<PAGE>
As filed with the Securities and Exchange Commission on September 1, 1998
Registration No. 333-58473
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
LABORATORY SPECIALISTS OF AMERICA, INC.
(Name of small business issuer in its charter)
OKLAHOMA 8734 73-1451065
(State or other (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)
---------------------------
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
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 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, 716,650 shares are being offered for
resale by the holders thereof after giving effect to exercise of the Jesup &
Lamont Group Warrants. 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 August 31, 1998, the closing sale price of the Common Stock was $3.50.
------------------------
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS PROCEEDS TO
PRICE TO DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS COMPANY SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share underlying Jesup & Lamont
Group Warrants . . . . . . . . . . . . . . . . . . . $5.40 -- $5.40(1) $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Per share . . . . . . . . . . . . . . . . . . . . . . . . $3.50 -- -- $ 3.50
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . -- $299,819 $2,508,275(2)
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
-2-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. 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 DOES NOT GIVE EFFECT TO (i) EXERCISE OF THE JESUP & LAMONT GROUP
WARRANTS (ii) THE PURCHASE OF CERTAIN INTANGIBLE ASSETS OF TOXWORX
LABORATORIES, INC. ON JULY 1, 1998 AND (iii) THE EXERCISE OF WARRANTS FOR
THE PURCHASE OF 98,572 SHARES OF COMMON STOCK AFTER JUNE 30, 1998 FOR NET
PROCEEDS TO THE COMPANY OF $216,858. SEE "THE COMPANY--BACKGROUND--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.
-3-
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
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......................... 716,650 shares.
Common Stock outstanding.............................. 5,701,018 shares of Common Stock as of the date of this Prospectus;
5,756,540 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>
- ------------------------
(1) Excludes (i) outstanding stock options and warrants on the date of
this Prospectus to purchase 178,486 shares of Common Stock at a
weighted average exercise price of $2.94 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 615,000
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."
-4-
<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 six months ended June 30, 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 six
months ended June 30, 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
six months ended June 30, 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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- -----------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................................. $12,836,953 $8,726,799 $7,659,764 $6,010,982
Cost of laboratory services............................... 5,828,665 3,816,114 3,462,846 2,659,857
----------- ---------- ---------- ----------
Gross profit.............................................. 7,008,288 4,910,685 4,196,918 3,351,125
Operating expenses........................................ 4,574,669 3,673,201 2,603,892 2,208,347
Other income (expense).................................... (151,252) (21,808) 31,872 (70,919)
----------- ---------- ---------- ----------
Income from continuing operations
before income taxes................................... 2,282,367 1,215,676 1,624,898 1,071,859
Income tax expense........................................ 953,264 527,171 670,592 449,243
----------- ---------- ---------- ----------
Income from continuing operations......................... 1,329,103 688,500 954,306 622,616
----------- ---------- ---------- ----------
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) $ 954,306 $ 622,616
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Basic earnings per common share:
Weighted average number of common
stock shares outstanding.......................... 3,693,146 3,309,594 5,018,523 3,313,405
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations................................. $ .36 $ .21 $ .19 $ .19
Discontinued operation................................ -- (.39) -- --
----------- ---------- ---------- ----------
Total............................................. $ .36 $ (.18) $ .19 $ .19
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average number of common
stock shares and common stock equivalents
outstanding....................................... 4,325,618 3,954,787 5,381,554 3,834,644
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations................................. $ .31 $ .17 $ .18 $ .16
Discontinued operation................................ -- (.32) -- --
----------- ---------- ---------- ----------
Total............................................. $ .31 $ (.15) $ .18 $ .16
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------
1997 1996 1998
----------- ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA(1)
Current assets................................................. $ 5,702,984 $ 3,194,480 $ 8,028,281
Working capital................................................ 3,305,983 1,002,712 4,872,894
Total assets................................................... 15,016,580 9,394,808 17,953,038
Current debt obligations....................................... 1,164,854 1,312,650 1,145,605
Long-term debt, net of current portion......................... 2,353,428 1,245,690 1,730,909
Stockholders' equity........................................... 9,906,303 5,650,250 12,706,894
</TABLE>
- ------------------------
(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."
-5-
<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 the six-month
period ended June 30, 1998, and during each of the years ended December 31,
1997 and December 31, 1996, declined 3.2 percent, 2.0 percent and 4.7 percent,
respectively, compared to the preceding period or 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."
-6-
<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 six
months ended June 30, 1998, the price per specimen decreased 2.0 percent,
4.7 percent and 3.2 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
-7-
<PAGE>
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
-8-
<PAGE>
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, 1,020,906
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 793,486 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
-9-
<PAGE>
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
-10-
<PAGE>
Promissory Note was paid in March 1998. 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
34,000 Units (68,000 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 face amount of $638,000, were issued and delivered to
the NPLI Shareholders, and NPLI conveyed to the NPLI shareholders an office
building and NPLI's leasehold interest in the real property on which the
office building is located and affixed at an agreed market value of $75,000,
and (ii) $140,000 for the NPLI Goodwill payable in 24 monthly installments
commencing on February 1, 1996.
Pursuant to the NPLI Purchase Agreement, the aggregate principal amount
of the Promissory Notes was reduced to $510,000 effective January 2, 1996,
further reduced by principal payments, and 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
-11-
<PAGE>
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 (the "Barber & Bronson Group Warrants"), and paid Barber & Bronson
Incorporated aggregate fees of $190,829. As of the date of this Prospectus, a
portion of the Baron Chase Group Warrants have been exercised for the
purchase of 32,000 units (64,000 shares of Common Stock) and the Company
received net proceeds of $230,400 and a portion of the Barber and Bronson
Group Warrants have been exercised for the purchase of 98,572 shares of
Common Stock and the Company received net proceeds of $216,858.
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 base 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 six years. A penalty, in the form of warrants representing five percent
the shares of Common Stock sold pursuant to the
-12-
<PAGE>
1998 Private Offering applies for each 30-day period in which LABZ fails to
file or obtain effectiveness of the registration statement on or before
September 2, 1998. 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 June 30, 1998, the outstanding principal
amount of this loan was $668,208, 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 8.5%
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 -- --
Holders of Jesup & Lamont Group Warrants(1):
Gary B. Davis . . . . . . . . . . . . . . . . . . 11,500 11,500 -- --
George R. Hoos . . . . . . . . . . . . . . . . . . 1,500 1,500 -- --
Eileen Sena. . . . . . . . . . . . . . . . . . . . 1,500 1,500 -- --
Joan L. Morgen . . . . . . . . . . . . . . . . . . 7,000 7,000 -- --
Gilard Ottensoser . . . . . . . . . . . . . . . . 1,000 1,000 -- --
Peter Stern. . . . . . . . . . . . . . . . . . . . 2,500 2,500 -- --
Jessup & Lamont Securities Corporation . . . . . . 14,022 14,022 -- --
Ron Furman . . . . . . . . . . . . . . . . . . . . 4,000 4,000 -- --
John Z. Rigos . . . . . . . . . . . . . . . . . . 3,000 3,000 -- --
Samuel Gordon . . . . . . . . . . . . . . . . . . 2,000 2,000 -- --
Susan Sweet . . . . . . . . . . . . . . . . . . . 2,500 2,500 -- --
Howard F. Curd . . . . . . . . . . . . . . . . . . 5,000 5,000 -- --
</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.
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 August 31, 1998, the closing sale price of the Common Stock, as quoted
on Nasdaq SmallCap Market, was $3.50. As of the date of this Prospectus,
there are 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
JUNE 30,
1998(1)
-----------
<S> <C>
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $535,531
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . 1,730,909
Stockholders' equity:
Common Stock, $.001 par value, 20,000,000 shares authorized;
5,602,446 shares issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . 5,602
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . 10,136,973
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,564,319
-----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,706,894
-----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,973,334
-----------
-----------
</TABLE>
- ------------------------
(1) Gives no effect to (i) the exercise of stock options and warrants after
June 30, 1998, (ii) the exercise of the Jesup & Lamont Group Warrants,
(iii) the exercise of the outstanding stock options granted under the
1994 Option Plan and the 1997 Option Plan exercisable for the purchase
of 615,000 shares of Common Stock, and (iv) the exercise of the other
outstanding stock options and warrants exercisable for the purchase of
178,486 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 six months ended June 30, 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 SIX MONTHS ENDED
DECEMBER 31 , JUNE 30,
------------------------- --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . $12,836,953 $8,726,799 $ 7,659,764 $ 6,010,982
Cost of laboratory services . . . . . . . . . . . 5,828,665 3,816,114 3,462,846 2,659,857
----------- ---------- ----------- -----------
Gross profit. . . . . . . . . . . . . . . . . 7,008,288 4,910,685 4,196,918 3,351,125
Operating expenses:
Selling expenses. . . . . . . . . . . . . . . . 654,284 601,945 424,932 292,095
General and administrative. . . . . . . . . . . 3,230,117 2,442,602 1,786,052 1,599,080
Depreciation and amortization . . . . . . . . . 690,268 504,123 392,908 317,172
Asset impairment. . . . . . . . . . . . . . . . -- 124,531 -- --
----------- ---------- ----------- -----------
Total operating expenses. . . . . . . . . . . 4,574,669 3,673,201 2,603,892 2,208,347
----------- ---------- ----------- -----------
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . (230,433) (67,185) (98,438) (90,484)
Interest income . . . . . . . . . . . . . . . . 78,035 41,208 77,823 19,493
Other income. . . . . . . . . . . . . . . . . . 1,146 4,169 52,487 72
----------- ---------- ----------- -----------
Total other (expense) income. . . . . . . . . (151,252) (21,808) 31,872 (70,919)
----------- ---------- ----------- -----------
Income from operations before income taxes. . 2,282,367 1,215,676 1,624,898 1,071,859
Income tax expense. . . . . . . . . . . . . . . . 953,264 527,171 670,592 449,243
----------- ---------- ----------- -----------
Income from continuing operations . . . . . . 1,329,103 688,505 954,306 622,616
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) $954,306 $622,616
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Basic earnings per common share:
Weighted average number of common stock
shares outstanding. . . . . . . . . . . . . . 3,693,146 3,309,594 5,018,523 3,313,405
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations . . . . . . . . . . . . $.36 $.21 $.19 $.19
Discontinued operation. . . . . . . . . . . . -- (.39) -- --
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . $.36 $(.18) $.19 $.19
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average number of common stock
shares and common stock equivalents
outstanding . . . . . . . . . . . . . . . . . 4,325,618 3,954,787 5,381,554 3,834,644
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations . . . . . . . . . . . . $.31 $.17 $.18 $.16
Discontinued operation. . . . . . . . . . . . -- (.32) -- --
----------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . $.31 $(.15) $.18 $.16
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
CASH FLOW DATA:
Net cash provided by operating activities . . . . $1,654,806 $472,801 $1,049,111 $ 928,758
Net cash used in investing activities . . . . . . (3,644,741) (1,402,328) (884,566) (2,413,655)
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31 , JUNE 30,
------------------------- --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . . 4,126,193 (754,143) 1,748,685 1,460,673
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1996 1998
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (1):
Current assets. . . . . . . . . . . . . . . . . . $ 5,702,984 $ 3,194,480 $ 8,028,281
Working capital . . . . . . . . . . . . . . . . . 3,305,983 1,002,712 4,872,894
Total assets. . . . . . . . . . . . . . . . . . . 15,016,580 9,394,808 17,953,038
Current debt obligations. . . . . . . . . . . . . 1,164,854 1,312,650 1,145,605
Long-term debt, net of current portion. . . . . . 2,353,428 1,245,690 1,730,909
Stockholders' equity. . . . . . . . . . . . . . . 9,906,303 5,650,250 12,706,894
</TABLE>
- ------------------------
(1) Gives no effect to (i) the exercise of stock options and warrants after
June 30, 1998, (ii) the exercise of the Jesup & Lamont Group Warrants,
(iii) the exercise of the outstanding stock options granted under the 1994
Option Plan and the 1997 Option Plan exercisable for the purchase of
615,000 shares of Common Stock, and (iv) the exercise of other outstanding
stock options and warrants exercisable for the purchase of 178,486 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 six months ended
June 30, 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 SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ------------------------------------------
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% $7,659,764 100.0% $6,010,982 100.0%
Cost of laboratory services . . . . 5,828,665 45.4% 3,816,114 43.7% 3,462,846 45.2% 2,659,857 44.2%
----------- ------ ---------- ------ ---------- ----- ---------- -----
Gross profit. . . . . . . . . . . . 7,008,288 54.6% 4,910,685 56.3% 4,196,918 54.8% 3,351,125 55.8%
----------- ------ ---------- ------ ---------- ----- ---------- -----
Operating expenses:
Selling . . . . . . . . . . . . . 654,284 5.0% 601,945 6.9% 424,932 5.6% 292,095 4.9%
General and administrative. . . . 3,230,117 25.2% 2,442,602 28.0% 1,786,052 23.3% 1,599,080 26.6%
Depreciation and
amortization . . . . . . . . . . 690,268 5.4% 504,123 5.8% 392,908 5.1% 317,172 5.3%
Asset impairment. . . . . . . . . -- -- % 124,531 1.4% -- -- -- --
. ----------- ------ ---------- ------ ---------- ----- ---------- -----
Total operating expenses. . . . . . 4,574,669 35.6% 3,673,201 42.1% 2,603,892 34.0% 2,208,347 36.8%
----------- ------ ---------- ------ ---------- ----- ---------- -----
2,433,619 19.0% 1,237,484 14.2% 1,593,026 20.8% 1,142,778 19.0%
----------- ------ ---------- ------ ---------- ------ ---------- ------
Other income (expense). . . . . . . (151,252) 1.2% (21,808) .3% 31,872 0.4% (70,919) 1.2%
----------- ------ ---------- ------ ---------- ------ ---------- ------
Income from continuing
operations before income
taxes . . . . . . . . . . . . . 2,282,367 17.8% 1,215,676 13.9% 1,624,898 21.2% 1,071,859 17.8%
Income tax expense. . . . . . . . . 953,264 7.4% 527,171 6.0% 670,592 8.8% 449,243 7.5%
----------- ------ ---------- ------ ---------- ------ ---------- ------
Income from continuing
operations. . . . . . . . . . . . 1,329,103 10.4% 688,505 7.9% 954,306 12.4% 622,616 10.3%
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% $954,306 12.4% $ 622,616 10.3%
----------- ------ ---------- ------ ---------- ------ ---------- ------
----------- ------ ---------- ------ ---------- ------ ---------- ------
Basic earnings per common share:
</TABLE>
-18-
<PAGE>
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ------------------------------------------
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 5,018,523 3,313,405
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Continuing operations . . . . . .36 .21 $.19 $.19
Discontinued operation. . . . . -- (.39) -- --
----------- ----------- ----------- -----------
Total . . . . . . . . . . . $.36 $(.18) $.19 $.19
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per
common share:
Weighted average number
of common stock and common
stock equivalents
outstanding . . . . . . . . . 4,325,618 3,954,787 5,381,554 3,834,644
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Continuing operations . . . . . .31 .17 $.18 $.16
Discontinued operation. . . . . -- (.32) -- --
----------- ----------- ----------- -----------
Total . . . . . . . . . . . $.31 $(.15) $.18 $.16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
During each of the fiscal years ended December 31, 1997 and 1996, and
the six months ended June 30, 1998, LSI experienced a 2.0 percent, 4.7
percent and 3.2 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 six months ended June 30, 1998, the number of specimens analyzed
increased 51.6 percent, 34.5 percent and 31.1 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 AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
Revenues increased to $7,659,764 in the six months ended June 30, 1998
(the "1998 Interim Period"), from $6,010,982 in the six months ended June 30,
1997 (the "1997 Interim Period"), an increase of 27.4 percent. Revenues
increased to $4,088,156 in the three months ended June 30, 1998 (the "1998
Second Quarter"), from $3,423,760 in the three months ended June 30, 1997
(the "1997 Second Quarter"), and increase of 19.4 percent. The increase in
revenues was due to a 31.1 percent and 21.4 percent increase, respectively,
in the number of specimens analyzed during the 1998 Interim Period as
compared to the 1997 Interim Period and the 1998 Second Quarter as compared
to the 1997 Second Quarter, although partially offset by a decrease of 3.2
percent and 2.4 percent, respectively, in the average price per specimen.
