock for which the SAR is exercised.
3.1.2 ACCELERATION OF OTHERWISE UNEXERCISABLE SARS ON RETIREMENT,
DEATH, DISABILITY OR OTHER SPECIAL CIRCUMSTANCES. The Board, in its sole
discretion, may permit (i) a Participant is terminated as a director, an
employee, an independent contractor, or a consultant with the Company or a
subsidiary due to Retirement or Disability, (ii) the personal
representative of such deceased Participant, or (iii) any other
Participant who is terminated as director, an employee, an independent
contractor or a consultant with the Company or a subsidiary upon the
occurrence of special circumstances (as determined by the Board) to
exercise (within three years of such date of such termination) all or any
part of any such SARs previously granted to such Participant as of the
date of such Participant's termination, Retirement, Disability, death, or
as the Board otherwise so determines, notwithstanding that all
installments, if any with respect to such SARs, had not accrued on such
date.
3.1.3 FORM OF PAYMENT OF SARS. The Participant may request the
method and combination of payment upon the exercise of a SAR; however, the
Board has the final authority to determine whether the value of the SAR
shall be paid in cash or shares of Stock or both. Upon exercise of a SAR,
the holder is entitled to receive the excess amount of the fair market
value of the Stock (as of the date of exercise) for which the SAR is
exercised over the Option Price under the related Stock Option. All
applicable Taxes will be paid by the Participant to the Company upon the
exercise of a SAR in accordance with Section 1.23.
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DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
2800 OKLAHOMA TOWER 405.235.8318
210 PARK AVENUE TELECOPY 405.235.9605
OKLAHOMA CITY, OKLAHOMA 73102-5604
July 2, 1998
Board of Directors
Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102
Gentlemen:
We have acted as counsel to Laboratory Specialists of America, Inc., an
Oklahoma corporation (the "Company"), in conjunction with the offering and sale
of warrants to Jesup & Lamont Securities Corporation (the "Warrants") and, upon
exercise of the Warrants, the offer and sale of an aggregate of 55,522 shares of
Common Stock, $.001 par value per share, underlying the Warrants (collectively
the "Shares").
The offering of the Shares is more fully described in that certain
Registration Statement on Form SB-2 (No. 333-_________________), filed by the
Company with the Securities and Exchange Commission (the "Commission") pursuant
to the Securities Act of 1933, as amended (the "Act"), and all amendments
thereto (collectively the "Registration Statement"), and the Prospectus in the
form as filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations of the Commission under the Act (the "Prospectus").
For purposes of this opinion, we have reviewed and considered such
certificates, documents and materials and made such investigations as we deem
necessary or appropriate. Based upon the Registration Statement (including the
Prospectus contained therein and the exhibits thereto), we are of the opinion
that:
1. The Company is duly organized and existing under the laws of the State
of Oklahoma;
2. All of the issued and outstanding shares of the Common Stock of the
Company have been legally issued, are fully paid and are not liable to
further call or assessment; and
3. In the event of exercise of the Warrants by the holders thereof to
purchase the Shares in accordance with the terms of the Warrants, the
Shares when issued against payment of the exercise price of the
Warrants and pursuant to the Registration Statement as declared
effective by the Commission on or prior to the date of issuance, will
be legally issued and fully paid, and will not be liable to further
call or assessment.
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DUNN SWAN & CUNNINGHAM
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELLORS AT LAW
Board of Directors
laboratory Specialists of America, Inc.
July 2, 1998
Page 2
In arriving at the foregoing opinion, we have relied, among other things,
upon the examination of the corporate records of the Company and certificates of
officers of the Company and of public officials. We hereby consent to the use
of this opinion in the Registration Statement and all amendments thereto, and to
the reference to our firm name under the caption "Legal Matters" of the
Prospectus which is included as a part of the Registration Statement and any
post-effective amendments thereto.
Very truly yours,
DUNN SWAN & CUNNINGHAM
A Professional Corporation
<PAGE>
EXHIBIT 10.17
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
this 13th day of April, 1998, by and between HARRISON LABORATORIES, INC., a
Texas corporation ("HLI"), ROY D. HARRISON, an individual, officer, director and
shareholder of HLI ("Harrison"), LABORATORY SPECIALISTS OF AMERICA, INC., an
Oklahoma corporation ("LSAI"), and LABORATORY SPECIALISTS, INC., a Louisiana
corporation and wholly-owned subsidiary of LSAI ("LSI").
R E C I T A L S
1. HLI and LSAI through LSI are each primarily engaged in the providing
of forensic drug testing services to corporate and institutional customers.
2. LSAI and LSI desire to purchase from HLI and HLI desires to sell to
LSAI and LSI certain assets of HLI, principally the customer base of HLI and the
assets related thereto.
3. HLI, LSAI and LSI 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 HLI.
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 this Agreement on
the Closing Date.
CLOSING DATE: The date on which the Closing shall occur on and be effective May
1, 1998, or on such other date as mutually agreed among the parties hereto, but
in any event not later than May 31, 1998.
HARRISON: Roy D. Harrison, an individual, officer, director and shareholder of
HLI.
HLI: Harrison Laboratories, Inc., a Texas corporation.
HLI ASSETS: The assets of HLI as defined in Section 2.1 hereof and as more
specifically identified on SCHEDULE 2.1 attached hereto.
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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.
LSI: Laboratory Specialists, Inc., a Louisiana corporation and the wholly-owned
subsidiary of LSAI.
ONE-YEAR ACCOUNTING PERIOD: The 12 months ended following Closing.
ONE-YEAR REVENUE BASE: Determined in accordance with generally accepted
accounting principles, the sum of all revenues directly attributable to the HLI
Assets during the One Year Accounting Period.
TAXES: All net income, gross income, gross receipts, sales and use, AD VALOREM,
franchise, profits, licenses, withholding, payroll, excise, severance, stamp,
occupation, property, customs duties or other taxes, fees or charges of any kind
whatsoever imposed by a foreign, federal, state, county or local taxing
authority together with any interest or penalty thereon.
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 HLI ASSETS. At the Closing, upon the terms and
subject to the conditions set forth in this Agreement, HLI shall sell, assign,
convey, set over, transfer and deliver to LSAI and LSI, and LSAI and LSI,
jointly and not severally, shall purchase, acquire and accept all right, title
and interest of HLI 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.
2.2 PURCHASE PRICE OF HLI ASSETS. In consideration for the HLI Assets to
be sold, assigned, conveyed, transferred and delivered to HLI pursuant to
Section 2.1 hereof and upon the terms and subject to the conditions contained
herein, the following payment and deliveries shall be made:
2.2.1 PAYMENT AT CLOSING. At Closing, LSAI and LSI, jointly and
not severally, shall deliver to HLI, in immediately available funds, the
sum of Five Hundred Thousand Dollars ($500,000); and
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2.2.2 PAYMENT SUBSEQUENT TO CLOSING. On or before 30th day
following the One-Year Accounting Period, LSAI and LSI, jointly and not
severally, shall pay HLI, in immediately available funds, an amount equal
to the One-Year Revenue Base, less (i) Five Hundred Dollars ($500,000) paid
to HLI pursuant to Section 2.2.1 and (ii) Thirty-Three Thousand Eight
Hundred Fifteen Dollars ($33,815) representing an account receivable owed
by HLI to LSI on the Closing Date.
2.3 CLOSING. Subject to the terms and conditions hereof, the Closing
shall take place by telecommunications at the offices of LSAI in Oklahoma City,
Oklahoma, and at the offices of HLI in Midland, Texas, or at such other places
as the parties hereto shall agree.
2.4 INSTRUMENTS OF TRANSFER AND CONVEYANCE. The conveyance, transfer,
assignment and delivery of the HLI Assets as herein provided shall be effected
by delivery by HLI at Closing (or any time thereafter) to LSAI and LSI of
instruments of transfer, conveyance, endorsements, bills of sale, all in form
satisfactory to LSAI and LSI, duly executed, as LSAI and LSI shall reasonably
deem necessary to vest in LSAI and LSI at Closing and at any time thereafter,
good and marketable title to the HLI Assets, free and clear of any lien, charge,
claim, pledge, security interest or other encumbrance of any type or kind
whatsoever.
2.5 NO ASSUMPTION OF LIABILITIES. Except as set forth on SCHEDULE 2.5, in
connection with the purchase of the HLI Assets and consummation of the
transactions contemplated under this Agreement, LSAI and LSI shall not nor shall
any provision of this Agreement be construed to cause LSAI and LSI to, assume or
become liable for any liability, obligation, performance, duty, debt, lien or
any other claim of any kind or nature of HLI, and HLI 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, other than as set
forth on SCHEDULE 2.5, after the Closing. Provided, however, LSI shall assume
all obligations of HLI to maintenance 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, formerly National Institute on
Drug Abuse.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LSAI AND LSI
LSAI and LSI hereby represent and warrant to HLI as of the date hereof 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. LSI is a corporation, duly organized, validly existing
and in good standing under the laws of the State of Louisiana 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.
3.2 AUTHORIZATION OF AGREEMENT. Each of LSAI and LSI 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
LSI and the consummation by LSAI and LSI of the transactions
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contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of LSAI and LSI. This Agreement has been duly
executed and delivered by LSAI and LSI, and constitutes the legal, valid and
binding obligation of LSAI and LSI, enforceable against each of LSAI and LSI in
accordance with terms of this Agreement, 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. Neither the execution and delivery of this
Agreement by LSAI and LSI nor the consummation of the transactions contemplated
by this Agreement, will (a) violate or conflict with any provision of the
Certificate of Incorporation or Bylaws of LSAI and Articles of Incorporation and
Bylaws of LSI, 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 LSI 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 LSAI or LSI is a party or by
which LSAI or LSI 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 or LSI is a party or by which LSAI or LSI 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 or LSI.
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 or LSI in
connection with the execution and delivery of this Agreement by LSAI or the
consummation by LSAI of the transactions contemplated hereby, other than
following consummation of the transactions contemplated by this Agreement in
connection or compliance with any applicable provisions of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). LSAI hereby agrees to
undertake all required actions in compliance with the Exchange Act; provided,
however, that any failure of LSAI to comply with the Exchange Act shall not
affect the obligations of LSAI and LSI under the terms of this Agreement.
3.5 FULL DISCLOSURE. No representation, covenant or warranty by LSAI or
LSI contained in this Agreement and no written information or agreements
furnished or to be furnished to HLI by LSAI and LSI or in connection with the
transactions contemplated by this Agreement, 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.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HLI
HLI hereby represents and warrants to LSAI and LSI as follows:
4.1 ORGANIZATION, GOOD STANDING, POWER, ETC. HLI is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Texas 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. HLI is duly qualified to do business and is in good standing in each
other jurisdiction in which the ownership, operation or leasing of its
properties or assets or the nature of its business requires such qualification.
4.2 AUTHORIZATION OF AGREEMENT. HLI 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 HLI and the consummation by HLI of
the transactions contemplated hereby have been duly authorized and all necessary
corporate action on the part of HLI has been taken or will have been taken on or
before Closing. This Agreement has been duly executed and delivered by HLI, and
constitutes the legal, valid and binding obligation of HLI, enforceable against
HLI 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. Neither the execution and delivery of this
Agreement by HLI, nor the consummation of the transactions contemplated by this
Agreement, will (a) violate or conflict with any provision of the Articles of
Incorporation or By-laws of HLI, 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 HLI or any of its properties or assets;
(c) at Closing or thereafter 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 HLI
is a party or by which HLI or any of the HLI Assets is bound or affected, or
(ii) any lease, license, tariff, contract or other agreement or instrument to
which HLI is a party or by which HLI or any of the HLI 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 HLI Assets.
4.4 CONSENTS AND APPROVALS. 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 HLI in connection with the
execution and delivery of this Agreement by HLI, or the consummation by HLI of
the transactions contemplated by this Agreement.
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4.5 HLI ASSETS. The HLI Assets are free and clear of any lien, charge,
claim, pledge, security interest or other encumbrance of any type or kind
whatsoever.
