<PAGE>
As filed with the Securities and Exchange Commission on July 8, 1998
Registration No. 333-30997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------------------------------
POST-EFFECTIVE
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)
<TABLE>
<S> <C> <C>
OKLAHOMA 8734 73-1451065
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
101 PARK AVENUE, SUITE 810 JOHN SIMONELLI, CHIEF EXECUTIVE OFFICER
OKLAHOMA CITY, OKLAHOMA 73102 LABORATORY SPECIALISTS OF AMERICA, INC.
(405) 232-9800 101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-9800
(Address and telephone number, including area code, of (Name, address and telephone number,
registrant's principal executive offices) of agent for service)
</TABLE>
------------------------------------------------
Copies To:
MICHAEL E. DUNN, ESQ.
DUNN SWAN & CUNNINGHAM
2800 OKLAHOMA TOWER
210 PARK AVENUE
OKLAHOMA CITY, OKLAHOMA 73102-5604
------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------------------------
<PAGE>
------------------------------------------------
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.
THIS REGISTRATION STATEMENT CONTAINS A PROSPECTUS WHICH CONSTITUTES A
COMBINED PROSPECTUS RELATED TO REGISTRANT'S REGISTRATION STATEMENT
NO. 33-82058-D IN ACCORDANCE WITH RULE 429.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sales of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
SUBJECT TO COMPLETION, DATED JULY 7, 1998 PROSPECTUS
LABORATORY SPECIALISTS OF AMERICA, INC.
34,000 UNITS
(EACH CONSISTING OF TWO SHARES OF COMMON STOCK)
ISSUABLE UPON EXERCISE OF WARRANTS
194,058 SHARES OF COMMON STOCK
ISSUED OR ISSUABLE UPON EXERCISE OF COMMON STOCK
PURCHASE OPTIONS AND WARRANTS
The units (each consisting of two shares of Common Stock (the "Units")) of
Laboratory Specialists of America, Inc. (the "Company" or "LSAI") are offered to
the holders of certain warrants exercisable on or before October 11, 1999, at an
exercise price of $7.20 per Unit. The two shares of Common Stock comprising the
Units will be separately transferrable immediately upon issuance and will trade
only as separate securities. The 194,058 shares of Common Stock of the Company
are offered to or by (i) the holder of stock options exercisable on or before
February 14, 2001, for the purchase of 50,000 shares of Common Stock at an
exercise price of $3.00 per share and (ii) the holders of warrants exercisable
on or before October 14, 2000, for the purchase of 144,058 shares of Common
Stock at an exercise price of $2.20 per share. Following their exercise of the
warrants and stock options, the holders of the Common Stock named herein intend
to resell the Common Stock (the "Selling Shareholders"). The Company will
receive the proceeds from exercise of the warrants and stock options, but will
not receive any proceeds from the resale of the Common Stock by the Selling
Shareholders. See "Selling Shareholders" and "Description of Securities."
The Common Stock is quoted on Nasdaq SmallCap Market under the symbols
LABZ. On July 6, 1998, the closing sale price of the Common Stock was
$4.63.
------------------------
SEE "RISK FACTORS," BEGINNING AT PAGE 8, 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>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY (1)(2) SHAREHOLDERS(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Unit underlying warrants . . . . . $ 7.20 -- $ 7.20 $ --
- ---------------------------------------------------------------------------------------------------
Per share underlying stock options . . $ 3.00 -- $ 3.00 $ --
- ---------------------------------------------------------------------------------------------------
Per share underlying warrants. . . . . $ 2.20 -- $ 2.20 $ --
- ---------------------------------------------------------------------------------------------------
Per share. . . . . . . . . . . . . . . $ 4.63 -- $ $ 4.63
- ---------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $711,728 -- $711,728 $1,213,329
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Proceeds to Company assumes exercise of the warrants and stock options in
full at the Price to Public.
(2) Before deducting offering expenses payable by the Company estimated to be
$30,000. See "Use of Proceeds."
(3) The Price to Public and Proceeds to Selling Shareholders is based upon the
closing sale price of the Common Stock as reported by Nasdaq SmallCap
Market on July 6, 1998.
It is expected that delivery of the certificates representing the Common
Stock will be made as promptly as practicable following exercise of the
warrants or stock options and payment of the respective exercise prices. See
"Description of Securities--Barron Chase Group Warrants," "--EGI Stock
Options," and "--Barber Branson 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 ("LSAI"), AND ITS WHOLLY-OWNED
SUBSIDIARIES, LABORATORY SPECIALISTS, INC., A LOUISIANA CORPORATION ("LSI")
AND NATIONAL PSYCHOPHARMACOLOGY LABORATORY, INC., A TENNESSEE CORPORATION
("NPLI"). EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS
PROSPECTUS GIVES EFFECT TO THE SALE AND ISSUANCE BY THE COMPANY OF 555,222
SHARES OF COMMON STOCK TO THE SELLING SHAREHOLDERS PURSUANT TO AN OFFERING
THAT CLOSED ON JUNE 4, 1998, AND THE RECEIPT OF ESTIMATED NET PROCEEDS OF
$2,285,600 (THE "1998 PRIVATE OFFERING"), (ii) THE EXERCISE OF STOCK OPTIONS
FOR THE PURCHASE OF 108,406 SHARES OF COMMON STOCK DURING APRIL AND JUNE
1998, AND (iii) THE EXERCISE OF CERTAIN WARRANTS FOR THE PURCHASE OF 4,000
SHARES OF COMMON STOCK ON APRIL 27, 1998, BUT DOES NOT GIVE EFFECT TO (i) THE
EXERCISE OF OUTSTANDING STOCK OPTIONS AND WARRANTS, (ii) THE PURCHASE OF
CERTAIN ASSETS OF HARRISON LABORATORIES ON MAY 1, 1998, AND TOXNORX
LABORATORIES ON JULY 1, 1998. SEE "THE COMPANY--BACKGROUND--1998 PRIVATE
OFFERING," "--HLI ASSET PURCHASE," AND "--TLI ASSET PURCHASE." PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH IN "RISK
FACTORS." ALL REFERENCES IN THIS PROSPECTUS TO FISCAL YEARS ARE TO THE
COMPANY'S FISCAL YEAR ENDED DECEMBER 31 OF EACH YEAR.
THE COMPANY
The Company through LSI, its wholly-owned subsidiary, owns and operates an
independent drug testing laboratory providing drug testing services to corporate
and institutional customers seeking to detect, both on a pre- and post-
employment basis, and deter the use of illegal drugs. LSI's laboratory is
certified by the Substance Abuse and Mental Health Services Administration
("SAMHSA"), a federal agency and regulatory successor to the National Institute
on Drug Abuse ("NIDA"), to conduct drug testing using procedures required for
legal defensibility of test results. See "Risk Factors--Effect of Loss or
Suspension of Laboratory Certification" and "Business--Certification and
Government Regulation." The drug testing procedures provide accurate and
reliable testing and a secure chain-of-custody for each specimen from its
collection to the reporting of the test results. The test results are reported
to the customer for its use in screening of prospective employees and, to an
increasing extent, testing of employees in order to maintain safety standards
especially with respect to safety-sensitive jobs such as trucking, aviation,
public transportation, railroads and pipelines. LSI tests for drugs of abuse,
including cocaine, methamphetamine, heroin, PCP, marijuana and alcohol,
primarily by urinalysis. In conjunction with the drug testing services, LSI
offers a range of services which are customized to assist customers in
implementing cost-effective drug testing programs. See "Business."
The market for drug testing services has grown rapidly in recent years as a
result of heightened public awareness of the national drug abuse problem.
Concerns about drug abuse have generated a broad base of government and private
sector initiatives, including federal regulations mandating drug testing under
certain circumstances and a significant increase in the number of companies that
have instituted drug testing programs. Certain regulations of the Department of
Transportation, which became effective in 1995, increased the number of workers
required to be tested for drug abuse in safety-sensitive jobs, including
trucking, public transportation, aviation, railroads and pipelines. Under these
regulations, it is estimated that approximately 7.5 million workers are required
to be tested each year. The actual number of workers to be tested in 1997,
however, is estimated to have been approximately 20 million, representing a
market size for drug testing of approximately $625 million.
The Company has grown and intends to continue to generate growth
principally through the acquisition of additional established drug testing
companies and the assets of companies engaged in the drug testing business. The
Company expects to utilize, in part, the proceeds of the Offering to further
implement this acquisition strategy. See "The Company--Background" and
"Business--Growth Strategy."
The Company's principal executive offices are located at 101 Park Avenue,
Suite 810, Oklahoma City, Oklahoma 73102, and its telephone number is (405)
232-9800. THE EXECUTIVE OFFICES AND LABORATORY OF LSI AND THE EXECUTIVE
OFFICES OF NPLI ARE LOCATED AT 1111 NEWTON STREET, GRETNA, LOUISIANA 70053,
WHICH IS NEAR NEW ORLEANS, AND THEIR TELEPHONE NUMBERS ARE (504) 361-8989 AND
(800) 433-3823.
-3-
<PAGE>
EXERCISE OF WARRANTS AND STOCK OPTIONS BY SELLING SHAREHOLDERS
The Selling Shareholders may exercise the warrants or stock options for
purchase of the Units (consisting of two shares of Common Stock) or shares of
Common Stock by presentation and surrender of the warrants or stock option and,
if applicable, the purchase form or subscription form annexed thereto, duly
executed and accompanied by payment, in cash, certified or official bank check
payable to the order of the Company in the amount of the exercise price of the
Units or the shares of Common Stock being purchased at the Company's office at
101 Park Avenue, Suite 810, Oklahoma City, Oklahoma 73102.
THE OFFERING
Securities offered by:
The Company ...................... 34,000 Units (each consisting of two shares
of Common Stock) offered to the holders and
in connection with the exercise of certain
warrants (the "Barron Chase Group Warrants")
and the resale by such holders as some of the
Selling Shareholders of the Common Stock
comprising the Units. Each share of Common
Stock comprising each Unit will only be
separately tradable upon issuance. Each of
the Barron Chase Group Warrants entitles the
the holder to purchase one Unit at $7.20 at
any time each on or before October 11, 1999.
See "Description of Securities--Underwriters'
Warrants."
50,000 shares of Common Stock offered to the
Equity Group, Inc. (the "Equity Group") in
connection with the exercise of a certain
stock option (the "EGI Stock Option") and the
resale by the Equity Group as one of the
Selling Shareholders of the Common Stock.
The EGI Stock Option entitles the Equity
Group to purchase up to 50,000 shares of
Common Stock at an exercise price of $3.00
per share on or before February 14, 2001.
See "Description of Securities--EGI Stock
Option."
144,058 shares of Common Stock offered to the
holders and in connection with the exercise
of certain warrants (the "Barber Bronson
Group Warrants") and the resale by such
holders as Selling Shareholders of the Common
Stock. Each of the Barber Bronson Group
Warrants entitles the the holder to purchase
one share of Common Stock at $2.20 at any
time each on or before October 14, 2000. See
"Description of Securities--Barber Bronson
Group Warrants."
The Selling Shareholders ......... 262,058 shares of Common Stock.
-4-
<PAGE>
Offering exercise price:
Per Unit underlying Barron
Chase Warrants ................ $7.20 per Unit, each comprised of two shares
of Common Stock, pursuant to exercise of the
Barron Chase Group Warrants. See
"Description of Securities--Barron Chase
Group Warrants."
Common Stock underlying Stock
Options ...................... $3.00 per share of Common Stock, pursuant to
exercise of the EGI Stock Option. See
"Description of Securities--EGI Stock
Option."
Common Stock underlying Barber
Bronson Group Warrants ....... $2.20 per share of Common Stock, pursuant to
exercise of the Barber Bronson Group
Warrants. See "Description of
Securities--Barber Bronson Group Warrants."
Common Stock offered for
resale by the Selling
Shareholders .................. Market price, which at July 6,
1998, the closing sale price as reported by
Nasdaq SmallCap Market was $4.63.
Common Stock outstanding ......... 5,602,446 shares of Common Stock as of the
date of this Prospectus; 5,864,504 after
completion of this offering, assuming
exercise in full of the Barron Chase Group
Warrants, the EGI Stock Option and Barber
Bronson Group Warrants. The number of
outstanding shares does not give effect to
the exercise of the outstanding warrants
exercisable for the purchase of 55,522
shares of Common Stock at $5.40 per share
and (ii) 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 Stock Option Plan") exercisable
for the purchase of 85,000 shares of Common
Stock and (iii) other stock options and
warrants exercisable for the purchase of
70,058 shares of Common Stock. See
"Management--1994 Stock Option Plan" and
"--1997 Non-Qualified Stock Option Plan" and
"Description of Securities--Other Outstanding
Stock Options and Warrants."
Net proceeds Indeterminable ...... $681,728 (after deduction of estimated
expenses of this offering of $30,000)
estimated net proceeds in the event the
Barron Chase Group Warrants, the EGI Stock
Option, and Barber Bronson Group Warrants are
exercised in full. There is no assurance
that any portion of the Barron Chase Group
Warrants, the EGI Stock Option, and Barber
Bronson Group Warrants will be exercised;
therefore, the net proceeds to the Company
are not determinable as of the date of this
Prospectus.
Use of proceeds .................. The reduction of indebtedness, possibly
acquisition of established drug testing
companies, and working capital. See "Use of
Proceeds."
Consequences to Non-Exercising
Warrant and Stock Option
Holders ....................... In the event the holders of any of the Barron
Chase Group Warrants, the EGI Stock Option,
and Barber Bronson Group Warrants fail to
exercise their respective warrants or stock
options on or before the respective
expiration dates, such warrants and stock
options will expire by their respective terms
without any further obligation on the part of
LSAI.
Delivery of Securities ........... The Company will deliver the certificates for
the shares of Common Stock issuable upon
exercise of the Barron Chase Group Warrants,
the EGI Stock Option, and Barber Bronson
Group Warrants, as promptly as
-5-
<PAGE>
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 symbol: Common Stock. . . . . . . . . . . . . . LABZ
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table sets forth summary financial and operating information
of the Company for the fiscal years ended December 31, 1997 and 1996, the three
months ended March 31, 1998 and 1997. See "Selected Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The financial information presented for the three months ended
March 31, 1998 and 1997, are derived from the unaudited financial statements of
the Company appearing elsewhere in this Prospectus. In the opinion of
management, the financial information presented for the three months ended March
31, 1998 and 1997, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. The
following information should be read in conjunction with the consolidated
financial statements and the related notes thereto of the Company, and other
information relating to the Company presented elsewhere in this Prospectus. The
results of operations during fiscal years and periods presented are not
necessarily indicative of the Company's future operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . $12,836,953 $8,726,799 $3,571,608 $2,587,222
Cost of laboratory services. . . . . . . . . 5,828,665 3,816,114 1,675,281 1,186,084
----------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . 7,008,288 4,910,685 1,896,327 1,401,138
Operating expenses . . . . . . . . . . . . . 4,574,669 3,673,201 1,241,786 968,594
Other income (expense) . . . . . . . . . . . (151,252) (21,808) 30,956 432,544
----------- ---------- ---------- ----------
Income from continuing operations
before income taxes . . . . . . . . . . . 2,282,367 1,215,676 685,497 407,624
Income tax expense . . . . . . . . . . . . . 953,264 527,171 283,937 173,621
----------- ---------- ---------- ----------
Income from continuing operations. . . . . . 1,329,103 688,505 401,560 234,003
----------- ---------- ---------- ----------
Loss from operations of discontinued
clinical business, net of tax benefit . . -- (500,636) -- --
Loss on disposal of clinical business,
net of tax benefit. . . . . . . . . . . . -- (773,580) -- --
----------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . . . . . $ 1,329,103 $ (585,711) $ 401,560 $ 234,003
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Basic earnings per common share:
Weighted average number of common
stock shares outstanding . . . . . . . 3,693,146 3,309,594 4,925,485 3,313,405
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations . . . . . . . . . . $ .36 $ .21 $ .08 $ .07
Discontinued operation. . . . . . . . . . -- (.39) -- --
----------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . $ .36 $ (.18) $ .08 $ .07
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average number of common
stock and common stock equivalents
outstanding. . . . . . . . . . . . . . 4,325,618 3,954,787 5,288,380 3,891,723
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations . . . . . . . . . . $ .31 $ .17 $ .08 $ .06
Discontinued operation. . . . . . . . . . -- (.32) -- --
----------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . $ .31 $ (.15) $ .08 $ .06
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ ------------
1997 1996 1998
----------- ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA(1)
Current assets . . . . . . . . . . . . .$ 5,702,984 $ 3,194,480 $ 5,936,802
Working capital. . . . . . . . . . . . . 3,305,983 1,002,712 3,603,129
Total assets . . . . . . . . . . . . . . 15,016,580 9,394,808 14,897,338
Current debt obligations . . . . . . . . 654,509 1,312,650 926,177
Long-term debt, net of current portion . 2,353,428 1,245,690 1,865,954
Stockholders' equity . . . . . . . . . . 9,906,303 5,650,250 10,337,863
</TABLE>
- ------------------------
(1) Gives no effect to exercise of (i) the EGI Stock Option, Barron Chase Group
Warrants, and Barber Bronson Group Warrants, (ii) the outstanding stock
options granted under the Laboratory Specialists of America, Inc. 1994
Stock Option Plan (the "1994 Option Plan") and the Laboratory Specialists
of America, Inc. 1997 Non-Qualified Stock Option Plan (the "1997 Option
Plan") exercisable for the purchase of 85,000 shares of Common Stock, and
(iii) other stock options and warrants exercisable for the purchase of
70,522 shares of Common Stock. See "Management--1994 Stock Option Plan"
and "--1997 Non-Qualified Stock Option Plan," and "Description of
Securities--Other Outstanding Stock Options and Warrants."
-7-
<PAGE>
RISK FACTORS
THE PURCHASE OF THE UNITS AND 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 THIS OFFERING SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT
IN THE UNITS AND COMMON STOCK OFFERED HEREBY.
MANAGEMENT'S DISCRETION OVER APPLICATION OF PROCEEDS. The Company will
allocate the estimated net proceeds of this offering, which are $681,728,
assuming exercise of the Barron Chase Group Warrants, the EGI Stock Option,
and Barber Bronson Group Warrants in full (although there is no assurance
that any portion of such warrants and stock options 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 this offering will be in the sole discretion of
management of the Company. Individual shareholders will have no control over
decisions regarding the application or use of the net proceeds of this
offering.
NON-SPECIFIC ACQUISITION STRATEGY. As part of its business strategy,
the Company has 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 LSAI, utilization of available cash equivalents,
possibly proceeds of this offering (if any), borrowings or other sources of
equity capital. The non-specific nature of the acquisitions makes an
estimation of 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 November 1994 (see "The Company--Background"), as
of the date of this Prospectus, the Company has not entered into any
agreements or commitments regarding any additional acquisitions, and there
can be no assurance that additional acquisitions will be consummated. The
Company's shareholders will, in all likelihood, not be afforded the
opportunity to approve the terms of any such acquisitions because the Board
of Directors will, in most cases, have the authority to consummate an
acquisition without shareholder approval. Shareholders will also not have an
opportunity to review the financial statements of an acquisition candidate,
except where shareholder approval is required.
The Company's acquisitions involve a number of risks including the
diversion of management's attention to the assimilation of the acquired
companies, adverse short-term effects on the Company's results of operations,
the amortization of acquired intangible assets, the possibility that the
acquired company or assets will not contribute to the Company's business,
profitability and cash flows as expected, as well as the acquisition of
operations other than legally defensible ("forensic") drug testing which may
be discontinued or disposed of at a loss. See "Business--Growth Strategy."