The increase in number of specimens analyzed was attributable to the
Accu-Path and HLI Asset Purchases 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 $802,989 from $2,659,857 in the 1997 Interim
Period to $3,462,846 in 1998 Interim Period and $313,792 from $1,473,773 in
the 1997 Second Quarter to $1,787,565 in the 1998 Second Quarter, increases
of 30.2 percent and 21.3 percent, respectively. Gross profit on revenues
decreased as a percentage of revenues from 55.8 percent in the 1997 Interim
Period to 54.8 percent in 1998 Interim Period and from 57.0 percent in the
1997 Second Quarter to 56.3 percent in the 1998 Second Quarter. The decrease
was primarily due to the decrease in the price per specimen.
Operating expenses increased from $2,208,347 in the 1997 Interim Period
to $2,603,892 in the 1998 Interim Period and from $1,239,753 in the 1997
Second Quarter to $1,362,106 in the 1998 Second Quarter, increases of 17.9
percent and 9.9 percent respectively, and decreased as a percentage of
revenues from 36.8 percent to 34.0 percent and 36.2 percent to 33.3 percent,
respectively. The increase in operating expenses was attributable to the
increase in selling expenses of $132,837 for the Interim Period and $68,552
for the Second Quarter, general and administrative expenses of $186,972 for
the Interim Period and $29,560 for the Second Quarter and depreciation and
amortization of $75,736 for the Interim Period and $24,241 for the Second
Quarter. The increase in general and administrative expenses was principally
the 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, Accu-Path and HLI Asset Purchases.
The increase in selling expenses was due to several additions to the sales
force during late 1997 and early 1998, to assist in maintaining forensic
clients acquired as part of the PLL, Accu-Path and HLI Asset Purchases, as
well as additional business development in other areas of the United States.
Depreciation increased due to the renovation of the new laboratory and
purchase of additional equipment at LSI, while amortization increased due to
the customer list acquisitions from PLL, Accu-Path and HLI and the
amortization of the purchase price of such customer lists.
-19-
<PAGE>
Income from operations increased from $1,142,788 in the 1997 Interim
Period to $1,593,026 in the 1998 Interim Period, a 39.4 percent increase, and
from $710,234 in the 1997 Second Quarter to $938,485 in the 1998 Second
Quarter, a 32.1 percent increase. Operating income increased as a percentage
of revenues from 19.0 percent to 20.8 percent in the Interim Period and from
20.8 percent to 23.0 percent in the Second Quarter.
Interest expense increased 8.8 percent from $90,484 in the 1997 Interim
Period to $98,438 in 1998 Interim Period, but decreased 2.5 percent from
53,608 in the 1997 Second Quarter to $52,294 in the 1998 Second Quarter. The
overall increase in interest expense was due to obtaining bank loans during
1997 associated with the PLL Asset Purchase and the purchase and renovation
of the new laboratory building, while partially offset by a decrease late in
the first quarter of 1998 related to the repayment in full of the note
payable to MBf USA, Inc. Interest income increased from $19,493 in the 1997
Interim Period to $77,823 in the 1998 Interim Period, a 299.2 percent
increase, and from $7,840 in the 1997 Second Quarter to $40,656 in the 1998
Second Quarter, a 418.6 percent increase. These increases were due to
additional funds on deposit primarily from the exercise of stock warrants
late in 1997 and the 1998 Private Offering during the second quarter of 1998.
Other income increased from $72 in the 1997 Interim Period to $52,487 in the
1998 Interim Period and from ($231) in the 1997 Second Quarter to $12,554 in
the 1998 Second Quarter. The increase in other income is primarily due to a
one-time gain realized due to the early payout of the note payable to MBf
USA, Inc. in addition to the recovery of bad debts previously written off.
Net income, after provision for income taxes, increased from $622,616 in the
1997 Interim Period to $954,306 in the 1998 Interim Period, a 53.3 percent
increase, and from $388,613 in the 1997 Second Quarter to $552,746 in the
1998 Second Quarter, a 42.2 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
-20-
<PAGE>
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
former 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
-21-
<PAGE>
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, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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
-22-
<PAGE>
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 40 percent in the six months
ended June 30, 1998, 42 percent in 1997 and 43 percent for 1996. The
provisions for income taxes were $670,592, $953,264 and $527,171 for the six
months ended June 30, 1998 and years ended December 31, 1997 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1,049,111 in the
six months ended June 30, 1998, and $928,758 in the six months ended June 30,
1997. As of June 30, 1998, LSAI had working capital of $4,872,894, 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
$4,776,869 at June 30, 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 June 30, 1998,
the outstanding capital lease obligation was $379,898.
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. On August 25, 1998, the
one-year revolving loan was renewed for two-years and increased to
$1,000,000. As of June 30, 1998, the outstanding principal amount of the
five-year term loan was $1,218,333. Advances on the revolving loan are based
upon LSI maintaining certain ratios and compliance with the covenants of the
loan agreement and LSI's liquid assets including its accounts receivable.
The outstanding principal amount of the revolving loan bears interest at the
Citibank, N.A. rate (which was nine percent at June 30, 1998) plus up to one
percent and the term
loan bears interest at such rate plus one-half percent. The loans are
secured by the accounts receivable, intangible assets, and by a mortgage on
the building owned by LSI, and is guaranteed by
-23-
<PAGE>
LSAI. The loan agreement contains various covenants, including certain
financial ratios, all of which the Company was in full compliance with as of
June 30, 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 located. 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 June 30, 1998, the
outstanding principal balance amount of such loan was approximately $668,208.
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 $360,000.
As of June 30, 1998, total payments of $90,151 have been recorded for the
first two quarterly installments 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 $533,855. The estimated gross revenues attributable to the customer
base, for the year ended December 31, 1997, was approximately $960,000. As of
June 30, 1998, no installment payments have been made related to the HLI Asset
Purchase; however, an account receivable of $33,855 owed by HLI to LSI was
offset against the installment obligation.
On June 26, 1998, 480,000 stock options were exercised by certain
officers of the Company. Pursuant to the 1994 Option Plan and 1997 Option
Plan and the terms of the exercised options, the exercise price of the
options and the payroll taxes associated with the exercise of the options
were paid to the Company in the form of previously issued fully mature shares
of Common Stock of the Company. As a result of the exercise, 105,906
additional shares of Common Stock were issued on June 26, 1998, and the
Company paid approximately $478,962 in related payroll taxes on July 16,
1998. The payroll taxes were accrued as part of the payroll tax liability on
the balance sheet as of June 30, 1998.
On July 1, 1998, the Company completed the TLI Asset Purchase. In
connection with the TLI Asset Purchase, the Company paid $2,400,000 at
closing. The purchase price of the acquired customer list was recorded as an
intangible asset, which is being amortized over 15 years. See "The
Company--Background--TLI 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 June 30, 1998, the unamortized portion of the goodwill and
the
-24-
<PAGE>
customer lists was $2,271,859 and $5,217,751, 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
-25-
<PAGE>
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
-26-
<PAGE>
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
-27-
<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.
-28-
<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, possibly including infection from AIDS and hepatitis, if
appropriate laboratory practices are not followed. Although no infections of
this type have been reported in LSI's history, no assurance can be provided that
such infections will not occur in the future. In the ordinary course of its
business, LSI from time to time is sued by individuals who have tested positive
for drugs of abuse. To date, LSI has not experienced any material liability
related to these claims, although there can be no assurance that LSI will not at
-29-
<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.
-30-
<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 July 31, 1998, LABZ had three full-time employees, and LSI had
approximately 110 full-time and 40 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
-31-
<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. . . . . . . . . . . . . . . . . . . 51 Chairman of the Board, Chief
Executive Officer, Secretary,
and Director
Larry E. Howell. . . . . . . . . . . . . . . . . . 51 President and Chief Operating Vice President and Director
Officer, and Director
Arthur R. Peterson, Jr. . . . . . . . . . . . . . . 52 Treasurer and Director President and Chief Executive
Officer, and Director
Robert A. Gardebled, Jr. . . . . . . . . . . . . . 33 Director Controller, Secretary and
Director
Jerome P. Welch . . . . . . . . . . . . . . . . . . 60 Director --
Michael E. Dunn . . . . . . . . . . . . . . . . . . 52 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
-32-
<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.
-33-
<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
-34-
<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 July 16, 1998, each of 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 $152,500, (iii) bonuses equal to one
percent of the net income of LSI before income taxes and such other 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 July 16, 1998, 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 $165,000, (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
-35-
<PAGE>
and ISO Options to purchase 40,000 shares at an exercise price of $3.94 per
share (exercisable after April 17, 1999 and on or before July 20, 2008) have
been granted under the Plan, of which 190,000 NSO Options have been
exercised.
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 shares 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. On July 20, 1998, the Board of Directors approved an
amendment to the 1997 Option Plan which increased the total number of shares
of Common Stock authorized and reserved for issuance to 800,000 subject to
shareholder approval at the next shareholders meeting to the extent required
pursuant to the Governance Rules of Nasdaq Stock Market, Inc. 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. On
July 20, 1998, options exercisable for the purchase of 490,000 shares of
Common Stock were granted with an exercise price of $4.25 per share. In the
event the amendment to the 1997 Option Plan is not approved by the
shareholders as mentioned above, the number of shares purchasable pursuant to
exercise will be reduced to 55,000 shares.On August 17, 1998, these Options
were amended which reduced the exercise price to $3.94 per share and provided
that such Options become exercisable on or after April 17, 1999 and expire on
July 20, 2008.
The Board of Directors (the "Board") administers the Plan and has the
authority to interpret and construe the Plan, and determine all questions
arising under the Plan and any agreement made pursuant to the Plan. 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
-36-
<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
-37-
<PAGE>
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 John Simonelli and Larry E. 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."
On July 20, 1998, the Company granted non-qualified stock options
under the 1997 Option Plan to each of John Simonelli, Larry E. Howell
and Arthur R. Peterson Jr. exercisable for the purchase of 160,000
shares of Common Stock, and to each of Jerome P. Welch and Michael E. Dunn
exercisable for the purchase of 5,000 shares of Common Stock after January
20, 1999 and before July 20, 2008. Furthermore, the Company granted ISO
Options under the 1994 Option Plan to Robert A. Gardebled, Jr. exercisable
for the purchase of 10,000 shares of Common Stock. On August 17, 1998, these
stock options were amended to reduce the per share exercise price from $4.25
to $3.94 and to provide that such option will become exercisable after April
17, 1999. With respect to each stock option granted to Messrs. Simonelli,
Howell and Peterson, unless the amendment increasing the number of authorized
and reserved shares of Common Stock under the 1997 Plan is approved by the
shareholders, to the extent required under the Governance Rules of the Nasdaq
Stock Market, Inc., the number of shares purchasable pursuant to such stock
option will be reduced to 15,000 each.
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 9.2% 35,472 490,000 8.5%
John Simonelli............................................ 235,217 4.1% 35,217 200,000 3.5%
Larry E. Howell........................................... 235,217 4.1% 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 19.1% 105,906 985,000 17.2%
</TABLE>
-38-
<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 5,701,018
shares of Common Stock outstanding before the Offering and 5,756,540
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
716,650 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
5,701,018 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.