4.6 FINANCIAL STATEMENTS. HLI has delivered to LSAI (a) the unaudited
balance sheet of HLI as of December 31, 1997, and the related unaudited
statements of income, and cash flows of HLI for the fiscal year ended December
31, 1997, together with the notes related thereto (the "HLI Financial
Statements"). Each HLI Financial Statements (and the notes relating thereto)
were prepared in accordance with generally accepted accounting principles
consistently applied and fairly presents the financial condition of HLI as of
the date thereof and the related results of operations, and cash flows of HLI
for and during the periods covered thereby.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, HLI
has not (i) borrowed or agreed to borrow funds secured or to be secured by the
HLI Assets; (ii) incurred or become subject to, or agreed to incur or become
subject to, any obligation or liability, contingent or otherwise, that resulted
in or may become a lien, charge, claim, pledge, security interest or encumbrance
of any type or kind whatsoever against or burden upon the HLI Assets;
(iii) declared, set aside or paid any distribution of the HLI Assets;
(iv) mortgaged, pledged or subjected to lien, charge or other encumbrance, or
agreed so to do, any of the HLI Assets; (v) sold, assigned, transferred,
conveyed, leased or otherwise disposed of or agreed to sell, assign, transfer,
convey, lease or otherwise dispose of any of the HLI Assets; (vi) entered into
any material transaction, contract or commitment, other than this Agreement,
affecting or related to the HLI Assets; and (vii) made or permitted, or agreed
to make or permit, any amendment or termination of any material contract,
franchise, license, agreement or other instrument (that constitutes in whole or
part or relates to the HLI Assets) to which HLI is a party or by which any of
the HLI Assets is bound. Furthermore, except as otherwise set forth on SCHEDULE
4.7, during the year ended December 31, 1997 and since December 31, 1997, HLI
has not lost and has no knowledge of the threatened of loss of any customer for
whom forensic drug testing services were provided during the year ended December
31, 1997, which such customer services accounted for $30,000 or more of HLI
revenues during the year ended December 31, 1997.
4.8 TITLE TO THE HLI ASSETS; ABSENCE OF LIENS AND ENCUMBRANCES. HLI holds
good and defensible title to the HLI Assets, free and clear of all mortgages,
liens, pledges, charges and encumbrances of any nature whatsoever.
4.9 LITIGATION. (i) Except as set forth on SCHEDULE 4.9, 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 HLI and/or the HLI Assets or
business of HLI 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) HLI 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 HLI or which would prevent or hinder the sale,
assignment, conveyance, setting over, transfer and delivery of the HLI Assets by
HLI to LSAI of all right, title and interest of HLI in and to the HLI Assets
free and clear of all mortgages, liens, pledges, charges and encumbrances of any
nature whatsoever, as contemplated hereunder.
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(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 HLI from taking, or requiring HLI to take, any action
of any kind or to which HLI or any of the HLI Assets, are subject or bound.
(iv) HLI 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 HLI Assets by HLI to LSAI of all
right, title and interest of HLI in and to the HLI Assets free and clear of all
mortgages, liens, pledges, charges and encumbrances of any nature whatsoever, as
contemplated hereunder.
4.10 COMPLIANCE WITH LAWS. HLI is in compliance with all Legal
Requirements applicable to any of its properties or assets including the HLI
Assets and/or the ownership, operation or use thereof, and HLI 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 HLI
Assets or to the operation of its business.
4.11 FULL DISCLOSURE. No representation, covenant or warranty by HLI
contained in this Agreement and no written information or agreements furnished
or to be furnished to LSAI and LSI by HLI pursuant hereto or in connection with
the transactions contemplated by this Agreement, 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 LSAI AND LSI
Each of LSAI and LSI covenants and agrees with HLI that, at all times
between the date hereof and the Closing, each of LSAI and LSI will comply with
all covenants and provisions of this Article V, except to the extent HLI may
otherwise consent in writing or to the extent otherwise expressly required or
permitted by this Agreement.
5.1 APPROVALS. Each of LSAI and LSI 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,
certificates, franchises, licenses, consents and clearances of governmental
authorities and of third parties, required of LSAI to consummate the
transactions contemplated by this Agreement, (ii) provide such other information
and communications to such governmental authorities as HLI or such authorities
may reasonably request, and (iii) cooperate with HLI in obtaining, as promptly
as practicable, all approvals, authorizations, certificates, franchises,
licenses, consents and clearances of governmental authorities required of HLI to
consummate the transactions contemplated by this Agreement.
5.2 BROKERS' FEES. Each of LSAI and LSI has not and will not incur any
brokerage, finder's or similar fee in connection with the transactions
contemplated by this Agreement.
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ARTICLE VI
COVENANTS OF HLI
HLI covenants and agrees with LSAI and LSI that, at all times between the
date hereof and the Closing, HLI will comply with all covenants and provisions
of this Article VI, except to the extent LSAI and LSI may otherwise consent in
writing or to the extent otherwise expressly required or permitted by this
Agreement.
6.1 APPROVALS. HLI 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 by this Agreement, (ii) provide such other
information and communications to such governmental authorities as LSAI or LSI
or such authorities may reasonably request, and (iii) cooperate with LSAI and
LSI in obtaining, as promptly as practicable, all approvals, authorizations and
clearances of governmental authorities required of LSAI and LSI to consummate
the transactions contemplated by this Agreement.
6.2 INVESTIGATION BY LSAI AND LSI. HLI will provide LSAI and LSI, their
counsel, accountants, and other representatives with reasonable access (at the
sole cost, risk and expense of LSAI and LSI), upon prior notice and during
normal business hours, to all facilities, officers, directors, employees,
agents, accountants, assets, properties, books and records of HLI. HLI will
furnish to LSAI and LSI and such other persons during such period all such other
information and data concerning the business, operations and affairs of HLI or
the transactions contemplated by this Agreement as LSAI and LSI or any of such
other persons reasonably may request. LSAI and LSI hereby agrees to indemnify
and hold HLI harmless from all claims, losses or damages arising out of exercise
of such information access rights pursuant to this Section 6.2. HLI will also
provide to LSAI and LSI timely notice of and access to minutes of all meetings
(and all actions by written consent in lieu thereof) of the board of directors
and stockholders of HLI.
6.3 NO NEGOTIATIONS. Except as contemplated in this Agreement, HLI will
not take (or permit any other person acting for or on behalf of HLI to take),
directly or indirectly, any action to (i) seek or encourage any offer or
proposal from any person to acquire any of the HLI Assets or any interest
therein, (ii) merge, consolidate or combine, or permit any other person to
merge, consolidate or combine, with HLI, (iii) liquidate, dissolve or reorganize
HLI, (iii) acquire or transfer any of the HLI Assets or any interests therein,
other than in the ordinary course of business, or (iv) 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, dissolution or reorganization. LSAI and LSI hereby acknowledge
that, following the Closing Date, HLI anticipates selling all or a portion of
its remaining assets and adopting a plan of liquidation and dissolution and the
filing articles of dissolution in accordance with the Texas Business Corporation
Act and distributing the assets of HLI to the shareholders of HLI, after payment
or provision for payment of its debts.
6.4 CONDUCT OF BUSINESS. HLI will conduct its business only in the
ordinary course and consistent with past practices. Without limiting the
generality of the foregoing:
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(i) HLI will cause the books and records of HLI, and HLI maintain its
books and records 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 HLI or in any assumption
underlying such a practice or policy.
(ii) HLI 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) HLI (A) will not convey, encumber, mortgage, pledge or dispose of any
portion of the HLI 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 HLI or of any
termination or cancellation, or written threat of termination or cancellation,
of any contracts, agreements or other arrangements with HLI's customers, (D)
will promptly notify LSAI in writing of the loss or suspension of any
certification, which would have a material adverse effect upon HLI and its
operations, including without limitation, loss or suspension of certification by
the Substance Abuse and Mental Health Services Administration or any applicable
state agency.
6.5 NO DISTRIBUTIONS. HLI will not make any distributions of the HLI
Assets to its shareholders.
6.6 NO DISPOSAL OF HLI ASSETS. Except as contemplated in this Agreement,
HLI will not (a) dispose of or assign any of the HLI Assets or permit any of the
HLI Assets to be subjected to any liens, or (b) sell any portion of the HLI
Assets to any third party.
6.7 CONTRACTS. HLI 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.
6.8 NOTICE AND CURE. HLI will notify LSAI and LSI promptly in writing
of, and contemporaneously will provide LSAI and LSI 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 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 HLI being breached under this
Agreement, or that renders or will render untrue any representation or warranty
of HLI contained in this Agreement as if the same were made on or as of the date
of such event, transaction or circumstance. HLI 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 HLI in this Agreement.
6.9 AGREEMENTS AND COVENANTS. HLI will not make any commitment, either
in writing or orally, which would violate any of the provisions set forth in
this Article VI.
6.10 BROKERS' FEES. HLI not and will not incur any brokerage, finder's or
similar fee in connection with the transactions contemplated by this Agreement.
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ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PARTIES
Notwithstanding any other provision of this Agreement, the obligation of
HLI, on the one hand, and LSAI and LSI, on the other hand, to consummate the
transactions contemplated by this Agreement 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:
7.1 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.
7.2 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, LSI, HLI 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.
7.3 APPROVAL OF STOCKHOLDERS OF HLI. The stockholders of HLI shall have
approved this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF HLI
Not withstanding any other provision of this Agreement, the obligations of
HLI to consummate the transactions contemplated by this Agreement 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 HLI:
8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of LSAI and LSI set forth in Article III above shall be true and
correct in all material respects as of the date of this Agreement, with the same
effect as though such representations and warranties had been made at and as of
Closing.
8.2 PERFORMANCE OF COVENANTS, AGREEMENTS AND CONDITIONS. LSAI and LSI
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.
8.3 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, LSI, HLI, or any of their respective
directors or officers, any action, suit or proceeding by or before any
governmental authority that would impose or confirm material limitations on the
ability of HLI to receive the consideration for purchase of the HLI Assets
pursuant to Section 2.2 hereof.
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8.4 NO ADVERSE CHANGE. No material adverse change shall have occurred in
the business, operations, properties, assets or financial condition of LSAI and
LSI since the date of this Agreement.
8.5 OFFICERS' CERTIFICATE, ETC. HLI shall have received (a)
certificates, dated the date of the Closing and signed by the Chief Executive
Officer or President of LSAI or LSI, as the case may be, to the effect set forth
in Sections 8.1, 8.2, 8.3 and 8.4 above, and (b) such other certificates,
instruments and documents as shall be reasonably requested by HLI for the
purpose of verifying the accuracy of such representations and warranties and the
performance and satisfaction of such covenants and conditions.
8.6 EMPLOYMENT OFFER TO KEY LABORATORY PERSON. LSI shall offer Randy
Clouette, an employee of HLI, an employment position in the laboratory
facilities of LSI in Gretna, Louisiana as a "responsible person" under the
regulations of the Substance Abuse and Mental Health Services Administration for
annual compensation of Fifty Thousand Dollars ($50,000).
8.7 THREE-YEAR EMPLOYMENT AGREEMENT. LSAI shall have caused LSI to have
executed and delivered to Harrison the Employment Agreement attached hereto as
EXHIBIT A.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF LSAI AND LSI
Notwithstanding any other provision of this Agreement, the obligations of
LSAI and LSI to consummate the transactions contemplated by this Agreement 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 and LSI:
9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of HLI 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.
9.2 PERFORMANCE OF COVENANTS, AGREEMENTS AND CONDITIONS. HLI 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 HLI, at or prior to the Closing.
9.3 NO ADVERSE CHANGE. No material adverse change shall have occurred in
the business, prospects, operations, properties or financial condition of HLI as
such related to the HLI Assets since December 31, 1997.
9.4 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, LSI, HLI, or any of their respective
directors or officers, any action, suit or proceeding by or before any
governmental authority that would prohibit the ownership of all of the HLI
Assets by LSAI and LSI.