COMPETITION AMONG DRUG TESTING PROVIDERS. Drug testing laboratories
compete primarily on the basis of price per specimen, technical superiority,
and customer service. The price per specimen is an important factor in
obtaining and maintaining customers, as well as maintaining profitability
from operations. Competitive pricing by drug testing providers has resulted
in a decline in the price per specimen tested during recent years. The
average price per specimen obtained by the Company during each of the years
ended December 31, 1997 and 1996, and the three months ended March 31, 1998,
declined 2.0 percent, 4.7 percent and 4.0 percent, respectively, compared to
the preceding year or the same period in the preceding year, principally due
to increased price competition among providers of drug testing services.
There 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
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companies that offer hand-held devices and on-site equipment that can be used
to screen for the presence of drugs, although without forensic results. See
"Business--Competition."
EFFECT OF LOSS OR SUSPENSION OF LABORATORY CERTIFICATION. LSI's
laboratory is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), the College of American
Pathologist ("CAP"), as well as eight state and local jurisdictions. SAMHSA
is a federal regulatory agency charged with the responsibility and authority
to license laboratories performing drug testing services for the federal
government and its agencies and federally regulated industries, such as the
Department of Transportation, Department of Defense, etc. SAMHSA inspects,
monitors and certifies laboratories that perform drug testing services under
specific mandated guidelines. In order to obtain certification a laboratory
must apply for certification, meet certain minimum facility requirements and
then successfully complete a series of proficiency tests, which takes
approximately 12 months to complete. CAP is a private organization which
primarily focuses on the safety of working conditions in laboratories.
Certification by SAMHSA is essential to LSI's business because some of
its customers are required to use SAMHSA certified laboratories and many of
its customers look to such certification as an indication of reliability and
accuracy of tests. In order to remain certified, LSI is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements to which LSI is subject could result in suspension
or loss of certification. Such suspension or loss of certification could
have a material adverse effect on LSI and LSAI. NIDA suspended LSI's
certification from January 24 to April 26, 1990, citing LSI's alleged failure
to conform to NIDA regulations concerning certain operating procedures and
failure to segregate the processing of specimens from those specimens that
were not being processed in accordance with NIDA regulations. Laboratory
remodeling was necessary to effect the required division of specimen
processing. Upon LSI's compliance with NIDA regulations and reinspection by
NIDA, the suspension was lifted. Many of LSI's competitors are also
certified by one or more certifying bodies in addition to SAMHSA and CAP.
See "Business--Certification and Government Regulation."
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.
The average price per specimen obtained by the Company during each of the
years ended December 31, 1997 and 1996, and the three months ended March 31,
1998, declined 2.0 percent, 4.7 percent and 4.0 percent, respectively,
compared to the preceding year or the same period in the preceding year,
principally due to increased price competition among providers of drug
testing services. There can be no assurance that the price decline per
specimen will not further decline during 1998 and thereafter. The Company's
operations are affected by general economic conditions, as well as seasonal
trends, to which drug testing laboratories are generally subject.
Recessionary periods generally result in fewer new employee hires, and,
therefore, may lead to fewer pre-employment drug tests for customers. Budget
cuts at the federal, state or local government level may reduce business from
LSI's institutional and governmental customers. Because expenses associated
with maintaining LSI's testing work force are relatively fixed over the short
term, LSI's margins tend to increase in periods of higher testing volume and
decrease in periods of lower testing volume. These effects are not always
readily predictable because of the effect and timing of the startup of new
business and other factors, such as timing and amount of general and
administrative expense increases and price increases of laboratory supplies,
most of which are not within the control of the Company. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations."
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POTENTIAL LIABILITIES; LIMITED INSURANCE COVERAGE. Employees of LSI,
like those of all companies that provide drug testing services dealing with
urine analysis specimens, may be exposed to risks of urine-borne infections,
possibly including infection from AIDS and hepatitis, if appropriate
laboratory practices are not followed. Although no infections of 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 LSAI and LSI
have employment contracts with certain of their key employees, each such
contract may be terminated by the employee and the loss of one or more 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
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market, and may become subject to the "penny stock" trading rules. The
over-the-counter market is characterized as volatile in that securities
traded in such market are subject to substantial and sudden price increases
and decreases and at times price (bid and asked) information for such
securities may not be available. In addition, when there are two or less
market makers (a dealer holding itself out as ready to buy and sell the
securities on a regular basis), there is a risk that the dealer or group of
dealers may control the market in the security and set prices that are not
based on competitive forces, 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 this offering could adversely
affect the market price of the Common Stock. At the date of this Prospectus,
1,020,906 shares of LSAI'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. The Company has
filed a registration statement (Registration No. 333-58473) with the
Commission pursuant to which certain officers and directors are offering for
resale 105,906 shares of Common Stock which will not be subject to the resale
limitations of Rule 144. Rule 144 generally provides that beneficial owners
of shares who have held such shares for one year may sell within a
three-month period a number of shares not exceeding one percent of the total
outstanding shares or the average trading volume of the shares during the
four calendar weeks preceding such sale. Future sales of substantial amounts
of Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. See "Shares Eligible for Future
Sale."
EFFECT OF SECURITIES ISSUABLE UPON EXERCISE OF OUTSTANDING WARRANTS AND
STOCK OPTIONS. In addition to the Barron Chase Group Warrants, the EGI Stock
Option, and Barber Bronson Group Warrants, there are outstanding stock
options and warrants exercisable for the purchase of 155,222 shares of Common
Stock. See "Description of Securities--Other Outstanding Stock Options and
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 LSAI's Certificate of Incorporation and the Oklahoma
General Corporation Act may make it difficult to effect a change in control
of LSAI and replace incumbent management, and such provisions could limit the
price investors might be willing to pay in the future for shares of Common
Stock. See "Description of Securities--Anti-Takeover Provisions." The
Certificate of Incorporation authorizes the issuance of Preferred Stock in
classes or series, and the Board of Directors to set and determine voting,
redemption and conversion rights and other rights related to such class or
series of Preferred Stock, which in some circumstances, the Preferred Stock
could be issued and have the effect of preventing
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a merger, tender offer or other takeover attempt which the Company's Board of
Directors opposes. At some time in the future, the Company may become
subject to the anti-takeover provisions of the Oklahoma General Corporation
Act, which in such case and in some circumstances may discourage a person
from making a control share acquisition (generally an acquisition of voting
stock having more than 20 percent of all voting power in the election of
directors) without shareholder approval. See "Description of
Securities--Anti-Takeover Provisions."
THE COMPANY
Laboratory Specialists of America, Inc. (the "Company" or "LSAI"),
through its wholly-owned subsidiary Laboratory Specialists, Inc. ("LSI"),
owns and operates a laboratory providing drug testing services to corporate
and institutional customers seeking to detect and deter the use of illegal
drugs. The drug testing market currently is in an expansion mode in part due
to the adoptions of additional Department of Transportation regulations,
which became effective in 1995, that substantially expanded the regulations
mandating random drug testing of workers, especially in safety-sensitive
jobs, such as trucking, aviation, railroads and pipelines. Under these
amended regulations, 50 percent of transportation workers (mass-transit
workers and interstate truckers and bus drivers) are required to be tested
annually. It is expected that 7.5 million workers will be required to
undergo drug testing each year, up from 3.5 million workers in years prior to
1995. In addition, testing is on the rise generally as more companies test
job applicants and employees. Since 1987, the number of companies with drug
testing programs has more than tripled. Government data indicates that drug
abuse costs American business $100 billion annually in lost productivity,
increased accidents, absenteeism, medical claims and employee theft.
In the 1970s, drug testing was limited largely to criminal justice
agencies and drug treatment programs. In the 1980s, however, increased
awareness of the drug abuse problem and its consequences led to increased
drug testing in the workplace. Since a 1986 Executive Order by President
Reagan, there has been a broad base of governmental and private sector
initiatives, including federal regulations mandating drug testing in certain
circumstances. There has been a significant increase in the number of
companies which have instituted drug testing programs. It is estimated that
approximately 20 million U.S. workers 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.
LSAI was incorporated in Oklahoma on March 24, 1994, and its executive
offices are located at 101 Park Avenue, Suite 810, Oklahoma City, Oklahoma
73102 with a telephone number of (405) 232-9800. LSI 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
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resulted in LSI ceasing to be a wholly-owned subsidiary of MBf USA (the
"Peterson Share Exchange"). The MBf Promissory Note bears interest at the
rate of seven percent per annum and becomes due and payable on February 23,
1999. The acquisition of the LSI common stock by Mr. Peterson was accounted
for under the purchase method of accounting. The purchase price exceeded the
fair market value of the net tangible assets of LSI by approximately
$1,565,000 and represented a material payment for goodwill, an intangible
asset, which is being amortized over 40 years.
LSI ACQUISITION. Pursuant to an Exchange Agreement dated June 30, 1994,
Arthur R. Peterson, Jr. exchanged the outstanding common stock of LSI for
1,000,000 shares of Common Stock and 300,000 shares of Series I Preferred
Stock of LSAI, and MBf USA exchanged the LSI Preferred Stock for 239,405
shares of Common Stock of LSAI (the "LSI Acquisition"). As a result of the
LSI Acquisition, LSI became a wholly-owned subsidiary of LSAI on July 8,
1994. The LSI Acquisition was accounted for as a reverse acquisition of LSAI
by LSI. On July 10, 1995, the Series I Preferred Stock was redeemed by LSAI
in full and ceased to be issued and outstanding.
PRIVATE PLACEMENT AND PRIOR OPERATIONS OF LSAI. Prior to the LSI
Acquisition, the operations of LSAI were limited to completion of a private
placement of 150,000 shares of its Common Stock for net proceeds of
approximately $145,000 and the operations associated with the LSI Acquisition.
INITIAL PUBLIC OFFERING. On October 11, 1994, the Company completed its
offering of 1,320,000 shares of Common Stock and 660,000 1994 Warrants in
units of two shares of Common Stock and one 1994 Warrant at a price of $5.49
per unit, which represented a 10 percent discount of the public offering
price of $6.10 per unit. The 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, LSAI acquired all of the issued
and outstanding capital stock (the "NPLI Stock") of National
Psychopharmacology Laboratory, Inc., a Tennessee corporation ("NPLI"), and
purchased goodwill (the "NPLI Goodwill"), pursuant to a Stock Purchase
Agreement dated January 1, 1996 (the "NPLI Purchase Agreement"), and NPLI
became a wholly-owned subsidiary of the Company. NPLI was engaged in
forensic drug testing and clinical testing and analysis.
Pursuant to the NPLI Purchase Agreement, the Company agreed to pay (i)
$1,585,000 for the NPLI Stock (the "NPLI Stock Purchase Price") of which
$1,075,000 was paid at closing to the shareholders of NPLI (the "NPLI
Shareholders"), two unsecured promissory notes (the "Promissory Notes"), in
the aggregate adjusted face value of $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
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Company and NPLI leased certain office and laboratory facilities for a term
of six months and agreed to pay monthly rent of $3,000. The total purchase
price of approximately $3,400,000 was recorded as intangible assets.
The Company consolidated and assimilated the forensic drug testing
operations of NPLI with those of LSI during the first quarter of 1996. The
Company discontinued the clinical testing and analysis operations of NPLI
during the fourth quarter of 1996 after several attempts to dispose of the
clinical testing and analysis operations.
PLL ASSET PURCHASE. On January 31, 1997, LSAI acquired from Pathology
Laboratories, Ltd., a Mississippi corporation ("PLL"), certain forensic drug
testing assets (the "PLL Asset Purchase") pursuant to an Asset Purchase
Agreement dated January 31, 1997 (the "PLL Purchase Agreement"). The assets
purchased included the customer list of PLL and all related assets, and all
assets owned by PLL used in connection with the PLL office in Greenville,
South Carolina. Pursuant to the Purchase Agreement, LSAI (i) paid $1,600,000
at closing and $765,601 in four quarterly installments during the 12-month
period ended January 31, 1998, and (ii) assumed the obligations of PLL under
a certain Lease between Edith Schlien and PLL, dated September 16, 1996,
covering approximately 2,500 square feet of office space located in
Greenville, South Carolina, which requires monthly base rental payments of
$2,083 and which expires on September 16, 1999.
WARRANT REDEMPTION. In October 1997, LSAI completed the redemption of
its outstanding 1994 Warrants and, in connection therewith and pursuant to
exercise of the 1994 Warrants, issued 1,440,580 shares of its Common Stock
for $2.00 per share for net proceeds to LSAI of $2,470,951 (the "Warrant
Redemption Offering"). For services performed, LSAI issued to Barber &
Bronson Incorporated and its assigns warrants to purchase 144,058 shares of
Common Stock for $2.20 per share during the three-year period ending October
14, 2000, and paid Barber & Bronson Incorporated aggregate fees of $190,829.
In addition, 30,000 of the Barron Chase Group Warrants were exercised for the
purchase 30,000 units (60,000 shares of Common Stock) and the Company
received net proceeds of $216,000.
ACCU-PATH ASSET PURCHASE. On December 1, 1997, the Company acquired
from Accu-Path Medical Laboratory, Inc. ("Accu-Path") certain intangible
assets pursuant to an Asset Purchase Agreement, dated December 1, 1997, (the
"Accu-Path Asset Purchase"). The assets purchased included the customer list
of Accu-Path and all related assets and certain assets utilized in the
office of Accu-Path at its offices in Ruston, Louisiana (the "Accu-Path
Assets"). In connection with the acquisition of the Accu-Path Assets, the
Company agreed to pay 180 percent of the forensic testing revenues during the
period of June through November 1998, with an advance payment of $100,000 on
December 1, 1997, and the remaining purchase price balance will be paid
through four quarterly installment payments with the first of such payments
due on December 31, 1998. The purchase price of the Accu-Path Assets was or
will be allocated entirely to the customer list, which was recorded as an
intangible asset, which is being amortized over 15 years. At December 31,
1997, the accrued installment payments totaled $260,000.
HLI ASSET PURCHASE. On May 1, 1998, the Company acquired from Harrison
Laboratories, Inc. ("HLI") a customer list pursuant to an Asset Purchase
Agreement, dated April 13, 1998 (the "HLI Asset Purchase"). In connection
with the HLI Asset Purchase, the Company (i) paid $500,000 at closing and
agreed to pay on or before May 30, 1999, an amount equal to the revenues
attributable to the customer list during the one-year period ending April 30,
1999, in excess of $500,000, (ii) assumed HLI's obligations under a five-year
lease with Linc Quantum Analytics Inc., dated November 11, 1997, and acquired
the related equipment, and (iii) entered into a three-year employment
agreement with the principal shareholder of HLI as a sales representative,
providing for a based salary of $50,000 per year, monthly bonuses equal to
3.5 percent of revenues attributable to the customer list, and other
benefits. The purchase price of the customer list was recorded as an
intangible asset, which is being amortized over 15 years.
1998 PRIVATE OFFERING. On June 4, 1998, LABZ completed the offering of
555,222 shares of Common Stock for estimated net proceeds of $2,285,600 (the
"1998 Private Offering"). Furthermore, LABZ paid Jesup & Lamont Securities
Corporation (the "Jesup & Lamont") a placement fee of $174,650 and issued
warrants to Jesup & Lamont and its designees (the "Jesup & Lamont Group
Warrants") exercisable for the purchase of 55,522 shares of Common Stock for
$5.40 per share on or before June 3, 2003. 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 and obtain effectiveness of such registration statement
on or before September 2, 1998 or within five days of the clearance by the
Securities and Exchange Commission to allow acceleration of effectiveness,
and (ii) maintain the effectiveness of such registration statement until June
4, 2004. A penalty, in the form of warrants representing five percent the
shares of Common Stock sold pursuant to the 1998 Private Offering applies for
each 30-day period in which LABZ fails to file or obtain effectiveness of such
-14-
<PAGE>
registration statement. See "Description of Securities--Other Outstanding
Stock Options and Warrants."
TLI ASSET PURCHASE. On July 1, 1998, the Company acquired the customer
list and other intangible assets of TOXWORX Laboratories, Inc. for $2.4
million pursuant to an Asset Purchase Agreement dated June 8, 1998 (the "TLI
Asset Purchase"). The purchase price of the customer list and other
intangible assets acquired was recorded as an intangible asset, amortizable
over 15 years.
USE OF PROCEEDS
The net proceeds of this offering to be received by the Company will be
dependent upon the number of Units and shares of Common Stock purchased
pursuant to exercise of the Barron Chase Group Warrants, the EGI Stock
Option, and Barber Bronson Group Warrants. In the event such warrants and
options are exercised in full, the estimated net proceeds to the Company,
after deduction of estimated offering costs of $30,000, will be $681,728.
However, there is no assurance that any portion of the Barron Chase Group
Warrants, the EGI Stock Option, and Barber Bronson Group Warrants will be
exercised; therefore, the proceeds of this offering are not determinable as
of the date of this Prospectus. Pending use, the net proceeds will be
invested by the Company in investment grade, short-term, interest-bearing
securities. It is anticipated that the Company will expend the net proceeds
of this offering, assuming exercise of the Barron Chase Group Warrants, the
EGI Stock Option, and Barber Bronson Group Warrants in full, in repayment of
LSI's installment bank loan which was obtained on July 2, 1997, and secured
by LSI's recently acquired and renovated building in which the laboratory
facilities of LSI are currently located. This installment bank loan is
payable in 36 monthly principal and interest payments of approximately
$9,800, followed by 23 monthly principal and interest payments of
approximately $6,000, with a final payment becoming due on July 2, 2002, of
approximately $484,700. As of March 31, 1998, the outstanding principal
amount of this loan was $682,650, which bore interest at 8.65 percent per
annum. See "Business--Properties."
With respect to the repayment of all or a portion of the outstanding
borrowings under LSI's installment loan indebtedness, the Company or LSI may
reborrow such amounts under such loans for general corporate purposes,
including working capital and acquisitions in the Company's current and
related business area. See "Business--Growth Strategy."
The Company's business plan contemplates acquisitions of companies and
the assets of companies engaged in the providing of drug testing services
compatible with, or complementary to, the Company's business. As of the date
of this Prospectus, the Company has not entered into any definitive
agreements or commitments with respect to any additional acquisitions, and
there can be no assurance that any additional acquisitions will be
consummated. The amount of net proceeds expended with respect to an
acquisition will be determined by the Board of Directors of LSAI, and, in
most cases, it is anticipated that each acquisition will be consummated
without approval by the shareholders of LSAI. The amount, if any, of net
proceeds of this offering and the current available cash equivalents to be
utilized in the consummation of any acquisition cannot be determined at the
date of this Prospectus; however, in the event LSAI enters into any binding
commitments or definitive agreements with respect to an acquisition, this
Prospectus will be appropriately supplemented or amended. It is anticipated
by management of LSAI that the acquisitions funded with the net proceeds of
this offering, assuming exercise of the Barron Chase Group Warrants, the EGI
Stock Option, and Barber Bronson Group Warrants in full, and the available
cash equivalents of the Company, will be completed within three years after
completion of this offering. In the event the net proceeds of this offering,
if any, and the available cash equivalents of the Company are not sufficient
to complete an acquisition, additional sums will be drawn from the earnings
of the Company, if any, and thereafter from borrowings or other sources of
equity capital. See "Risk Factors--Non-Specific Acquisition Strategy."