-39-
<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
-40-
<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 for the purchase of
40,000 shares of Common Stock at $3.94 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 and exercisable after
April 16, 1999 and on or before July 20, 2008, for the purchase of 490,000
shares at $3.94 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 163,486 shares of Common Stock at $2.20 to $3.60
per share (with a weighted average exercise price of $3.03), 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 5,701,018 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
5,756,540 shares of Common Stock and outstanding stock options and warrants
exercisable for the purchase of 793,486 shares 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 716,650 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 June 30, 1998 (Unaudited) . . . . . . . . . . F-2
Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 1997 and 1998. . . . . . . . . F-4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 and 1998 . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . F-6
Report of Independent Public Accountants . . . . . . . . . . . . . . F-9
Consolidated Balance Sheets, December 31, 1997 and 1996. . . . . . . F-10
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . F-12
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995. . . . . . . . . . F-13
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . F-14
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-15
F-1
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,863,639 $4,776,869
Accounts receivable, net of allowance of $568,237 in
1997 and $494,989 in 1998 2,262,990 2,860,074
Income tax refund receivable 190,498 --
Inventories 109,929 72,172
Prepaid expenses and other 115,219 158,457
Deferred tax asset 160,709 160,709
----------- -----------
Total current assets 5,702,984 8,028,281
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,123,909 in 1997 and $1,281,817 in 1998 2,376,885 2,390,096
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $272,148 in
1997 and $316,592 in 1998 2,316,302 2,271,859
Customer lists, net of accumulated amortization of $518,105
in 1997, and $695,913 in 1998 4,587,814 5,217,751
Deferred costs 32,595 45,051
----------- -----------
Total other assets 6,936,711 7,534,661
----------- -----------
Total assets $15,016,580 $17,953,038
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 742,292 $ 871,128
Accrued income tax -- 95,559
Accrued payroll expense 411,364 974,202
Other accrued expenses 78,491 68,893
Accrued customer list installment payments 510,345 595,994
Obligations related to discontinued operations 126,813 14,080
Current portion of long-term debt. 527,696 535,531
----------- -----------
Total current liabilities 2,397,001 3,155,387
----------- -----------
LONG-TERM DEBT, net of current portion 2,353,428 1,730,909
----------- -----------
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 5,602,446 shares
issued and outstanding at 6/30/98 4,925 5,602
Paid in capital in excess of par 8,291,365 10,136,973
Retained earnings 1,610,013 2,564,319
----------- -----------
Total stockholders' equity 9,906,303 12,706,894
----------- -----------
Total liabilities and stockholders' equity $15,016,580 $17,953,038
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
F-3
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 3,423,760 $ 4,088,156 $ 6,010,982 $ 7,659,764
COST OF LABORATORY SERVICES 1,473,773 1,787,565 2,659,857 3,462,846
----------- ----------- ----------- -----------
GROSS PROFIT 1,949,987 2,300,591 3,351,125 4,196,918
----------- ----------- ----------- -----------
OPERATING EXPENSES:
SELLING 159,966 228,518 292,095 424,932
GENERAL AND ADMINISTRATIVE 903,464 933,024 1,599,080 1,786,052
DEPRECIATION AND AMORTIZATION 176,323 200,564 317,172 392,908
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,239,753 1,362,106 2,208,347 2,603,892
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 710,234 938,485 1,142,778 1,593,026
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (53,608) (52,294) (90,484) (98,438)
INTEREST INCOME 7,840 40,656 19,493 77,823
OTHER INCOME (231) 12,554 72 52,487
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (45,999) 916 (70,919) 31,872
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 664,235 939,401 1,071,859 1,624,898
INCOME TAX EXPENSE 275,622 386,655 449,243 670,592
----------- ----------- ----------- -----------
NET INCOME $ 388,613 $ 552,746 $ 622,616 $ 954,306
----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
SHARES OUTSTANDING 3,313,405 5,110,538 3,313,405 5,018,523
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON STOCK SHARE $ .12 $ .11 $ .19 $ .19
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
SHARES AND COMMON STOCK EQUIVALENTS
SHARES OUTSTANDING 3,766,454 5,470,042 3,834,644 5,381,554
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON STOCK AND
COMMON STOCK EQUIVALENTS $ .10 $ .10 $ .16 $ .18
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 622,616 $ 954,306
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 317,172 392,908
Provision for bad debts and other 40,000 --
Gain from extinguishment of long-term debt -- (38,122)
Impact of changes in assets and liabilities:
Accounts receivable (627,671) (630,939)
Income tax refund receivable 241,243 190,498
Inventories 24,384 37,757
Prepaid expenses and other 53,759 (43,238)
Income tax payable -- 95,559
Accounts payable and accrued expenses 257,255 90,382
----------- -----------
Net cash provided by operating activities 928,758 1,049,111
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (481,957) (183,870)
Purchase of PLL Customer List (1,894,184) (42,033)
Purchase of Accu-Path Customer List -- (92,692)
Purchase of Harrison Customer List -- (553,515)
Acquisition costs (37,514) (12,456)
----------- -----------
Net cash used in investing activities (2,413,655) (884,566)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings (11,667) --
Payments on long-term borrowings (199,533) (576,562)
Proceeds from long-term borrowings 1,682,293 --
Proceeds from exercise of warrants and stock options -- 49,400
Proceeds from private offering -- 2,275,847
Warrant offering costs (10,420) --
----------- -----------
Net cash provided by financing activities 1,460,673 1,748,685
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,224) 1,913,230
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 727,381 2,863,639
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 703,157 $ 4,776,869
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 90,484 $ 110,573
----------- -----------
----------- -----------
Cash paid during the period for income taxes $ 190,000 $ 384,535
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997,
AND JUNE 30, 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 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. Diluted earnings per
share also reflect the dilutive effect, if any, of the conversion of stock
options, outstanding warrants and contingent shares. In the diluted earnings
per share calculation the outstanding warrants were calculated using the
weighted average market price during the term of the warrants.
Income from continuing operations for purposes of computing both basic earnings
per share and diluted earnings per share was $552,746 and $388,613 for the
three months ended June 30, 1998 and 1997, respectively, and $954,306 and
$622,616 for the six months ended June 30, 1998 and 1997, respectively. A
reconciliation of the average shares outstanding used to compute basic earnings
per share to the shares used to compute diluted earnings per share for both
periods is presented below:
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average shares outstanding-basic 5,110,538 3,313,405 5,018,523 3,313,405
Dilutive effect of stock options 263,698 47,571 268,107 58,429
Dilutive effect of warrants 95,806 251,174 94,924 308,506
Dilutive effect of contingent shares related
to NPL purchase -- 154,304 -- 154,304
--------- --------- --------- ---------
Average shares outstanding assuming dilution 5,470,042 3,766,454 5,381,554 3,834,644
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-6
<PAGE>
3. GOODWILL AND CUSTOMER LISTS
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 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 to protect itself against such liability, and LSIs
insurance carriers have assumed the defense of LSI in connection with certain
actions, the extent of such insurance coverage is limited, both in terms of
types of risks covered by the policies and the amount of coverage. In the
opinion of the Company's management and it's legal counsel, these suits and
claims should not result in judgments or settlements which would have a
material adverse effect on the Company's results of operations or financial
position. Although LSI has not experienced any material liability related to
such claims, there can be no assurance that LSI, and possibly LSAI, will not at
some time in the future experience significant liability in connection with
such claims and such liability may exceed the extent of such insurance
coverage, both in terms of risks covered by the policies and the amount of
coverage, which could have a material adverse effect upon the results of
operations and financial condition of the Company.
5. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the purchase of assets from Pathology Laboratories, Ltd.
("PLL"), a liability of $960,000 was recorded based upon estimated future
quarterly installment payments to be made to PLL. As of June 30, 1998, all
installment payments, totaling $751,688 had been made and the remaining balance
of the liability, approximately $208,312, was treated as a reduction in the
carrying value of the PLL customer list since it will not be paid pursuant to
the purchase agreement.
In connection with the purchase of assets from Accu-Path Medical Laboratory,
Inc. ("Accu-Path"), a liability of $260,000 was recorded based upon estimated
future quarterly installment payments to be made to Accu-Path. As of June 30,
1998, the first and second installment payments, totaling $90,151, had been
made, with two quarterly installment payments to be made.
F-7
<PAGE>
In connection with the purchase of assets from Harrison Laboratories, Inc.
("HLI"), a liability of $460,000 was recorded based upon the estimated future
payment obligation. As of June 30, 1998, no payments have been made on this
liability; however, a $33,855 reduction was recorded as a result of the offset
of an account receivable owed to Laboratoary Specialists, Inc. by HLI.
The above transactions, except the reductions in the liability owed to PLL,
Accu-Path and HLI, are non-cash transactions and have been excluded from the
accompanying statements of cash flows.
6. SUBSEQUENT EVENTS
On July 1, 1998, the Company acquired from Toxworx Laboratories, Inc. ("TLI"), a
California corporation, a customer list pursuant to an Asset Purchase Agreement
dated June 8, 1998, ("TLI Asset Purchase"). In connection with the TLI Asset
Purchase, the Company paid $2,400,000 at closing. The purchase price of the
customer list was recorded as an intangible asset, which is being amortized
over 15 years.
On July 20, 1998, the Company amended the Laboratory Sepcialists of America,
Inc. 1997 Non-Qualified Stock Option Plan (the "1997 Plan"), which increased
to 800,000 the number of shares of common stock authorized and reserved for
issuance under the 1997 Plan, subject to shareholder approval. In addition,
the Company granted 525,000 stock options under the 1997 Plan and 40,000
stock options under the Laboratory Specialists of America, Inc. 1994 Stock
Option Plan. On August 17, 1998, the stock options were amended which reduced
the exercise price from $4.25 to $3.94 per share, which represented the fair
market value of the shares on the date of grant and the amendment,
respectively. In the event the 1997 Plan amendment is not approved by the
shareholders, the number of shares of common stock purchasable pursuant to
exercise of the options will be reduced to 55,000 shares. The stock options,
as amended, are exercisable at any time after April 17, 1999 and on or before
July 20, 2008.
Since June 30, 1998, the Company has issued 98,572 shares of Common Stock in
connection with the exercise of certain warrants for net proceeds of $216,858.
F-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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.
2.3 The Selling Agreement with Jesup & Lamont Securities Corporation,
dated June 4, 1988.
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)
4.6 Laboratory Specialists of America, Inc. 1997 Non-Qualified Stock
Option Plan, as amended and restated July 20, 1998.
5.1 Opinion of Dunn Swan & Cunningham, A Professional Corporation,
counsel to Registrant, regarding legality of the securities covered
by this Registration Statement.*
10.1 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
July 16, 1998.
10.11 Employment Agreement with Larry E. Howell, as amended and restated
July 16, 1998.
10.12 Employment Agreement between Arthur R. Peterson, Jr. and Laboratory
Specialists, Inc.,as amended and restated July 16, 1998.
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 August 27, 1998.
23.2 Consent of Dunn Swan & Cunningham, A Professional Corporation,
dated August 27, 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.*
- ------------------------------------------------------
* Previously furnished.
(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 Amendment No.
1 to Registration Statement to be signed on its behalf by the undersigned in
the City of Oklahoma City, State of Oklahoma, on the 1st day of September,
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 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 September 1, 1998
John Simonelli Executive Officer, Secretary
- ------------------------------ and Director
/S/LARRY E. HOWELL President and Chief Operating September 1, 1998
Larry E. Howell Officer and Director
- ------------------------------
/S/ARTHUR R. PETERSON, JR. Treasurer and Director September 1, 1998
Arthur R. Peterson, Jr.
- ------------------------------
/S/ROBERT A. GARDEBLED, JR. Director September 1, 1998
Robert A. Gardebled, Jr.
- ------------------------------
/S/MICHAEL E. DUNN Director September 1, 1998
Michael E. Dunn
- ------------------------------
/S/JEROME P. WELCH Director September 1, 1998
Jerome P. Welch
- ------------------------------
</TABLE>
II-6
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of June 4, 1998,
by and among Laboratory Specialists of America, Inc., a corporation organized
under the laws of the State of Oklahoma, with offices located at 101 Park
Avenue, Oklahoma City, Oklahoma 73102 (the "Company"), Jesup & Lamont Securities
Corporation, a corporation organized under the laws of the State of Delaware
having offices at 650 Fifth Avenue, New York, NY 10017 (the "Placement Agent"),
and the undersigned investors (together with affiliates, the "Initial
Investors").
WHEREAS, in connection with an offering (the "Offering") pursuant to a
Confidential Private Placement Offering Circular dated April 24, 1998, and any
supplements or amendments thereto, and various Subscription Agreements between
the Company and the Initial Investors (the "Subscription Agreements"), the
Company has agreed, upon the terms and subject to the conditions contained
therein, to issue and sell to the Initial Investors shares of its common stock,
par value $.001 per share (the "Common Stock");
WHEREAS, in order to induce the Initial Investors to execute and deliver
the Subscription Agreements and to purchase shares of the Common Stock pursuant
to the Offering, the Company has agreed to provide certain registration rights
under the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "Securities
Act"), and applicable state securities laws; and
WHEREAS, in connection with the Offering, the Company has issued to the
Placement Agent warrants (the "Warrants") to purchase Common Stock and has
agreed to provide the Placement Agent the rights set forth herein with respect
to the shares of Common Stock issuable upon exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company, the Placement Agent
and the Initial Investors hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Register", "registered" and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, including a registration statement pursuant to Rule 415 and Rule
416 under such Act (or any successor rules), and the declaration or ordering of
effectiveness of such registration statement by the Securities and Exchange
Commission ("SEC").
(b) "Registrable Securities" means all shares of Common Stock issued
pursuant to the Offering or upon the exercise of the Warrants or any warrants
described in Section 8 hereof, and any shares of Common Stock issued or
issuable, from time to time (with any adjustments), as a
1
<PAGE>
distribution on, in exchange for or otherwise with respect to any such shares.
(c) "Holder" means any person owning of record Registrable Securities or
any assignee of record of such Registrable Securities to whom rights under this
Agreement have been assigned in accordance with this Agreement.
2. SHELF REGISTRATION.
(a) The Company, within 30 days from the date hereof, shall file a
registration statement under the Securities Act on Form S-3 (or, if not
available, on such Form as is then available to effect a registration of all
Registrable Securities) for, and shall obtain all such qualifications and
compliances as may be required and as would permit the sale and distribution of,
all Registrable Securities, and shall use its best efforts to secure the
effectiveness of such registration statement no later than 90 days following the
date hereof or, if earlier, within 5 days after the date on which the Company
shall receive clearance from the SEC to request acceleration of the
effectiveness of such registration statement.
(b) The Company shall pay all expenses incurred in connection with any
registration, qualification and compliance (excluding underwriters' and brokers'
discounts and commissions), including, without limitation, all filing,
registration and qualification fees, printer and accounting fees.
(c) The Company shall use its best efforts to cause the registration
statement filed pursuant to this Section 2 to remain effective until the earlier
of (i) the date on which all Registrable Securities shall have been sold or (ii)
the sixth anniversary of the date hereof.
3. Intentionally omitted.
4. OBLIGATIONS OF THE COMPANY. The Company shall, as expeditiously as
possible:
(a) Prepare and file with the SEC a registration statement with respect to
such Registrable Securities and use its best efforts to cause such registration
statement to become effective in accordance with the terms and provisions of
Section 2 hereof.