9.5 OFFICERS' CERTIFICATES, ETC. LSAI shall have received (a) a
certificate, dated the date of the Closing and signed by the Chief Executive
Officer or President of HLI to the effect set forth in Sections 9.1, 9.2, 9.3
and 9.4 above, and (b) such other certificates, instruments and documents as
shall
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be reasonably requested by LSAI for the purpose of verifying the accuracy of
such representations and warranties and the performance and satisfaction of such
covenants and conditions.
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, LSI and HLI;
(ii) by either LSAI or HLI in the event the Closing shall not have been
consummated on or before May 30, 1998; provided, however, that if LSAI and LSI
(on the one hand) are or HLI (on the other hand) is in compliance with their or
its respective representations, warranties and covenants made in this Agreement
and prepared to close the transactions contemplated in this Agreement on May 30,
1998, the in such event, LSAI and LSI may require HLI or HLI may require LSAI
and LSI to perform as quickly after May 30, 1998, as possible and may
specifically use the remedies provide in Section 11.2 to enforce the provisions
this Section 10.1 and the other provisions of this Agreement to cause
consummation of the transactions contemplated in this Agreement; or
(iii) by LSAI and LSI on the one hand or HLI on the other hand if there
shall have been entered or rendered against LSAI, LSI, HLI, or any of their
respective directors or officers in any action or proceeding referred to in
Sections 7.2, 8.3 or 9.4 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 and LSI on the one hand or HLI on the other hand, 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, LSI, HLI or their respective
officers, directors or shareholders, except as stated in Section 12.7 hereof;
provided, however, that such limitation shall not apply in the event of a
willful breach by LSAI, LSI or HLI 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 this Agreement.
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.
ARTICLE XI
SURVIVAL OF PROVISIONS; REMEDIES; FEES AND COSTS
11.1 SURVIVAL. The representations, warranties, covenants and agreements
respectively made by LSAI and HLI in this Agreement, in the Schedules or Exhibit
hereto, or on any certificate delivered pursuant to the provisions hereof shall
survive shall not terminate upon the Closing and consummation of the
transactions contemplated by this Agreement. The parties hereto acknowledge
that the representations
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and warranties contained in this Agreement are intended to and shall give rise
to liability, claim, action or cause of action on the part of any party hereof
on account of breach of any such representation or warranty.
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 by this Agreement, 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 pursuant to
Section 2.1 hereof.
11.3 ATTORNEYS' FEES AND COSTS. In the event any party hereto shall be
required to employ an attorney or attorneys to institute a legal proceeding
against the other party or parties for the purpose of enforcing any of the
provisions of this Agreement or protecting its interest in any matter arising
under this Agreement, the non-prevailing party in any such action pursued in
courts of competent jurisdiction (the finality of which is not legally
contestable) shall pay to the prevailing party all reasonable costs, damages and
expenses, including attorneys' fees, expended or incurred in connection with
such proceeding. The standard to be applied in determining who is a prevailing
party for purposes of this Section 11.2 shall be the same standard as applied by
the courts in determining who is a prevailing party for purposes of Rule 54(d)
of the Federal Rules of Civil Procedure.
ARTICLE XII
CONTINUING OBLIGATIONS OF HLI, HARRISON, LSAI AND LSI AFTER CLOSING
Following Closing and consummation of the transactions contemplated in this
Agreement, the HLI covenants and agrees (except to the extent LSAI and LSI may
otherwise consent in writing or to the extent otherwise expressly required or
permitted by this Agreement), and each of LSAI and LSI covenants and agrees
(except to the extent HLI otherwise consent in writing or to the extent
otherwise expressly required or permitted by this Agreement), as follows:
12.1 INDEMNIFICATIONS BY HLI. Subject to the provisions of this Article
XII, HLI agrees to indemnify fully in respect of, hold harmless and defend LSAI,
LSI and any Affiliate (as defined below) of LSAI or LSI against any and all
damages, liabilities, costs, claims, proceedings, investigations, penalties,
judgments, deficiencies, losses, including Taxes, expenses (including interest,
penalties, and fees and disbursements of attorneys, accountants and experts)
("Loss" or "Losses") incurred or suffered by any of them arising out of or
relating to (i) any misrepresentation or breach of warranty or covenant on the
part of HLI under this Agreement and (ii) any nonfulfillment or failure to
perform any covenant or agreement on the part of any of HLI under this
Agreement. For purposes of this Article XII, "Affiliate" shall refer to an
officer, director or employee of LSAI, LSI or HLI, as the case may be.
12.2 INDEMNIFICATIONS BY LSAI. Subject to the provisions of this Article
XII, LSAI agrees to indemnify fully in respect of, hold harmless and defend HLI
and any Affiliate of HLI against, any and all Losses arising out of or relating
to (i) any misrepresentation, or breach of warranty or covenant on the part of
LSAI under this Agreement, or (ii) nonfulfillment or failure to perform any
covenant or agreement on the part of LSAI or LSI under this Agreement.
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12.3 SET OFF. Subject to Section 12.5, in the event that HLI, LSI or LSAI
(the "Debtor Party") shall be indebted to HLI, LSI or LSAI or any other person
or entity (the "Creditor Party") for any amounts pursuant to the terms of this
Agreement, including, but not limited to, the provisions of this Article XII or
under any other agreement, then the Creditor Party (or Affiliate, if applicable)
may give notice to the Debtor Party of such obligation. If such notice has been
given and the Debtor Party does not fully pay such obligation within 90 days of
such notice, then the Creditor Party may retain and apply to the payment of that
amount otherwise owed by the Creditor Party (or Affiliate, if applicable) to the
Debtor Party (or Affiliate, if applicable) under this Agreement or under any
other agreement and in doing so such Creditor Party (or Affiliate, if
applicable) shall have no liability to such Debtor Party for such retention and
application, under this Agreement or any such other agreement and such retention
and application shall not be a violation or breach thereof; provided, however,
the amount which may be retained pursuant to this Section 12.3 of any payment
otherwise due under this Agreement or any such other agreement shall be an
amount equal to that percentage of such payment obtained by dividing such
payment by all amounts then due and which can then be determined to become due
to the Debtor Party (or Affiliate, if applicable) by the Creditor Party (or
Affiliate, if applicable) under this Agreement or any such other agreement.
12.4 LIMITATION OF LIABILITY FOR CERTAIN MISREPRESENTATIONS OR BREACHES.
(i) HLI shall not be liable under this Agreement for any misrepresentation or
breach of warranty, or breach of any covenant to be performed at or prior to
Closing, except to the extent that the aggregate amount of Losses for which it
would otherwise (but for this provision) be liable exceeds in the aggregate the
sum of $10,000 and then in such case to the full extent of such Losses;
provided, however, that in no event shall HLI be liable for any such
misrepresentation or such breach in excess of the sum of One Million Dollars
($1,000,000). LSAI and LSI hereby acknowledge that, following the Closing Date,
HLI anticipates selling all or a portion of its remaining assets and adopting a
plan of liquidation and dissolution and the filing articles of dissolution in
accordance with the Texas Business Corporation Act and distributing the assets
of HLI to the shareholders of HLI, after payment or provision for payment of its
debts. HLI hereby acknowledges that the obligations of HLI under the provisions
of this Article XII and the other provisions of this Agreement shall survive the
Closing and that adequate provision must be made for payment of said obligations
prior to the filing of said articles of dissolution in accordance with the Texas
Business Corporation Act.
(ii) LSAI and LSI, jointly and not severally, shall not be liable under
this Agreement for any misrepresentation or breach of warranty, or breach of any
covenant to be performed at or prior to Closing, except to the extent that the
aggregate amount of Losses for which it would otherwise (but for this provision)
be liable exceeds in the aggregate the sum of $10,000 and then in such case to
the full extent of such Losses; provided, however, that in no event shall LSAI
and LSI be liable for any such misrepresentation or breach for an aggregate
amount in excess of One Million Dollars ($1,000,000).
12.5 METHOD OF ASSERTING CLAIMS, ETC. The party claiming indemnification
under Section 12.1 or 12.2 of this Agreement hereinafter referred to as the
"Indemnified Party" and the party against whom such claims are asserted
hereunder is hereinafter referred to as the "Indemnifying Party." All claims
for indemnification by any Indemnified Party under this Article XII shall be
asserted and conducted as follows:
12.5.1 NOTIFICATION; DEFENSE. In the event that any claim or
demand for which an Indemnifying Party would be liable to an Indemnified
Party hereunder is asserted against or sought to be collected from such
Indemnified Party by a third party, said Indemnified Party shall with
reasonable promptness notify the Indemnifying Party of such claim or
demand, specifying the
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nature of and specific basis for such claim or demand and the amount or the
estimated amount thereof to the extent then feasible (which estimate shall
not be conclusive of the final amount of such claim and demand (the "Claim
Notice"). The Indemnified Party's failure to so notify the Indemnifying
Party in accordance with the provisions of this Agreement shall not relieve
the Indemnifying Party of liability hereunder unless such failure
materially prejudices the Indemnifying Party's ability to defend against
the claim or demand. The Indemnifying Party shall have 30 days from the
giving of the Claim Notice (the "Notice Period") to notify the Indemnified
Party (i) whether or not the Indemnifying Party disputes the liability of
the Indemnifying Party to the Indemnified Party hereunder with respect to
such claim or demand and (ii) whether or not the Indemnifying Party
desires, at the sole cost and expense of the Indemnifying Party, to defend
the Indemnified Party against such claim or demand; provided, however, that
any Indemnified Party is hereby authorized prior to and during the Notice
Period to file any motion, answer or other pleading which it shall deem
necessary or appropriate to protect its interests or those of the
Indemnifying Party and not prejudicial to the Indemnifying Party. In the
event that the Indemnifying Party notifies the Indemnified Party within the
Notice Period that he desires to defend the Indemnified Party against such
claim or demand and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by all appropriate proceedings, which
proceedings shall be promptly settled or prosecuted by him to a final
conclusion. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement by the Indemnifying Party it may do
so at its sole cost and expense. If requested by the Indemnifying Party,
the Indemnified Party agrees to cooperate with the Indemnifying Party and
his counsel in contesting any claim or demand which the Indemnifying Party
elects to contest, or, if appropriate and related to the claim in question,
in making any counterclaim against the person asserting the third party
claim or demand, or any cross-complaint against any person. No claim for
which indemnity is sought hereunder may be settled without the consent of
the Indemnifying Party, which consent may not be unreasonably withheld.
12.5.2 COUNTERCLAIM NOTIFICATION. In the event any Indemnified
Party should have a claim against any Indemnifying Party hereunder which
does not involve a claim or demand being asserted against or sought to be
collected from it by a third party, the Indemnified Party shall give a
Claim Notice with respect to such claim to the Indemnifying Party.
12.5.3 ACCESS TO BOOKS AND RECORDS. To the extent that LSAI or LSI
or its Affiliate may claim indemnity against HLI hereunder, HLI agrees to
give LSAI or LSI or its Affiliate access to the books, records and
employees of HLI in connection with the matters for which indemnification
is sought hereunder, to the extent LSAI or LSI or its Affiliate reasonably
deems necessary in connection with the rights and obligations under this
Agreement. To the extent that HLI may claim indemnity against LSAI or LSI
under this Agreement, LSAI or LSI agrees to give HLI access to the books,
records and employees of LSAI or LSI, as the case may be, in connection
with the matters for which indemnification is sought hereunder, to the
extent HLI reasonably deems necessary in connection with its rights and
obligations under this Agreement.
12.6 TRANSITION ASSISTANCE. Harrison agrees to provide LSAI and LSI with
such transition assistance and services for a period of ninety (90) days
following Closing as LSAI or LSI may reasonably request in order to provide for
an orderly and business-like transition of the ownership of the HLI Assets from
HLI. For such assistance and services, Harrison shall not be entitled to
receive any compensation other than as provided in the Employment Agreement
attached hereto as EXHIBIT A.