SELLING SHAREHOLDERS
The 34,000 Barron Chase Group Warrants were issued to the respective
holders thereof in connection with the initial public offering of LSAI, each
of which is exercisable for the purchase one Unit (comprised of two shares of
Common Stock) at $7.20. The EGI Stock Option was granted in connection with
certain public relations services performed by the Equity Group. The EGI
Stock Option is exercisable for the purchase of 50,000 shares of Common
-15-
<PAGE>
Stock at an exercise price of $3.00 per share. The 144,058 Barber Bronson
Group Warrants were issued to the respective holders thereof in connection
with the Warrant Redemption Offering, each of which is exercisable for the
purchase of one share of Common Stock at $2.20. The following table presents
certain information as to the holders of the Barron Chase Group Warrants,
the EGI Stock Option, and Barber Bronson Group Warrants (the "Selling
Shareholders"), the ownership of Common Stock as of the date of this
Prospectus, as adjusted to give effect to exercise of the Barron Chase Group
Warrants, the EGI Stock Option, and Barber Bronson Group Warrants in full by
the named Selling Shareholders, together with the percentage holdings of the
outstanding shares of Common Stock, and, as adjusted, after giving effect to
this offering. Each of the Selling Shareholders have not held any position
or office or had any other material relationship with the Company or its
affiliates during the past three years, other than in connection with the
Company's initial public offering and Warrant Redemption Offering.
<TABLE>
COMMON STOCK OWNED
AFTER THE OFFERING
COMMON STOCK --------------------
UNDERLYING COMMON STOCK NUMBER
OPTIONS OR SHARES OF PERCENT
SELLING SHAREHOLDER WARRANTS OFFERED(1) SHARES OWNED
- ------------------- -------- ---------- ------ -----
<S> <C> <C> <C> <C>
The Equity Group, Inc. . . . . . . . . . 50,000 50,000 -- --
BARRON CHASE GROUP:
Roger Lockhart . . . . . . . . . . . . . 10,000 20,000 -- --
Michael Morrisett. . . . . . . . . . . . 5,000 10,000 -- --
Glenn Desort . . . . . . . . . . . . . . 5,000 10,000 -- --
Paul Medrano . . . . . . . . . . . . . . 2,000 4,000 -- --
Joe Cornwell . . . . . . . . . . . . . . 2,000 4,000 -- --
Larry Turel. . . . . . . . . . . . . . . 2,000 4,000 -- --
Brian Herman . . . . . . . . . . . . . . 2,000 4,000 -- --
Jack Gilbert . . . . . . . . . . . . . . 2,000 4,000 -- --
Ken Kamen. . . . . . . . . . . . . . . . 2,000 4,000 -- --
Dan O'Halloran . . . . . . . . . . . . . 1,000 2,000 -- --
Kent Grimm . . . . . . . . . . . . . . . 1,000 2,000 -- --
BARBER BRONSON GROUP:
Steven N. Bronson. . . . . . . . . . . . 53,073 53,073 -- --
James S. & Windy E. Cassel . . . . . . . 31,873 31,873 -- --
Steven C. Jacobs . . . . . . . . . . . . 36,015 36,015 -- --
Bruce C. Barber. . . . . . . . . . . . . 14,664 14,664 -- --
Eric R. Elliott. . . . . . . . . . . . . 5,012 5,012 -- --
Barry J. Booth . . . . . . . . . . . . . 1,621 1,621 -- --
Keil B. Stern. . . . . . . . . . . . . . 270 270 -- --
Mark A. Llano. . . . . . . . . . . . . . 270 270 -- --
Barber & Bronson Incorporated. . . . . . 1,260 1,260 -- --
</TABLE>
- ------------------------
(1) Assumes exercise of the EGI Stock Option, Barron Chase Group Warrants, and
Barber Bronson Group Warrants in full by each of the Selling Shareholders
followed by resale of such Common Stock.
LSAI has agreed to indemnify the Selling Shareholders against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments that they may be required to make in respect thereof, to the extent
permitted by law. In the opinion of the Securities and Exchange Commission,
such indemnification against liabilities under the 1933 Act is against public
policy and is therefore unenforceable. Furthermore, with respect to the EGI
Stock Option,
-16-
<PAGE>
Barron Chase Group Warrants, and Barber Bronson Group Warrants, the Company
agreed to pay and bear the cost of registering the Common Stock, the
incremental cost of which is $347. To the extent required by any state
securities regulatory agency, the Selling Shareholders will bear their
allocable shares of the incremental cost of registration of the securities
underlying the EGI Stock Option, Barron Chase Group Warrants, and Barber
Bronson Group Warrants.
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>
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 July 6 , 1998, the closing sale price of the Common Stock, as
quoted on Nasdaq SmallCap Market, was $4.63. On July 6, 1998, there were
approximately 1,600 holders of LSAI's Common Stock.
LSAI has never paid a cash dividend on its Common Stock. LSAI's
dividend policy is to retain its earnings to support the expansion of its
operations. The Board of Directors of LSAI does not intend to pay cash
dividends on the Common Stock in the foreseeable future. Any future cash
dividends will depend on future earnings, capital requirements, LSAI's
financial condition and other factors deemed relevant by the Board of
Directors.
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, 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
-17-
<PAGE>
required to (i) obtain information concerning the purchaser's financial
situation, investment experience, and investment objectives and (ii) make a
reasonable determination that transactions in the penny stock are suitable
for the purchaser and the purchaser (or his independent adviser in such
transactions) has sufficient knowledge and experience in financial matters
and may be reasonably capable of evaluating the risks of such transactions,
followed by receipt of a manually signed written statement which sets forth
the basis for such determination and which informs the purchaser that it is
unlawful to effectuate a transaction in the penny stock without first
obtaining a written agreement to the transaction. Furthermore, until the
purchaser becomes an established customer (I.E., having had an account with
the dealer for at least one year or, the dealer had effected three sales or
more of penny stocks on three or more different days involving three or more
different issuers), the broker-dealer must obtain from the purchaser a
written agreement to purchase the penny stock which sets forth the identity
and number of shares or units of the security to be purchased prior to
confirmation of the purchase. A dealer is obligated to provide certain
information disclosures to the purchaser of a penny stock, including (i) a
generic risk disclosure document which is required to be delivered to the
purchaser before the initial transaction in a penny stock, (ii) a
transaction-related disclosure prior to effecting a transaction in the penny
stock (I.E., confirmation of the transaction) containing bid and asked
information related to the penny stock and the dealer's and salesperson's
compensation (I.E., commissions, commission equivalents, markups and
markdowns) in connection with the transaction, and (iii) the
purchaser-customer must be furnished account statements, generally on a
monthly basis, which include prescribed information relating to market and
price information concerning the penny stocks held in the customer's account.
The penny stock trading rules do not apply to those transactions in which a
broker-dealer or salesperson does not make any purchase or sale
recommendation to the purchaser or seller of the penny stock.
Required compliance with the penny stock trading rules affect or will
affect the ability to resell the Common Stock by a holder principally because
of the additional duties and responsibilities imposed upon the broker-dealers
and salespersons recommending and effecting sale and purchase transactions in
such securities. In addition, many broker-dealers will not effect
transactions in penny stocks, except on an unsolicited basis, in order to
avoid compliance with the penny stock trading rules. The penny stock trading
rules consequently may materially limit or restrict the liquidity typically
associated with other publicly traded equity securities. In this connection,
the holder of Common Stock may be unable to obtain on resale the quoted bid
price because a dealer or group of dealers may control the market in such
securities and may set prices that are not based on competitive forces.
Furthermore, at times there may be a lack of bid quotes which may mean that
the market among dealers is not active, in which case a holder of Common
Stock may be unable to sell such securities. Because market quotations in the
over-the-counter market are often subject to negotiation among dealers and
often differ from the price at which transactions in securities are effected,
the bid and asked quotations of the Common Stock may not be reliable.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
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>
AS OF
MARCH 31,
1998(1)
-----------
<S> <C>
Current portion of long-term debt. . . . . . . . . . . . . . $ 926,177
Long-term debt, net of current portion . . . . . . . . . . . 1,865,954
Stockholders' equity:
Preferred Stock, $.001 par value, 10,000,000
authorized; none outstanding. . . . . . . . . . . . . . --
Common Stock, $.001 par value, 20,000,000 shares
authorized; 4,934,818 shares issued and outstanding . . 4,935
Paid-in capital in excess of par, common stock . . . . . . 8,321,355
Retained earnings. . . . . . . . . . . . . . . . . . . . . 2,011,573
-----------
Total stockholders' equity . . . . . . . . . . . . . . . 10,337,863
-----------
Total capitalization . . . . . . . . . . . . . . . . . . . . $13,129,994
-----------
-----------
</TABLE>
- ------------------------
-18-
<PAGE>
(1) Gives no effect to exercise of (i) the EGI Stock Option, Barron Chase Group
Warrants, and Barber Bronson Group Warrants, (ii) the outstanding stock
options granted under the 1994 Option Plan and the 1997 Option Plan
exercisable for the purchase of 85,000 shares of Common Stock, and (iii)
other stock options exercisable for the purchase of 70,522 shares of Common
Stock. See "Management--1994 Stock Option Plan" and "--1997 Non-Qualified
Stock Option Plan," and "Description of Securities--Other Outstanding
Stock Options and Warrants."
SELECTED FINANCIAL INFORMATION
The following selected financial information is qualified by
reference to, and should be read in conjunction with, the consolidated
financial statements and related notes of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein. The selected financial information presented
below is not necessarily indicative of the future results of operations or
financial performance of the Company. The selected financial information as
of and for the years ended December 31, 1997 and 1996, is derived from the
Company's audited financial statements which are presented elsewhere in this
Prospectus. The selected financial information presented as of and for the
three months ended March 31, 1998 and 1997, is derived from the unaudited
financial statements of the Company which are presented elsewhere in this
Prospectus. In the opinion of management of the Company, the unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such information.
<TABLE>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . $12,836,953 $8,726,799 $3,571,608 $2,587,222
Cost of laboratory services. . . . . . . 5,828,665 3,816,114 1,675,281 1,186,084
----------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . 7,008,288 4,910,685 1,896,327 1,401,138
----------- ---------- ---------- ----------
Operating expenses:
Selling expenses . . . . . . . . . . . 654,284 601,945 196,414 132,129
General and administrative . . . . . . 3,230,117 2,442,602 853,028 695,616
Depreciation and amortization. . . . . 690,268 504,123 192,344 140,849
Asset impairment . . . . . . . . . . . -- 124,531 -- --
----------- ---------- ---------- ----------
Total operating expenses . . . . . . 4,574,669 3,673,201 1,241,786 968,594
----------- ---------- ---------- ----------
Other income (expense):
Interest expense . . . . . . . . . . . (230,433) (67,185) (46,144) (36,876)
Interest income. . . . . . . . . . . . 78,035 41,208 37,167 11,653
Other income . . . . . . . . . . . . . 1,146 4,169 39,933 303
----------- ---------- ---------- ----------
Total other (expense) income . . . . (151,252) (21,808) 30,956 (24,920)
----------- ---------- ---------- ----------
Income from operations before
income taxes. . . . . . . . . . . 2,282,367 1,215,676 685,497 407,624
Income tax expense . . . . . . . . . . . 953,264 527,171 283,937 173,621
----------- ---------- ---------- ----------
Income from continuing operations. . 1,329,103 688,505 401,560 234,003
Discontinued Operations:
Loss from operations of discontinued
clinical business, net of tax
benefit. . . . . . . . . . . . . . . -- (500,636) -- --
Loss on disposal of clinical
business, net of tax benefit . . . . -- (773,580) -- --
----------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . . . 1,329,103 (585,711) 401,560 234,003
Dividend on preferred stock(1) . . . . . -- -- -- --
----------- ---------- ---------- ----------
Net income (loss) available for
common stockholders. . . . . . . . . . $ 1,329,103 $ (585,711) $ 401,560 $ 234,003
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Basic earnings per common share:
Weighted average number of common
stock shares outstanding. . . . . . 3,693,146 3,309,594 4,925,485 3,313,405
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations. . . . . . . . $ .36 $ .21 $ .08 $ .07
Discontinued operation . . . . . . . -- (.39) -- --
----------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . $ .36 $ (.18) $ .08 $ .07
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average number of common
stock and common stock
equivalents outstanding . . . . . . 4,325,618 3,954,787 5,288,380 3,891,723
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations. . . . . . . . $ .31 $ .17 $ .08 $ .06
Discontinued operation . . . . . . . -- (.32) -- --
----------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . $ .31 $ (.15) $ .08 $ .06
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
-19-
<PAGE>
<TABLE>
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1997 1996 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by operating
activities . . . . . . . . . . . . . . $ 1,654,806 $ 472,801 $ 762,426 $ 392,623
Net cash used in investing activities. . (3,644,741) (1,402,328) (89,631) (2,060,922)
Net cash provided by (used in)
financing activities . . . . . . . . . 4,126,193 (754,143) (415,474) 1,584,331
</TABLE>
<TABLE>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1996 1998
----------- ---------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (1):
Current assets . . . . . . . . . . . . . $ 5,702,984 $3,194,480 $ 5,936,802
Working capital. . . . . . . . . . . . . 3,305,983 1,002,712 3,603,129
Total assets . . . . . . . . . . . . . . 15,016,580 9,394,808 14,897,338
Current debt obligations . . . . . . . . 654,509 1,312,650 926,177
Long-term debt, net of current portion . 2,353,428 1,245,690 1,865,954
Stockholders' equity . . . . . . . . . . 9,906,303 5,650,250 10,337,863
</TABLE>
- ------------------------
(1) Gives no effect to exercise of (i) the EGI Stock Option, Barron Chase Group
Warrants, and Barber Bronson Group Warrants, (ii) the outstanding stock
options granted under the 1994 Option Plan and the 1997 Option Plan
exercisable for the purchase of 85,000 shares of Common Stock, and (iii)
other stock options and warrants exercisable for the purchase of 70,522
shares of Common Stock. See "Management--1994 Stock Option Plan" and
"--1997 Non-Qualified Stock Option Plan," and "Description of Securities--
Other Outstanding Stock Options and Warrants."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO OF THE COMPANY AND "SELECTED
FINANCIAL INFORMATION" APPEARING ELSEWHERE IN THIS PROSPECTUS.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for
(i) the fiscal years ended December 31, 1997 and 1996, and (ii) the three
months ended March 31, 1998 and 1997, which are derived from the consolidated
financial statements of the Company appearing elsewhere in this Prospectus.
The results of operations for the years and periods presented are not
necessarily indicative of the Company's future operations.
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------- -----------------------------------------
1997 1996 1998 1997
--------------------- ------------------- ------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . $12,836,953 100.0% $8,726,799 100.0% $3,571,608 100.0% $2,587,222 100.0%
Cost of laboratory services. . . . . . . 5,828,665 45.4% 3,816,114 43.7% 1,675,281 46.9% 1,186,084 45.9%
----------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit . . . . . . . . . . . . . . 7,008,288 54.6% 4,910,685 56.3% 1,896,327 53.1% 1,401,138 54.1%
----------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling. . . . . . . . . . . . . . . . 654,284 5.0% 601,945 6.9% 196,414 5.5% 132,129 5.1%
General and administrative . . . . . . 3,230,117 25.2% 2,442,602 28.0% 853,028 23.9% 695,616 26.9%
Depreciation and amortization. . . . . 690,268 5.4% 504,123 5.8% 192,344 5.4% 140,849 5.4%
Asset impairment . . . . . . . . . . . -- -- % 124,531 1.4% -- 0.0% -- 0.0%
----------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses . . . . . . . . 4,574,669 35.6% 3,673,201 42.1% 1,241,786 34.8% 968,594 37.4%
----------- ----- ---------- ----- ---------- ----- ---------- -----
2,433,619 19.0% 1,237,484 14.2% 654,541 18.3% 432,544 16.7%
Other income (expense) . . . . . . . . . (151,252) 1.2% (21,808) .3% 30,956 .9% (24,920) 1.0%
----------- ----- ---------- ----- ---------- ----- ---------- -----
Income from continuing
operations before income taxes . . . . 2,282,367 17.8% 1,215,676 13.9% 685,497 19.2% 407,624 15.7%
Income tax expense . . . . . . . . . . . 953,264 7.4% 527,171 6.0% 283,937 8.0% 173,621 6.7%
----------- ----- ---------- ----- ---------- ----- ---------- -----
Income from continuing operations. . . . 1,329,103 10.4% 688,505 7.9% 401,560 11.2% 234,003 9.0%
Discontinued Operations:
Loss from operations of discontinued
clinical business, net of tax
benefit. . . . . . . . . . . . . . . -- -- % (500,636) 5.7% -- -- % -- -- %
Loss on disposal of clinical
business, net of tax benefit . . . . -- -- % (773,580) 8.9% -- -- % -- -- %
----------- ----- ---------- ----- ---------- ----- ---------- -----
Net income (loss). . . . . . . . . . . . $ 1,329,103 10.4% $ (585,711) 6.7% $ 401,560 11.2% $ 234,003 9.0%
----------- ----- ---------- ----- ---------- ----- ---------- -----
----------- ----- ---------- ----- ---------- ----- ---------- -----
Basic earnings per common share:
Weighted average number of common
stock shares outstanding . . . . . . 3,693,146 3,309,594 4,925,485 3,313,405
---------- ----------
---------- ----------
</TABLE>
-20-
<PAGE>
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------- -----------------------------------------
1997 1996 1998 1997
--------------------- ------------------- ------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing operations. . . . . . . . .36 .21 $ .08 $ .07
Discontinued operation . . . . . . . -- (.39) -- --
----------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . $ .36 $ (.18) $ .08 $ .07
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average number of common
stock and common stock
equivalents outstanding . . . . 4,325,618 3,954,787 5,288,380 3,891,723
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Continuing operations. . . . . . . . .31 .17 $ .08 $ .06
Discontinued operation . . . . . . . -- (.32) -- --
----------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . $ .31 $ (.15) $ .08 $ .06
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
During each of the fiscal years ended December 31, 1997 and 1996, and
the three months ended March 31, 1998, LSI experienced a 2.0 percent, 4.7
percent and 4.0 percent decrease in the price per specimen, respectively,
compared to the preceding fiscal year or the same period in the preceding
year, principally due to increased price competition amongst providers of
drug testing services, price per specimen being an important factor in
obtaining and maintaining customers. Management of LSI closely monitors its
price per specimen, the prices of its competitors and the costs of processing
specimens to remain competitive, as well as profitable. There can be no
assurance that the price decline per specimen will not further decline during
1998 and thereafter. In the event price stabilization has not occurred, LSI
will, as it has in the past, take appropriate measures to downsize its drug
testing personnel and possibly further automate the testing processes and
employ additional technology to continue profitability from operations,
although there can be no assurance that such measures will assure
profitability in the event of substantial price reductions within the short
term. During each of the fiscal years ended December 31, 1997 and 1996, and
the three months ended March 31, 1998, the number of specimens analyzed
increased 51.6 percent, 34.5 percent and 44.2 percent, respectively,
compared to the preceding fiscal year ended or the same period in the
preceding year.
In connection with NPLI Acquisition, the Company acquired the clinical
testing and analysis operation conducted by NPLI. After several attempts to
sell the clinical testing analysis operation of NPLI, the Company
discontinued the clinical testing and analysis operation in the fourth
quarter of 1996. This resulted in a loss from the discontinued operation of
$500,636 (after giving effect to the associated tax benefit of $257,904) and
a loss on disposal of the clinical business of $773,580 (after giving effect
to the associated tax benefit of $489,420), which resulted in a loss of $.39
per weighted average number of common shares used to compute basic earnings
per share for the fiscal year ended December 31, 1996. Before such
discontinued operation, the Company's income from continuing operations for
the fiscal year ended December 31, 1996 was $688,505 or $.21 per weighted
average number of common shares used to compute basic earnings per share.