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus included therein as may be necessary
to keep the registration statement effective and comply with the provisions of
the Securities Act with respect to the disposition of all Registrable Securities
covered by such registration statement until such time as all of such
Registrable Securities shall have been disposed of in accordance with the
intended methods of disposition as set forth in such registration statement, or,
if applicable, until such earlier time as provided in Section 2(c) hereof.
(c) Furnish to each Holder and its legal counsel (i) promptly after filing
with the SEC,
2
<PAGE>
one copy of such registration statement and any amendments thereto, including
each prospectus contained therein, and each letter written by or on behalf of
the Company to the SEC or the staff of the SEC and each correspondence
therefrom, (ii) on the date of effectiveness of such registration statement
or amendment, a notice that such registration statement or amendment has been
declared effective and (iii) such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Securities Act, and all amendments thereto, and such other documents as
any Holder may reasonably request, in order to facilitate the disposition of
the Registrable Securities owned by such Holder which shall have been
included in such registration statement.
(d) Use its best efforts to register and qualify the Registrable
Securities covered by such registration statement under any applicable
securities or "blue sky" laws of such states and jurisdictions as shall be
reasonably requested by any Holder or to obtain exemptions therefrom, and
maintain the effectiveness of such registrations, qualifications and exemptions,
PROVIDED, that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) Use its best efforts promptly to secure the listing and quotation of
all Registrable Securities covered by the registration statement on the NASDAQ
SmallCap Market ("Nasdaq") or on any other market or exchange on which the
Common Stock shall then be traded.
(f) Notify each Holder of Registrable Securities included in such
registration statement, at any time when a prospectus relating thereto shall be
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement
shall include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing, and, upon such
notice, the Company shall promptly correct such misstatement or omission and
deliver to each Holder copies of the corrected prospectus.
(g) Take all reasonable actions required to prevent the entry of any stop
order issued or threatened by the SEC or any state regulatory authority with
respect to the registration statement covering the Registrable Securities, and
notify each Holder of any such stop order and take all reasonable actions to
remove it if entered.
(h) Permit one counsel designated by the Placement Agent to review such
registration statement and all amendments and supplements thereto on behalf of
the Holders in a reasonable period of time prior to their filing with the SEC,
and not file any document in a form to which such counsel shall reasonably
object.
5. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 2 that a
selling Holder shall furnish to the Company such information regarding such
Holder, the Registrable Securities held by such Holder and the intended method
of dispositions of such Registrable Securities as reasonably shall be required
to
3
<PAGE>
effect the registration of the Registrable Securities.
6. INDEMNIFICATION. In the event that any Registrable Securities shall
be included in a registration statement under this Agreement:
(a) The Company shall indemnify and hold harmless each Holder, the
partners, stockholders, officers and directors of each Holder, any underwriter
(as defined in the Securities Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Securities Act or
the Securities Exchange Act of 1934 (the "Exchange Act") (each, an "Indemnified
Person") against any joint or several losses, claims, damages, liabilities or
expenses (together with actions, proceedings or inquiries by any regulatory or
self-regulatory organization, whether commenced or threatened, in respect
thereof, "Claims") to which any of them may become subject insofar as such
Claims arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
registration statement, or contained in the final prospectus (as amended or
supplemented, if the Company shall filed any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities (the matters in the
foregoing clauses (i) through (iii) being, collectively, called "Violations").
The Company shall reimburse each Indemnified Person for any reasonable legal or
other expenses (promptly as such expenses shall be incurred and shall be due and
payable) incurred by such Indemnified Person in connection with investigating or
defending any such Claim. The indemnification agreement contained in this
Section 6(a) (x) shall not apply to a Claim arising out of or based upon a
violation which shall occur in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person expressly for use
in such registration statement or any such amendment or supplement thereto; (y)
shall not apply to amounts paid in settlement of any Claim if such settlement
shall be effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld; and (z) shall not inure to the
benefit of any Indemnified Person, with respect to any prospectus, if the untrue
statement or omission of material fact in any prospectus shall have been
corrected on a timely basis and the Indemnified Person shall have failed to
utilize such corrected prospectus. This indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Initial Investors.
(b) In connection with any registration statement in which a Holder shall
participate, such Holder, severally and not jointly, shall indemnify and hold
harmless the Company, each of its directors, each of its officers who shall sign
the registration statement, its employees and agents and each person, if any,
who controls the Company within the meaning of the Securities Act or the
4
<PAGE>
Exchange Act, any underwriter and any other stockholder selling securities
pursuant to such registration statement or any of its partners, stockholders,
directors or officers or any person who controls such underwriter or stockholder
within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Party") against any Claim to which any of them may become subject,
under the Securities Act, the Exchange Act or otherwise, insofar as much Claim
shall arise out of or shall be based upon any Violation, in each case to the
extent (and only to the extent) that such Violation shall occur in reliance upon
and in conformity with written information furnished to the Company by such
Holder expressly for use in connection with such registration statement. Such
Holder shall reimburse the Indemnified party for any reasonable legal or other
reasonable expenses (promptly as such expenses shall be incurred and shall be
due and payable) incurred in connection with investigating or defending any such
Claim. The indemnity agreement contained in this Section 6(b) shall not apply
to amounts paid in settlement of any Claim if such settlement shall be effected
without the prior written consent of such Holder, which consent shall not be
unreasonably withheld; and, PROVIDED, FURTHER, that the total amounts payable by
a Holder under this Section 6(b) shall not exceed the aggregate proceeds (net
of discounts or commissions) actually received by such Holder upon the sale of
such Holder's Registrable Securities included in such registration statement.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) shall not inure to the benefit of any
person or entity if the untrue statement or omission of material fact in any
prospectus shall have been corrected on a timely basis and such person or entity
shall have failed to utilize such corrected prospectus.
(c) Promptly after receipt by an Indemnified Person or Indemnified Party
(the "Indemnitee") under this Section 6 of notice of the commencement of any
action (including, without limitation, any governmental action), such
Indemnitee, if a claim in respect thereof shall be made against any indemnifying
party under this Section 6, shall deliver to the indemnifying party a written
notice of the commencement thereof, and the indemnifying party shall be entitled
to participate therein, and, to the extent it shall desire, to assume the
defense thereof, with counsel mutually satisfactory to the Indemnitee, after
which the indemnifying person shall not be liable to such Indemnitee for any
legal expenses subsequently incurred by such Indemnitee in connection with the
defense thereof; PROVIDED, HOWEVER, that an Indemnitee shall have the right to
retain its own counsel, with fees and expenses to be paid by the indemnifying
party, if the indemnifying party shall have failed to assume the defense of any
such action or if, in the reasonable opinion of counsel retained by the
indemnifying party, representation of such Indemnitee by the counsel retained
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such action.
No indemnifying person shall be responsible for paying the fees and expenses of
more than one separate counsel for all Indemnitees. Failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any action, if the indemnifying party shall be materially prejudiced thereby,
shall relieve such indemnifying party of liability, but only to the extent that
such indemnifying party shall be prejudiced with respect to a specific claim.
An indemnifying party shall not, without the prior written consent of the
Indemnitee, settle or compromise or consent to the entry of a judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder unless such settlement, compromise or
consent shall include an unconditional
5
<PAGE>
release of such Indemnitee from all liability arising out of such claim,
action, suit or proceeding.
(d) If the indemnification provided for in Sections 6(a) or 6(b) hereof
shall be held by a court of competent jurisdiction to be unavailable to an
Indemnitee in respect of any liability under the Securities Act, then, and in
each such case, the indemnifying party, in lieu of indemnifying such Indemnitee
hereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such Indemnitee as a result of such loss, liability,
claim, damage or expense in such proportion as shall be appropriate to reflect
the relative fault of the indemnifying party on the one hand and of the
Indemnitee on the other in connection with the Violation that resulted in such
loss, liability, claim, damage or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the Indemnitee shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact shall have related
to information supplied by the indemnifying party or by the Indemnitee and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement, alleged statement, omission or alleged
omission; PROVIDED, that in no event, shall any contribution under this Section
6(d) by any Holder exceed the proceeds from the offering received by such
Holder. No person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11 of the Securities Act) shall be entitled to contribution
from any person or entity who shall not have been guilty of such fraudulent
misrepresentation.
7. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC which may at any time permit the sale
of the Registrable Securities to the public without registration, the Company
shall:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144, at all times while the Company shall be
reporting under the Exchange Act;
(b) Use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange act; and
(c) So long as a Holder shall own any Registrable Securities, furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144, the Securities Act and
the Exchange Act, a copy of the most recent annual or quarterly report of the
Company and such other reports and documents of the Company as a Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing a Holder to sell any such Securities without registration.
8. DEFAULT WARRANTS. In the event that the registration statement
required to be filed pursuant to Section 2 hereof shall either (a) not be filed
within 30 days from the date hereof (the "Filing Default date"), or (b) not be
declared effective by the SEC within 90 days from the date hereof or, if
earlier, within 5 days after the date on which the Company shall receive
clearance from the SEC to request acceleration of the effectiveness of such
registration statement (the "Registration
6
<PAGE>
Default Date"), the Company shall issue and deliver, free of charge and
without cost, to each of the Holders (i) within 10 days of the Filing Default
Date and/or the Registration Default Date, as applicable, warrants, in the
form annexed hereto as Exhibit A, to purchase a number of shares of Common
Stock equal to 5% of the number of shares of Common stock purchased by each
such Holder (or such Holder's predecessor in interest) in the Offering and
(ii) within 10 days of the last date of each additional 30-day period in
which such registration statement shall not have been filed and/or declared
effective by the SEC, additional warrants, in the form annexed hereto as
Exhibit A, to purchase a number of shares of Common Stock equal to 5% of the
number of shares of Common Stock purchased by each such Holder (or such
Holder's predecessor in interest) in the Offering. The exercise price of
such warrants, as well as the number of shares of Common Stock for which each
of such warrants shall initially be exercisable, shall be appropriately
adjusted, in the same manner as set forth in Section 6 of such warrants, to
reflect dilutive events which shall occur after the date hereof and prior to
the issuance of such warrants. Any and all shares of Common Stock issued by
the Company upon the exercise of any warrants delivered pursuant to this
Section 8 shall constitute "Registrable Securities," and the Company shall be
required to register them under the Securities Act in accordance with the
provisions of this Agreement.
9. MISCELLANEOUS.
(a) a person or entitiy shall be deemed to be a Holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company shall receive conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of any
instructions, notice or election received from the registered owner of such
Registrable Securities.
(b) Any notices required or permitted to be given under the terms of this
Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy , and
shall be effective five (5) days after being placed in the mail, if mailed, or
upon receipt or refusal of receipt, if delivered personally or by courier or
confirmed telecopy, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
Laboratory Specialists of America, Inc.
101 Park Avenue
Oklahoma City, OK 73102
If to the Placement Agent:
Jesup & Lamont Securities Corporation
650 Fifth Avenue
New York, NY 10019
7
<PAGE>
and if to any Holder, at such address as such Holder shall have provided in
writing to the Company, or at such other address as each such party shall
furnish by notice given in accordance with this Section 9(b).
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed in the State of New York. The Company irrevocably consents to the
exclusive jurisdiction of the United States federal and state courts located in
New York County, New York in any suit or proceeding based on or arising under
this Agreement and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in such courts. The Company irrevocably waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The Company further agrees that service of process upon the Company, mailed by
first class mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect
any Holder's right to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
(e) This Agreement, and the Subscription Agreements constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof. This Agreement and the Subscription Agreements supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
(f) This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties hereto. The rights of any Holder
hereunder may be transferred in connection with a transfer of all or any portion
of such Holder's Registrable Securities. Any transferee of any such Registrable
Securities shall be required, as a condition precedent to such transfer, to
agree to be bound by all the terms and conditions of this Agreement.
(g) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
(h) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be deliverable to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
(ii) Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and
8
<PAGE>
documents, as the other party may reasonably request in order to carry out
the intent and accomplish the purposes of this Agreement and the consummation
of the transactions contemplated hereby.
(j) All consents and other determinations to be made by the Holders
pursuant to this Agreement shall be made by Holders holding a majority of the
Registrable Securities (determined as if all warrants described in Section 8
hereof then outstanding had been converted into or exercised for Registrable
Securities).
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
LABORATORY SPECIALISTS OF AMERICA, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
JESUP & LAMONT SECURITIES CORPORATION
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
INITIAL INVESTORS
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
153 East 53rd Street, 51st Floor
New York, NY 10022
By: MG Advisers, L.L.P.
By:
-----------------------------------------
9
<PAGE>
- ------------------------------------------
Alain Aysseh
9 Shields Lane
Darien, CT 06820
- ------------------------------------------
Alfred Aysseh
9 Shields Lane
Darien, CT 06820
- ------------------------------------------
William H. Duling
3825 Wilshire Circle
Sarasota, FL 34238
- ------------------------------------------
David Herzog
c/o S. Eisenberger
1550 54th Street
Brooklyn, NY 11219
KDP ENTERPRISES INC.
18 Kupperman Lane
Monsey, NY 10952
By:
--------------------------------------
Jack Siegel
- ------------------------------------------
George Levine
c/o Reuters
200 No. Sepulveda Boulevard
Suite 500
El Segundo, CA 90245
- ------------------------------------------
Elvire Levy
c/o Lucien I. Levy
635 So. Orange Avenue
Sarasota, FL 34236
10
<PAGE>
LUCIEN I. LEVY Rev. Living Trust
635 So. Orange Avenue
Sarasota, FL 34236
By:
--------------------------------------
Lucien I. Levy
- ------------------------------------------
Julius Luck
17 Manor Parkway
Ledgewood, NJ 07852
- ------------------------------------------
Ralph Mandarino
21 Fourth Place
Syosset, NY 11791
MERL Trust
635 So. Orange Avenue
Sarasota, FL 34236
By:
--------------------------------------
Lucien I. Levy
METROPOLIS EQUITY FUND, L.P.