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12.8 NON-COMPETITION. (i) In order to induce LSAI and LSI to enter into
this Agreement and the Employment Agreement attached hereto as EXHIBIT A, HLI
and Harrison covenants and agrees that, for a period of three (3) years from
Closing, each of HLI and Harrison shall not, and HLI shall not permit any of its
officers and directors, (A) to engage in any business similar to, or in any way
competitive with, that carried on by LSAI or LSI as constituted on the date of
this Agreement within any county in any state in which HLI is engaged in any
such similar or competitive business ("Competitive Business") (except pursuant
to agreements with LSAI and LSI), (B) to acquire any legal or beneficial
interest in, or otherwise participate in the ownership of any person, firm,
corporation, partnership or other entity or association which is or becomes
engaged in a Competitive Business, except ownership of less than one percent of
a publicly traded company shall be permissible, (C) to directly or indirectly
solicit, canvass or otherwise contact or accept any business or transaction from
any present or former customer of HLI, or take any action which shall cause the
termination or curtailment of the business relationship between HLI or LSAI or
LSI and/or its successor or successors and any of their present, future or
former customers, including without limitation those customers constituting in
whole or in part the HLI Assets relating to a Competitive Business, and (D) to
directly or indirectly, without the prior written consent of LSAI and LSI,
solicit, entice, raid, persuade or induce any individual who at of the date of
this Agreement is, or at any time during such period shall be, an employee of
LSAI, LSI or its subsidiary, or any of its respective successors, to terminate
or refrain from renewing or extending his or her employment with LSAI or LSI or
its subsidiary, or any of its respective successors, except this clause shall
not apply to any such employee whose employment shall have been terminated by
LSAI, LSI or its subsidiary. This covenant and agreement is included herein in
order to protect the value of the HLI Assets being acquired by LSAI and LSI
pursuant to this Agreement and to assure that LSAI and LSI shall have the full
benefit of the value of the HLI Assets.
(ii) If any part of the restrictions set forth in subsection (i) of this
Section 12.8 shall, for any reason whatsoever, be declared invalid by a court of
competent jurisdiction, the validity or enforceability of the remainder of such
restrictions shall not thereby be adversely affected and shall be enforced to
the fullest extent permitted by law. If any of such restrictions are deemed to
be unreasonable by a court of competent jurisdiction, then HLI shall submit to
the reduction or modification of this Section 12.8 as said court deems
reasonable.
(iii) If HLI shall be in violation of the aforementioned restrictive
covenant and agreements in this Section 12.8, then in addition to other remedies
available to LSAI or LSI, the time limitation thereof shall be extended for a
period of time equal to the period of time during which such violation occurred.
(iv) The terms and provisions of this Section 12.8 are for the benefit of
LSAI and LSI and may be waived in whole or in part only in writing by LSAI and
LSI.
(v) HLI, LSAI and LSI agree that no portion of the purchase price of the
HLI Assets shall be allocable to the restrictive covenant and agreement as set
forth in this Section 12.8.
12.9 INJUNCTIVE RELIEF. HLI acknowledge that LSAI and LSI would be
irreparable damaged and that money damages and any other remedy available at law
would be inadequate to redress or remedy any loss in the event that the
provisions of Section 12.8 were not fully performed in accordance with their
specific terms or are otherwise breached, and HLI, therefore, agrees that LSAI
and its assigns, in addition to recovering any claim for damages or obtaining
any other remedy available at law, also may enforce the terms of Section 12.8 by
injunction or specific performance and may obtain may other appropriate
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remedy available in equity, and that HLI hereby waives its or his right to
assert and will not assert in defense against such equitable claims that an
adequate legal remedy is available.
12.9 SPECIMEN COLLECTION SITE AND PERSONNEL EMPLOYMENT. LSAI and LSI
hereby agree to (i) establish a specimen collection site in Midland, Texas, and
(ii) employ Brandi Hamilton at such collection site as an employee of LSI,
commencing on the date following the Closing Date, with annual compensation of
Thirty Thousand Dollars ($30,000) payable in equal semi-month installments on
the fifteenth and last day of each month. Provided, however, LSAI and LSI shall
not be obligated to maintain the collection site or such employment for any
definite period of time and shall have the right to terminate such collection
site and employment in their sole and absolute discretion at any time.
ARTICLE XIII
MISCELLANEOUS
13.1 EXPENSES. Except as otherwise provided herein, LSAI will pay its own
costs and expenses, and HLI will pay own costs and expenses, incurred in
connection with this Agreement and the transactions contemplated by this
Agreement, including without limitation fees and expenses of counsel,
irrespective of when incurred and regardless of whether this transaction is
consummated.
13.2 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) 232-9801
With a copy to:
Michael E. Dunn, Esq.
Dunn Swan & Cunningham
2800 First Oklahoma Tower
Oklahoma City, Oklahoma 73102-5604
Facsimile: (405) 235-9605
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If to HLI:
Harrison Laboratories, Inc.
Post Office Box 61750
Midland, Texas 79711
Attention: Roy D. Harrison
Facsimile: (915) 563-3131
With copies to:
Mike Atkins, Esq.
McMahon, Tidwell, Hansen, Atkins & Peacock, P.C.
4001 East 42nd Street, Suite 200
Odessa, Texas 79762
Facsimile: (915) 363-9121
13.3 ENTIRE AGREEMENT. This Agreement (including the Exhibit and
Schedules hereto 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.
13.4 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.
13.5 WAIVER. Any term or provision of this Agreement may be waived in
writing at any time by LSAI and LSI, if it is entitled to the benefits thereof,
or by HLI, 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.
13.6 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed within that State.
13.7 CONFIDENTIALITY. Prior to the consummation of the transactions
contemplated herein, HLI, LSI 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 HLI, LSI or LSAI, as the
case may be, prior to receipt from the other, (c) is lawfully received by HLI or
LSAI and LSI, as the case may be, from an unrelated third party after receipt of
the same from the other, (d) HLI or LSAI and LSI, as the case may be, is
required by law to disclose, or (e) HLI or LSAI and LSI, 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
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or financial institution. If the transactions contemplated herein are not
consummated, each of HLI, LSI and LSAI shall return to the other all data
obtained pursuant to this Agreement.
13.8 PUBLICITY. All press releases and other publicity concerning the
transactions contemplated herein shall be jointly planned and coordinated by and
between HLI 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.
13.9 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 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.
"HLI" HARRISON LABORATORIES, INC.
By:/S/ROY D. HARRISON
------------------------------------------
Roy D. Harrison, Chief Executive Officer
"Harrison" /S/ROY D. HARRISON
---------------------------------------------
Roy D. Harrison
"LSAI" LABORATORY SPECIALISTS OF
AMERICA, INC.
By:/S/JOHN SIMONELLI
------------------------------------------
John Simonelli, Chief Executive Officer
"LSI" LABORATORY SPECIALISTS, INC.
By:/S/ARTHUR R. PETERSON, JR.
------------------------------------------
Arthur R. Peterson, Jr., President
LIST OF SCHEDULES AND EXHIBITS
SCHEDULE 2.1 Description of HLI Assets
Appendix A -- HLI Customer List
SCHEDULE 2.5 Liabilities Assumed by LSAI and LSI
SCHEDULE 4.7 HLI Customer Losses and Threatened Losses
SCHEDULE 4.9 Pending or Threatened Litigation
EXHIBIT A Employment Agreement
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EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into this
1st day of May, 1998, by and between Laboratory Specialists, Inc. (the
"Company"), a Louisiana corporation, Laboratory Specialists of America, Inc., an
Oklahoma corporation and parent of the Company ("LSAI") and Roy D. Harrison, an
individual ("Harrison").
WHEREAS, the parties hereto entered into this Employment Agreement in
connection with and as a condition of that certain Asset Purchase Agreement
between Harrison Laboratories, Inc. ("HLI"), Harrison, the Company and LSAI,
dated April 13, 1998 (the "Asset Purchase Agreement"), providing for the
purchase of certain assets of HLI by the Company and LSAI;
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 Harrison, and
Harrison hereby agrees to serve the Company as a sales representative, during
the three-year period commencing on the date of this Agreement, subject to the
provisions of Sections 4 and 5 hereof.
2. DUTIES. Substantially all of the duties and responsibilities of
Harrison, subject to such travel as the duties of Harrison hereunder may
reasonably require, shall be performed by Harrison at and from Midland, Texas.
During the term of employment hereunder, Harrison shall devote his full business
time, attention, skill, energy and best efforts to the duties assigned to him
from time to time by the Company as a sale representative to service and
maintain the customer base acquired by LSAI and the Company from HLI pursuant to
the Asset Purchase Agreement and to further develop the customer base of the
Company for the services offered and provided by the Company within the
marketing area assigned to Harrison by the Company. As an employee of the
Company, Harrison shall be subject to the overall supervision and instructions
of management of the Company.
3. COMPENSATION AND OTHER BENEFITS. During Harrison's employment pursuant
to this Agreement, the Company or LSAI shall pay or provide to Harrison and
Harrison shall be entitled to receive or have maintained for his benefit, the
following:
3.1 The Company or LSAI shall compensate Harrison for the services to
be rendered by him hereunder as follows:
3.1.1 The Company or LSAI shall pay to Harrison an annual base
salary in the sum of Fifty Thousand ($50,000) per year, payable in
equal semi-monthly, pay-period installments on the first and fifteen
day of each month following the date of this Agreement; provided,
however, that the first and last semi-monthly pay-period installments
to be paid during the term of Harrison's employment pursuant to this
Agreement shall be pro rated based on the number of days of such
employment during the applicable semi-monthly, pay-period installment.
3.1.2 The Company or LSAI shall pay to Harrison a monthly bonus
equal to three and one-half percent (3.5%) of HLI Revenues (as defined
below) during each month payable on the fifteenth day of the following
month. For purposes of this Agreement, "HLI Revenues" shall mean all
revenues of the Company directly attributable to the customers
comprising the customer based of HLI acquired by LSAI and the Company
pursuant to the Asset Purchase Agreement as determined in accordance
with generally accepted accounting principles.
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3.1.3 With respect to New Customers (as defined below) obtained
by Harrison for the Forensic Testing services provided by the Company
and LSAI, Harrison shall be entitled to monthly sales commissions as
set forth in this Section 3.1.3. The Company or LSAI shall pay to
Harrison a monthly commission, payable on the fifteenth day of each
month, based upon the revenues for Forensic Testing provided to each
New Customer during the preceding month, as determined in accordance
with generally accepted account principles, equal to (i) six percent
(6%) of such revenues during the first year that each New Customer
utilizes the Forensic Testing services of the Company, (ii) four
percent (4%) of such revenues during the second year that each New
Customer utilizes the Forensic Testing services of the Company, (iii)
two percent (2%) of such revenues during the third year that such New
Customer utilizes the Forensic Testing services of the Company, and
(iv) one percent (1%) after the third year that such New Customer
utilizes the Forensic Testing services of the Company and LSAI. For
purposes of this Agreement, "New Customers" shall mean customers of
the Company and LSAI other than those customers that have previously
utilized the Forensic Testing services of the Company and LSAI on the
date of this Agreement, the customers comprising in part the assets
purchase by LSAI and the Company from HLI pursuant to the Asset
Purchase Agreement, and those customers comprising in whole or in part
the assets of a company subsequently acquired directly or indirectly
by LSAI or the Company pursuant to a purchase or merger transaction.
3.2 Harrison is hereby authorized to incur reasonable expenses for
the promotion of the Company's business, including entertainment, travel
and similar expenses (including without limitation oil and gas expenses of
the automobile utilized by Harrison), and he shall be reimbursed therefore
by the Company or LSAI upon his presentation of itemized accounts of such
expenditures.
3.3 The Company or LSAI shall provide to Harrison health and
disability insurance benefits comparable to those provided to an executive
of the Company.
3.4 Harrison shall be entitled to reasonable periods of vacation with
pay in each year, and reasonable periods of sick leave with pay in
accordance with Company's vacation and sick leave policies applicable to an
executive of the Company as established by the Board of Directors of the
Company.