See "Business--Background--NPLI Acquisition."
Through its acquisition strategy, management of the Company anticipates,
although there can be no assurance, that the consolidation and assimilation
of the operations associated with the additional companies acquired, if any,
will result in increased testing volume with minimal indirect additional
specimen processing cost, resulting in increased profitability and cash
flows. See "Business--Growth Strategy." In the event the Company fails to
make acquisitions which contribute to the profitability, the Company may be
required to reduce general and administrative expenses.
COMPARISON OF THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Revenues increased to $3,571,608 in the three months ended March 31,
1998 (the "1998 Interim Period"), from $2,587,222 in the three months ended
March 31, 1997 (the "1997 Interim Period"), an increase of 38.0 percent. The
increase in revenues was due to a 44.2 percent increase in the number of
specimens analyzed during the 1998 Interim Period as compared to the 1997
Interim Period, although partially offset by a decrease of 4.0 percent in the
average price per specimen. The increase in number of specimens analyzed was
attributable to the purchase of customer lists and other assets of Pathology
Laboratories, Ltd. (the "PLL Asset Purchase") and Accu-Path Medical
Laboratory, Inc. (the "Accu-Path Asset Purchase") as well as LSI's normal
sales and marketing efforts. The decrease in the average price per specimen
was principally due to increased price competition among providers of drug
testing services, price per specimen being an important factor in obtaining
and maintaining clients.
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<PAGE>
Cost of revenues increased $489,197 from $1,186,084 in the 1997 Interim
Period to $1,675,281 in 1998 Interim Period, an increase of 41.2 percent.
Gross profit on revenues decreased as a percentage of revenues from 54.1
percent in the 1997 Interim Period to 53.1 percent in 1998 Interim Period.
The decrease was primarily due to the decrease in the price per specimen. In
addition, a key laboratory position was added in early 1998 resulting in
increased salaries.
Operating expenses increased from $968,594 in the 1997 Interim Period to
$1,241,786 in the 1998 Interim Period, an increase of 28.2 percent, and
decreased as a percentage of revenues from 37.4 percent to 34.8 percent. The
increase in operating expenses for the Interim Period was attributable to
increases in selling expenses of $64,285, general and administrative expenses
of $157,412 and depreciation and amortization of $51,495. The increase in
general and administrative expenses was principally a result of (i) an
increase in executive officer compensation, (ii) the addition of several key
positions at LSI and (iii) the addition of certain overhead costs associated
with the PLL Asset Purchase and Accu-Path Asset Purchase. The increase in
selling expenses was due to several additions to the sales force during 1997,
to assist in maintaining forensic clients acquired in the PLL Asset Purchase
and Accu-Path Asset Purchase as well as generate additional business in
other areas of the country. Depreciation increased due to the renovation of
the new laboratory and purchase of additional equipment at LSI, while
amortization increased due to the PLL Asset Purchase and Accu-Path Asset
Purchase and the amortization of the acquired customer lists.
Income from operations increased from $432,544 in the 1997 Interim
Period to $654,541 in the 1998 Interim Period, a 51.3 percent increase and
increased from 16.7 percent of revenues in the 1997 Interim Period to 18.3
percent of revenues in the 1998 Interim Period.
Interest expense increased from $36,876 in the 1997 Interim Period to
$46,144 in 1998 Interim Period, a 25.1 percent increase. The increase in
interest expense is a result of a capital lease agreement for certain
laboratory equipment entered into late in the first quarter of 1996 and the
bank loans associated with the PLL Asset Purchase and the purchase and
renovation of the new laboratory building. Interest income increased from
$11,653 in the 1997 Interim Period to $37,167 in the 1998 Interim Period.
Other income increased from $303 in the 1997 Interim Period to $39,933 in the
1998 Interim Period. Net income, after provision for income taxes, increased
from $234,003 in the 1997 Interim Period to $401,560 in the 1998 Interim
Period, a 71.6 percent increase.
COMPARISON OF FISCAL 1997 AND 1996
Revenues increased $4,110,154 to $12,836,953 in 1997 from $8,726,799 in
1996, an increase of 47.1 percent. The increase in revenues was due to a
51.6 percent increase in the number of specimens analyzed during 1997 as
compared to 1996, although partially offset by a decrease of two percent in
the average price per specimen. The increase in number of specimens analyzed
was attributable to the PLL Asset Purchase and Accu-Path Asset Purchase as
well as the obtaining of additional accounts through LSI's normal sales and
marketing efforts. The decrease in the average price per specimen was
principally due to increased price competition among providers of drug
testing services, price per specimen being the most important factor in
obtaining and maintaining clients. There can be no assurance that the price
per specimen will not further decline in 1998 which will directly impact
profitability. See "Business--Competition." Cost of laboratory services
increased $2,012,551 from $3,816,114 in 1996 to $5,828,665 in 1997, an
increase of 52.7 percent. This increase was primarily due to the increased
volume of specimen testing and increased as a percentage of revenues by 1.7
percent. Gross profit on revenues decreased as a percentage of revenues from
56.3 percent in 1996 to 54.6 percent in 1997.
Operating expenses increased $901,468 from $3,673,201 in 1996 to
$4,574,669 in 1997, an increase of 24.5 percent, but decreased as a
percentage of revenues from 42.1 percent to 35.6 percent. The increase in
operating expenses was attributable to the increase in general and
administrative expenses of $787,515, selling expense of $52,339, and
depreciation and amortization of $186,145. The Company did not recognize an
asset impairment in 1997, while during 1996 the Company recognized an asset
impairment of $124,531, which was attributable primarily 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
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<PAGE>
customers obtained in connection with the PLL Asset Purchase and the
Accu-Path Asset Purchase. Depreciation increased due to the acquisition of
new laboratory equipment in 1997 and the acquisition and renovation of LSI
laboratory and office facilities, and amortization increased due to the
amortization of the customer list and goodwill acquired in connection with
the PLL Asset Purchase and the Accu-Path Asset Purchase.
Interest expense increased $163,248 from $67,185 in 1996 to $230,433 in
1997, a 243 percent increase. The increase in interest expense was the
result of the effect of a full year of a capital lease agreement, entered
into in February 1996, for certain laboratory equipment and the increase in
long-term debt associated with the acquisition and renovation of LSI's
current laboratory and office facilities, and the PLL Acquisition. Interest
income increased from $41,208 in 1996 to $78,035 in 1997, a 89.4 percent
increase. The increase resulted from an increase in cash equivalents held
for investment attributable to cash flows from operations and the net
proceeds from the issuance of Common Stock in connection with the Warrant
Redemption Offering. See "Business--Background--Warrant Redemption
Offering." Other income decreased from $4,169 in 1996 to $1,146 during 1997.
Income from continuing operations, after provision for income taxes,
increased $640,598 from $688,505 in 1996 to $1,329,103 in 1997, a 93 percent
increase. Income per share of common stock from continuing operations on a
basic basis was $.36 ($.31 per share on a diluted basis) in 1997, compared to
net income per share of common stock on a basic basis of $.21 ($.17 per share
on a diluted basis) in 1996.
COMPARISON OF FISCAL 1996 AND 1995
Revenues increased to $8,726,799 in 1996 from $6,925,716 in 1995, an
increase of 26 percent. The increase in revenues was due to a 34.5 percent
increase in the number of specimens analyzed during 1996 as compared to 1995,
although partially offset by a decrease of 4.7 percent in the average price
per specimen. The increase in number of specimens analyzed was attributable
to the NPLI Acquisition as well as the obtaining of additional accounts
through LSI's normal sales and marketing efforts. The decrease in the
average price per specimen was principally due to increased price competition
among providers of drug testing services, price per specimen being the most
important factor in obtaining and maintaining clients. Cost of laboratory
services increased $569,644 from $3,246,470 in 1995 to $3,816,114 in 1996.
This increase was primarily due to the increased volume of specimen testing
and decreased as a percentage of revenues by 3.2 percent. Gross profit on
revenues increased as a percentage of revenues from 53.1 percent in 1995 to
56.3 percent in 1996.
Operating expenses increased from $2,951,415 in 1995 to $3,673,201 in
1996, an increase of 24.5 percent, but decreased as a percentage of revenues
from 42.6 percent to 42.1 percent. The increase in operating expenses was
attributable to the increase in general and administrative expenses of
$285,192, selling expense of $40,475, depreciation and amortization of
$271,588, and the recognition of asset impairment of $124,531. The increase
in general and administrative expenses was principally due to the increase in
executive officer compensation of LSAI and accrued bonuses for certain key
employees of LSI. The increase in selling expenses was due to the addition
of one sales representative and increased personnel to assist in maintaining
forensic drug testing clients and customers obtained in connection with the
NPLI Acquisition, although partially offset by a reduction in commission
expenses. Depreciation increased due to the acquisition of new laboratory
equipment in February 1996, and amortization increased due to the
amortization of the customer list and goodwill acquired in connection with
the NPLI Acquisition. Asset impairment was attributable principally to the
write-down, to the estimated fair market value, of LSI's current laboratory
facilities which are held for sale as of the date of this Report.
Interest expense increased from $29,651 in 1995 to $67,185 in 1996, a
126.6 percent increase. The increase in interest expense was the result of a
capital lease agreement for certain laboratory equipment. Interest income
decreased from $126,939 in 1995 to $41,208 in 1996, a 67.5 percent decrease.
The decrease resulted from a reduction of cash equivalents held for
investment due to the NPLI Acquisition and other acquisition activities.
Other income decreased from $323,846 in 1995 to $4,169 in 1996. The decrease
in other income was primarily due to the 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.
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<PAGE>
During the fourth quarter of 1996, the clinical testing and analysis
operation conducted by NPLI was discontinued, which resulted in a loss from
discontinued operation of $500,636 (after giving effect to the associated tax
benefit of $257,904) and a loss on disposal of the clinical business of
$773,580 (after giving effect to the associated tax benefit of $489,420),
which resulted in a net loss from continued and discontinued operations of
$585,711. Net loss from continued and discontinued operations per share of
common stock on a basic basis was $.18 and $.15 per share of common stock on
a diluted basis.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
The Company has historically used options to retain and compensate its
officers, directors, employees and others. During 1997, 1996 and 1995, the
Company granted 590,000 stock options for the purchase of the Common Stock of
LSAI to certain officers, directors, employees and others. In accordance
with Accounting Principles Board Opinion No. 25, the compensation cost of
such stock options is not recognized in the consolidated financial statements
of the Company. The outstanding stock options granted in 1997 had an
estimated fair value at the date of grant of the options of $473,958,
utilizing the methodology prescribed under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. After giving effect to the estimated fair value of
such options, the Company had net pro forma income of $1,053,706 ($.29 per
common share on a basic basis and $.24 per common share on a diluted basis)
for the year ended December 31, 1997, and had net pro forma loss of $673,516
($.20 per common share on a basic basis and $.17 per common share on a
diluted basis) for the year ended December 31, 1996.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
The Company has numerous computer systems which were developed employing
two digit year date format rather than four digit date format. Where date
logic requires the year 2000 or beyond, such data structures may produce
inaccurate results. Management has implemented a program to comply with year
2000 requirements on a system-by-system basis. The program includes
extensive systems testing and is expected to be completed in 1998, at which
time the Company's computer systems will be year 2000 compliant. Each of the
systems has a solution that is potentially unique and often dependent on
third-party software and developers. A failure of the Company to ensure that
its computer systems are year 2000 compliant could have a material adverse
effect on the Company's operations.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires the reporting of all items of income that are
recognized under accounting standards as components of comprehensive income,
consisting of both net income and those items that bypass the income
statement and are reported in the balance within a separate component of
stockholders' equity, be reported in a financial statement and displayed with
the same prominence as other financial statements. This statement is
effective for financial statements of the Company for the year ending
December 31, 1998. Management of the Company believes that adoption of SFAS
No. 130 will not have a material effect on the Company's financial statements.
Furthermore, in June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which modifies segment
reporting requirements and establishes certain criteria for reporting
disclosures concerning a company's products and services, geographic areas
and major customers in annual and interim financial statements. This
statement is effective for financial statements of the Company for the year
ending 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.
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<PAGE>
QUARTERLY RESULTS OF OPERATIONS
LSI's operations are affected by seasonal trends to which drug testing
laboratories are generally subject. In LSI's experience, testing volume
tends to be higher in the second calendar quarter and lower in the winter
holiday season and the beginning of the first calendar quarter primarily due
to hiring patterns which affect pre-employment drug testing. Because the
general and administrative expenses associated with maintaining and adding to
LSI's testing work force are relatively fixed over the short term, LSI's
margins tend to increase in periods of higher testing volume and decrease in
periods of lower testing volume. These effects are not always apparent
because of the impact and timing of the startup of new businesses and other
factors such as the timing and amount of price increases or decreases and
additional acquisitions. Nevertheless, LSI's results of operations for a
particular quarter may not be indicative of the results to be expected during
other quarters.
INCOME TAXES
The provisions for income taxes from continuing operations on pretax
income were based on the effective combined federal and state graduated
corporate income tax rates of approximately 42 percent in 1997 and 43 percent
for 1996, and were $953,264 and $527,171 for the years ended December 31,
1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $762,426 in the
three months ended March 31, 1998, and $392,623 in the three months ended
March 31, 1997. As of March 31, 1998, LSAI had working capital of
$3,603,129, compared to working capital of $3,305,983, at December 31, 1997.
In the event the Company's revenues increase as anticipated by management of
the Company, the Company's working capital requirements will also increase
and such requirements may exceed the net cash provided by operating
activities and require that cash be used in operating activities from sources
other than operations, including the available cash and cash equivalents
(which were $3,120,960 at March 31, 1998) and borrowings. The increase in
cash used in operations will principally be due to the timing differential
between Company's payment for materials and services to its suppliers and
employee work force, and the time at which the Company receives payment from
its customers.
On June 4, 1998, LSAI completed the offering of 555,222 shares of Common
Stock for estimated net proceeds of $2,285,600 pursuant to the 1998 Private
Offering. On July 1, 1998 the Company completed the TLI Asset Purchase. The
$2.4 million purchase price was paid from the proceeds of the 1998 Private
Offering. See "The Company--Background--1998 Private Offering and "--TLI
Asset Purchase."
FUTURE OPERATIONS AND LIQUIDITY
In February 1996, LSI entered into a capital lease obligation of
approximately $650,000 with a vendor for the purchase equipment and certain
lab supplies at a fixed price per drug screen performed. The minimum monthly
amount payable under the agreement is approximately $59,750, with
approximately $13,000 per month allocated to the principal and interest of
the capital lease obligation, and the remaining cost being allocated to the
cost of laboratory supplies. The agreement resulted in LSI recording
approximately $650,000 in additional equipment, with an equal amount of
capital lease obligation recorded as a long-term debt obligation payable over
five years. As of March 31, 1998, the outstanding capital lease obligation
was $411,545.
On January 9, 1997, LSI entered in to a loan agreement with Hibernia
National Bank (the "Bank") which established a credit facility comprised of a
five-year term loan of up to $1,700,000 and a one-year revolving loan of
$250,000 to be used for the PLL Asset Purchase. As of March 31, 1998, the
outstanding principal amount of the five-year term loan was $1,303,333.
Advances on the revolving loan are based upon LSI maintaining certain ratios
and compliance with the covenants of the loan agreement and LSI's liquid
assets including its accounts receivable. The outstanding principal amount
of the revolving loan bears interest at the Citibank, N.A. rate (which was
nine percent at March 31, 1998) and the term loan bears interest at such rate
plus one-half percent. The loan is secured by the accounts receivable,
intangible assets, and by a mortgage on the building owned by LSI, and is
guaranteed by LSAI. The loan agreement contains various covenants, including
certain financial ratios, all of which the Company was in full compliance
with as of March 31, 1998.
On July 2, 1997, LSI entered into a loan agreement with the bank for a
term loan in the principal amount of $720,000, to refinance the building in
which LSI's laboratory and offices are relocated. This loan is payable in 36
monthly installments of approximately $9,800, followed by 23 monthly
installments of approximately $6,000, with a final payment becoming due on
July 2, 2002, of approximately $484,700. The outstanding principal balance
of this
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<PAGE>
loan bears interest at a rate of 8.65 percent per annum. As of March 31,
1998, the outstanding principal balance amount of such loan was approximately
$682,650.
On December 1, 1997, the Company completed the Accu-Path Asset Purchase
pursuant to an Asset Purchase Agreement. Pursuant to the Asset Purchase
Agreement, the Company agreed to pay 180 percent of the forensic testing
revenues during the period from June through November, 1998 as follows: (i)
$100,000 paid at closing, (ii) an amount equal to 50 percent of the forensic
testing revenues for each of the first three quarters, to be paid 30 days
following the end of each quarter, and (iii) the balance to be paid in four
quarterly installments with the first payment due March 1, 1999. The
estimated gross revenues attributable to this customer base was approximately
$400,000. As of March 31, 1998, no installment payments have been made
related to the Accu-Path Asset Purchase.
On May 1, 1998, the Company acquired from HLI, certain intangible assets
pursuant to an Asset Purchase Agreement dated April 13, 1998 (the "HLI Asset
Purchase"). Pursuant to the HLI Asset Purchase the Company (i) paid $500,000
at closing, (ii) assumed the obligations of HLI under a certain capital
lease, dated November 11, 1997, which requires 60 monthly base payments of
$6,137, and (iii) is required to make a final payment, on or before, June 1,
1999, in an amount equal to 100 percent of the gross revenues directly
attributable to each customer comprising the customer base of HLI for the
year ended April 30, 1999, exceeding $533,000. The estimated gross revenues
attributable to the customer base, for the year ended December 31, 1997, was
approximately $1,300,000. As of March 31, 1998, no installment payments had
been made related to the HLI Asset Purchase.
Through its acquisition strategy, management of the Company intends to
continue its growth through the acquisition of drug testing companies and the
assets of such companies, and assimilation of the acquired drug testing
operations and assets with and into LSI, to obtain increased testing volume
with minimal additional specimen processing cost, resulting in increased
profitability and cash flows. See "Business--Growth Strategy." Although the
Company will not consummate an acquisition unless, at the time of the
acquisition, it is anticipated that such acquisition will contribute to the
profitability and provide positive cash flows from operations following
consolidation and assimilation of the operations of the acquired company with
those of the Company, there can be no assurance of such profitability and
positive cash flows. In the event the Company fails to make acquisitions
which contribute to the profitability of the Company and provide positive
cash flows to the Company, LSI and LSAI may be required to reduce general and
administrative expenses, possibly including consolidation of Company
operations into the offices of LSI and reduction of management compensation,
and may be required to utilize borrowings to fund negative cash flows from
operations until such reductions of general and administrative expenses are
achieved.
As of the date of this Prospectus, other than as described above, the
Company does not have any significant future capital commitments. The
Company anticipates that existing cash and cash equivalent balances,
short-term investments and funds to be generated from future operations will
be sufficient to fund operations and budgeted capital expenditures of the
Company through 1998.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL AND
CUSTOMER LIST. In connection with its various acquisitions (see "The
Company--Background"), the Company recorded goodwill and customer lists,
which are being amortized on a straight-line basis over periods of 15 to 40
years (the estimated period that the Company will be benefitted by such
assets), respectively. At March 31, 1998, the unamortized portion of the
goodwill and the customer lists was $2,291,956 and $4,296,908, respectively.