80 Broad Street, 35th Floor
New York, NY 10004
By:
--------------------------------------
Ronny Kraft
QT FINANCE S.A
635 So. Orange Avenue
Sarasota, FL 34236
By:
--------------------------------------
By: Lucien I. Levy
11
<PAGE>
PEQUOT SCOUT FUND, LP
354 Pequot Avenue
Southport, CT 06490
By:
--------------------------------------
Amiel Peretz
- ------------------------------------------
Spycher, Michele
c/o Lucien I. Levy
635 So. Orange Avenue
Sarasota, FL 34236
- ------------------------------------------
Paul S. And Ann Laurie Vanderwerf
34423 N. 68th Way
Scottsdale, AZ 85262
12
<PAGE>
SELLING AGREEMENT
June 4, 1998
Jesup & Lamont Securities Corporation
650 Fifth Avenue
New York, New York 10019
RE: LABORATORY SPECIALISTS OF AMERICA, INC.
Gentlemen:
Laboratory Specialists of America, Inc. is a corporation duly organized
under the laws of the State of Oklahoma (the "Corporation"). The Corporation
intends to offer and sell shares of the Corporation's Common Stock (the "Common
Stock") in a non-public offering and sale under Section 4(2) of the Securities
Act of 1933, as amended (the "Act") pursuant to Regulation D, in accordance with
the terms of the Confidential Private Placement Offering Circular dated April
24, 1998, relating to the Corporation, together with any amendments thereto (the
"Memorandum"). The Corporation is offering up to a maximum of 611,112 shares of
Common Stock at a price of $4.50 per share. The offering period (the "Offering
Period") for the Common Stock shall extend until May 31, 1998, unless extended
by the Company with or without notice, but in any event, until no later than
June 30, 1998 (the "Offering Termination Date").
Subject to the terms and conditions herein set forth the Corporation hereby
appoints you (the "Placement Agent") as its exclusive agent to offer and sell
the Common Stock on its behalf, on a best efforts basis, until all of the Common
Stock offered has been sold, subject only to your right to engage participating
Broker-Dealers pursuant to Section 2 hereof. By your confirmation hereof you
agree to act in such capacity and to use your best efforts as agent for the
Corporation to find purchasers for the Common Stock acceptable to the
Corporation on terms and conditions set forth below. We confirm our
understanding with you as follows:
1. OFFERING:
(a) Subject to the terms and conditions herein set forth, you hereby
agree to use your best efforts to offer and sell the Common Stock in accordance
with the terms hereof and of the Memorandum. The Corporation shall have the
right, in its discretion, to reject subscriptions furnished by you, in whole or
in part, and has no obligation to accept subscriptions in the order in which
they are received. No commissions will be paid to the Placement Agent for the
sale of
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 2
Common Stock to person whose subscriptions are subsequently rejected. Any
payments made in connection with subscriptions rejected by the Corporation
will be returned (less any escrow fees) to the subscriber. At all times
during the Offering Period, cash proceeds received from subscribers for the
Common Stock shall be held in an escrow account maintained with UMB Oklahoma
Bank. All checks received from prospective purchasers of Common Stock shall
be made payable to UMB Oklahoma Bank, Escrow Holder for Laboratory
Specialists of America, Inc. Upon the closing of the sale of the Common
Stock (the "Closing"), the funds will be released to the Corporation in
accordance with the terms and provisions of that certain Escrow Agreement,
dated May 12, 1998 by and among the Corporation, the Placement Agent and UMB
Oklahoma Bank, as Escrow Agent.
(b) The sale of the Common Stock shall be made only to persons or
entities whom you reasonably believe constitute accredited investors as
determined in accordance with the standards of Subsection (a) of Rule 501 of
Regulation D promulgated under the Act or qualified institutional buyers as
defined in Rule 144A promulgated under the Act or Qualified Institutional Buyers
as determined in accordance with Rule 144A under the Act.
(c) Upon receipt of an executed Subscription Agreement and any other
Subscription documentation included in the Subscription package prepared by the
Corporation for delivery by you to prospective subscribers (the "Subscription
Documents") you shall promptly furnish to us the Executed Subscription
Documents, together with the purchase price for the shares of Common Stock
subscribed for by such subscriber.
2. PARTICIPATING BROKER-DEALERS
The Corporation hereby authorizes you to engage other qualified
Broker-Dealers (the "Participating Broker-Dealers") to assist you in the
placement of the Common Stock provided that each such Participating
Broker-Dealer shall be registered as a broker-deal under the Securities
Exchange Act of 1934 (the "Exchange Act"), shall be a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD"), and shall
be authorized to offer and sell the Common Stock under the laws of the
jurisdiction in which the Common Stock will be offered and sold by such
Participating Broker-Dealers.
3. COMPENSATION.
If the Corporation accepts offers for the sale of up to 611,112 shares of
the Common Shares (or such lessor amount) and the Closing occurs, the
Corporation will pay to you the following compensation:
(i) Sales commissions in an amount up to 7% of the aggregate gross
proceeds of the offering price per shares of Common Stock sold which commissions
shall be payable on the date on which the Company receives the proceeds from the
sale of the Common Stock. Such sales commissions may be reallocated to
Participating Broker-Dealers, if any.
(ii) Concurrent with the Closing, sell to the Placement Agent (or
its designees) Warrants to acquire such number of shares of Common Stock as is
equal to ten percent (10%) of the shares of Common Stock sold at the Closing
(the "Placement Agent's
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 3
Warrants"). The purchase price of the Placement Agent's Warrants shall be
reallocated $0.001 per warrant. Such warrants, which shall be satisfactory
in form and substance to the Placement Agent and its counsel, will expire
five years from the date of issuance and will be non-callable. The Placement
Agent's Warrants will be exercisable at $5.40 per Warrant, which is equal to
twenty percent (20%) above the price at which the Common Stock is sold in the
Offering. The Placement Agent's Warrants shall not be redeemable. The
Placement Agent's Warrants may be exercised as to all or a lesser number of
Common Stock. The Corporation will register the shares of Common Stock
underlying the Placement Agent's Warrants in a registration statement
covering the shares of Common Stock.
(iii) The Corporation will pay all the fees, expenses and
disbursements related to the Offering, including but not limited to, (a) fees
and disbursements of its counsel; (b) costs relating to the preparation,
printing, filing and distribution of the Memorandum and all amendments thereto,
and any other instruments connected with the Offering; (c) applicable Blue Sky
filing fees and disbursements all reasonable and accountable "road show"
expenses, if any; and (d) fees and disbursements of Placement Agent's counsel,
and (e) any other expenses incurred by the Corporation in connection with the
Offering. It is also understood that the Corporation shall reimburse the
Placement Agent for its out-of pocket expenses incurred in rendering services
within a reasonable period of time following the presentation by the Placement
Agent of an itemized statement of such expenses.
(iv) It is expressly understood and agreed by the parties hereto
that the Placement Agent shall have the right of first refusal with respect to
any financing activities of the Corporation of $10,000,000.00 or less, whether
through senior or subordinated debt or equity, for twenty-four months from the
date of the Closing. Failure of the Corporation to give the Placement Agent
the right of first refusal granted herein and to comply with this paragraph 3
(iv) of this Agreement, shall result in such fees and compensation due and
payable by the Corporation to the Placement Agent under the same terms of this
Section 3. It is further understood and agreed that in the event that the
Corporation shall engage in financing activities in excess of $10,000,000, then
the parties shall in good faith determine the role of the Placement Agent, if
any, at or prior to the time upon which the Corporation has committed to such
financing activities.
(vi) The undersigned parties, intending to be legally bound hereby
irrevocably agree not to circumvent, avoid, bypass or abrogate each other,
directly or indirectly to avoid payment of fees or commissions, in any
transaction with any corporation, partnership, or individual, introduced by
either party to the other, in connection with any projects, any loans or
collateral, or funding, or any other transaction involving any products,
transfers or services, or additional, renewal, extension, rollover, amendment,
renegotiation, new contracts, parallel contracts/agreements, or third party
assignments thereto.
4. REPRESENTATIONS, WARRANTIES AND CONVENANTS OF PLACEMENT AGENT.
You represent and warrant to the Corporation as follows:
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 4
(a) You are registered as a Broker-Dealer under the Exchange Act,
that you are and shall remain during the offering period a member in good
standing of the NASD and that you are licensed or qualified as a Broker-Dealer,
or otherwise authorized to offer and sell the Common Stock, under the laws of
the jurisdictions in which the Common Stock will be offered and sold by you.
(b) You agree that the offers and sales of the Common Stock made by
you will be effected in accordance with the requirements of Section 4(2) of the
Act and Regulation D thereunder, it being understood that you are not
responsible for the accuracy, adequacy, or completeness of the Memorandum
(except for information supplied by you to the Corporation) or any supplemental
information supplied by the Corporation to prospective investors or the actions
or omissions of the Corporation or any affiliates of the Corporation. Without
limiting the generality of the foregoing, in effecting the offering and sale of
the Common Stock, you will not utilize any form of general solicitation or
general advertising including, but not limited to, any advertisement, article,
notice, or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio. You will not make any
representations or transmit any information relating to the Corporation or its
assets or business dealings, the Common Stock or the transactions contemplated
in the Memorandum, other than the information set forth in the Memorandum or
such additional information as is expressly approved by the Corporation. Any
projections distributed to potential investors developed by the Placement Agent
will be based on information deemed to be reliable and accurate, supplied to the
Placement Agent by the Corporation.
(c) You agree that the manner by which you offer the Common Stock
for sale will be in accordance with Blue Sky or other state securities laws
applicable in the jurisdictions in which the Common Stock will be offered and
sold.
(d) You will maintain, for a period of three years after the date
of the Closing, a current list of the name and address of each person to whom
you have made an offer and will make the same available to the Corporation in
the event the Corporation shall reasonably believe such access to be necessary
for the purpose of any pending or threatened litigation, arbitration or other
administrative or judicial proceeding or investigation. Upon request, you will
provide the Corporation on a timely basis with such additional information
relating to the offer and sale of the Common Stock by you as the Corporation my
reasonably request or as may be required to enable the Corporation to prepare a
Form D for filing with the Securities and Exchange Commission (the "Commission")
and to prepare such other reports or sale as may be required to be filed under
any applicable Blue Sky laws.
(e) You will furnish each prospective investor with the Memorandum
and the Subscription Documents and the offer and sale of Common Stock by you
will be made in accordance with the terms of the Memorandum and the Subscription
Documents. You will not offer or sell any Common Stock with an understanding
that you will later repurchase or arrange the sale of the same.
(f) With respect to engagement of the Participating Broker-Dealers,
you will use due care in selecting participating Broker-Dealers to participate
in the offering and sale of Common Stock. Each Participating Broker-Dealer is,
and shall remain through the date of the
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 5
Closing, registered and in good standing with the NASD and is, and shall
remain through the date of the Closing, licensed or qualified as a
Broker-Dealer, or otherwise authorized to offer and sell the Common Stock in
the jurisdictions in which such Participating Broker-Dealer will offer and
sell the Common Stock
(g) You have been duly organized and are, and at all times through
the Offering Termination Date will be validly existing as a corporation under
the laws of the State of Delaware, with full power and authority to enter into
this Agreement and to be bound by the provisions and the conditions thereof.
(h) This Agreement has been duly and validly authorized, executed
and delivered by you and on your behalf and constitutes a legal, valid and
binding obligations, enforceable against you in accordance with their terms,
subject to applicable bankruptcy, insolvency, and other laws affecting the
enforceability of creditors' rights generally and subject to general principals
of equity.
5. REPRESENTATIONS, WARRANTIES AND CONVENANTS OF THE CORPORATION.
The Corporation represents and warrants to you and any Participating
Broker-Dealer engaged by your as follows:
(a) The Memorandum, together with any exhibits, supplements and
amendments thereto, does not state any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made therein not
misleading as of the date thereof. The Corporation further represents and
warrants that all information which it has supplied in connection with this
offering is true and correct in all material respects, and that you are entitled
to rely on such information, including the information set forth in the
Memorandum.
(b) The Corporation has been duly organized and is, and at all
times through the date of the Closing will be validly existing and in good
standing as a corporation under the laws of the State of Oklahoma.
(c) The Corporation has all of the requisite corporate power and
authority and all necessary authorizations and approvals to enter into this
Agreement and to carry out the provisions and conditions hereof.
(d) There is no material litigation, undisclosed liability or
governmental proceeding pending or threatened against or affecting or involving
the business or operations (financial or otherwise) of the Corporation which
would adversely affect the value or the operation of the business of the
Corporation taken as a whole, except as disclosed in the Memorandum.
(e) The Corporation covenants and agrees that it will deliver to
you such number of copies of the Memorandum and any amendment or supplement
thereto, with all exhibits, as you may reasonably request.
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 6
(f) If at any time any event occurs as a result of which the
Memorandum would include an untrue statement of material fact or, in view of the
circumstances under which they were made, omit to state any material fact
necessary to make the statements therein not materially misleading, the
Corporation will notify you thereof (unless the information shall have been
received from you) and will effect the preparation of an amended or supplemented
Memorandum which will correct such statement or omission. The Corporation will
deliver to you as many copies of such amended or supplemented Memorandum as you
may reasonably request.
(g) The net proceeds from the offering received by the Corporation
shall be applied substantially in the manner set forth in the Memorandum.
(h) The Corporation shall make such filings with the Securities and
Exchange Commission and state and other governmental agencies as may be
necessary to assure or confirm exemption of the offering and sale of the Common
Stock from the registration requirements of the Act and of the securities laws
of any state or other jurisdiction in which Common Stock may be offered.
(i) The Corporation will not take any action which could reasonably
be expected to jeopardize the exemption under Section 4(2) of the Act and
Regulation D thereunder.
(j) Except as set forth in clause (h) above, the Corporation knows
of no consent by any court or governmental agency is necessary to conduct the
offering as described in the Memorandum.
(k) This Agreement has been duly authorized and validly executed
and delivered by the Corporation and constitutes a legal, valid and binding
obligation, enforceable against the Corporation in accordance with its terms,
subject to applicable bankruptcy, insolvency, and other laws affecting the
enforceability of creditors' rights generally and subject to general principles
of equity.