3.5 The Company or LSAI shall pay to Harrison an automobile allowance
of Five Hundred Dollars ($500) per month, payable on the fifteen day of
each month while employed pursuant to this Agreement to assist Harrison in
the performance of his duties and responsibilities as an employee of the
Company.
3.6 On the date of this Agreement, Harrison shall be entitled to
become a participant in the 401(k) retirement benefit plan maintained by
the Company for its employees on the same basis that other Company
employees participate. The Company agrees to waive any minimum service
requirement for initial participation and vesting under such benefit plan.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Harrison is unable, because of physical or mental illness
or disability, to render services of the character contemplated by this
Agreement and that such illness or 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 Harrison
hereunder upon written notice by the Company to Harrison effective on the
next first or fifteenth day of the month following the date of such notice.
Prior to and as a condition precedent of any such termination by the Board
of Directors, upon request therefor by the Company, Harrison shall submit
to a medical examination by a physician designated by the Company in
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Midland, Texas, for the purpose of determining the existence, nature and
extent of any such illness or disability; provided, however, that in the
event Harrison refuses or fails to submit himself to such medical
examination within 30 days of such request, the Board of Directors shall
have the right immediately to terminate Harrison's employment pursuant to
this Agreement without such medical examination. In the event the
physician designated by the Company determines that Harrison is unable,
because of physical or mental illness or disability, to render services of
the character contemplated this Agreement, Harrison shall have the right,
within 10 days of the determination of Harrison's illness or disability by
the physician selected by the Company, to select a physician in Midland,
Texas, and submit himself to an examination for the purpose of determining
the existence, nature and extent any such illness or disability. In the
event Harrison fails to submit himself for examination by the physician
selected by Harrison within the 10-day period, the determination of such
illness or disability the by physician selected by the Company shall be
binding upon Harrison and shall be reasonable grounds for the Company to
terminate Harrison's employment pursuant to this Agreement. Furthermore,
in the event the physician designated by the Company and the physician
selected by Harrison are unable to reach an agreement on the issue of the
ability of Harrison to perform services under this Agreement due to any
illness or disability, such physicians shall promptly designate a qualified
physician to make such determination and the finding of such physician as
to the existence or nonexistence of such illness or disability shall be
binding on the Company and Harrison and, if such illness or disability is
found to exist, such finding shall be reasonable grounds for the Company to
terminate Harrison's employment pursuant to this Agreement. In the event
the Board of Directors terminates the employment of Harrison under this
Agreement pursuant to this Section 4.1, Harrison shall be entitled to
receive the amount of compensation determined pursuant to (i) Sections
3.1.1 and 3.1.3 up to the date of the termination of the employment of
Harrison, payable on the dates established pursuant to Sections 3.1.1 and
3.1.3, respectively, and (ii) Section 3.1.2 from the date of Harrison's
employment termination pursuant to this Section 4.1 through April 30, 2001,
payable on the fifteenth day of each month following the end of each month
during such period.
4.2 In the event Harrison shall die during the term of this
Agreement, this Agreement shall terminate effective on the next first or
fifteenth day of the month following the date of death, and the Company or
LSAI shall pay to the spouse of Harrison, or if unmarried at the time of
his death, to the estate of Harrison, the compensation otherwise payable to
Harrison but for his death pursuant to (i) Sections 3.1.1 and 3.1.2 for a
period of three (3) months following the date of Harrison's death, payable
on the dates established pursuant to Sections 3.1.1 and 3.1.3,
respectively, and (ii) Section 3.1.2 from the date of Harrison's death
through April 30, 2001, payable on the fifteenth day of each month
following the end of each month during such period.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Harrison should be terminated for Cause
(as defined below), the Company may terminate this Agreement, and all
obligations hereunder shall thereupon terminate. For purposes of this
Agreement, "Cause" shall mean (i) gross negligence by Harrison, (ii) the willful
failure by Harrison to substantially perform the duties assigned to Harrison
under this Agreement (other than physical or mental illness or disability which
determination shall be in accordance with Section 4.1 of this Agreement), (iii)
fraud, including without limitation any misrepresentation or breach of any
warranty or covenant by HLI contained in the Asset Purchase Agreement, or (iv)
the willful misconduct by Harrison which is materially injurious to the Company
or LSAI, or (v) Harrison's conviction of a felony.
6. NON-COMPETITION. (i) During Harrison's employment pursuant to this
Agreement, or, if longer, the period of employment of Harrison by the Company or
LSAI, Harrison shall not engage in competition with the Company or LSAI, 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 or LSAI at any time during the term of Agreement. Furthermore, in order
to induce LSAI and the Company to enter into the Asset Purchase Agreement and
this Agreement, Harrison covenants and agrees, for a period of three (3) years
following the date of Harrison's termination of employment with the Company, not
to (A) directly or indirectly solicit, canvass or otherwise contact or accept
any
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business or transaction from any customer, former or otherwise of the Company,
or take any action which shall cause the termination or curtailment of the
business relationship with LSAI or the Company and/or its successor or
successors and any of its customers, former or otherwise, including without
limitation those customers constituting in whole or in part the HLI Assets and
(B) directly or indirectly, without the prior written consent of LSAI and the
Company or their successor or successors, solicit, entice, raid, persuade or
induce any individual who as of the date of Harrison's employment termination is
an employee of LSAI or the Company, or any of its successor or successors, to
terminate or refrain from renewing or extending his or her employment with LSAI
or the Company or any of its respective successors, except this clause shall not
apply to any such employee whose employment shall have been terminated by LSAI
or the Company or its successor or successors.
(ii) If any part of the restrictions set forth in subsection (i) of this
Section 6 shall, for any reason whatsoever, be declared invalid by an
arbitration panel, the validity or enforceability of the remainder of such
restrictions shall not thereby be adversely affected and shall be enforced to
the fullest extent permitted by law. If any of such restrictions are deemed to
be unreasonable by an arbitration panel, then Harrison shall submit to the
reduction or modification of this Section 6 as said panel deems reasonable.
(iii) If Harrison shall be in violation of the aforementioned restrictive
covenant and agreements in this Section 6, then in addition to other remedies
available to LSAI or the Company, the time limitation thereof shall be extended
for a period of time equal to the period of time during which such violation
occurred.
(iv) The terms and provisions of this Section 6 are for the benefit of
LSAI and the Company and may be waived in whole or in part only in writing by
LSAI and the Company.
7. CONFIDENTIALITY. During Harrison's employment pursuant to this
Agreement, or, if longer, the period of employment of Harrison by the Company,
and for a period of three (3) years thereafter, Harrison shall not divulge to
anyone, other than the Company, LSAI or persons designated by the Company or
LSAI in writing, any confidential material information directly or indirectly
useful in any aspect of the business of the Company, LSAI or any of its
subsidiaries, as conducted from time to time, as to which Harrison 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, Harrison, 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.
Harrison acknowledges that the Company, LSAI and its successor or successors
would be irreparable damaged and that money damages and any other remedy
available at law would be inadequate to redress or remedy any loss in the event
that the provisions of Sections 6 and 7 were not fully performed in accordance
with their specific terms or are otherwise breached, and Harrison, therefore,
agrees that the Company, LSAI and its successor or successors, in addition to
recovering any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of Sections 6 and 7 by injunction or specific
performance and may obtain may other appropriate remedy available in equity, and
that Harrison hereby waives his right to assert and will not assert in defense
against such equitable claims that an adequate legal remedy is available.
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 Midland, Texas, 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
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connection with such arbitration; provided, however, that nothing in this
Section 10 shall be construed so as to deny the Company, LSAI and its successor
or successors the right and power to seek and obtain injunctive relief in a
court of equity for any breach or threatened breach by Harrison 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 Harrison: Mr. Roy D. Harrison
5301 Shady Bend Court
Midland, Texas 79707
If to the Company: Laboratory Specialists, Inc.
1111 Newton Street
Gretna, Louisiana 70053
Attention: Larry E. Howell
If to LSAI: Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102
Attention: John Simonelli
12. GENERAL. The terms and provisions herein contained (i) constitute the
entire Agreement between the Company, LSAI and Harrison 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 Texas 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 date first above written.
"Company" LABORATORY SPECIALISTS, INC.
By: /S/ARTHUR R. PETERSON, JR.
Arthur R. Peterson, Jr., President
"LSAI" LABORATORY SPECIALISTS OF AMERICA, INC.
By: /S/LARRY E. HOWELL
Larry E. Howell, President
"Harrison" /S/ROY D. HARRISON
Roy D. Harrison
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EXHIBIT 10.19
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
this 8th day of June, 1998, by and between TOXWORX LABORATORIES, INC., a
California corporation ("TWI"), Kingsley Labrosse, an individual and shareholder
of TWI ("Labrosse") and LABORATORY SPECIALISTS OF AMERICA, INC., an Oklahoma
corporation ("LSAI").
R E C I T A L S
1. TWI and LSAI are each primarily engaged in the providing of forensic
drug testing services to corporate and institutional customers.
2. LSAI desires to purchase from TWI and TWI desires to sell to LSAI
certain assets of TWI, principally the customer base of TWI and the assets
related thereto.
3. TWI, Labrosse 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 TWI.
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, as mutually agreed
among the parties hereto, but in any event not later than July 1, 1998.
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.
LSI: Laboratory Specialists, Inc., a Louisiana corporation and the wholly-owned
subsidiary of LSAI.
TAXES: All net income, gross income, gross receipts, sales and use, AD VALOREM,
franchise, profits, licenses, withholding, payroll, excise, severance, stamp,
occupation, property, customs duties or other taxes, fees or charges of any kind
whatsoever imposed by a foreign, federal, state, county or local taxing
authority together with any interest or penalty thereon.
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TWI: TOXWORX Laboratories, Inc., a California corporation.
TWI ASSETS: The assets of TWI as defined in Section 2.1 hereof and as more
specifically identified on SCHEDULE 2.1 attached hereto.
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 TWI ASSETS. At the Closing, upon the terms and
subject to the conditions set forth in this Agreement, TWI shall sell, assign,
convey, set over, transfer and deliver to LSAI, and LSAI shall purchase, acquire
and accept all right, title and interest of TWI in and to the customer base, all
contracts and contract rights for the providing of drug testing services (but
excluding all accounts receivable), any trade names, logos, designs or other
intellectual rights related to or utilized in the marketing of the drug testing
services provided by TWI to its customers forming its customer base, as more
specifically described in SCHEDULE 2.1 hereto (the "TWI 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.
2.2 PURCHASE PRICE OF TWI ASSETS. In consideration for the TWI Assets to
be sold, assigned, conveyed, transferred and delivered to LSAI pursuant to
Section 2.1 hereof and upon the terms and subject to the conditions contained
herein, LSAI shall deliver to TWI, at Closing, in immediately available funds,
the sum of Two Million Four Hundred Thousand Dollars ($2,400,000).
2.3 CLOSING. Subject to the terms and conditions hereof, the Closing
shall take place at the offices of Carney & Delany, LLP, 3801 University Avenue,
Suite 650, Riverside, California, by way of wire and telephonic communication.
2.4 INSTRUMENTS OF TRANSFER AND CONVEYANCE. The conveyance, transfer,
assignment and delivery of the TWI Assets as herein provided shall be effected
by delivery by TWI at Closing (or any time thereafter) to LSAI of instruments of
transfer, conveyance, endorsements, bills of sale, all in form satisfactory to
LSAI, duly executed, as LSAI shall reasonably deem necessary to vest in LSAI at
Closing and at any time thereafter, all of TWI's right, title and interest in
and to the TWI Assets, free and clear of any lien, charge, claim, pledge,
security interest or other encumbrance of any type or kind whatsoever.