The carrying value and recoverability of unamortized goodwill and customer
lists will be periodically reviewed by management of the Company. If the
facts and circumstances suggest that the goodwill or customer list may be
impaired, the carrying value of goodwill or customer list will be adjusted
which will result in an immediate charge against income during the period of
the adjustment and/or the length of the remaining amortization period may be
shortened, which will result in an increase in the amount of goodwill or
customer list amortization during the period of adjustment and each period
thereafter until fully amortized. Once adjusted, there can be no assurance
that there will not be further adjustments for impairment and recoverability
in future periods. Of the various factors to be considered by management of
the Company in determining goodwill or customer list impairment, the most
significant will be (i) losses from operations, (ii) loss of customers, (iii)
developments within the drug testing industry, including the Company's
inability to maintain its market share, development of drug testing
technologies, imposition of additional regulatory and certification
requirements, and (iv) loss or suspension for an extended period of
laboratory certification, especially by SAMHSA. See
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"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 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
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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 following key elements:
ACQUISITIONS. The Company has and intends to continue the expansion of
its client base and drug testing services through the acquisition of
companies and the assets of companies providing drug testing services
compatible with and comparable to those provided by LSI. Since November
1994, the Company has completed six 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 achieving the anticipated increase in profitability and cash
flows from operations, (ii) the ability on a post-acquisition basis to
maintain the acquisition target's client base and market share, (iii) the
ability to preserve the essential marketing personnel of the acquisition
target, (iv) the terms of the acquisition, such as the cash requirements and
willingness of the target's owners to accept equity securities of LSAI, (v)
the revenue base of the acquisition target, and (vi) the legal and
accounting costs of the acquisition.
Such acquisitions will be completed through the issuance of Common Stock
or Preferred Stock of LSAI, cash acquisitions utilizing available cash and
cash equivalents, borrowings or other sources of equity capital. The
non-specific nature of the acquisitions makes an estimation of amount to be
allocated to acquisitions from these sources impossible to estimate or
determine at the date of this Prospectus. LSAI's growth strategy will
require expanded customer services and support, increased personnel, expanded
operational and financial systems and implementation of control procedures.
There can be no assurance that LSAI will be able to manage expanded
operations effectively and efficiently. LSAI's acquisitions may involve a
number of risks including the diversion of management's attention to the
assimilation of the acquired company, adverse short-term effects on the
Company's results of operations, the
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amortization of acquired intangible assets, and the possibility that the
acquired company will not contribute to the Company's profitability and cash
flows as expected, and the acquisition may include business operations, other
than forensic drug testing, the may be discontinued or disposed of at a loss.
LSAI's shareholders will, in all likelihood, not be afforded the
opportunity to approve the terms of any such acquisitions because the Board
of Directors will, in most cases, have the authority to consummate
acquisitions without shareholder approval. Shareholders will also not have
an opportunity, prior to consummation of an acquisition, to review the
financial statements of an acquisition candidate, except where shareholder
approval is required.
EXPANDING ITS CLIENT BASE. LSI intends to continue to compete
aggressively for clients, with a greater emphasis on potential clients
currently served by competitors. In this effort, LSI intends to focus in
particular on the institutional and private employers, where LSI believes
demand for drug testing services is the greatest and the average price per
specimen historically has been higher. LSI also is targeting numerous
moderate volume clients which have yet to implement drug testing programs.
EMPHASIZING CLIENT SERVICE. SAMHSA certification requirements have
established a quality baseline for forensic drug testing. As a result, it
has become increasingly difficult for laboratories to differentiate their
drug testing services on the basis of quality. LSI has chosen to
differentiate itself by providing drug testing services, customized to
address each client's needs including assisting clients with the development
of drug testing programs, training client personnel, managing specimen
collection, arranging for transportation of specimens to LSI's laboratory,
identifying trends in local and national drug use, interpreting test results
and providing expert testimony concerning challenged test results. Unlike
most of LSI's competitors, LSI specializes in drug testing, and, through
specialization, LSI believes that its customer services equal or exceed those
provided by its competitors.
IMPROVING OPERATING EFFICIENCIES. LSI believes that price continues to
be an important factor in obtaining new clients and maintaining current
clients. LSI intends to continue focusing on being a low-cost provider by
improving the efficiency of both its laboratory operations and customer
services. Achievement of improved efficiency is primarily a function of
increased specimen testing volume. Increased specimen testing volume reduces
the cost per specimen tested because of the somewhat fixed nature of general
and administrative costs and permits LSI to obtain volume purchase price
concessions from its vendors which also lower the direct cost per specimen
tested. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
DRUG TESTING OPERATIONS
The essential elements of legally defensible (forensic) drug testing are
a secure chain-of-custody for each specimen from its collection to the
reporting of test results, and accurate and reliable testing in which a
second independent test is performed to confirm each positive test result.
LSI carefully controls each step of the testing process by following detailed
written procedures and by using the specific forensic testing methods
required for legal defensibility of results. LSI tests for drugs of abuse,
including cocaine, methamphetamine, heroin, PCP, marijuana and alcohol,
primarily by urinalysis. LSI performs all testing at its laboratory in
Gretna, Louisiana which operates 24 hours per day, six days per week. The
steps in LSI's forensic drug testing process 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
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number is entered into the laboratory computer which automatically orders the
proper screening and confirmation testing and directs the reporting of test
results. A small portion, or aliquot, of the specimen is then poured from
one of the specimen bottles and prepared for screening. The specimen bottle
is resealed with a tamper-proof seal and placed in locked cold storage for
approximately 12 months.
SCREENING. Each specimen submitted to LSI is screened for the presence
of the drugs specified by the client. During 1996, LSI performed more than
5,700,000 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.
SAMHSA certification is essential to LSI's business because a major
number of its clients are required to use certified laboratories, and many of
its clients look to certification as an indication of reliability and
accuracy of tests. In order to remain certified, LSI is subject to frequent
inspections and proficiency tests. Failure to meet any of the numerous
certification requirements, to which LSI is subject, could result in
suspension or loss of certification. Such suspension or loss of
certification could have a material adverse effect on LSI and LSAI. In such
event, until the suspension is lifted or certification reobtained, LSI would
be required to utilize the drug testing services of a SAMHSA certified
competitor to process SAMHSA-related specimens, which would result in a
substantial reduction in the number of specimens tested at LSI's laboratory
and the price received per specimen received net of such competitor's cost to
LSI of performing such testing services. In the event such suspension or
loss of certification continued for a substantial period, LSI may be required
to downsize its laboratory personnel and operations and, upon lifting of the
suspension or reobtaining of SAMHSA certification, restaffing of the
laboratory could occur over an extended period, and client base and market
share may be required to be reestablished, all at substantial cost and
expense to LSI.
DATA REVIEW. Each test result, whether negative or positive, undergoes
four independent levels of review before being reported. A result is first
reviewed by the laboratory analyst conducting the test. Following the
analyst's review, the screening or confirmation laboratory supervisor reviews
the result. Next, a quality assurance and control technician reviews the
result. Finally, the test result, including all chain-of-custody and testing
documentation, is
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reviewed by a certifying scientist. It is only after all of these reviews
have been successfully completed and all documentation is in order that the
certifying scientist signs and releases a test result.
REPORTING OF RESULTS. LSI transmits an increasing number of its test
results electronically through a secured national communications network.
This network immediately encrypts and transmits each test result from the
laboratory computer to the client's personal computer or secure fax machine
as soon as it has been released by the certifying scientist. Using this
network, LSI routinely reports results for specimens that screen negative
within 24 hours of receipt in the laboratory and within 48 hours for
specimens that require confirmation. Other clients receive test results via
overnight courier or U.S. mail.
CONTRACTUAL ARRANGEMENTS
Most large drug testing clients, including the majority of public
employers and criminal justice agencies, use a formal competitive bid process
in which the potential client provides a detailed specification of the drug
testing services it requires. While price is an important factor, in most
cases these organizations are not required to accept the lowest bid, but
rather may choose the winning bidder on the basis of technical superiority
and client service. LSI has previously obtained contracts through biding and
procurement procedures and will continue to attempt to obtain such contracts
through competitive bidding. Such contracts are typically long-term, but are
also subject to termination on short notice with little or no penalty.
Other than drug testing services performed pursuant to contracts
obtained through competitive bidding procedures, LSI performs most of its
drug testing services without a formal contract. In most cases, LSI accepts
and tests specimens for an agreed price which is generally renegotiated
periodically. Because LSI does not currently have any long-term contracts,
which is typical of high volume clients, LSI is not dependent to any
significant degree upon any one client or contractual relationship with a
client, the termination of which would have a material adverse effect upon
LSI.
INSURANCE COVERAGE
Employees of LSI, like those of all companies that provide drug testing
services dealing with urine analysis specimens, may be exposed to risks of
urine-borne infections, possible including infection from AIDS and hepatitis,
if appropriate laboratory practices are not followed. Although no infections
of this type have been reported in LSI's history, no assurance can be
provided that such infections will not occur in the future. In the ordinary
course of its business, LSI from time to time is sued by individuals who have
tested positive for drugs of abuse. To date, LSI has not experienced any
material liability related to these claims, although there can be no
assurance that LSI will not at 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
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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 LSAI and LSI are also subject to various federal,
state and local requirements which affect businesses generally, such as
taxes, postal regulations, labor laws, and environment and zoning regulations
and ordinances.
ENVIRONMENTAL MATTERS
LSI and consequently the Company is subject to federal, state and local
laws, regulations and policies governing the use, generation, storage,
effluent discharge, handling and disposal of certain materials, chemicals and
wastes. LSI utilizes the services of an independent third party to dispose of
hazardous material and chemical waste. The Company believes that the
procedures and methods utilized to dispose of the hazardous waste by such
third party comply in all material respects with all applicable federal,
state and local laws, regulations and policies. Although since beginning
operations in 1978 LSI has not been required to take any extraordinary action
to correct any noncompliance, there can be no assurance that LSI will not be
required to incur significant costs to comply with environmental and health
and safety regulations in the future.
LSI's drug testing activities involve the controlled use of certain
hazardous materials and chemicals, including possibly the testing of
infectious urine specimens. LSI believes that it has adequately warned
employees of potential risks associated with working at LSI and has provided
a workplace safe from hazard, as required by the Occupational Safety and
Health Administration and certain Louisiana laws. Although LSI believes that
its safety procedures for handling and disposing of such materials and
chemicals comply with the standards prescribed by federal, state and local
laws and regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. In the event of any such accident, LSI
and consequently the Company could be held liable for any damages that result
and any such liability could exceed any applicable insurance coverage and the
financial resources of the Company.
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EMPLOYEES
As of March 31, 1998, LSAI had three full-time employees, and LSI had 111
full-time and 43 part-time employees, none of which are represented by a labor
organization. LSAI considers its and LSI's relations with their employees to be
good.
PROPERTIES
LSAI maintains its executive office in approximately 1800 square feet at
Suite 810, 101 Park Avenue, Oklahoma City, Oklahoma 73102. The office premises
are occupied under a long-term lease which expires August 31, 2000, and the
monthly rental payment is $1,685. LSAI considers such space to be adequate for
its current needs.
LSI's executive offices and laboratory are located in approximately 20,000
square feet at 1111 Newton Street, Gretna Louisiana 70053, in a building owned
by LSI. The building was acquired in December 1996 and remodeling was completed
in June 1997 at an estimated aggregate cost of $890,000. The Company believes
that, with the acquisition of the building, the new location of the offices and
laboratory will be adequate for the current and anticipated future needs of LSI.
In addition, LSI's owns and holds for sale a 7,390 square foot building located
at 113 Jarrell Drive, Belle Chasse, Louisiana, in which the laboratory and
executive offices of LSI were formerly located.
In connection with the PLL Asset Purchase (see "The Company--Background--
PLL Asset Purchase"), the Company assumed the obligations of Pathology
Laboratories Limited ("PLL") under a certain Lease between Edith Schlien and
PLL, dated September 16, 1996, covering approximately 2,500 square feet of
office space located in Greenville, South Carolina. This lease requires
monthly base rental payments of $2,083, and will expire on September 16, 1999.
LITIGATION
LSAI does not have any pending litigation. In the ordinary course of 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 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 LSAI and LSI. Directors are generally elected
at the annual shareholders' meeting and hold office until the next annual
shareholders' meeting and until their successors are elected and qualified.
Executive officers are elected by the Board of Directors and serve at its
discretion. LSAI's Bylaws authorize the Board of Directors to be constituted of
not less than one and such number as the Board of Directors may from time to
time determine by resolution or election. The Board currently consists of six
members.
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<TABLE>
NAME AGE POSITION WITH LSAI 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 Vice President and Director
Operating 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 LSAI as may be required, but not less than 50 percent of their time is and
will continue to be devoted to the business and affairs of LSAI.
The following is a brief description of the business background of the
executive officers and directors of LSAI:
JOHN SIMONELLI is Chairman of the Board, Chief Executive Officer, Secretary
and a Director of LSAI. Mr. Simonelli served as a Director, Chief Executive
Officer and Secretary of Vantage Capital Resources, Inc. from March 1996 until
its merger with Applied Intelligence Group, Inc. and thereafter served as a
Director and Vice President of Applied Intelligence Group, Inc. until October
14, 1996. He served as Chairman of the Board and Chief Executive Officer of MBf
USA, Inc. (formerly American Drug Screens, Inc.), a publicly-held company
engaged in the medical products and services industry, from February 1988
through June 1992. He served as Chief Executive Officer of Unico, Inc.
(formerly CMS Advertising, Inc.), a publicly-held company engaged in the
franchising of cooperative direct mail advertising businesses, from June 1986 to
June 1988. From July 1981 through June 1985, he served in various capacities,
including President and Director, with Moto Photo, Inc., a publicly-held company
engaged in the business of franchising one-hour, photo development laboratories.
Mr. Simonelli served as President and CEO, from May 1985 until November 1985,
and a Director, from May 1985 through 1988, of TM Communications, Inc. (formerly
Video Image, Inc. and TM Century, Inc.), a publicly-held company engaged in
radio broadcasting and corporate communications.
LARRY E. HOWELL is President and Chief Operating Officer, and a Director of
LSAI. Mr. Howell served as a Director, President and Treasurer of Vantage
Capital Resources, Inc. from March 1996 until its merger with Applied
Intelligence Group, Inc. and thereafter served as a Director and Vice President
of Applied Intelligence Group, Inc. until October 14, 1996. He served as
President and Chief Operating Officer of MBf USA, Inc. (formerly American Drug
Screens, Inc.), a publicly-held company engaged in the medical products and
services industry, from February 1988 through June 1992. From June 1986 to
April 1988, Mr. Howell served first as Vice President and than as President and
Chief Operating Officer of Unico, Inc. (formerly CMS Advertising, Inc.), a
publicly-held company engaged in the franchising of cooperative direct mail
advertising businesses. Since January 1982, Mr. Howell as the sole proprietor
of Howell and Associates, Inc. provides consulting services principally related
to corporate acquisitions and mergers.
ARTHUR R. PETERSON, JR. was elected Treasurer and a Director of LSAI in
July 1994. Mr. Peterson founded LSI in 1978 and served as its President and
Chief Executive Officer and a Director from inception. From March 1989 until
April 1994, he served as a Director of MBf USA, Inc. (formerly American Drug
Screens, Inc.), a publicly held company in the medical products and services
industry and former parent of LSI. Prior to 1978, Mr. Peterson was Chairman of
the Board and Chief Executive Officer of Clinical Laboratories of La., Inc., a
company he founded which served the medical community in clinical studies.
ROBERT A. GARDEBLED, JR. was elected a Director of LSAI in July 1994.
Since July 1989, he has served as an assistant to the President and was elected
Controller of LSI and in connection with the LSI Acquisition, he was elected
Secretary of LSI. From July 1991 until April 1994, Mr. Gardebled served as a
Director of MBf USA, Inc. (formerly American Drug Screens, Inc.), a publicly
held company in the medical products and services industry and former
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parent of LSI. Prior to joining LSI, he was a Production Manager for Halter
Yachts, Inc., a Louisiana ship building company.
JEROME P. WELCH was elected a Director of LSAI on August 26, 1994. Mr.
Welch is President of Prospect Publishers, Inc., a publisher of literary
hardback anthologies and newsletters. From May 1990 through June 1992, he
served as a Director and in July 1990 was elected Secretary of MBf USA, Inc.
(formerly American Drug Screens, Inc.), a publicly-held company engaged in the
medical products and services industry. From July 1988 to January 1990, Mr.
Welch served as President of Simon & Schuster Supplementary Publishers, a
subsidiary of Paramount Communications, Inc. and was Senior Vice President and
Publisher of McGraw Hill Educational Publishing from July 1987 to July 1988.
MICHAEL E. DUNN was elected a Director of LSAI on August 26, 1994. Since
April 1980 to January 1995, he was a member, shareholder and director of the law
firm of Zrenda Dunn & Swan, A Professional Corporation (formerly Bright Zrenda &
Dunn), in Oklahoma City, Oklahoma, and President from April 1992 until January
1995. Mr. Dunn has been a member, shareholder and 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 LSAI and each of the executive officers that during 1997 received
compensation in excess of $100,000.
OFFICER COMPENSATION TABLE
<TABLE>
ANNUAL COMPENSATION
---------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
John Simonelli. . . . . . . . . . . . . 1997 $112,500 $ 72,000 $13,088
Chief Executive Officer of LSAI 1996 100,000 -- 12,600
1995 75,000 -- 12,000
Larry E. Howell . . . . . . . . . . . . 1997 $112,500 $ 72,000 $14,501
President and Chief Operating 1996 100,000 -- 14,100
Officer of LSAI 1995 75,000 -- 12,000
Arthur R. Peterson, Jr. . . . . . . . . 1997 $125,000 $122,000 $22,124
Treasurer of LSAI and Chief Executive 1996 120,133 50,000 21,700
Officer of LSI 1995 100,000 76,956 16,000
</TABLE>
- ------------------------
(1) Dollar value of base salary (both cash and non-cash) earned during the
year.
(2) Dollar value of bonus (both cash and non-cash) earned during the year.
(3) The amounts reflected are for an automobile allowance and life and
disability insurance premiums paid by the Company.
AGGREGATE OPTION GRANTS AND EXERCISES IN 1997 AND YEAR-END OPTION VALUES
STOCK OPTIONS AND OPTION VALUES. The following table sets forth
information related to options granted to the executive officers named in the
Officer Compensation Table during 1997.
<TABLE>
INDIVIDUAL GRANTS(1)
-----------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
NUMBER OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
OF OPTIONS TO EMPLOYEES 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>
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<PAGE>
- ------------------------
(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 LSAI's Common Stock over the term of the options.
These amounts do not take into consideration provisions restricting
transferability and represent certain assumed rates of appreciation only.
Actual gains on stock option exercises are dependent on the future
performance of LSAI's Common Stock and overall stock market conditions.
There can be no assurance that the potential values reflected in this table
will be achieved. All amounts have been rounded to the nearest whole
dollar amount.
AGGREGATE STOCK OPTION EXERCISE AND YEAR-END AND OPTION VALUES. The
following table sets forth information related to the number and value of
options held by the named executive officers at the end of 1997. During 1997,
there were no options to purchase LSAI's Common Stock exercised by the named
executive officers.
<TABLE>
NUMBER OF OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
AS OF DECEMBER 31, 1997 OPTIONS AS OF DECEMBER 31, 1997(1)
--------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- -------------- ------------------
<S> <C> <C> <C> <C>
John Simonelli . . . . . . . . . 60,000 100,000 $157,800 $145,000
Larry E. Howell. . . . . . . . . 60,000 100,000 157,800 145,000
Arthur R. Peterson, Jr. . . . . 60,000 100,000 157,800 145,000
</TABLE>
- ------------------------
(1) The closing sale price of the Common Stock as quoted on Nasdaq SmallCap
Market on December 31, 1997, was $4.63. Value is calculated on the basis
of the difference between the option exercise price and $4.63 multiplied
by the number of shares of Common Stock underlying the option.