(l) The Corporation will deliver to the Placement Agent prior to
the Closing a true, correct, and complete copy of each form, report, schedule,
registration statement, definitive proxy statement and other document (together
with all amendments thereof and supplements thereto) requested by the Placement
Agent and filed by the Corporation or any of its subsidiaries with the SEC since
May 15, 1998 (as such documents have, since the time of their filing, been
amended or supplemented (the "Corporation's SEC Reports"), which are all the
documents (other than preliminary material) that the Corporation and its
subsidiaries were required to file with the Commission since such date. As of
their respective dates, the Corporation's SEC Reports (i) complied as to form in
all material respects with the requirements of the Act or the Exchange Act, as
the case may be, and (ii) to the best of the Corporation's knowledge, did not
contain any untrue statements of a material fact or omit to state a material
fact required to be stated therein or necessary, in order to make the statements
therein in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
consolidated financial statements (including, in each case, the notes, if any,
thereto) included in the Corporation's SEC Reports (the "Corporation's
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 7
Financial Statements") complied as to form in all material respects with the
published rules and regulations of the Commission with respect thereto, were
prepared in accordance with generally accepted accounting principles applied
on a consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto and except with respect to unaudited
statements as permitted by Form 10-Q) and fairly present (subject, in the
case of the unaudited interim financial statements, to normal, recurring
year-end audit adjustments which are not expected to be, individually or in
the aggregate, materially adverse to the Corporation and the Corporation's
subsidiaries taken as a whole) the consolidated financial position of the
Corporation and its consolidated subsidiaries is treated as a consolidated
subsidiary of the Corporation in the Corporation' Financial Statements for
all periods covered thereby.
(m) Except as disclosed in the Corporation's SEC Reports filed
prior to the date of this Agreement, (i) since March 31, 1998 there has not been
any change, event or development or combination of changes or developments
(including any worsening of any condition currently existing) having, or that
could be reasonably expected to have, individually or in the aggregate, a
material adverse effect on the Corporation and the Corporation's subsidiaries
taken as a whole (a "Material Adverse Change in the Corporation"), and (ii)
between such date and the date hereof (A) the Corporation and the Corporation's
subsidiaries have conducted their respective business only in the ordinary
course consistent with past practice and (B) neither the Corporation nor any of
the Corporation's subsidiaries has taken any action which, if taken after the
date hereof, would constitute a breach of any provisions of this Agreement.
(n) The Corporation will use commercially reasonable efforts to
file a Registration Statement covering the shares of Common Stock, including
those shares issuable upon exercise of the Placement Agents Warrants, within 30
days following the Closing of the Offering contemplated by this Agreement and as
contemplated by the Registration Rights Agreement, a copy of which is attached
hereto as Exhibit A and incorporated by reference herein (the "Rights
Agreement"). The Company agrees that it shall use its best efforts to cause
such Registration Statement to be declared effective by the Commission no later
than 90 days following the Closing.
(o) The Corporation will assure that the Common Stock will be
registered and sold in accordance with Blue Sky or other state securities laws
applicable in the jurisdictions in which the Common Stock will be offered and
sold, and that the Corporation will, at any time, provide evidence, if requested
by the Placement Agent, of compliance with same to the Placement Agent.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PLACEMENT AGENT AND RIGHTS
OF THE CORPORATION.
The right of the Corporation to obtain the funds received from subscribers
at the Closing is subject to the material accuracy, as of the date of the
Closing, of the representations and warranties of the Corporation set forth
herein, to the performance by the Corporation of its obligations under this
Agreement required to be performed on or before the date of the Closing, and to
the satisfaction of the following further conditions at the time of the Closing.
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 8
(a) Receipt by the Placement Agent of a certificate, signed by the
Corporation setting forth in such certificate that the Corporation has performed
all obligations required to be performed by it under this Agreement at or prior
to such Closing, that it has examined the Memorandum and other documents
required to be delivered in connection with the offer and sale of the Common
Stock and that the representations and warranties contained in Section 5 hereof
are true and correct on the date of such Closing with the same force and effect
as though expressly made on such date.
(b) At the Closing, receipt by the Placement Agent of an opinion
or opinions of counsel for the Corporation approved by the Placement Agent and
by counsel to the Placement Agent dated the Closing Date, in form and content
reasonably satisfactory to the Placement Agent and counsel to the Placement
Agent, stating that:
(i) The Corporation is duly organized, validly existing and in
good standing as a corporation under the laws of the State of Oklahoma. The
Corporation is qualified to do business and is in good standing in such
jurisdictions where failure to so qualify would have a material adverse effect
on the business of the Corporation when taken as a whole. The Corporation has
full power and authority to conduct the business in which it intends to engage,
as described in the Memorandum, and to perform all of its obligations hereunder
or contemplated hereby or in the Memorandum.
(ii) The Corporation has the requisite authority to execute
and deliver this Agreement, and such Agreement has been duly executed and
delivered by the Corporation, and constitutes the legal, valid and binding
agreement of the Corporation enforceable in accordance with its terms, except
(i) as the enforceability thereof may be limited by the laws of generally, and
(ii) subject to limitation by general principles of equity.
(iii) All corporate action required to be taken by the
Corporation to authorize the offering and sale of the Common Stock in accordance
with the Memorandum has been taken.
(iv) Based upon an examination of the Memorandum, such
counsel has no reason to believe that the Memorandum, including any amendments
or supplements thereto (but excluding the financial statements as to which
counsel need express no opinion), contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, no misleading.
(v) To counsel's knowledge, there is no litigation,
undisclosed liability or governmental proceeding pending or threatened against,
or involving the property or business of the Corporation which might materially
and adversely affect the value of the property or the business of the
Corporation taken as a whole, except as discussed in the Memorandum.
(c) Receipt by the Placement Agent of a duly executed copy of the
Rights Agreement, dated as of the date of Closing.
7. INDEMNIFICATION.
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 9
(a) The Corporation agrees to indemnify and hold harmless you, and
your officers, directors, shareholders, affiliates, agents and employees, and
any Participating Broker-Dealer engaged by you, against any and all losses,
liabilities, claims, damages or expenses whatsoever (including reasonable legal
expenses) but only to the extent such losses, liabilities, claims, damages and
expenses shall arise out of or be based upon: (i) the inaccuracy of any
representation, or a breach of any warranty, convenant, or agreement of the
Corporation contained herein; (ii) any act or omission of the Corporation which
results in the loss or unavailability of any exemption for the offer and sale of
the Common Stock from the registration requirements of the Act or any local
securities law; and (iii) any untrue statement of a material fact contained in
the Memorandum (or in any amendment or supplement thereto), any untrue statement
of a material fact contained in any application or other papers, hereinafter
collectively called Blue Sky applications, filed with the written approval of
the Corporation in any state or states in order to qualify under the securities
laws thereof, or any commission to state therein a material fact necessary to
make the statement contained in such documents not misleading; provided,
however, the Corporation will not be liable in any such case to the extent that
any such losses, liabilities, claims, damages or expenses arise out of or are
based upon an untrue statement or omission made in the Memorandum, any amendment
or amendments, or any Blue Sky application, or arise out of or are based upon
the omission to state in those documents a material fact required to be stated
therein or necessary to make the statements therein not misleading, where such
statement or omission was made in reliance upon information furnished by you to
the Corporation expressly for use in the Memorandum or in any amendment or
amendments thereto, or where such statement or omission was made by you in any
Blue Sky application not in reliance upon any information furnished by the
Corporation.
(b) Promptly after receipt by the indemnified party of notice of
the commencement of any action, such indemnified party will notify the
indemnifying party in writing of the commencement thereof, but the omission to
so notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified part. Where an action is brought against any
indemnified party and where the indemnified party notifies the indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate in and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to the indemnified party; after notice by the
indemnifying party of its election to so assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof, other than the
reasonable costs of investigation. The indemnifying party shall not be liable
for any settlement of a claim or action by any third party effected without the
written consent of the indemnifying party which consent shall not be
unreasonably withheld. In any claim for indemnification of federal or state
securities law violations, the party seeking indemnification shall place before
the court the position of the Commission (and the Oklahoma Securities Division,
if Oklahoma law is applicable) with respect to the issue of indemnification for
securities law violations.
(c) If the indemnification provided for in this Section 7 is
unavailable for any reason to any party entitled to such indemnification in
respect of any losses, claims, damages or liabilities referred to herein, then
each applicable indemnifying party, in lieu of indemnifying such
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 10
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities,
(i) in such proportions as is appropriate to reflect the relative benefits
received by the Corporation on the one had and the Placement Agent on the
other hand from the offering of the Common Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Corporation on the one hand and the Placement Agent on the other hand in
connection with the statements or other actions or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Corporation
on the one hand and the Placement Agent on the other shall be deemed to be
in the same proportion as the total proceeds from the offering (net of
commissions and fees to the Placement Agent and their affiliates, but before
deducting other expenses) received by the Corporation and to the commissions
and fees received by the Placement Agent and their affiliates. The relative
fault of the Corporation on the one hand and of the Placement Agent on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact, or the omission to
state a material fact, if any, relates to information supplied by the
Corporation or by the Placement Agent and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement of omission. The amount paid or payable by a party as a result of
the losses, claims, damages and liabilities referred to above shall be deemed
to include, subject to the limitations set forth in subsection (b) of this
Section 7, any reasonable legal or other fees or expenses reasonably incurred
by such party in connection with investigating or defending any action or claim.
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 11
(d) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in subsection (c) above.
Notwithstanding the provision of this Section 7, the Placement Agent shall not
be required to pay any amount in excess of the amount of the commissions
received by the Placement Agent from the offering. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The respective representations, warranties and Convenants set
forth in this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of you, the Corporation and any controlling
person or any Participating Broker-Dealer, and will survive for a period of
three (3) years following the final Closing Date regardless of any termination
or cancellation of this Agreement.
8. GOVERNING LAWS.
This Agreement will be governed by, and construed in accordance with,
the laws of the State of Oklahoma without giving effect to the rules governing
the conflicts of law.
Very truly yours,
LABORATORY SPECIALISTS OF AMERICA, INC.
By:
------------------------------------
Name:
Title:
Accepted and agreed to as of
this _____day of June ____, 1998
JESUP & LAMONT SECURITIES CORPORATION
By:
----------------------------------
Name:
Title:
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC.
1997 NON-QUALIFIED STOCK OPTION PLAN
(AS AMENDED AND RESTATED JULY 20, 1998)
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 "Original Plan"). On July 20, 1998, the
Board of Directors of the Company (the "Board") approved amendment of the
Original Plan increasing the shares of stock authorized to be issued under
the Original Plan and readopted the 1997 Stock Option Plan (the "Revised 1997
Plan"). Amendment of the Original Plan. The amendment must be approved by
the shareholders of the Company at the next annual or special meeting of the
Shareholders of this Corporation to the extent and only in the event such
approval is required under the Nasdaq Stock Market, Inc. governance rules.
If the Revised 1997 Plan requires shareholder approval and such shareholder
approval is not obtained, (i) the Original Plan will continue in effect and
(ii) any Options issued under the Revised 1997 Plan shall remain valid and
unchanged to the extent that such Options contain terms which could have been
granted under the Original Plan. The Revised 1997 Plan shall be known as 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
1
<PAGE>
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 800,000 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 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 an employee-Director 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
2
<PAGE>
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").
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
3
<PAGE>
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.
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
4
<PAGE>
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.
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
5
<PAGE>
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 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
6
<PAGE>
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.
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
7
<PAGE>
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.
8
<PAGE>
EMPLOYMENT AGREEMENT
(Amended and Restated)
THIS EMPLOYMENT AGREEMENT (this "Agreement"), shall be effective the
15th day of April, 1994, by and between Laboratory Specialists of America,
Inc. (the "Company"), an Oklahoma corporation, and John Simonelli, an
individual ("Simonelli").
WHEREAS, the parties hereto entered into this Employment Agreement on
April 15, 1994, which was amended and restated on September 9, 1994, April
23, 1996 and September 26, 1997;
WHEREAS, the parties have determined that it is in the best interest of
the Company that this Agreement be further amended to extend the term of this
Agreement, effective as of the date hereof;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow
to be performed on the part of the respective parties hereto, and in
consideration of the mutuality thereof, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Simonelli,
and Simonelli hereby agrees to serve the Company, during the period beginning
on April 15, 1996 and ending on April 15, 2000 (the "Period of Employment"),
or on such earlier date as provided in Sections 4 and 5 hereof; provided,
however, that the Period of Employment shall be extended an additional one
year period to next April 15 immediately following the end of each full year
of employment with the Company that Simonelli completes pursuant to and
accordance with this Agreement.
2. DUTIES. Substantially all of the duties and responsibilities of
Simonelli, subject to such travel as the duties of Simonelli hereunder may
reasonably require, shall be performed by Simonelli at and from the corporate
offices of the Company in Oklahoma City, Oklahoma.
2.1 During the Employment Period, Simonelli shall devote such time,
attention, skill, energy and best efforts to the duties assigned to him
from time to time by management and/or the Board of Directors of the
Company, and shall, but without obligation hereunder, serve the Company in
the executive officer positions to which he may be elected or appointed by
the Board of Directors of the Company, subject to acceptance by Simonelli
of such executive officer position or positions. Notwithstanding the
foregoing, Simonelli shall be required to devote not less than 50 percent
of his full business time, attention, skill, energy and efforts to the
performance of his duties hereunder; provided, however, that Simonelli may
engage in any other employment or pursuit of other endeavors which does not
conflict with his ability to perform his duties to the business interests
of the Company, provided that such other employment or pursuit of other
endeavors does not violate the duty of loyalty and care which Simonelli has
to the Company by reason of this Agreement or in his capacity as an
executive officer of the Company.
2.2 As an employee of the Company, Simonelli shall be subject to the
overall supervision and instructions of management of the Company and, if
applicable, that are associated with the executive officer position or
positions held by Simonelli which shall be subject to the overall
supervision and instructions of the Board of Directors to the Company.
3. COMPENSATION AND OTHER BENEFITS. During the Employment Period, the
Company shall pay or provide to Simonelli and Simonelli shall be entitled to
receive or have maintained for his benefit, the following:
3.1 Effective July 1, 1998, the Company shall compensate Simonelli
for the services to be rendered by him thereunder at the rate of one
hundred fifty-two thousand five hundred dollars ($152,500) per year,
payable in equal semi-monthly installments on the first and fifteen day of
each month, commencing on July 15,
1
<PAGE>
1998.