2.5 NO ASSUMPTION OF LIABILITIES. In connection with the purchase of the
TWI Assets and consummation of the transactions contemplated under this
Agreement, LSAI shall not nor shall any provision of this Agreement be construed
to cause LSAI to, assume or become liable for any liability, obligation,
performance, duty, debt, lien or any other claim of any kind or nature of TWI
other than:
(i) the obligations of TWI arising after the Closing to customers and
the testing to be conducted after the Closing for customers except as set forth
in Section 12.5;
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(ii) obligations of TWI 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,
formerly National Institute on Drug Abuse.
TWI hereby acknowledges that it shall remain liable for all of its
other obligations, performances, liabilities, duties, debts, liens or any other
claim of any kind or nature after the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LSAI
LSAI hereby represents and warrants to TWI as of the date hereof 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 now being
conducted and as contemplated following the Closing.
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. 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 credit agreement or any other agreement or instrument
evidencing indebtedness for money borrowed to which LSAI or LSI is a party or by
which LSAI or LSI 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 or LSI is a party or by which LSAI or LSI 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 or LSI.
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 or LSI in
connection with the execution and delivery of this Agreement by LSAI or the
consummation by LSAI of the transactions contemplated hereby, other than in
connection or compliance with any applicable provisions of the Securities
Exchange Act of 1934, as amended.
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3.5 FULL DISCLOSURE. No representation, covenant or warranty by LSAI or
by LSAI for and on behalf of LSI contained in this Agreement and no written
information or agreements furnished or to be furnished to TWI by LSAI hereto or
in connection with the transactions 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.
3.6 PERMITS; LICENSES. LSAI, itself or through one or more wholly-owned
subsidiaries, has all permits, licenses and certificates necessary or
appropriate to provide the testing and other services to TWI customers and to
perform the obligations under the contracts and contract rights included in the
TWI Assets, after the Closing.
3.7 BROKER'S FEES. Neither LSAI nor LSI has incurred any brokerage,
finder's or similar fee in connection with the transactions contemplated by this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TWI
Except as set forth on Exhibit IV to this Agreement, TWI hereby represents
and warrants to LSAI as of the date hereof as follows:
4.1 ORGANIZATION, GOOD STANDING, POWER, ETC. TWI is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
California 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. TWI is duly qualified to do business and is in good standing in each
other jurisdiction in which the ownership, operation or leasing of its
properties or assets or the nature of its business requires such qualification.
4.2 AUTHORIZATION OF AGREEMENT. TWI 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 TWI and the consummation by TWI of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of TWI. This Agreement has been duly executed and
delivered by TWI, and constitutes the legal, valid and binding obligation of
TWI, enforceable against TWI 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. Neither the execution and delivery of this
Agreement by TWI, nor the consummation of the transactions contemplated hereby,
will (a) violate any provision of the Articles of Incorporation or By-laws of
TWI, as currently in effect; (b) violate 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 TWI
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 TWI is a party or by which TWI or any of the TWI Assets is
bound or affected, or (ii) any lease, license, tariff, contract or other
agreement or instrument to which TWI is a party or by which TWI or any of the
TWI 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 TWI
Assets.
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4.4 CONSENTS AND APPROVALS. 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 TWI in connection with the
execution and delivery of this Agreement by TWI, or the consummation by TWI of
the transactions contemplated hereby.
4.5 TWI ASSETS. The TWI Assets are free and clear of any lien, charge,
claim, pledge, security interest or other encumbrance of any type or kind
whatsoever.
4.6 FINANCIAL STATEMENTS. TWI has delivered to LSAI (a) the unaudited
balance sheet of TWI as of December 31, 1997, and the related unaudited
statement of income of TWI for the fiscal year ended December 31, 1997, together
with the notes related thereto (the "TWI Financial Statements"). Each TWI
Financial Statements (and the notes relating thereto) were prepared in
accordance with generally accepted accounting principles consistently applied
and fairly present the financial condition of TWI as of the date thereof and the
related results of operations, of TWI for and during the periods covered
thereby.
4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, TWI
has not (i) borrowed or agreed to borrow funds secured or to be secured by the
TWI Assets; (ii) incurred or become subject to, or agreed to incur or become
subject to, any obligation or liability, contingent or otherwise, that resulted
in or may become a lien, charge, claim, pledge, security interest or encumbrance
of any type or kind whatsoever against or burden upon the TWI Assets; (iii)
declared, set aside or paid any distribution of the TWI Assets; (iv) mortgaged,
pledged or subjected to lien, charge or other encumbrance, or agreed so to do,
any of the TWI Assets; (v) sold, assigned, transferred, conveyed, leased or
otherwise disposed of or agreed to sell, assign, transfer, convey, lease or
otherwise dispose of any material part of the TWI Assets; (vi) entered into any
material transaction, contract or commitment, other than this Agreement,
affecting or related to the TWI Assets; and (vii) made or permitted, or agreed
to make or permit, any material adverse amendment or termination of any material
contract, franchise, license, agreement or other instrument (that constitutes in
whole or part or relates to the TWI Assets) to which TWI is a party or by which
any of the TWI Assets is bound. Furthermore, except as otherwise set forth in
SECTION 4.7 of EXHIBIT IV, during the year ended December 31, 1997 and since
December 31, 1997, TWI has not lost and has no knowledge of the threatened of
loss of any customer: (aa) for whom forensic drug testing services were provided
during the year ended December 31, 1997, and (bb) for which such customer
services accounted for $30,000 or more of TWI revenues during the year ended
December 31, 1997.
4.8 TITLE TO THE TWI ASSETS; ABSENCE OF LIENS AND ENCUMBRANCES. TWI holds
title to the TWI Assets, free and clear of all mortgages, liens, pledges,
charges and encumbrances of any nature whatsoever.
4.9 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 TWI and/or the TWI Assets or business of TWI or that questions the
validity of this Agreement or affects the transactions contemplated herein.
(ii) TWI 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 TWI or which would prevent or hinder the sale,
assignment, conveyance, setting over, transfer and delivery of the TWI Assets by
TWI to LSAI of all right, title and interest of TWI in and to the TWI 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 TWI from taking, or requiring TWI to take, any action
of any kind or to which TWI or any of the TWI Assets, are subject or bound.
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(iv) TWI 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 TWI Assets by TWI to LSAI
of all right, title and interest of TWI in and to the TWI Assets free and clear
of all mortgages, liens, pledges, charges and encumbrances of any nature
whatsoever, as contemplated hereunder.
4.10 COMPLIANCE WITH LAWS. TWI is in compliance with all Legal
Requirements applicable to any of its properties or assets included in the TWI
Assets and/or the ownership, operation or use thereof, and TWI has not received
notice of any noncompliance or alleged noncompliance with any Legal Requirement
relating or applicable to any of its properties or assets included in the TWI
Assets or to the operation of its business.
4.11 FULL DISCLOSURE. No representation, covenant or warranty by TWI
contained in this Agreement and no written information or agreements furnished
or to be furnished to LSAI by TWI pursuant hereto or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact concerning the TWI Assets, 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.
4.12 BROKER'S FEES. TWI has not incurred any brokerage, finder's or
similar fee in connection with the transactions contemplated by this Agreement.
ARTICLE V
COVENANTS OF LSAI
5.1 ACKNOWLEDGMENT OF LSAI. LSAI is fully aware that TWI has no written
contracts with any of its customers and that any customer may discontinue
services from TWI at any time without advance notice. TWI makes no guarantee
with respect to: (i) the customers of TWI which will be retained by LSAI (or
one or more of its subsidiaries) following the Closing; (ii) the level of gross
or net income that LSAI (or one or more of its subsidiaries) will achieve as a
result of this transaction; nor (iii) any other matter in any way relating to
the use of the TWI assets by LSAI, or any other person or entity whatsoever,
following the Closing. LSAI further acknowledges and agrees that TWI has taken
no steps to protect its ability to use the word "TOXWORX" in its name or
otherwise in business operations except only for qualifying to use that word as
a part of its corporate name with the California Secretary of State. LSAI
further acknowledges and agrees that if it desires to retain the services of any
sales representative, employee, or any other persons in any way associated with
TWI following the Closing, LSAI must negotiate arrangements on its own behalf;
any assistance given by TWI in connection therewith will not create any
liability whatsoever with respect to TWI.
5.2 TRANSFER OF CERTAIN CUSTOMER INFORMATION PRIOR TO CLOSING. LSAI has
requested that TWI attach the TWI customer list to Schedule 2.1 hereto. In
addition, LSAI has requested that following the execution of this Agreement and
prior to the Closing, TWI deliver certain information concerning TWI's customers
to LSI to enable LSI to input this customer information into its computer data
bank. The goal is to enable LSAI, through LSI, to begin providing services to
customers of TWI on the day immediately following the Closing. LSAI
acknowledges and agrees that the damage to TWI from agreeing to transfer
customer information to LSAI prior to the Closing is potentially very great and
likely to be extremely difficult and impracticable to measure if LSAI, for any
reason, justified or unjustified, whether pursuant to the terms of this
Agreement or in breach of this Agreement, whether based on failure of a
condition precedent or otherwise, does not close the transaction. In order to
encourage TWI to engage in the cooperative transfer of customer information
prior to the Closing, LSAI covenants and agrees as follows and requests that TWI
rely thereon in so transferring the customer information prior to the Closing.
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A. If for any reason whatsoever, whether justified or unjustified,
whether pursuant to the terms of this Agreement or in breach of the terms of
this Agreement; whether based on failure of a condition precedent or otherwise,
LSAI does not fully complete the Closing and pay to TWI the full amount of the
purchase price hereunder, then: (i) LSAI will cause LSI to delete completely
from its records, however those records are kept, whether in one or more
computer data banks, or otherwise, all of the information given to it by TWI in
anyway concerning any TWI customer and to certify to TWI in writing that the
same has been accomplished; and (ii) LSAI further covenants that neither LSAI,
nor LSI nor any other person or entity in any way affiliated with either of
them, will use any of the information concerning TWI customers in any
circumstance or for any purpose whatsoever and will not convey any of such
information, by any means whatsoever, to any other person or entity whatsoever.
B. In addition to and not in limitation of Section 5.2A above, LSAI
agrees that if any of the TWI customers about whom information was conveyed to
LSI conducts any business with LSI or LSAI or any person or entity affiliated
with either of them from the date of this Agreement through and including June
30, 2000, that such business shall be conclusively presumed to have been
generated as a result of the wrongful use of information obtained from TWI, and
LSAI shall pay to TWI, as liquidated damages and not as a penalty, 10% of gross
revenues generated from any such TWI customer by LSAI, LSI and/or any person or
entity affiliated with either of them at any time during such period.
SECTION 5.3 NOTICE TO PUBLIC, EMPLOYEES, AND CUSTOMERS. LSAI and TWI
anticipate that notice will be given to the public, to employees of both
companies and to customers of TWI concerning the transaction on or about June
15, 1998. LSAI and TWI will cooperate with each other in determining the
language and method of making such announcements. Participation by LSAI in the
preparation of and the making of any of such announcements shall also be deemed
and construed to be confirmation by LSAI that there is no breach or default by
TWI, as of that time, and that LSAI will consummate the transaction at the
Closing as scheduled.
ARTICLE VI
COVENANTS OF TWI
TWI covenants and agrees with LSAI that, at all times between the date
hereof and the Closing, TWI will comply with all covenants and provisions of
this Article VI, except to the extent LSAI may otherwise consent in writing or
to the extent otherwise expressly required or permitted by this Agreement.
6.1 NO NEGOTIATIONS. Except as contemplated in this Agreement, TWI will
not take (or permit any other person acting for or on behalf of TWI to take),
directly or indirectly, any action to (i) seek or encourage any offer or
proposal from any person to acquire any of the TWI Assets or any interest
therein, (ii) merge, consolidate or combine, or permit any other person to
merge, consolidate or combine, with TWI, (iii) liquidate, dissolve or reorganize
TWI, (iii) acquire or transfer any of the TWI Assets or any interests therein,
other than in the ordinary course of business; or (iv) 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, dissolution or reorganization.