COMPENSATION OF DIRECTORS
The directors of LSAI that are employees of LSAI or LSI are not
currently compensated for attending meetings of directors and committees of
the Board of Directors, but are reimbursed out-of-pocket expenses. The
compensation of non-employee directors has not been determined by the Board
of Directors, but non-employee directors are reimbursed out-of-pocket
expenses incurred in attending meetings of directors and committees on which
they serve. During 1997, the Board of Directors of LSAI held one meeting, at
which all directors were present in person or participated by telephonic
communications, except Michael E. Dunn. The directors of LSAI did not receive
any compensation nor was any compensation accrued during 1997.
EMPLOYMENT ARRANGEMENTS
LSAI has employment agreements with Messrs. Simonelli and Howell, which
were amended and restated on September 26, 1997, each of which provides, among
other things, (i) a five-year term commencing April 15, 1996, which is
automatically extended an additional year for each year of service under the
agreement, (ii) an annual base salary of $112,500, (iii) bonuses at the
discretion of the Board of Directors, but not in excess of 10 percent of the net
income of LSAI, (iv) eligibility for stock options under LSAI's stock option
plans, (v) health and disability insurance benefits and life insurance, (vi) an
automobile allowance, and (vii) benefits consistent with similar executive
employment agreements. The agreements require Messrs. Simonelli and Howell to
devote not less than 50 percent of their time and attention to the business and
affairs of LSAI. The agreements also restrict the employee's right to
participate in other activities outside of LSAI to the extent such activities
conflict with the employee's ability to perform his duties and that would
violate his duty and loyalty to LSAI.
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<PAGE>
LSI has an employment agreement with Mr. Peterson, which was amended and
restated on September 26, 1997, and which provides, among other things, (i) a
four-year term commencing April 15, 1996, which is automatically extended an
additional year for each year of service under the agreement, (ii) an annual
base salary of $125,000, (iii) annual bonuses equal to the lesser of $50,000 or
10 percent of the net income of LSAI before provision for income taxes, (iv)
eligibility for stock options under LSAI's stock option plans, (v) health and
disability insurance benefits and life insurance, maintained at the Company's
cost and expense, covering the life of Mr. Peterson in the face amount of
$1,000,000, (vi) an automobile allowance, and (vii) benefits consistent with
similar executive employment agreements. The agreement requires Mr. Peterson
to devote his full time and attention to the business and affairs of LSI.
Furthermore, on November 20, 1997, LSI entered into an Employment Severance
Agreement with Robert A. Gardebled, Jr. which remains in effect during the
period Mr. Gardebled remains employed by LSI. This agreement obligates LSI to
pay Mr. Gardebled 12 months of compensation in the event of and following his
employment termination by LSI other than for cause (I.E. a good faith
determination by the Board of Directors of LSI of the misconduct or willful and
material breach of the agreement in the performance of services). Termination
(other than with cause) includes the termination of employment by LSI or Mr.
Gardebled's resignation upon the occurrence of a "change in control." "Change
in control" generally includes (i) any person or group that becomes the
beneficial owner of shares of LSI (which would include the Common Stock of LSAI)
or of proxies or other rights pertaining to LSI (including LSAI) which carry 25
percent or more of the total number of votes for the election of the Board of
Directors of LSI (including LSAI), (ii) a merger or consolidation, (iii) the
sale or a business combination, lease or disposition of all or substantially all
of the assets of LSI, or (iv) during a 24 month period a majority of the
members of LSI's Board of Directors cease to constitute a majority of the
members of the Board.
Each of the employment agreements with the officers of LSAI and LSI may be
terminated by LSAI or LSI in the event the Board of Directors determines in good
faith that the officer is guilty of gross negligence or fraud materially
injurious to LSAI or LSI.
1994 STOCK OPTION PLAN
LSAI established the Laboratory Specialists of America, Inc. 1994 Stock
Option Plan (the "1994 Stock Option Plan" or the "Plan") in May 1994. The Plan
was amended and restated on October 30, 1996.
The Plan provides for the issuance of incentive stock options ("ISO
Options") with or without stock appreciation rights ("SARs") and nonincentive
stock options ("NSO Options") with or without SARs to directors, employees
and consultants of the Company and its subsidiaries. The total number of
shares of Common Stock authorized and reserved for issuance under the Plan is
425,000. As of the date of this Prospectus, NSO Options to purchase 235,000
shares (exercisable on or before March 28, 2007) at an exercise price of
$2.00 per share have been granted under the Plan, of which NSO Options for
the purchase of 190,000 shares have been exercised. No ISO Options have been
granted under the Plan.
The Board of Directors administers and interprets the Plan and has the
authority to grant options to all eligible employees and determine the types of
options granted, with or without SARs, the terms, restrictions and conditions of
the options at the time of grant, and whether SARs, if granted, are exercisable
at the time of exercise of the Option to which the SAR is attached. The Board
of Directors may at any time appoint a committee of two or more members of the
Board of Directors and delegate to such committee administration of the Plan.
Options under the Plan may be granted only to persons who at the time of
grant are directors, executive officers, key employees and independent
contractors and consultants of the Company and its subsidiaries. Non-employee
directors are not eligible to be granted ISO Options. Any ISO Options granted
under the Plan must be consistent with the qualification requirements set forth
in the Internal Revenue Code of 1986, as amended. The maximum number of shares
of stock for which employee-directors may be granted options in any calendar
year may not exceed 25 percent of the aggregate number of share of stock with
respect to which Options may be granted under the Plan. The Board of Directors
determines the period during which any Option may be exercised; but may not be
exercisable more than 10 years after the date of grant. The exercise prices of
Options are determined by the Plan Administrator, but in no event may such price
be less than 85 percent (100 percent for ISO Options) of the fair market value
of the stock on the date of grant. Options granted are non-transferable except
by will or by the laws of descent and distribution. No option may be granted
under the Plan after June 30, 2005.
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<PAGE>
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
LSAI established the Laboratory Specialists of America, Inc. 1997
Non-Qualified Stock Option Plan (the "1997 Option Plan") in October 1997.
The 1997 Option Plan provides for the grant of non-qualified stock options
("Options"), with stock appreciation rights ("SARs") to employees, directors,
independent contractors and consultants of the Company. The total number of
shares of Common Stock authorized and reserved for issuance under the 1997
Option Plan is 400,000. As of the date of this Prospectus, Options to
purchase 340,000 shares (exercisable after March 1, 1998 and on or before
October 1, 2007) at an exercise price of $3.18 per share have been granted
under the 1997 Option Plan, of which options for the purchase of 300,000
shares have been exercised.
The Board of Directors (the "Board") administers the Plan and the authority
to interpret and construe the Plan, and determine all questions arising under
the Plan and any agreement made pursuant to the Plan. Options under the 1997
Option Plan may be granted only to persons ("Eligible Persons") who at the time
of grant are directors, executive officers, key employees and independent
contractors and consultants of the Company and its subsidiaries.
Options may be granted by the Board on terms and conditions determined
solely by the Board. No Option shall be exercisable more than 10 years after
the date of grant. The maximum number of shares of stock for which an Eligible
Person may be granted Options in any calendar year may not exceed 25 percent of
the aggregate number of shares of stock with respect to which Options may be
granted under the 1997 Option Plan. The exercise prices of Options are
determined by the Board, but in no event may such price be less than 85 percent
of the fair market value 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.
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<PAGE>
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Oklahoma General Corporation Act, the
Certificate of Incorporation (the "Certificate") eliminates in certain
circumstances the monetary liability of directors of LSAI for a breach of their
fiduciary duty as directors. These provisions do not eliminate the liability of
a director for (i) a breach of the director's duty of loyalty to LSAI or its
shareholders, (ii) acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) liability
arising under Section 1053 of the Oklahoma General Corporation Act (relating to
the declaration of dividends and purchase or redemption of shares in violation
of the Oklahoma General Corporation Act), or (iv) any transaction from which the
director derived an improper personal benefit. In addition, these provisions do
not eliminate liability of a director for violations of federal securities laws,
nor do they limit the rights of LSAI or its shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. Such remedies may not be effective in all cases.
The Certificate and Bylaws of LSAI provide that LSAI shall indemnify all
directors and officers of LSAI to the full extent permitted by the Oklahoma
General Corporation Act. Under such provisions, any director or officer, who in
his capacity as such, is made or threatened to be made, a party to any suit or
proceeding, may be indemnified if the Board of Directors determines such
director or officer acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of LSAI. The Certificate and
Bylaws of LSAI and the Oklahoma General Corporation Act further provide that
such indemnification is not exclusive of any other rights to which such
individuals may be entitled under the Certificate, the Bylaws, an agreement,
vote of shareholders or disinterested directors or otherwise. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors and officers of LSAI pursuant to the foregoing provisions, or
otherwise, LSAI has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
CERTAIN TRANSACTIONS
Set forth below is a description of transactions entered into between LSI
and LSAI and certain of its officers, directors and shareholders during the last
two years. Certain of these transactions will continue in effect and may
result in conflicts of interest between the Company and such individuals.
Although these persons have fiduciary duties to the Company and its
shareholders, there can be no assurance that conflicts of interest will always
be resolved in favor of the Company.
Until June 1996, LSAI's offices located at 1101-A Sovereign Row in Oklahoma
City were subleased from Unico, Inc. ("Unico") on a month-to-month basis
currently for $1,500 per month, and the lessors of such premises to Unico
include Messrs. Simonelli and Howell, who are officers and directors of LSAI.
Messrs. Simonelli and Howell own, in the aggregate, a 50 percent undivided
interest in such premises, and are former directors of Unico. During 1996, LSAI
paid Unico, pursuant to the sublease, aggregate monthly rent of $6,000.
During 1997 and 1996, Michael E. Dunn, a Director of the Company, was
President, a Director and a shareholder of Dunn Swan & Cunningham. During 1997
and 1996, LSAI paid Dunn Swan & Cunningham, A Professional Corporation, $143,785
and $27,525, respectively, for services rendered and $20,374 and $3,576.91,
respectively, in reimbursement of expenses advanced on behalf of LSAI. In
addition, Michael E. Dunn received $10,000 for legal services rendered during
1997 on behalf of LSAI.
On March 28, 1997, the Company issued to each of Jerome P. Welch, Michael
E. Dunn and Harry Gray Browne, M.D. (a former Director), stock options
exercisable for the purchase of 5,000 shares of Common Stock in replacement of
options previously granted in 1995. The replacement options effectively reduced
the exercise price of options granted in 1995 from $3.00 to $2.00 and extended
the exercise period to March 28, 2007. In addition, on October 1, 1997, the
Company issued to each of Jerome P. Welch and Michael E. Dunn stock options
pursuant to the 1997 Option Plan to purchase 5,000 shares of LSAI Common Stock
at $3.18 per share, which will become exercisable after April 1, 1998 and until
October 1, 2007. See "Management--1997 Non-Qualified Stock Option Plan."
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<PAGE>
The Board of Directors of LSAI believes that the terms of the transactions
described above were at least as favorable as could be obtained from
unaffiliated third parties. LSAI has adopted policies that any loans to
officers, directors and five percent or more shareholders ("affiliates") are
subject to approval by a majority of the disinterested independent directors of
LSAI and that further transactions with affiliates will be on terms no less
favorable than could be obtained from unaffiliated parties and approved by a
majority of the disinterested independent directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as to the beneficial
ownership of the Common Stock as of the date of this Prospectus, and the
beneficial ownership of the Common Stock, as adjusted to give effect to this
offering (assuming exercise of the Barron Chase Group Warrants, the EGI Stock
Option, and Barber Bronson Group Warrants in full), of (i) each person who is
known to LSAI to be the beneficial owner of more than five percent thereof, (ii)
each director and executive officer of LSAI, and (iii) all executive officers
and directors as a group, together with their percentage holdings of the
outstanding shares, and, as adjusted, after giving effect to this offering. All
persons listed have sole voting and investment power with respect to their
shares unless otherwise indicated, and there are no family relationships between
the executive officers and directors of LSAI.
<TABLE>
COMMON STOCK
-----------------------------------
PERCENT OF
COMMON STOCK(2)
SHARES -------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------ ------------ --------- --------
<S> <C> <C> <C>
Arthur R. Peterson, Jr.(3) . . . . . . . 525,472 9.4% 9.0%
John Simonelli . . . . . . . . . . . . . 235,217 4.2% 4.0%
Larry E. Howell. . . . . . . . . . . . . 235,217 4.2% 4.0%
Robert A. Gardebled, Jr.(4). . . . . . . 75,000 1.3% 1.3%
Jerome P. Welch(5) . . . . . . . . . . . 10,000 .2% .2%
Michael E. Dunn(5) . . . . . . . . . . . 10,000 .2% .2%
Executive Officers and Directors as
a group (six persons)(6) . . . . . . . 1,090,906 19.2% 18.4%
</TABLE>
- ------------------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them within 60 days are treated as outstanding for
determining the amount and percentage of Common Stock owned by such person.
To the Company's knowledge, each named person has sole voting and sole
investment power with respect to the shares shown except as noted, subject
to community property laws, where applicable.
(2) Rounded to the nearest one-tenth of one percent, based upon 5,602,446
shares of Common Stock outstanding before this offering and 5,864,504
shares of Common Stock after this offering, assuming exercise of the Barron
Chase Group Warrants, the EGI Stock Option, and Barber Bronson Group
Warrants in full. See "Description of Securities--Barron Chase Group
Warrants," "--EGI Stock Option," and "--Barber Bronson Group 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.
-40-
<PAGE>
DESCRIPTION OF SECURITIES
Pursuant to its Certificate of Incorporation, LSAI is currently
authorized to issue up to 30,000,000 shares of capital stock, consisting of
20,000,000 shares of Common Stock, $.001 par value ("Common Stock"), and
10,000,000 shares of Preferred Stock, $.001 par value ("Preferred Stock"), of
which 300,000 shares were designated by the Board of Directors as the Series
I Cumulative Convertible Preferred Stock (the "Series I Preferred Stock").
The Series I Preferred Stock was redeemed in full on July 10, 1995, at the
aggregate stated value of $300,000 and ceased to be issued and outstanding.
This offering consists of (i) 34,000 Units, each consisting of two shares of
Common Stock, which are being offered in the event of exercise of the Barron
Chase Group Warrants at $7.20 per Unit, (ii) 50,000 shares of which Common
Stock, which are being offered in the event of exercise of the EGI Stock
Option at $3.00 per share, and (iii) 144,058 shares of Common Stock, which
are being offered in the event of exercise of the Barber Bronson Group
Warrants at $2.20 per share. The shares of Common Stock comprising each Unit
will be immediately detachable and separately tradeable upon issuance. After
giving effect to this offering and assuming full exercise of the Barron Chase
Group Warrants, the EGI Stock Option, and Barber Bronson Group Warrants, the
issued and outstanding capital stock of LSAI will consist of 5,864,504 shares
of Common Stock. See "--Common Stock--Barron Chase Group Warrants," "--EGI
Stock Option," and "--Barber Bronson Group Warrants."
The following description of certain matters relating to the capital stock
and the Barron Chase Group Warrants, the EGI Stock Option, and Barber Bronson
Group Warrants is a summary and is qualified in its entirety by the provisions
of LSAI's Certificate of Incorporation and the agreements evidencing the Barron
Chase Group Warrants, the EGI Stock Option, and Barber Bronson 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, LSAI is authorized to issue
up to 20,000,000 shares of Common Stock. The holders of outstanding shares of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of assets legally
available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that may be outstanding. In the event of
liquidation, dissolution and winding-up of LSAI, the holders of outstanding
Common Stock are entitled to share ratably in all assets available for
distribution to the Common Stock shareholders after payment of all liabilities
of LSAI, subject to the prior distribution rights of the holders of any
Preferred Stock that may be outstanding at that time. Holders of outstanding
Common Stock are entitled to one vote per share on matters submitted to a vote
by the Common Stock shareholders of LSAI. The Common Stock has no preemptive
rights and no subscription, redemption or conversion privileges. The Common
Stock does not have cumulative voting rights, which means that holders of a
majority of shares voting for the election of directors can elect all members of
the Board of Directors subject to election. In general, a majority vote of
shares represented at a meeting of Common Stock shareholders at which a quorum
(a majority of the outstanding shares of Common Stock) is present is sufficient
for all actions that require the vote or concurrence of shareholders, subject to
and possibly in connection with the voting rights of the holders of any
Preferred Stock that from time to time may be outstanding and entitled to vote
with the holders of the Common Stock. Upon issuance of the Common Stock
pursuant to this offering, all of the outstanding shares of Common Stock will be
fully paid and nonassessable.
BARRON CHASE GROUP WARRANTS
In connection with the its initial public offering, LSAI issued the
outstanding Barron Chase Group Warrants (as evidenced by each of the
Representative's Warrants, dated October 11, 1994) to the assigns of Barron
Chase Securities, Inc. to purchase 34,000 Units (68,000 shares of Common Stock)
at an exercise price of $7.20 per Unit). The Barron Chase Group Warrants are
exercisable at any time during the period ending October 11, 1999. The number
and kind of securities or other property for which the Barron Chase 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 Barron Chase Group Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of the Common Stock. LSAI
may find it more difficult to raise additional equity capital while the Barron
Chase Group Warrants are outstanding. At any time at which the Barron Chase
Group Warrants are likely to be exercised,
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<PAGE>
LSAI will probably be able to obtain additional equity capital on more
favorable terms. LSAI has registered the Units (and the shares of Common
Stock underlying Units) underlying the Barron Chase 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 October 11, 1999, the expiration date of the Barron Chase Group
Warrants. The Barron Chase Group Warrants are not redeemable by LSAI.
The Barron Chase Group Warrants may be exercised by presentation and
surrender of the Barron Chase Group Warrant to LSAI at its principal office
accompanied by the duly executed Purchase Form annexed to the Barron Chase 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 Units being purchased. Upon exercise, LSAI will deliver to the
holder of the Barron Chase Group Warrant one or more certificates evidencing the
Common Stock. In the event the exercise is in part only, LSAI will promptly
execute and deliver a new Barron Chase Group Warrant evidencing the rights of
the holder to purchase the balance of the Units purchasable pursuant to the
Barron Chase Group Warrant.
The Barron Chase Group Warrants may be assigned by surrender of the Barron
Chase Group Warrants to the Company at its principal office with the Assignment
Form annexed thereto duly executed and funds sufficient to pay any transfer tax.
In such event, LSAI will, without charge, execute and deliver a new Barron Chase
Group Warrant in the name of the assignee. The Barron Chase Group Warrants may
be divided or combined with other Barron Chase Group Warrants.
EGI STOCK OPTION
On December 1, 1995, LSAI issued to the Equity Group the EGI Stock Option
to purchase 50,000 shares of Common Stock at an exercise price of $3.00 per
share on or before February 14, 2001. LSAI has registered the shares of Common
Stock underlying the EGI Stock Option under the 1933 Act pursuant to the
Registration Statement of which this Prospectus is a part and has agreed, at its
expense, to maintain such registration in force until such time that an
amendment to the Registration Statement is required pursuant to Section 10(a)(3)
of the 1933 Act.