3.2 In addition to the compensation payable to Simonelli pursuant to
Section 3.1 hereof, within 90 days following the end of each fiscal year of
Laboratory Specialists of America, Inc. ending during the Employment
Period, the Company shall pay Simonelli a bonus equal to one percent of the
net income from continuing operations of Laboratory Specialists, Inc.
before provision for income taxes determined in accordance with generally
accepted accounting principles as reflected on the audited financial
statements of Laboratory Specialists of America, Inc. for the immediately
preceding fiscal year. The bonus payable pursuant to this Section 3.2
shall be deemed earned by Simonelli as of the end of each such fiscal year
of Laboratory Specialists of America, Inc. for all intents and purposes,
including for federal income tax purposes, notwithstanding termination of
the employment of Simonelli on or after the end of such fiscal year of
Laboratory Specialists of America, Inc. To the extent that bonuses or
stock options are paid or granted by the Board of Directors to its
executive officers, Simonelli shall be deemed to be a member of the bonus
group or group to which stock options are granted, and his bonus or stock
option grants shall be determined in the same manner as are the bonuses or
stock option grants of other executives in the group.
3.3 Simonelli is hereby authorized to incur reasonable expenses for
the promotion of the Company's business, including entertainment, travel
and similar expenses, and he shall be reimbursed therefore by the Company
upon his presentation of itemized accounts of such expenditures.
3.4 The Company shall provide to Simonelli health and disability
insurance benefits comparable to those provided to the executive officers
of the Company either as a group or individually.
3.5 Simonelli shall be entitled to reasonable periods of vacation
with pay in each year, and reasonable periods of sick leave with pay
commensurate with his position, in accordance with Company policy as
established by the Board of Directors.
3.6 The Company shall provide to Simonelli and maintain insurance, at
the Company's cost and expense, covering the life of Simonelli in the face
amount of five hundred thousand dollars ($500,000), the proceeds of which
shall be payable to such beneficiary that Simonelli shall designate or in
the event of failure to designate a named beneficiary shall be payable to
the estate of Simonelli.
3.7 The Company shall pay to Simonelli an automobile allowance of
five hundred dollars ($500) per month, payable on the fifteen day of each
month while employed pursuant to this Agreement, and shall provide at the
sole cost and expense of the Company a mobile phone to assist Simonelli in
the performance of his duties and responsibilities as an employee and, if
applicable, executive officer of the Company.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Simonelli is unable, because of physical or mental illness
or disability, to render services of the character contemplated hereby and
that such disability reasonably may be expected to be permanent or to
continue for a period of at least six (6) consecutive months (or for
shorter periods totaling more than six (6) months during any period of
eighteen (18) consecutive months), in such event the Board of Directors of
the Company may elect to terminate the employment of Simonelli hereunder
upon written notice by the Company to Simonelli effective on the next first
or fifteenth day of the month following the date of such notice. At any
time and upon reasonable request therefor by the Company, Simonelli shall
submit to medical examination by a physician designated by the Company in
Oklahoma City, Oklahoma, for the purpose of determining the existence,
nature and extent of any such disability. In the event the Board of
Directors elects to terminate the employment of Simonelli pursuant to this
Section 4.1, Simonelli shall be entitled to receive any amount of
compensation determined pursuant to Section 3.1 up to the date of the
termination of the employment of Simonelli payable
2
<PAGE>
on the dates established pursuant to Section 3.1.
4.2 In the event Simonelli shall die during the Employment Period,
this Agreement shall terminate effective on the next first or fifteenth day
of the month following the date of death, and the Company shall pay to the
spouse of Simonelli, or if unmarried at the time of his death, to the
estate of Simonelli, the compensation payable to Simonelli pursuant to
Section 3.1 for a period of three (3) months following the effective date
of termination of this Agreement pursuant to this Section 4.2, payable on
the dates provided for such compensation payment thereunder.
4.3 In the event of termination of this Agreement pursuant to Section
4.1 and/or Section 4.2 of this Agreement, Simonelli (or his spouse or if
unmarried on the date of his death his estate) shall be entitled to receive
accrued and unpaid expense reimbursements, automobile allowance and any
unpaid bonus amounts awarded to Simonelli prior to such termination and
stock option grants awarded to Simonelli prior to such termination
exercisable in accordance with the terms of such stock option grants.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Simonelli is guilty of gross negligence
or fraud materially injurious to the Company, the Company may terminate this
Agreement, and all obligations hereunder shall thereupon terminate.
6. NON-COMPETITION. During the Employment Period, or, if longer, the
period of employment of Simonelli by the Company, Simonelli will not engage
in competition with the Company, either directly or indirectly, in any manner
or capacity as an employee or executive officer of a competitor company in
any phase of the business carried on by the Company at any time.
7. CONFIDENTIALITY. During the Employment Period, or, if longer, the
period of employment of Simonelli by the Company, and for a period of three
(3) years thereafter, Simonelli will not divulge to anyone, other than the
Company or persons designated by the Company in writing, any confidential
material information directly or indirectly useful in any aspect of the
business of the Company or any of its subsidiaries, as conducted from time to
time, as to which Simonelli is now, or at any time during employment shall
become, informed and which is not then generally known to the public or
recognized as standard practice.
8. CERTAIN PROVISIONS TO SURVIVE TERMINATION; ETC. Notwithstanding any
termination of his employment under this Agreement, Simonelli, in
consideration of his employment hereunder to the date of such termination,
shall remain bound by the provisions of Section 6 and 7, and consequently, in
addition to all other remedies that may be available to it, the Company shall
be entitled to injunctive relief for any actual or threatened violation of
such Sections.
9. NON-ASSIGNABILITY. Neither party hereto shall have the right to
assign this Agreement or any rights or obligations hereunder without the
written consent of the other party.
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitration
proceedings shall be conducted in Oklahoma City, Oklahoma unless otherwise
agreed by the parties hereto. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 10 shall be construed so as to deny the Company the right and power
to seek and obtain injunctive relief in a court of equity for any breach or
threatened breach by Simonelli of any of his covenants contained in Sections
6 and 7 hereof.
11. NOTICE. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given forty-eight (48)
hours after depositing in the United States mail, certified mail, postage
prepaid, addressed to the party to receive such notice at the address set
forth hereinbelow or such other address as either party
3
<PAGE>
may give to the other in writing pursuant to written notice pursuant to this
Section:
If to Simonelli: Mr. John Simonelli
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73112
If to the Company: Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73112
Attention: Larry E. Howell
12. GENERAL. The terms and provisions herein contained (i) constitute
the entire Agreement between the Company and Simonelli with respect to the
subject matter hereof, (ii) may be amended or modified only by a written
instrument executed by the parties hereto, and (iii) shall be construed and
enforced in accordance with the laws in effect in the State of Oklahoma
without regard to its conflicts of law provisions. Failure by a party hereto
to require performance of any provision of this Agreement shall not affect,
impair or waive such party's right to require full performance at any time
thereafter.
It is acknowledged that the furniture, equipment and artwork in the
corporate offices of the Company in Oklahoma City, Oklahoma are the property
of Larry E. Howell and Simonelli.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as amended and restated, on the 16th day of July, 1998, with an
effective date of the 1st day of July, 1998.
"Company" LABORATORY SPECIALISTS OF AMERICA, INC.
By:
--------------------------------------------
Larry E. Howell, President
"Simonelli"
--------------------------------------------
John Simonelli
4
<PAGE>
EMPLOYMENT AGREEMENT
(Amended and Restated)
THIS EMPLOYMENT AGREEMENT (this "Agreement"), shall be effective the
15th day of April, 1994, by and between Laboratory Specialists of America,
Inc. (the "Company"), an Oklahoma corporation, and Larry E. Howell, an
individual ("Howell").
WHEREAS, the parties hereto entered into this Employment Agreement on
April 15, 1994, which was amended and restated on September 9, 1994, April
23, 1996 and September 26, 1997;
WHEREAS, the parties have determined that it is in the best interest of
the Company that this Agreement be further amended to extend the term of this
Agreement, effective as of April 15, 1996;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow
to be performed on the part of the respective parties hereto, and in
consideration of the mutuality thereof, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Howell, and
Howell hereby agrees to serve the Company, during the period beginning on
April 15, 1996, and ending on April 15, 2000 (the "Employment Period"), or on
such earlier date as provided in Sections 4 and 5 hereof; provided, however,
that the Period of Employment shall be extended an additional one year period
to next April 15 immediately following the end of each full year of
employment with the Company that Howell completes pursuant to and accordance
with this Agreement.
2. DUTIES. Substantially all of the duties and responsibilities of
Howell, subject to such travel as the duties of Howell hereunder may
reasonably require, shall be performed by Howell at and from the corporate
offices of the Company in Oklahoma City, Oklahoma.
2.1 During the Employment Period, Howell shall devote such time,
attention, skill, energy and best efforts to the duties assigned to him
from time to time by management and/or the Board of Directors of the
Company, and shall, but without obligation hereunder, serve the Company in
the executive officer positions to which he may be elected or appointed by
the Board of Directors of the Company, subject to acceptance by Howell of
such executive officer position or positions. Notwithstanding the
foregoing, Howell shall be required to devote not less than 50 percent of
his full business time, attention, skill, energy and efforts to the
performance of his duties hereunder; provided, however, that Howell may
engage in any other employment or pursuit of other endeavors which does not
conflict with his ability to perform his duties to the business interests
of the Company, provided that such other employment or pursuit of other
endeavors does not violate the duty of loyalty and care which Howell has to
the Company by reason of this Agreement or in his capacity as an executive
officer of the Company.
2.2 As an employee of the Company, Howell shall be subject to the
overall supervision and instructions of management of the Company and, if
applicable, that are associated with the executive officer position or
positions held by Howell which shall be subject to the overall supervision
and instructions of the Board of Directors to the Company.
3. COMPENSATION AND OTHER BENEFITS. During the Employment Period, the
Company shall pay or provide to Howell and Howell shall be entitled to
receive or have maintained for his benefit, the following:
3.1 Effective July 1, 1998, the Company shall compensate Howell for
the services to be rendered by him thereunder at the rate of one hundred
fifty-two thousand five hundred dollars ($152,500) per year, payable in
equal semi-monthly installments on the first and fifteen day of each month,
commencing on July 15, 1998.
1
<PAGE>
3.2 In addition to the compensation payable to Howell pursuant to
Section 3.1 hereof, within 90 days following the end of each fiscal year of
Laboratory Specialists of America, Inc. ending during the Employment
Period, the Company shall pay Howell a bonus equal to one percent of the
net income from continuing operations of Laboratory Specialists, Inc.
before provision for income taxes determined in accordance with generally
accepted accounting principles as reflected on the audited financial
statements of Laboratory Specialists of America, Inc. for the immediately
preceding fiscal year. The bonus payable pursuant to this Section 3.2
shall be deemed earned by Simonelli as of the end of each such fiscal year
of Laboratory Specialists of America, Inc. for all intents and purposes,
including for federal income tax purposes, notwithstanding termination of
the employment of Howell on or after the end of such fiscal year of
Laboratory Specialists of America, Inc. To the extent that bonuses or
stock options are paid or granted by the Board of Directors to its
executive officers, Howell shall be deemed to be a member of the bonus
group or group to which stock options are granted, and his bonus or stock
option grants shall be determined in the same manner as are the bonuses or
stock option grants of other executives in the group.
3.3 Howell is hereby authorized to incur reasonable expenses for the
promotion of the Company's business, including entertainment, travel and
similar expenses, and he shall be reimbursed therefore by the Company upon
his presentation of itemized accounts of such expenditures.
3.4 The Company shall provide to Howell health and disability
insurance benefits comparable to those provided to the executive officers
of the Company either as a group or individually.
3.5 Howell shall be entitled to reasonable periods of vacation with
pay in each year, and reasonable periods of sick leave with pay
commensurate with his position, in accordance with Company policy as
established by the Board of Directors.
3.6 The Company shall provide to Howell and maintain insurance, at
the Company's cost and expense, covering the life of Howell in the face
amount of five hundred thousand dollars ($500,000), the proceeds of which
shall be payable to such beneficiary that Howell shall designate or in the
event of failure to designate a named beneficiary shall be payable to the
estate of Howell.
3.7 The Company shall pay to Howell an automobile allowance of five
hundred dollars ($500) per month, payable on the fifteen day of each month
while employed pursuant to this Agreement, and shall provide at the sole
cost and expense of the Company a mobile phone to assist Howell in the
performance of his duties and responsibilities as an employee and, if
applicable, executive officer of the Company.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Howell is unable, because of physical or mental illness or
disability, to render services of the character contemplated hereby and
that such disability reasonably may be expected to be permanent or to
continue for a period of at least six (6) consecutive months (or for
shorter periods totaling more than six (6) months during any period of
eighteen (18) consecutive months), in such event the Board of Directors of
the Company may elect to terminate the employment of Howell hereunder upon
written notice by the Company to Howell effective on the next first or
fifteenth day of the month following the date of such notice. At any time
and upon reasonable request therefor by the Company, Howell shall submit to
medical examination by a physician designated by the Company in Oklahoma
City, Oklahoma, for the purpose of determining the existence, nature and
extent of any such disability. In the event the Board of Directors elects
to terminate the employment of Howell pursuant to this Section 4.1, Howell
shall be entitled to receive any amount of compensation determined pursuant
to Section 3.1 up to the date of the termination of the employment of
Howell payable on the dates established pursuant to Section 3.1.
2
<PAGE>
4.2 In the event Howell shall die during the Employment Period, this
Agreement shall terminate effective on the next first or fifteenth day of
the month following the date of death, and the Company shall pay to the
spouse of Howell, or if unmarried at the time of his death, to the estate
of Howell, the compensation payable to Howell pursuant to Section 3.1 for a
period of three (3) months following the effective date of termination of
this Agreement pursuant to this Section 4.2, payable on the dates provided
for such compensation payment thereunder.
4.3 In the event of termination of this Agreement pursuant to Section
4.1 and/or Section 4.2 of this Agreement, Howell (or his spouse or if
unmarried on the date of his death his estate) shall be entitled to receive
accrued and unpaid expense reimbursements, automobile allowance and any
unpaid bonus amounts awarded to Howell prior to such termination and stock
option grants awarded to Howell prior to such termination exercisable in
accordance with the terms of such stock option grants.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Howell is guilty of gross negligence or
fraud materially injurious to the Company, the Company may terminate this
Agreement, and all obligations hereunder shall thereupon terminate.