6.2 CONDUCT OF BUSINESS. Except as otherwise provided in this Agreement,
TWI will conduct its business only in the ordinary course and consistent with
past practices. Without limiting the generality of the foregoing:
(i) TWI will cause the books and records of TWI, to be maintained 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 TWI or in any assumption underlying such a practice or
policy.
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(ii) TWI 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) TWI (A) will not convey, encumber, mortgage, pledge or
dispose of any portion of the TWI 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 TWI
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 TWI's customers, (D) will promptly notify LSAI in
writing of the loss or suspension of any certification, which would have a
material adverse effect upon TWI and its operations, including without
limitation, loss or suspension of certification by the National Institute on
Drug Abuse.
6.3 NO DISPOSAL OF TWI ASSETS. Except as contemplated in this Agreement,
TWI will not (a) dispose of or assign any of the TWI Assets or permit any of the
TWI Assets to be subjected to any liens, or (b) sell any portion of the TWI
Assets to any third party.
6.4 CONTRACTS. TWI 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.
6.5 NOTICE AND CURE. TWI 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 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 TWI being breached under this Agreement, or that
renders or will render untrue any representation or warranty of TWI contained in
this Agreement as if the same were made on or as of the date of such event,
transaction or circumstance. TWI 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 TWI in this
Agreement.
6.6 AGREEMENTS AND COVENANTS. TWI will not make any commitment, either in
writing or orally, which would violate any of the provisions set forth in this
Article VI.
6.7 COOPERATION. TWI will cooperate with LSAI in providing certain
customer information to be inputted into the LSI computer data bank in
anticipation of the Closing as set forth in Section 5.2 above, in reliance upon
the undertakings and obligations of LSAI in such Section 5.2 and otherwise under
this Agreement. In addition, TWI will cooperate in accomplishing the
announcements discussed in Section 5.3 above in reliance on the confirmation of
LSAI set forth therein and the other obligations of LSAI under this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PARTIES
The obligation of TWI, 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:
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7.1 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, TWI 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, the transaction contemplated by this
Agreement.
7.2 APPROVAL OF STOCKHOLDERS OF TWI. The stockholders of TWI shall have
approved this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF TWI
The obligations of TWI 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 TWI:
8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of LSAI set forth in Article III above shall be true and correct in
all material respects as of the date of this Agreement, with the same effect as
though such representations and warranties had been made at and as of Closing.
8.2 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.
8.3 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, TWI, or any of their respective directors
or officers, any action, suit or proceeding by or before any governmental
authority that would impose or confirm material limitations on the ability of
TWI to receive the consideration for purchase of the TWI Assets pursuant to
Section 2.2 hereof.
8.4 NO ADVERSE CHANGE. No material adverse change shall have occurred in
the business, operations, properties, assets or financial condition of LSAI
since the date hereof.
8.5 OFFICERS' CERTIFICATE, ETC. TWI shall have received (a) a
certificate, dated the date of the Closing and signed by the Chief Executive
Officer or President of LSAI, to the effect set forth in Sections 8.1, 8.2, 8.3
and 8.4 above, and (b) such other certificates, instruments and documents as
shall be reasonably requested by TWI for the purpose of verifying the accuracy
of such representations and warranties and the performance and satisfaction of
such covenants and conditions.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF LSAI
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:
9.1 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.
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9.2 PERFORMANCE OF COVENANTS, AGREEMENTS AND CONDITIONS. TWI 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 TWI, at or prior to the Closing.
9.3 CERTAIN ACTIONS. There shall not have been instituted and be
continuing or threatened against LSAI, TWI, 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 TWI Assets.
9.4 NO ADVERSE CHANGE. Except to the extent disclosed in Exhibit IV to
this Agreement, no material adverse change shall have occurred in the business,
prospects, properties, or financial condition of TWI since the date hereof.
9.5 OFFICERS' CERTIFICATES, ETC. LSAI shall have received (a) a
certificate, dated the date of the Closing and signed on behalf of TWI by the
Chief Executive Officer or President of TWI to the effect set forth in Sections
9.1, 9.2, 9.3 and 9.4 above, and (b) such other certificates, instruments and
documents as shall be reasonably requested by LSAI for the purpose of verifying
the accuracy of such representations and warranties and the performance and
satisfaction of such covenants and conditions.
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 TWI;
(ii) by TWI in the event the Closing shall not have been consummated on or
before July 1, 1998, or
(iii) by either LSAI or TWI if there shall have been entered or
rendered against LSAI, TWI, or any of their respective directors or officers in
any action or proceeding referred to in Sections 7.2, 8.3 or 9.34 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 TWI, 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, TWI or their respective officers, directors or shareholders, except as
stated in Sections 5.2, 11.3, 11.4 and 13.7 hereof; provided, however, that such
limitation shall not apply in the event of a willful breach by LSAI or TWI 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 this
Agreement in addition to any other rights and/or remedies set forth in Sections
5.2, 11.3, 11.4 and 13.7.
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; FEES AND COSTS
11.1 SURVIVAL. The representations, warranties, covenants and agreements
respectively made by LSAI and TWI in this Agreement, in the Schedules or Exhibit
hereto, or on any certificate delivered pursuant to the provisions hereof shall
survive and shall not terminate upon the Closing and consummation of the
transactions contemplated hereby. The parties hereto acknowledge that the
representations and warranties contained in this Agreement are intended to and
shall give rise to liability, claim, action or cause of action on the part of
any party hereof on account of breach of any such representation or warranty.
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 ATTORNEY'S FEES AND COSTS. In the event any party hereto shall be
required to employ an attorney or attorneys to institute a legal proceeding
against the other party or parties for the purpose of enforcing any of the
provisions of this Agreement or protecting its interest in any matter arising
under this Agreement, the non-prevailing party in any such action pursued in
courts of competent jurisdiction (the finality of which is not legally
contestable) shall pay to the prevailing party all reasonable costs, damages and
expenses, including attorney's fees, expended or incurred in connection with
such proceeding. The standard to be applied in determining who is a prevailing
party for purposes of this Section 11.3 shall be the same standard as applied by
the courts in determining who is a prevailing party for purposes of Rule 54(d)
of the Federal Rules of Civil Procedure.
11.4 JURISDICTION; VENUE; SERVICE OF PROCESS. The parties hereby expressly
and irrevocably agree and consent that any legal action, suit or proceeding
arising out of or relating to this Agreement, any of the transaction
contemplated herein, or any of the other agreements or documents related hereto,
may be instituted only in any state court in and for the County of Oklahoma,
State of Oklahoma, or the U.S. District Court for the Western District of
Oklahoma and by execution and delivery of this Agreement, each party expressly
waives any objection which such party may now have or hereafter may arise to the
venue of any such suit, action, or proceeding or to the jurisdiction of such
court, and irrevocably and unconditionally consents to the personal jurisdiction
of such court in such action, suit or proceeding. The parties each waive
personal service of any and all process upon them and consent to all such
service of process may be made by certified mail directed to such intended
recipient at the address given for notice to that party herein.
ARTICLE XII
CONTINUING OBLIGATIONS OF TWI AND LSAI AFTER CLOSING
Following Closing and consummation of the transactions contemplated in this
Agreement, the TWI covenants and agrees (except to the extent LSAI may otherwise
consent in writing or to the extent otherwise expressly required or permitted by
this Agreement), and LSAI covenants and agrees (except to the extent TWI
otherwise consent in writing or to the extent otherwise expressly required or
permitted by this Agreement), as follows. The survival of the provisions of
this Article XII following the Closing are in addition to the survival of all of
the other provisions hereof which, by their nature, are not to be performed or
fully performed before or at the Closing.
12.1 INDEMNIFICATION BY TWI. Subject to the provisions of this Article
XII, TWI agrees to indemnify fully in respect of, hold harmless and defend LSAI,
against any and all damages (excluding consequential and incidental damages),
liabilities, costs, claims, proceedings, investigations, penalties, judgments,
deficiencies, losses, expenses
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(including interest, penalties, and fees and disbursements of attorneys,
accountants and experts) ("Loss" or "Losses") incurred or suffered by any of
them arising out of or relating to (i) any misrepresentation or breach of
warranty or covenant on the part of TWI under this Agreement and (ii) any
nonfulfillment or failure to perform any covenant or agreement on the part of
any of TWI under this Agreement.
12.2 INDEMNIFICATION BY LSAI. Subject to the provisions of this
Article XII, LSAI agrees to indemnify fully in respect of, hold harmless and
defend TWI against, any and all Losses arising out of or relating to (i) any
misrepresentation, or breach of warranty or covenant on the part of LSAI under
this Agreement, or (ii) nonfulfillment or failure to perform any covenant or
agreement on the part of LSAI under this Agreement, or (iii) any assumed
liability.
12.3 LIMITATIONS.
(i) TWI will have no liability (for indemnification or otherwise) with
respect to any representation, warranty, covenant or obligation to be performed
or complied with prior to or at the Closing unless on or before 24 months from
the date of the Closing, LSAI notifies TWI of a claim specifying the factual
basis for that claim. LSAI will have no liability (for indemnification or
otherwise) with respect to any representation, warranty, covenant or obligation
to be performed and complied with prior to or at the Closing unless on or before
24 months from the date of the Closing, TWI notifies LSAI of a claim specifying
the factual basis for that claim;
(ii) TWI shall not be liable under this Agreement for any
misrepresentation or breach of warranty, or breach of any covenant to be
performed at or prior to Closing, except to the extent that the aggregate amount
of Losses for which TWI would otherwise (but for this provision) be liable
exceeds in the aggregate the sum of $100,000 and then only to the extent of such
excess; provided, however, in no event shall the aggregate liability of TWI for
all such misrepresentations or such breaches in exceed the amount of One Million
Two Hundred Thousand Dollars ($1,200,000.00).
(iii) The limitations set forth in subparts (i) and (ii) immediately
above shall apply in any proceeding in which any claim for a monetary damages is
asserted, regardless of the legal theory asserted;
(iv) The provisions of this Article XII shall constitute the sole and
exclusive remedy of LSAI against TWI except only in circumstances in which LSAI
has a legally-enforceable right to rescind this Agreement, which right of
rescission shall remain available to LSAI.
12.4 METHOD OF ASSERTING CLAIMS, ETC. The party claiming indemnification
under Section 12.1 or 12.2 of this Agreement hereinafter referred to as the
"Indemnified Party" and the party against whom such claims are asserted
hereunder is hereinafter referred to as the "Indemnifying Party". All claims
for indemnification by any Indemnified Party under this Article XII arising out
of third-party claims shall be asserted and conducted as follows, subject to the
limitations of Section 12.3:
12.4.1 NOTIFICATION; DEFENSE. In the event that any claim or
demand for which an Indemnifying Party would be liable to an Indemnified
Party hereunder is asserted against or sought to be collected from such
Indemnified Party by a third party, said Indemnified Party shall with
reasonable promptness, and within the time limits of Section 12.3(i) notify
the Indemnifying Party of such claim or demand, specifying the nature of
and specific basis for such claim or demand and the amount or the estimated
amount thereof to the extent then feasible (which estimate shall not be
conclusive of the final amount of such claim and demand (the "Claim
Notice"). The Indemnifying Party shall have 30 days from the giving of the
Claim Notice (the "Notice Period") to notify the Indemnified Party (i)
whether or not the Indemnifying Party disputes the liability of the
Indemnifying Party to the Indemnified Party hereunder with respect to such
claim or demand and (ii) whether or not the Indemnifying Party desires, at
the sole cost and expense of the Indemnifying Party, to defend the
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Indemnified Party against such claim or demand; provided, however, that any
Indemnified Party is hereby authorized prior to and during the Notice
Period to file any motion, answer or other pleading which it shall deem
necessary or appropriate to protect its interests or those of the
Indemnifying Party and not prejudicial to the Indemnifying Party. In the
event that the Indemnifying Party notifies the Indemnified Party within the
Notice Period that it desires to defend the Indemnified Party against such
claim or demand and except as hereinafter provided, the Indemnifying Party
shall have the right to defend by all appropriate proceedings, which
proceedings shall be promptly settled or prosecuted by it to a final
conclusion. If the Indemnified Party desires to participate in, but not
control, any such defense or settlement by the Indemnifying Party it may do
so at its sole cost and expense. If requested by the Indemnifying Party,
the Indemnified Party agrees to cooperate with the Indemnifying Party and
its counsel in contesting any claim or demand which the Indemnifying Party
elects to contest, or, if appropriate and related to the claim in question,
in making any counterclaim against the person asserting the third party
claim or demand, or any cross-complaint against any person. No claim for
which indemnity is sought hereunder may be settled without the consent of
the Indemnifying Party, which consent may not be unreasonably withheld.