The EGI Stock Option may be exercised by presentation and surrender of the
EGI Stock Option to LSAI at its principal office accompanied by the duly
completed and executed Subscription Form annexed to the EGI Stock Option and
payment, in cash or bank check payable to "Laboratory Specialists of America,
Inc." in the amount of the exercise price of the number of shares of Common
Stock being purchased. Upon exercise, LSAI will deliver to the Equity Group one
or more certificates evidencing the Common Stock. In the event the exercise is
in part only, LSAI will promptly execute and deliver a new EGI Stock Option
evidencing the right of the Equity Group to purchase the balance of the shares
of Common Stock purchasable pursuant to the EGI Stock Option.
BARBER BRONSON GROUP WARRANTS
In connection with the Warrant Redemption Offering, on October 14, 1997,
the Company issued to Barber & Bronson Incorporated and its designees (the
"Barber Bronson Group") the Barber Bronson Group Warrants exercisable for the
purchase of 144,058 shares of Common Stock at $2.20 per share on or before
October 11, 2000. The number and kind of securities or other property for which
the Barber Bronson 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 Barber Bronson Group Warrants, the holders
thereof are given the opportunity to profit from a rise in the market price of
the Common Stock. LSAI may find it more difficult to raise additional equity
capital while the Barber Bronson Group Warrants are outstanding. At any time at
which the Barber Bronson Group Warrants are likely to be exercised, LSAI will
probably be able to obtain additional equity capital on more favorable terms.
LSAI has registered the Common Stock underlying the Barber Bronson 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 October 14, 2000, the expiration date of the Barber
Bronson Group Warrants. The Barber Bronson Group Warrants are not redeemable by
LSAI.
The Barber Bronson Group Warrants may be exercised by presentation and
surrender of the Barber Bronson Group Warrant to LSAI at its principal office
accompanied by the duly executed Election to Purchase annexed to the Barber
Bronson 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. Upon
-42-
<PAGE>
exercise, LSAI will deliver to the holder of the Barber Bronson Group Warrant
one or more certificates evidencing the Common Stock. In the event the
exercise is in part only, LSAI will promptly execute and deliver a new Barber
Bronson Group Warrant evidencing the rights of the holder to purchase the
balance of the shares of Common Stock purchasable pursuant to the Barber
Bronson Group Warrant.
The Barber Bronson Group Warrants are not transferable, except to the
shareholders, directors, officers, employees or partners of the holder, by will,
or by operation of law. Subject to the foregoing, the Barber Bronson Group
Warrants may be assigned by surrender of the Barber Bronson Group Warrants to
the Company at its principal office accompanied by a certificate indicating that
the transferee is a qualified transferee. In such event, LSAI will, without
charge, execute and deliver a new Barber Bronson Group Warrant in the name of
the assignee. The Barber Bronson Group Warrants may be divided or combined with
other Barber Bronson Group Warrants.
PREFERRED STOCK
Pursuant to its Certificate of Incorporation, LSAI has an authorized class
of Preferred Stock of 10,000,000 shares, $.001 par value, of which 300,000
shares were designated the Series I Preferred Stock. On July 10, 1995, the
Series I Preferred Stock was redeemed in full at the aggregated stated value of
$300,000 and thereafter there were no shares of Preferred Stock issued and
outstanding. The Preferred Stock may be issued from time to time in one or more
series, and the Board of Directors of LSAI, without further approval of its
shareholders, is authorized to fix the relative rights, preferences, privileges
and restrictions applicable to each series of Preferred Stock. Management of
LSAI believes that having such a class of Preferred Stock provides LSAI with
greater flexibility in financing, acquisitions and other corporate activities.
While there are no current plans, commitments or understandings, written or
oral, to issue any additional shares of Preferred Stock, in the event of any
issuance, the holders of Common Stock will not have any preemptive or similar
rights to acquire any of such Preferred Stock.
The Board of Directors has the authority to issue shares of Preferred Stock
and to determine its rights and preferences to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of LSAI.
OTHER OUTSTANDING OPTIONS AND WARRANTS
The Board of Directors is authorized to issue options and other stock
purchase rights pursuant to 1994 Option Plan and the 1997 Option Plan. The
aggregate number of shares of Common Stock authorized and reserved for issuance
under the 1994 Option Plan and 1997 Option Plan is 825,000. See
"Management--1994 Stock Option Plan" and "--1997 Non-Qualified Stock Option
Plan." As of the date of this Offering Circular, (i) there are stock options
outstanding under the 1994 Option Plan exercisable, on or before March 28, 2007,
for the purchase of 45,000 shares of Common Stock at $2.00 per share, and (ii)
there are stock options outstanding under the 1997 Option Plan exercisable, on
or before October 1, 2007, for the purchase 40,000 shares at $3.18 per share.
In addition, stock options have been granted to the three non-employee
directors of LSAI exercisable for the purchase of 15,000 shares of Common Stock
at $2.00 per share, expiring in 2007. See "Certain Transaction."
In connection with the 1998 Private Offering, LSAI 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. LSAI has registered the shares of Common Stock underlying
the Jesup & Lamont Group Warrants under the 1933 Act pursuant to a
registration statement (Registration No. 333-58473) and has agreed, at its
expense, to maintain such registration in force until June 4, 2004.
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation of LSAI and the Oklahoma General
Corporation Act include a number of provisions which may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions include availability of
authorized but unissued Common Stock and Preferred Stock.
COMMON AND PREFERRED STOCK. The Certificate of Incorporation authorizes
the issuance of Common Stock and Preferred Stock in classes, and the Board of
Directors to set and determine the voting rights, redemption rights, conversion
rights and other rights relating to such class of Common Stock or Preferred
Stock, and to issue such stock in either private or public transactions. In
some circumstances, the Common Stock or Preferred Stock could be issued and have
the effect of preventing a merger, tender offer or other takeover attempt which
the LSAI's Board of Directors opposes.
-43-
<PAGE>
OKLAHOMA ANTI-TAKEOVER STATUTE. LSAI 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 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 Barron Chase Group Warrants, the EGI
Stock Option, and Barber Bronson Group Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, LSAI has 5,602,446 shares of Common
Stock outstanding. Assuming exercise of the Barron Chase Group Warrants, the
EGI Stock Option, and Barber Bronson Group Warrants in full, LSAI will have
outstanding 5,864,504 shares of Common Stock and outstanding stock options
and warrants exercisable for the purchase of 155,522 shares of Common Stock.
See "Description of Securities--Other Outstanding Stock Options and Warrants."
No prediction can be made as to the effect, if any, that future sales or the
availability of shares for sale will
-44-
<PAGE>
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock of LSAI in the
public market could adversely affect the prevailing market price of the
Common Stock and could impair LSAI's ability to raise capital through sales
of its equity securities.
The 68,000 shares of Common Stock comprising the Units and 194,058
shares of Common Stock (assuming exercise of the Barron Chase Group Warrants,
the EGI Stock Option, and Barber Bronson Group Warrants in full) offered in
this offering will be immediately eligible for resale in the public market
without restriction or further registration under the 1933 Act, except for
Common Stock and Units purchased by an "affiliate" (as that term is defined
under the 1933 Act) of LSAI, which will be subject to the resale limitations
of Rule 144 promulgated under the 1933 Act. There are 1,020,906 shares of
Common Stock held by the officers and directors of LSAI that are subject to
the resale limitations of Rule 144 promulgated under 1933 Act described
below. The Company has filed a registration statement (Registration No.
333-58473) that in part registers for resale 105,906 shares of Common Stock
held by John Simonelli, Larry E. Howell and Arthur R. Peterson, Jr., which
shares may be resold without regard to the applicable limitations under Rule
144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of LSAI's Common Stock or (ii) an
amount equal to the average weekly reported volume of trading in such shares
during the four calendar weeks preceding the date on which notice of such
sale is filed with the Commission. Sales under Rule 144 are also subject to
certain manner of sale limitations, notice requirements and the availability
of current public information about LSAI. 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 LSAI. In addition, affiliates of LSAI must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of Common Stock which are not
restricted shares within the meaning of Rule 144 (such as shares of Common
Stock acquired by affiliates of LSAI in this offering). As defined in Rule
144, an "affiliate" of an issuer is a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with such issuer. If two years have elapsed since the later
of the date of any acquisition of Restricted Shares from LSAI or from any
affiliate of LSAI, and the acquiror or subsequent holder thereof is deemed
not to have been an affiliate of LSAI at any time during the 90 days
preceding a sale, such person would be entitled to sell such shares in the
public market pursuant to Rule 144(k) without regard to volume limitations,
manner of sale restrictions, or public information or notice requirements.
Pursuant to Rule 144A promulgated under the 1933 Act, under certain
circumstances permits qualified institutional buyers, as defined in the Rule, to
more easily acquire and sell "restricted securities." The Company is unable to
predict the effect that Rule 144A will have on the prevailing market price of
LSAI's Common Stock due to the recent adoption of the Rule.
PLAN OF DISTRIBUTION
The Common Stock and Units are being offered on a best efforts basis by the
Company and its officers and directors, without their receipt of or entitlement
to commissions, selling fees or direct or indirect remuneration. From the
proceeds of this offering received by the Company, the costs (which are
estimated to be $30,000) incurred with respect to this offering will be paid by
the Company. Offers by the Company will be limited to the holders of the Barron
Chase Group Warrants, the EGI Stock Option, and Barber Bronson Group Warrants.
The Common Stock sold to the Selling Shareholders upon exercise of the Barron
Chase Group Warrants, the EGI Stock Option, and Barber Bronson Group Warrants
and which is reoffered for sale pursuant to this Prospectus, is being offered on
a best efforts basis by the respective Selling Shareholders.
-45-
<PAGE>
LEGAL MATTERS
The validity of issuance of the shares of Common Stock and Units offered
hereby and certain other legal matters in connection with this offering will be
passed upon for LSAI by its counsel, Dunn Swan & Cunningham, A Professional
Corporation, of Oklahoma City, Oklahoma.
EXPERTS
The financial statements of the Company included in this Prospectus and
Registration Statement to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
-46-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
LABORATORY SPECIALISTS OF AMERICA, INC.:
<S> <C>
Consolidated Balance Sheets December 31, 1997 and March 31, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 1997 and 1998. . . . . . . . . . F-4
Consolidated Statements of Cash Flows (Unaudited)Three Months Ended March 31, 1997 and 1998 . . . . . . . . F-5
Notes to Consolidated Financial Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Balance Sheets, December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
</TABLE>
F-1
<PAGE>
Page 1 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . $ 2,863,639 $ 3,120,960
Accounts receivable, net of allowances
of $568,237 in 1997 and $558,485 in 1998 . . . . 2,262,990 2,413,563
Income tax refund receivable . . . . . . . . . . 190,498 --
Inventories. . . . . . . . . . . . . . . . . . . 109,929 70,911
Prepaid expenses and other . . . . . . . . . . . 115,219 170,659
Deferred tax asset . . . . . . . . . . . . . . . 160,709 160,709
----------- -----------
Total current assets . . . . . . . . . . . . . 5,702,984 5,936,802
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,123,909 in 1997 and
$1,194,023 in 1998 . . . . . . . . . . . . . . . 2,376,885 2,340,997
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$272,148 in 1997 and $296,494 in 1998. . . . . . 2,316,302 2,291,956
Customer list, net of accumulated amortization
of $518,105 in 1997, and $603,240 in 1998. . . 4,587,814 4,296,908
Deferred costs . . . . . . . . . . . . . . . . . 32,595 30,675
----------- -----------
Total other assets . . . . . . . . . . . . . . 6,936,711 6,619,539
----------- -----------
Total assets . . . . . . . . . . . . . . . . . $15,016,580 $14,897,338
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-2
<PAGE>
Page 2 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . $ 742,292 $ 799,836
Accrued income tax . . . . . . . . . . . . . . . -- 93,439
Accrued payroll. . . . . . . . . . . . . . . . . 411,364 459,856
Accrued expenses . . . . . . . . . . . . . . . . 78,491 54,365
Accrued customer list installment payments . . . 510,345 260,000
Obligations from discontinued operations . . . . 126,813 134,604
Current portion of long-term debt. . . . . . . . 527,696 531,573
----------- -----------
Total current liabilities. . . . . . . . . . . 2,397,001 2,333,673
----------- -----------
LONG-TERM DEBT, net of current portion . . . . . . 2,353,428 1,865,954
----------- -----------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . 359,848 359,848
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000
shares authorized, 4,924,818 shares issued and
outstanding at 12/31/97 and 4,934,818 shares
issues and outstanding at 3/31/98. . . . . . . . 4,925 4,935
Paid in capital in excess of par, common stock. . 8,291,365 8,321,355
Retained earnings . . . . . . . . . . . . . . . . 1,610,013 2,011,573
----------- -----------
Total stockholders' equity . . . . . . . . . . 9,906,303 10,337,863
----------- -----------
Total liabilities and stockholders' equity . . $15,016,580 $14,897,338
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-3
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . $2,587,222 $3,571,608
COST OF LABORATORY SERVICES. . . . . . . . . . . . 1,186,084 1,675,281
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . 1,401,138 1,896,327
---------- ----------
OPERATING EXPENSES:
Selling. . . . . . . . . . . . . . . . . . . . . 132,129 196,414
General and administrative . . . . . . . . . . . 695,616 853,028
Depreciation and amortization. . . . . . . . . . 140,849 192,344
---------- ----------
Total operating expenses . . . . . . . . . . . 968,594 1,241,786
---------- ----------
Income from operations . . . . . . . . . . . . 432,544 654,541
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . . . . . . . . . (36,876) (46,144)
Interest income. . . . . . . . . . . . . . . . . 11,653 37,167
Other income . . . . . . . . . . . . . . . . . . 303 39,933
---------- ----------
Total other income (expense) . . . . . . . . . (24,920) 30,956
---------- ----------
Income before income taxes . . . . . . . . . . 407,624 685,497
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . 173,621 283,937
---------- ----------
Net income available to common stockholders. . $ 234,003 $ 401,560
---------- ----------
---------- ----------
BASIC EARNINGS PER SHARE:
Weighted Average Number Of Common Stock
Shares Outstanding . . . . . . . . . . . . . . . 3,313,405 4,925,485
---------- ----------
---------- ----------
Earnings Per Common Stock Share. . . . . . . . . $ .07 $ .08
---------- ----------
---------- ----------
DILUTED EARNINGS PER SHARE:
Weighted Average Number Of Common Stock and
Common Stock Equivalents Outstanding . . . . . . 3,891,723 5,288,380
---------- ----------
---------- ----------
Earnings Per Common Stock and Common Stock
Equivalents . . . . . . . . . . . . . . . . . . $ .06 $ .08
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . $ 234,003 $ 401,560
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization. . . . . . . . 140,849 192,344
Provision for bad debts. . . . . . . . . . . 30,000 --
Gain from extinguishment of long-term debt . -- (38,121)
Impact of changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . (300,764) (150,573)
Income tax refund receivable . . . . . . 173,621 190,498
Inventories. . . . . . . . . . . . . . . (16,389) 39,018
Prepaid expenses and other . . . . . . . 290 (55,440)
Income tax payable . . . . . . . . . . . -- 93,439
Accounts payable and accrued expenses . . 131,013 89,701
----------- ----------
Net cash provided by operating activities. . 392,623 762,426
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . (217,431) (46,977)
Purchase of PLL Customer List. . . . . . . . . . (1,650,433) (42,033)
Purchase of Accu-Path Customer List. . . . . . . -- (2,541)
Acquisition costs. . . . . . . . . . . . . . . . (193,058) 1,920
----------- ----------
Net cash used in investing activities. . . . (2,060,922) (89,631)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term debt. . . . . . . . . . . (11,666) --
Payments on long-term debt . . . . . . . . . . . (85,312) (445,474)
Proceeds from long-term borrowings . . . . . . . 1,681,309 --
Proceeds from exercise of warrants and stock
options . . . . . . . . . . . . . . . . . . . . -- 30,000
----------- ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . 1,584,331 (415,474)
----------- ----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . (83,968) 257,321
----------- ----------
CASH AND CASH EQUIVALENTS, beginning
of period. . . . . . . . . . . . . . . . . . . . 727,381 2,863,639
----------- ----------
CASH AND CASH EQUIVALENTS, end of period . . . . . $ 643,413 $3,120,960
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest . . . . $ 36,876 $ 58,279
----------- ----------
----------- ----------
Cash paid during the period for taxes. . . . . . $ -- $ --
----------- ----------
----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998, IS UNAUDITED.)
1. GENERAL
The consolidated financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation. These financial statements have not been audited by an
independent accountant. The consolidated balance sheet at December 31,
1997, has been derived from the audited consolidated balance sheet of the
Company.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the
disclosures are adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Annual
Report on Form 10-KSB filed by the Company with the Securities and Exchange
Commission on March 27, 1998. The financial data for the interim periods
presented may not necessarily reflect the results to be expected for the
full year.
2. EARNINGS PER COMMON SHARE
Both Basic and Diluted Earnings per common share were computed using the
weighted average number of common shares outstanding after adding the
dilutive effect, if any, of the conversion of stock options, outstanding
warrants and contingent shares. In the diluted earnings per share
calculation the outstanding warrants were calculated using the lowest
possible exercise price during the term of the warrants.
3. GOODWILL AND CUSTOMER LIST
Goodwill and customer lists are being amortized on a straight-line basis
over twenty to forty years and fifteen years, respectively. The Company
continually evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of goodwill and customer lists
may warrant revision or that the remaining unamortized balance of goodwill
or customer lists may not be recoverable. When factors, such as operating
losses, loss of customers, loss or suspension for an extended period of
laboratory certification, or changes in the drug testing industry, if
present, indicate that goodwill or customer lists should be evaluated for
possible impairment, the Company uses an estimate of the related
undiscounted cash flows over the remaining life of the goodwill or customer
lists in measuring whether the goodwill and the customer lists are
recoverable. Although management believes that goodwill and the customer
lists are currently recoverable over the respective remaining amortization
periods, it is possible, due to a change in circumstances, that the
carrying value could become impaired in the future. Such impairment could
have a material adverse effect on the results of operations in a particular
reporting period.
4. CONTINGENT LIABILITIES
Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse or who allege that
improper analysis has been performed, generally arising from Laboratory
Specialists, Inc.'s, the company's wholly owned subsidiary ("LSI"), alleged
failure to properly administer drug urinalysis tests. LSI is currently a
defendant in several such lawsuits. Based upon prior successful defense of
similar-type lawsuits, the Company believes it has valid defenses to each
of such lawsuits, and intends to vigorously defend in such actions.
Although LSI maintains insurance protection against such liability, and
LSI's insurance carriers have assumed the defense of LSI in connection
with certain actions, the extent of such insurance coverage is limited,
both in terms of types of risks covered by the policies and the amount of
coverage. In the opinion of the Company's management and it's legal
counsel, these suits and claims should not result in judgments or settle-
ments which would have a material adverse effect on the Company's results
F-6
<PAGE>
of operations or financial position. Although LSI has not experienced
any material liability related to such claims, there can be no assurance
that LSI, and possibly LSAI, will not at some time in the future
experience significant liability in connection with such claims and such
liability may exceed the extent of such insurance coverage, both in terms
of risks covered by the policies and the amount of coverage, which could
have a material adverse effect upon the results of operations and financial
condition of the Company.
5. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the purchase of certain assets of Pathology
Laboratories, Ltd. ("PLL"), LSI recorded a liability of $960,000 based upon
estimated future quarterly payments. As of March 31, 1998, total payments
of $751,688 were recorded as reductions in the liability owed to PLL for
the four installments. The remaining balance of the liability,
approximately $208,312, was recorded as a reduction in the carrying value
of the PLL customer list.