6. NON-COMPETITION. During the Employment Period, or, if longer, the
period of employment of Howell by the Company, Howell will not engage in
competition with the Company, either directly or indirectly, in any manner or
capacity as an employee or executive officer of a competitor company in any
phase of the business carried on by the Company at any time.
7. CONFIDENTIALITY. During the Employment Period, or, if longer, the
period of employment of Howell by the Company, and for a period of three (3)
years thereafter, Howell will not divulge to anyone, other than the Company
or persons designated by the Company in writing, any confidential material
information directly or indirectly useful in any aspect of the business of
the Company or any of its subsidiaries, as conducted from time to time, as to
which Howell is now, or at any time during employment shall become, informed
and which is not then generally known to the public or recognized as standard
practice.
8. CERTAIN PROVISIONS TO SURVIVE TERMINATION; ETC. Notwithstanding any
termination of his employment under this Agreement, Howell, in consideration
of his employment hereunder to the date of such termination, shall remain
bound by the provisions of Section 6 and 7, and consequently, in addition to
all other remedies that may be available to it, the Company shall be entitled
to injunctive relief for any actual or threatened violation of such Sections.
9. NON-ASSIGNABILITY. Neither party hereto shall have the right to
assign this Agreement or any rights or obligations hereunder without the
written consent of the other party.
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitration
proceedings shall be conducted in Oklahoma City, Oklahoma unless otherwise
agreed by the parties hereto. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 10 shall be construed so as to deny the Company the right and power
to seek and obtain injunctive relief in a court of equity for any breach or
threatened breach by Howell of any of his covenants contained in Sections 6
and 7 hereof.
11. NOTICE. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given forty-eight (48)
hours after depositing in the United States mail, certified mail, postage
prepaid, addressed to the party to receive such notice at the address set
forth hereinbelow or such other address as either party may give to the other
in writing pursuant to written notice pursuant to this Section:
3
<PAGE>
If to Howell: Mr. Larry E. Howell
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73112
If to the Company: Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73112
Attention: John Simonelli
12. GENERAL. The terms and provisions herein contained (i) constitute the
entire Agreement between the Company and Howell with respect to the subject
matter hereof, (ii) may be amended or modified only by a written instrument
executed by the parties hereto, and (iii) shall be construed and enforced in
accordance with the laws in effect in the State of Oklahoma without regard to
its conflicts of law provisions. Failure by a party hereto to require
performance of any provision of this Agreement shall not affect, impair or waive
such party's right to require full performance at any time thereafter.
It is acknowledged that the furniture, equipment and artwork in the
corporate offices of the Company in Oklahoma City, Oklahoma are the property of
John Simonelli and Howell.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
as amended and restated, on the 16th day of July, 1998, with an effective date
of the 1st day of July, 1998.
"Company" LABORATORY SPECIALISTS OF AMERICA, INC.
By:
--------------------------------------------
John Simonelli, Chief Executive Officer
"Howell"
--------------------------------------------
Larry E. Howell
4
<PAGE>
EMPLOYMENT AGREEMENT
(Amended and Restated)
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated this 16th day of
July, 1997 (the "date hereof"), with an effective date of the 15th day of
April, 1996 (the "effective date"), by and between Laboratory Specialists,
Inc. (the "Company"), a Louisiana corporation, and Arthur R. Peterson, Jr.,
an individual ("Peterson").
WHEREAS, the parties hereto entered into this Employment Agreement on
April 23, 1996, which was amended and restated on September 26, 1997;
WHEREAS, the parties have determined that it is in the best interest of
the Company that this Agreement be further amended to extend the term of this
Agreement, effective as of the date hereof;
WHEREAS, Peterson is currently serving as President and Chief Executive
Officer of the Company;
WHEREAS, the Company is a wholly-owned subsidiary of Laboratory
Specialists of America, Inc., of which Peterson is currently serving as
Treasurer;
WHEREAS, the Company desires to obtain the services of Peterson on a
full-time basis in order to preserve the continuation of the operations of
the Company with its suppliers, customers and others, and Peterson desires to
render such services to the Company;
NOW, THEREFORE, for and in consideration of the conditions hereinbelow
to be performed on the part of the respective parties hereto, and in
consideration of the mutuality thereof, the parties hereto agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Peterson,
and Peterson hereby agrees to serve the Company, during the period beginning
on April 15, 1996 and ending on April 15, 2000 (the "Period of Employment"),
or on such earlier date as provided in Sections 4 and 5 hereof; provided,
however, that the Period of Employment shall be extended an additional one
year period to next April 15 immediately following the end of each full year
of employment with the Company that Peterson completes pursuant to and
accordance with this Agreement.
2. DUTIES. Substantially all of the duties and responsibilities of
Peterson, subject to such travel as the duties of Peterson hereunder may
reasonably require, shall be performed by Peterson at and from the corporate
offices of the Company in Belle Chasse, Louisiana.
2.1 During the Period of Employment, Peterson shall serve as
President and Chief Executive Officer of the Company and shall devote his
full time, attention, skill, energy and best efforts to the duties assigned
to him from time to time by management and/or the Board of Directors of the
Company, and shall, but without obligation hereunder, serve the Company in
such additional executive officer positions to which he may be elected or
appointed by the Board of Directors of the Company, subject to acceptance
by Peterson of such additional executive officer position or positions.
Notwithstanding the foregoing, Peterson may engage in any other pursuit or
endeavor which does not conflict with his ability to perform his duties to
the business interests of the Company, provided that such other pursuit or
endeavors does not violate the duty of loyalty and care which Peterson has
to the Company by reason of this Agreement or in his capacity as an
executive officer of the Company.
2.2 As an employee of the Company, Peterson shall be subject to the
overall supervision and instructions of management of the Company and, if
applicable, that are associated with the executive officer position or
positions held by Peterson which shall be subject to the overall
supervision and instructions of the Board of Directors to the Company.
EMPLOYMENT AGREEMENT PAGE 1
<PAGE>
3. COMPENSATION AND OTHER BENEFITS. During the Employment Period, the
Company shall pay or provide to Peterson and Peterson shall be entitled to
receive or have maintained for his benefit, the following:
3.1 Commencing on the effective date, the Company shall compensate
Peterson for the services to rendered by him hereunder at the rate of one
hundred sixty-five thousand dollars ($165,000) per year, payable in equal
semi-monthly installments on the first and fifteen day of each month,
commencing on July 1, 1998.
3.2 In addition to the compensation payable to Peterson pursuant to
Section 3.1 hereof, within 90 days following the end of each fiscal year of
Laboratory Specialists of America, Inc. ending during the Employment
Period, the Company shall pay Peterson a bonus equal to the lesser of (i)
$50,000 or (ii) 10 percent of the net income of Laboratory Specialists of
America, Inc. before provision for income taxes determined in accordance
with generally accepted accounting principles as reflected on the audited
financial statements of Laboratory Specialists of America, Inc. for the
immediately preceding fiscal year. The bonus payable pursuant to this
Section 3.2 shall be deemed earned by Peterson as of the end of each such
fiscal year of Laboratory Specialists of America, Inc. for all intents and
purposes, including for federal income tax purposes, notwithstanding
termination of the employment of Peterson on or after the end of such
fiscal year of Laboratory Specialists of America, Inc. To the extent that
stock options are granted by the Board of Directors of Laboratory
Specialists of America, Inc. to its executive officers, Peterson shall be
deemed to be a member of the group to which stock options are granted, and
his stock option grants shall be determined in the same manner as are the
stock option grants of other executives in the group.
3.3 Peterson is hereby authorized to incur reasonable expenses for
the promotion of the Company's business, including entertainment, travel
and similar expenses, and he shall be reimbursed therefore by the Company
upon his presentation of itemized accounts of such expenditures.
3.4 The Company shall provide to Peterson health and disability
insurance benefits comparable to those provided to the executive officers
of the Company either as a group or individually.
3.5 Peterson shall be entitled to reasonable periods of vacation with
pay in each year, and reasonable periods of sick leave with pay
commensurate with his position, in accordance with Company policy as
established by the Board of Directors.
3.6 The Company shall provide to Peterson and maintain insurance, at
the Company's cost and expense, covering the life of Peterson in the face
amount of one million dollars ($1,000,000), the proceeds of which shall be
payable to such beneficiary that Peterson shall designate or in the event
of failure to designate a named beneficiary shall be payable to the estate
of Peterson.
3.7 The Company shall pay to Peterson an automobile allowance of five
hundred dollars ($500) per month, payable on the fifteen day of each month
while employed pursuant to this Agreement, and shall provide at the sole
cost and expense of the Company a mobile phone to assist Peterson in the
performance of his duties and responsibilities as an employee and, if
applicable, executive officer of the Company.
4. DISABILITY OR DEATH.
4.1 In the event the Board of Directors of the Company determines in
good faith that Peterson is unable, because of physical or mental illness
or disability, to render services of the character contemplated hereby and
that such disability reasonably may be expected to be permanent or to
continue for a period of at least six (6) consecutive months (or for
shorter periods totaling more than six (6) months during any period of
eighteen (18) consecutive months), in such event the Board of Directors of
the Company may elect to terminate the employment of Peterson hereunder
upon written notice by the Company to Peterson effective on the next first
or fifteenth day of the month following the date of such notice. At any
time and upon reasonable request therefor by the Company, Peterson shall
submit to medical examination by a physician designated by the Company in
New Orleans, Louisiana, for the purpose of determining the existence,
nature and extent of any such disability. In the event the Board of
Directors elects to terminate the employment of
EMPLOYMENT AGREEMENT PAGE 2
<PAGE>
Peterson pursuant to this Section 4.1, Peterson shall be entitled to
receive any amount of compensation determined pursuant to Section 3.1
hereof up to the date of the termination of the employment of Peterson
payable on the dates established pursuant to Section 3.1 hereof.
4.2 In the event Peterson shall die during the Employment Period,
this Agreement shall terminate effective on the next first or fifteenth day
of the month following the date of death, and the Company shall pay to the
spouse of Peterson, or if unmarried at the time of his death, to the estate
of Peterson, the compensation payable to Peterson pursuant to Section 3.1
hereof for a period of three (3) months following the effective date of
termination of this Agreement pursuant to this Section 4.2, payable on the
dates provided for such compensation payment thereunder.
4.3 In the event of termination of this Agreement pursuant to Section
4.1 and/or Section 4.2 of this Agreement, Peterson (or his spouse or if
unmarried on the date of his death his estate) shall be entitled to receive
accrued and unpaid expense reimbursements, automobile allowance and any
unpaid bonus amounts awarded to Peterson prior to such termination and
stock option grants awarded to Peterson prior to such termination
exercisable in accordance with the terms of such stock option grants.
5. TERMINATION FOR CAUSE. In the event the Board of Directors of the
Company determines in good faith that Peterson is guilty of gross negligence
or fraud materially injurious to the Company, the Company may terminate this
Agreement, and all obligations hereunder shall thereupon terminate.
6. NON-COMPETITION. During the Employment Period, or, if longer, the
period of employment of Peterson by the Company, Peterson will not engage in
competition with the Company, either directly or indirectly, in any manner or
capacity as an employee or executive officer of a competitor company in any
phase of the business carried on by the Company at any time.
7. CONFIDENTIALITY. During the Employment Period, or, if longer, the
period of employment of Peterson by the Company, and for a period of three
(3) years thereafter, Peterson will not divulge to anyone, other than the
Company or persons designated by the Company in writing, any confidential
material information directly or indirectly useful in any aspect of the
business of the Company or any of its subsidiaries, as conducted from time to
time, as to which Peterson is now, or at any time during employment shall
become, informed and which is not then generally known to the public or
recognized as standard practice.
8. CERTAIN PROVISIONS TO SURVIVE TERMINATION; ETC. Notwithstanding any
termination of his employment under this Agreement, Peterson, in
consideration of his employment hereunder to the date of such termination,
shall remain bound by the provisions of Section 6 and 7 hereof, and
consequently, in addition to all other remedies that may be available to it,
the Company shall be entitled to injunctive relief for any actual or
threatened violation of such Sections.
9. NON-ASSIGNABILITY. Neither party hereto shall have the right to
assign this Agreement or any rights or obligations hereunder without the
written consent of the other party.
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association and
judgment upon the award rendered by the arbitrator or arbitrators may be
entered in any court having jurisdiction thereof. The arbitration
proceedings shall be conducted in New Orleans, Louisiana, unless otherwise
agreed by the parties hereto. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 10 hereof shall be construed so as to deny the Company the right and
power to seek and obtain injunctive relief in a court of equity for any
breach or threatened breach by Peterson of any of his covenants contained in
Sections 6 and 7 hereof.
11. NOTICE. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given forty-eight (48)
hours after depositing in the United States mail, certified mail, postage
prepaid, addressed to the party to receive such notice at the address set
forth hereinbelow or such other address as either party may give to the other
in writing pursuant to written notice pursuant to this Section:
EMPLOYMENT AGREEMENT PAGE 3
<PAGE>
If to Peterson: (PERSONAL AND CONFIDENTIAL)
Mr. Arthur R. Peterson, Jr.
1111 Newton Street
Gretna, Louisiana 70053
If to the Company: Laboratory Specialists, Inc.
1111 Newton Street
Gretna, Louisiana 70053
12. GENERAL. The terms and provisions herein contained (i) constitute
the entire Agreement between the Company and Peterson with respect to the
subject matter hereof, (ii) may be amended or modified only by a written
instrument executed by the parties hereto, and (iii) shall be construed and
enforced in accordance with the laws in effect in the State of Louisiana
without regard to its conflicts of law provisions. Failure by a party hereto
to require performance of any provision of this Agreement shall not affect,
impair or waive such party's right to require full performance at any time
thereafter.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as amended and restated, on the 16th day of July, 1998, with an
effective date of the 1st day of July, 1998.
"Company" LABORATORY SPECIALISTS, INC.
By:
-----------------------------------------
Larry E. Howell, Vice President
"Peterson"
-----------------------------------------
Arthur R. Peterson, Jr.
EMPLOYMENT AGREEMENT PAGE 4
<PAGE>
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Oklahoma City, Oklahoma,
August 31, 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,
August 27, 1998