12.4.2 COUNTERCLAIM NOTIFICATION. In the event any Indemnified
Party should have a claim against any Indemnifying Party hereunder which
does not involve a claim or demand being asserted against or sought to be
collected from it by a third party, the Indemnified Party shall give a
Claim Notice with respect to such claim to the Indemnifying Party within
the time limits of Section 12.34(i).
12.4.3 ACCESS TO BOOKS AND RECORDS. To the extent that LSAI may
claim indemnity against TWI hereunder, TWI agrees to give LSAI access to
the books, records of TWI in connection with the matters for which
indemnification is sought hereunder, to the extent LSAI reasonably deems
necessary in connection with the rights and obligations under this
Agreement. To the extent that TWI may claim indemnity against LSAI under
this Agreement, LSAI agrees to give TWI access to the books, records and
employees of LSAI in connection with the matters for which indemnification
is sought hereunder, to the extent TWI reasonably deems necessary in
connection with its rights and obligations under this Agreement.
12.5 TRANSITION ASSISTANCE. TWI agrees to provide LSAI and LSI with such
transition assistance and services for a period of thirty (30) days following
Closing as LSAI may reasonably request in order to provide for an orderly and
business-like transition of the ownership of the TWI Assets from TWI. LSAI
acknowledges and agrees that under certain laws and regulations, TWI will be
required to complete the testing of some or perhaps all of the urine samples in
TWI's possession or being transported to TWI at the time of the Closing. TWI
will deliver the frozen urine samples and records related thereto to LSAI for
LSAI to hold and maintain in accord with Section 2.5 when same are available.
12.6 USE OF NAME. For a period of not more than 180 days following the
Closing, TWI is authorized by LSAI to continue to use the name TOXWORX
Laboratories, Inc. for the sole purpose of collecting accounts receivable and
otherwise winding-up its business activities. If TWI does not fully liquidate
and dissolve as a corporation before or at the end of such period, TWI shall
change its name and, thereafter, no longer use the word "TOXWORX" in its name or
in any of its business activities.
12.7 NON-COMPETITION. (i) In order to induce LSAI to enter into this
Agreement, for a period of three (3) years from Closing, (i) TWI covenants
and agrees not to engage in any business similar to, or in any way
competitive with, that carried on by LSAI or LSI as constituted on the date
of this Agreement or LSAI within any county in any state in which TWI is
engaged in any such similar or competitive business ("Competitive Business")
(except pursuant to agreements with LSAI and LSI), (ii) TWI covenants and
agrees not to acquire any legal or beneficial interest in, or otherwise
participate in the ownership of any person, firm, corporation, partnership or
other entity or association which is or becomes engaged in a Competitive
Business, except ownership of less than one percent of a publicly traded
company shall be permissible, (iii) each of TWI and Labrosse covenants and
agrees not to (A) directly or indirectly solicit, canvass or otherwise
contact or accept any business or transaction from any present
13
<PAGE>
or former customer of TWI, or take any action which shall cause the
termination or curtailment of the business relationship between LSAI or LSI
and/or its successor or successors and any of their present or former
customers, including without limitation those customers constituting in whole
or in part the TWI Assets relating to a Competitive Business, and (B) to
directly or indirectly, without the prior written consent of LSAI, solicit,
entice, raid, persuade or induce any individual who at of the date of this
Agreement is, or at any time during such period shall be, an employee of
LSAI, LSI or LSAI Affiliate, or any of their respective successors, to
terminate or refrain from renewing or extending his or her employment with
LSAI or LSI or LSAI Affiliate, or any of their respective successors, except
this clause shall not apply to any such employee whose employment shall have
been terminated by TWI, LSAI, LSI or LSAI Affiliate or to become employed by
or enter into a contractual relationship with NPLI, LSAI, or any of their
Affiliates. This covenant and agreement is included herein in order to
protect the value of the TWI Assets being acquired by LSAI pursuant to this
Agreement and to assure that LSAI shall have the full benefit of the value
thereof. For purposes of this Agreement, One Million Two Hundred Thousand
Dollars of the purchase price of the TWI Assets as set forth in Section 2.2
of this Agreement shall be allocated to the covenants and agreements set
forth in this subsection (i) of this Section 12.7.
(ii) If any part of the restrictions set forth in Section 12.7 shall, for
any reason whatsoever, be declared invalid by a court of competent jurisdiction,
the validity or enforceability of the remainder of such restrictions shall not
thereby be adversely affected and shall be enforced to the fullest extent
permitted by law. If any of such restrictions are deemed to be unreasonable by a
court of competent jurisdiction, then TWI shall submit to the reduction or
modification of this Section 12.7 as said court deems reasonable, including
reduction of the purchase price as set forth in Section 2.2 of this Agreement
of the TWI Assets and as allocated to the covenants and agreements set forth
in this subsection (i) of this Section 12.9.
(iii) If TWI or Labrosse shall be in violation of the aforementioned
restrictive covenant and agreements in this Section 12.7, then in addition to
LSAI's other remedies, the time limitation thereof shall be extended for a
period of time equal to the period of time during which such violation occurred.
(iv) The NPLI Shareholders and LSAI agree that no portion of the Stock
Purchase Price and Goodwill Purchase Price shall be allocable to the
restrictive covenant and agreement as set forth in this Section 9.9.
(iv) The terms and provisions of this Section 12.7 are for the benefit of
LSAI and may be waived in whole or in part only in writing by LSAI.
12.8 INJUNCTIVE RELIEF. Each of TWI and Labrosse acknowledge that LSAI,
LSI and LSAI Affiliates would be irreparable damaged and that money damages and
any other remedy available at law would be inadequate to redress or remedy any
loss in the event that the provisions of Section 12.7 were not fully performed
in accordance with their specific terms or are otherwise breached, and each of
TWI and Labrosse, therefore, agrees that LSAI and its assigns, in addition to
recovering any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of Section 12.7 by injunction or specific
performance and may obtain may other appropriate remedy available in equity, and
that each of TWI and Labrosse hereby waives its or his right to assert and will
not assert in defense against such equitable claims that an adequate legal
remedy is available.
ARTICLE XIII
MISCELLANEOUS
13.1 EXPENSES. Except as otherwise provided herein, LSAI will pay its own
costs and expenses, and TWI 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.
14
<PAGE>
13.2 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
fifth (5th) 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:
15
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If to LSAI:
Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102
Attention: John Simonelli
Facsimile: (405) 232-9801
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 TWI:
TOXWORX Laboratories, Inc.
6160 Variel Avenue
Woodland Hills, California 91367
Attention: Kingsley Labrosse, Ph.D.
With copies to: Jane W. Carney, Esq.
Carney & Delany, LLP
3801 University Avenue, Suite 650
Riverside, CA 92501
Facsimile: (909) 682-6591
If to Labrosse:
Kingsley Labrosse, Ph.D.
1431 Redsail Circle
Westlake Village, California 91361
Facsimile: (805) 381-0056
With copies to: Jane W. Carney, Esq.
Carney & Delany, LLP
3801 University Avenue, Suite 650
Riverside, CA 92501
Facsimile: (909) 682-6591
13.3 ENTIRE AGREEMENT. This Agreement (including the Exhibit and Schedules
hereto 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.
13.4 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
16
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of the parties hereto or such successors or assigns and for the benefit of no
other person. Notwithstanding the foregoing, LSAI understands and agrees that
TWI intends to completely dissolve following the sale contemplated herein and
the orderly winding-up of the remainder of its business. The rights and
remedies of TWI hereunder may be assigned proportionally to the shareholders of
TWI upon dissolution of the Company.
13.5 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
TWI, 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.
13.6 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma applicable to contracts made
and to be performed within that State.
13.7 CONFIDENTIALITY. Prior to the consummation of the transactions
contemplated herein, TWI 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 TWI or LSAI, as the case may be,
prior to receipt from the other, (c) is lawfully received by TWI or LSAI, as the
case may be, from an unrelated third party after receipt of the same from the
other, (d) TWI or LSAI, as the case may be, is required by law to disclose, or
(e) TWI 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 TWI and LSAI shall return to the other all data obtained hereunder. The
provisions of this Section 13.7 is not intended to and shall not be construed to
amend, obviate, or in any way modify the obligations of LSAI under Section 5.2
above.
13.8 PUBLICITY. All press releases and other publicity concerning the
transactions contemplated herein shall be jointly planned and coordinated by and
between TWI 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.
13.9 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 single agreement.
13.10 TIME. Time is of the essence of this 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.
"TWI" TOXWORX LABORATORIES, INC.
By: /S/KINGSLEY LABROSSE
-------------------------------
Kingsley Labrosse
Chief Executive Officer
"Labrosse" /S/KINGSLEY LABROSSE
-----------------------------------
Kingsley Labrosse
"LSAI" LABORATORY SPECIALISTS OF
AMERICA, INC.
By: /S/JOHN SIMONELLI
-------------------------------
John Simonelli
Chief Executive Officer
17
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LIST OF SCHEDULES
Schedule 2.1 Description of TWI Assets
Appendix A - TWI Customer List
Exhibit IV Exceptions to TWI Warranties
18
<PAGE>
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Oklahoma City, Oklahoma,
July __, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF DUNN SWAN & CUNNINGHAM
Dunn & Swan, A Professional Corporation, hereby consents to the use of its
name under the heading "Legal Matters" in the Prospectus constituting a part of
this Registration Statement.
DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma,
July 2, 1998
<PAGE>
EXHIBIT 25.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that John Simonelli constitutes and
appoints Larry Howell and Michael E. Dunn, and each of them, his true and lawful
attorney-in-fact and agent, with all power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, including post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto same attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated July 2, 1998 /S/JOHN SIMONELLI
------------------------------
John Simonelli
<PAGE>
EXHIBIT 25.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Larry E. Howell constitutes and
appoints John Simonelli and Michael E. Dunn, and each of them, his true and
lawful attorney-in-fact and agent, with all power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 2, 1998 /S/LARRY E. HOWELL
-----------------------------
Larry E. Howell
<PAGE>
EXHIBIT 25.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Arthur R. Peterson, Jr.
constitutes and appoints John Simonelli, Larry E. Howell and Michael E. Dunn,
and each of them, his true and lawful attorney-in-fact and agent, with all power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 2, 1998 /S/ARTHUR R. PETERSON, JR.
-----------------------------
Arthur R. Peterson, Jr.
<PAGE>
EXHIBIT 25.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Robert A. Gardebled, Jr.
constitutes and appoints John Simonelli, Larry E. Howell and Michael E. Dunn,
and each of them, his true and lawful attorney-in-fact and agent, with all power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 2, 1998 /S/ROBERT A. GARDEBLED, JR.
-----------------------------
Robert A. Gardebled, Jr.
<PAGE>
EXHIBIT 25.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Jerome P. Welch constitutes and
appoints John Simonelli, Larry Howell and Michael E. Dunn, and each of them, his
true and lawful attorney-in-fact and agent, with all power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto same attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated July 2, 1998 /S/JEROME P. WELCH
-----------------------------
Jerome P. Welch
<PAGE>
EXHIBIT 25.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Michael E. Dunn constitutes and
appoints John Simonelli and Larry Howell, and each of them, his true and lawful
attorney-in-fact and agent, with all power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, including post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto same attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated July 2, 1998 /S/MICHAEL E. DUNN
-----------------------------
Michael E. Dunn