In connection with the purchase of certain assets of Accu-Path Medical
Laboratory, Inc. ("Accu-Path"), LSI recorded a liability of $260,000 based
upon estimated future quarterly payments. As of March 31, 1998, no
payments have been made toward the liability with Accu-Path.
A capital lease obligation of approximately $650,000 was incurred when LSI
entered into an agreement with a vendor in 1996 to buy equipment and
certain lab supplies at a fixed price per drug screen performed. The
minimum monthly amount under the agreement was approximately $47,000 in
1996 and increased to approximately $60,000 in 1997, with approximately
$13,000 per month allocated to the principal and interest of the capital
lease obligation, and the remaining cost being allocated to the cost of
laboratory supplies. The agreement resulted in LSI recording approximately
$650,000 in additional equipment, with an equal amount of capital lease
obligation recorded as long-term debt obligation payable over five years.
The above transactions, except the monthly payment to the vendor and the
reductions in the liability owed to PLL and Accu-Path, are non-cash
transactions and have been excluded from the accompanying statements of
cash flows.
6. SUBSEQUENT EVENTS
On May 1, 1998, the Company acquired from Harrison Laboratories, Inc.
("HLI"), a Texas corporation, certain intangible assets pursuant to an
Asset Purchase Agreement dated April 13, 1998, ("HLI Asset Purchase"). The
assets purchased included the customer list of HLI and certain other
intangible assets. Pursuant to the HLI Asset Purchase, the Company (i)
paid $500,000 at closing, (ii) assumed the obligations of HLI under a
certain capital lease, dated November 11, 1997, which requires 60 monthly
base payments of $6,137, and (iii) is required to make a final payment, on
or before June 1, 1999, in an amount equal to 100 percent of the gross
revenues directly attributable to each customer comprising the customer
base of HLI for the year ended April 30, 1999, exceeding $533,000.
On June 4, 1998, the Company completed a private offering of 555,222
shares of its common stock. The net proceeds of this offering were
approximately $2,285,600. In part for services provided, the Company
sold to Jesup & Lamont Securities Corporation warrants exercisable on
or before June 3, 2003, for the purchase of 55,522 shares of the
Company's common stock for $5.40 per share. The Company agreed to
register and maintain the registration of the shares of common stock
sold pursuant to the offering and those shares underlying the warrants
at the Company's cost and expense. In the event the Company fails to
file a registration statement registering such shares of common stock
on or before July 4, 1998 and obtain effectiveness of such registration
statement on or before September 2, 1998, the Company agreed to issue
warrants to the purchasers of the common stock, exercisable for the
purchase of 5% of the number of shares purchased for each 30-day
period that the Company fails to file or obtain effectiveness of such
registration statement.
On July 1, 1998, the Company acquired the customer list and certain
other intangible assets of TOXWORX Laboratories, Inc. for $2,400,000
pursuant to an Asset Purchase Agreement dated June 8, 1998.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Laboratory Specialists of America, Inc.:
We have audited the accompanying consolidated balance sheets of Laboratory
Specialists of America, Inc. (an Oklahoma corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Laboratory Specialists of
America, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
March 6, 1998
F-8
<PAGE>
Page 1 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 2,863,639 $ 727,381
Accounts receivable, net of allowance of $568,237 in 1997 and
$597,499 in 1996. . . . . . . . . . . . . . . . . . . . . . . . . 2,262,990 1,696,744
Income tax refund receivable . . . . . . . . . . . . . . . . . . . . . 190,498 312,664
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,929 99,754
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . 115,219 146,859
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 160,709 211,078
----------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 5,702,984 3,194,480
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,123,909 in 1997 and $900,948 in 1996 . . . . . 2,376,885 1,592,599
----------- ----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $272,148 in 1997
and $171,355 in 1996. . . . . . . . . . . . . . . . . . . . . . . 2,316,302 2,663,850
Customer lists, net of accumulated amortization of $518,105 in
1997 and $216,429 in 1996 . . . . . . . . . . . . . . . . . . . . 4,587,814 1,863,061
Deferred costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,595 80,818
----------- ----------
Total other assets . . . . . . . . . . . . . . . . . . . . . 6,936,711 4,607,729
----------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $15,016,580 $9,394,808
----------- ----------
----------- ----------
</TABLE>
<PAGE>
Page 2 of 2
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
----------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 742,292 $ 521,705
Accrued payroll expenses . . . . . . . . . . . . . . . . . . . . . . 411,364 300,103
Accrued customer list installment payments . . . . . . . . . . . . . 510,345 --
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 78,491 57,310
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 410,293
Current portion of long-term debt. . . . . . . . . . . . . . . . . . 527,696 118,085
Obligations related to discontinued operation. . . . . . . . . . . . 126,813 784,272
----------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 2,397,001 2,191,768
----------- ----------
LONG-TERM DEBT, net of current portion . . . . . . . . . . . . . . . . 2,353,428 1,245,690
----------- ----------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 359,848 307,100
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares authorized,
4,924,818 shares issued and outstanding in 1997 and 3,313,405
shares issued and outstanding in 1996. . . . . . . . . . . 4,925 3,313
Paid in capital in excess of par. . . . . . . . . . . . . . . . 8,291,365 5,366,027
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 1,610,013 280,910
----------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . 9,906,303 5,650,250
----------- ----------
Total liabilities and stockholders' equity . . . . . . . . $15,016,580 $9,394,808
----------- ----------
----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED BALANCE SHEETS.
F-10
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,836,953 $8,726,799 $6,925,716
COST OF LABORATORY SERVICES. . . . . . . . . . . . . . . . . . . . . . 5,828,665 3,816,114 3,246,470
----------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,008,288 4,910,685 3,679,246
----------- ---------- ----------
OPERATING EXPENSES:
Selling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654,284 601,945 561,470
General and administrative . . . . . . . . . . . . . . . . . . . . 3,230,117 2,442,602 2,157,410
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 690,268 504,123 232,535
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . -- 124,531 --
----------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . 4,574,669 3,673,201 2,951,415
----------- ---------- ----------
OTHER (EXPENSE) INCOME:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (230,433) (67,185) (29,651)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 78,035 41,208 126,939
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,146 4,169 323,846
----------- ---------- ----------
Total other (expense) income . . . . . . . . . . . . . . . . . (151,252) (21,808) 421,134
----------- ---------- ----------
Income from continuing operations before income taxes. . . . . 2,282,367 1,215,676 1,148,965
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . 953,264 527,171 474,405
----------- ---------- ----------
Income from continuing operations. . . . . . . . . . . . . . . . . 1,329,103 688,505 674,560
DISCONTINUED OPERATION:
Loss from operations of discontinued clinical business,
net of tax benefit of $257,904 . . . . . . . . . . . . . . . . . -- (500,636) --
Loss on disposal of clinical business, net of tax benefit
of $489,420. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (773,580) --
----------- ---------- ----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . 1,329,103 (585,711) 674,560
DIVIDENDS ON PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . -- -- 13,344
----------- ---------- ----------
Net income (loss) available to common stockholders . . . . . . . . $ 1,329,103 $ (585,711) $ 661,216
----------- ---------- ----------
----------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common stock shares outstanding . . . . 3,693,146 3,309,594 3,298,405
----------- ---------- ----------
----------- ---------- ----------
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . $ 0.36 $ 0.21 $ 0.20
Discontinued operation . . . . . . . . . . . . . . . . . . . . . . -- (0.39) --
----------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.36 $ (0.18) $ 0.20
----------- ---------- ----------
----------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common stock shares
and common stock equivalents outstanding . . . . . . . . . . . . 4,325,618 3,954,787 3,843,391
----------- ---------- ----------
----------- ---------- ----------
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . $ 0.31 $ 0.17 $ 0.17
Discontinued operation . . . . . . . . . . . . . . . . . . . . . . -- (0.32) --
----------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.31 $ (0.15) $ 0.17
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Preferred stock, $0.001 par value, $1 stated value:
Balance, beginning of period . . . . . . . . . . . . . . . . . . . $ -- $ -- $ 300,000
Redemption of stock (Note 5) . . . . . . . . . . . . . . . . . . . -- -- (300,000)
---------- ---------- ----------
Balance, end of period . . . . . . . . . . . . . . . . . . . . -- -- --
---------- ---------- ----------
Common stock, $0.001 par value:
Balance, beginning of period . . . . . . . . . . . . . . . . . . . 3,313 3,298 3,298
Exercise of common stock warrants (Note 11). . . . . . . . . . . . 1,501 -- --
Issuance of stock in connection with the settlement
of a note payable (Note 7) . . . . . . . . . . . . . . . . . . 103 -- --
Other issuance of stock. . . . . . . . . . . . . . . . . . . . . . 8 15 --
---------- ---------- ----------
Balance, end of period . . . . . . . . . . . . . . . . . . . . 4,925 3,313 3,298
---------- ---------- ----------
Paid in capital in excess of par:
Balance, beginning of period . . . . . . . . . . . . . . . . . . . 5,366,027 5,341,667 5,341,667
Exercise of common stock warrants (Note 11). . . . . . . . . . . . 2,677,950 -- --
Issuance of stock in connection with the settlement
of a note payable (Note 7) . . . . . . . . . . . . . . . . . . 232,396 -- --
Other issuance of stock. . . . . . . . . . . . . . . . . . . . . . 14,992 24,360 --
---------- ---------- ----------
Balance, end of period . . . . . . . . . . . . . . . . . . . . 8,291,365 5,366,027 5,341,667
---------- ---------- ----------
Retained earnings:
Balance, beginning of period . . . . . . . . . . . . . . . . . . . 280,910 866,621 205,405
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . 1,329,103 (585,711) 674,560
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . -- -- (13,344)
---------- ---------- ----------
Balance, end of period . . . . . . . . . . . . . . . . . . . . 1,610,013 280,910 866,621
---------- ---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . $9,906,303 $5,650,250 $6,211,586
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
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)
Net proceeds from exercise of warrants and stock options. . . . . 2,733,272 - -
Payments on short-term debt . . . . . . . . . . . . . . . . . . . (91,833) (598,515) -
Payments on long-term debt. . . . . . . . . . . . . . . . . . . . (902,651) (155,628) (90,585)
Proceeds from long-term borrowings, net of loan
origination fees. . . . . . . . . . . . . . . . . . . . . . . . 2,387,405 -- --
------------ ----------- -----------
Net cash provided by (used in) financing activities 4,126,193 (754,143) (454,154)
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . 2,136,258 (1,683,670) (33,391)
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . . . . . 727,381 2,411,051 2,444,442
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . . . . . $ 2,863,639 $ 727,381 $ 2,411,051
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . . . $ 218,298 $ 112,698 $ 29,651
------------ ----------- -----------
------------ ----------- -----------
Cash paid during the period for income taxes. . . . . . . . . . . $ 823,000 $ 631,564 $ 480,405
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. GENERAL:
Laboratory Specialists of America, Inc. (the "Company" or "LSAI"), an Oklahoma
corporation, was organized in March 1994. Effective July 8, 1994, and January
2, 1996, respectively, LSAI acquired all of the capital stock of Laboratory
Specialists, Inc. ("LSI"), a Louisiana corporation, and National
Psychopharmacology Laboratory, Inc. ("NPLI"), a Tennessee corporation, and LSI
and NPLI became wholly owned subsidiaries of LSAI.
Through LSI, the Company operates an independent forensic drug testing
laboratory providing integrated drug testing services to corporations and
governmental bodies, by negotiated contract, for detection of illegal drug use
by employees and prospective employees. The Company's customers are primarily
in the construction, transportation, service, mining and manufacturing
industries, principally located in the southeast and southwest United States.
See Note 3 for a discussion of NPLI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all subsidiary
companies. All material intercompany transactions have been eliminated.
EARNINGS PER COMMON SHARE
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," during 1997 and
restated all previously presented amounts in conformity with SFAS No. 128.
Basic earnings per common share includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
stock shares outstanding for the period. Diluted earnings per common share is
computed by dividing income available to common stockholders by the
weighted-average number of common stock shares and common stock equivalents
outstanding which includes the dilutive impact of a convertible note payable
and outstanding warrants and options using the treasury stock method.
The following table summarizes the calculation of basic earnings per common
share and diluted earnings per common share:
<TABLE>
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
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-14
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1997 AND 1996
<TABLE>
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>
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:
<TABLE>
ESTIMATED
USEFUL LIVES 1997 1996
------------- ----------- ----------
<S> <C> <C> <C>
Land . . . . . . . . . . . . . . . . . . N/A $ 169,353 $ 29,353
Building and improvements. . . . . . . . 7 - 40 Years 1,457,097 867,110
Equipment. . . . . . . . . . . . . . . . 5 - 12 Years 1,765,377 1,492,633
Vehicles . . . . . . . . . . . . . . . . 5 Years 32,419 32,419
Furniture and fixtures . . . . . . . . . 5 - 10 Years 76,548 72,032
----------- ----------
3,500,794 2,493,547
Less- Accumulated depreciation and
amortization . . . . . . . . . . . . . (1,123,909) (900,948)
----------- ----------
$ 2,376,885 $1,592,599
----------- ----------
----------- ----------
</TABLE>
F-15
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1997 AND 1996
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
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
F-16
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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):
<TABLE>
(Unaudited)
-----------
<S> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . $8,626
Net income from continuing operations . . . . . . . . . . . . $ 851
Basic earnings per common share from continuing operations. . $ 0.26
Diluted earnings per common share from continuing operations. $ 0.22
</TABLE>
PATHOLOGY LABORATORIES, LTD.
On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement dated
January 31, 1997. PLL is a privately held corporation. The assets purchased
included the forensic drug testing customer list of PLL and all contracts,
contract rights and agreements, correspondence with the customers for which PLL
has provided forensic drug testing services, and all assets owned by PLL used in
connection with the PLL office in Greenville, South Carolina. Pursuant to the
Purchase Agreement, the Company (i) paid $1,600,000 at closing and (ii) assumed
the obligations of PLL under a certain lease, dated September 16, 1996, which
requires monthly base rental payments of $2,083 and which expires on September
16, 1999.
F-17
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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>
(Unaudited)
-----------
<S> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . $11,287
Net income from continuing operations . . . . . . . . . . . . $ 1,093
Basic earnings per common share from continuing operations. . $ 0.33
Diluted earnings per common share from continuing operations. $ 0.28
</TABLE>
ACCU-PATH MEDICAL LABORATORIES, INC.
On December 1, 1997, the Company acquired from Accu-Path Medical Laboratories,
Inc. ("Accu-Path") certain intangible assets pursuant to an Asset Purchase
Agreement dated December 1, 1997. Accu-Path is a privately held corporation.
The assets purchased included the forensic drug testing customer list of Accu-
Path, all contracts and contract rights for the providing of drug testing
services, and certain of the assets owned by Accu-Path used in connection with
the Accu-Path office in Ruston, Louisiana. The purchase price for these assets
was established as 180% of the collected and collectible forensic drug testing
customer list revenues during the period from June 1998 through November 1998.
The Company paid $100,000 at closing and will pay within 30 days following the
end of each three-month period after closing, 50% of the forensic testing
revenue for each of the first three quarters. The remaining purchase price
balance will be paid through four quarterly installment payments with the first
of such payments due 30 days following the end of the first twelve-month
anniversary date of the acquisition. The Company has estimated the total
purchase price will be $360,000, which was allocated entirely to the customer
list to be amortized over 15 years. In the accompanying consolidated balance
sheet at December 31, 1997, the Company has $260,000 accrued for the remainder
of the estimated purchase price as "accrued customer list installment payments."
The Company consolidated the drug testing services with LSI's laboratory in
December 1997. Had the acquisition occurred at the beginning of 1997, the
Company's results of operations for the year ended December 31, 1997, would not
have been materially different from those presented in the accompanying
consolidated statement of income.
4. OTHER INCOME:
Other income, as reflected in the consolidated statement of income for the year
ended December 31, 1995, includes proceeds of $320,000 received from the
settlement of litigation brought by LSI.
5. TRANSACTIONS WITH RELATED PARTIES:
During the years 1997, 1996 and 1995, LSAI incurred approximately $170,000,
$30,000 and $130,000, respectively, for legal services rendered by a director of
the Company who also serves as legal counsel for the Company.
F-18
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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>
1997 1996
---------- ----------
<S> <C> <C>
Note payable to MBf, due February 1999, interest rate 7%,
collateralized by substantially all of the assets of LSI (see Note 5) . . . . $ 353,123 $ 353,123
Note payable for purchase of laboratory building . . . . . . . . . . . . . . . . -- 450,000
Capital lease agreement with Boehringer-Mannheim Corporation . . . . . . . . . . 442,567 560,652
Note payable to a bank bearing interest at 8.65%, with principal and
interest payable monthly through June 2002 and the balance of
principal and interest due in a balloon payment in July 2002,
collateralized by substantially all of the assets of LSI. . . . . . . . . . . 697,101 --
Term loan with a bank bearing interest at the prime rate plus 0.5%
(9.0% at December 31, 1997), with principal and interest payable
monthly through January 2002, collateralized by substantially all
of the assets of LSI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,388,333 --
---------- ----------
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,881,124 1,363,775
Less- Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . (527,696) (118,085)
---------- ----------
$2,353,428 $1,245,690
---------- ----------
---------- ----------
</TABLE>
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
F-19
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
excluded from the accompanying 1996 consolidated statement of cash flows. In
1996, this note payable to the seller was classified as long-term based on a
written commitment from a bank to refinance the purchase and construction costs
up to the lesser of 80% of appraised value or cost, not to exceed $720,000.
Upon maturity in 1997, the note was refinanced through a note payable to a bank.
During February 1996, LSI entered into an agreement with Boehringer-Mannheim
Corporation through February 2001, to purchase equipment and certain lab
supplies at a fixed price, per drug screen performed. The agreement resulted in
the Company recording approximately $650,000 in additional equipment, with an
equal amount recorded as a capital lease obligation payable over five years.
The amortization of the capital lease assets is included in depreciation expense
in the accompanying consolidated statements of income. The total monthly
payment through November 1996 was $46,740. The agreement was amended during
December 1996, due to increased drug testing volumes and the new monthly payment
became $59,750, with $13,223 allocated to the principal and interest of the
capital lease obligation, and the remaining cost allocated to the cost of
laboratory supplies. In July 1997, due to further increases in drug testing
volumes, the original lease term was extended from five years to six years and
additional equipment was added. The total monthly payment and capital lease
obligation did not change as a result of this amendment, and the portion of the
monthly payment which is allocated to the principal and interest of the capital
lease obligation during the first five years of the agreement will be treated as
equipment rental expense during the sixth year. The future minimum lease
payments related to this obligation are as follows:
<TABLE>
CAPITAL OPERATING
-------- ----------
<S> <C> <C>
1998 . . . . . . . . . . . . . . . . . . $158,670 $ 558,330
1999 . . . . . . . . . . . . . . . . . . 158,670 558,330
2000 . . . . . . . . . . . . . . . . . . 158,670 558,330
2001 . . . . . . . . . . . . . . . . . . 26,446 690,555
2002 . . . . . . . . . . . . . . . . . . -- 119,500
-------- ----------
502,456 2,485,045
Less- Interest on capital lease obligation 59,889 --
-------- ----------
Total future minimum lease payments. . . $442,567 $2,485,045
-------- ----------
-------- ----------
</TABLE>
8. INCOME TAXES:
Prior to 1995, the Company had no material differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements,
except for certain goodwill which is not deductible for tax purposes, and
treated as a permanent difference.
The 1997, 1996 and 1995 provision (benefit) for income taxes on income from
continuing operations is summarized below:
F-20
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
U.S. Federal--
Current . . . . . . . . . . . . . . $690,916 $ 581,467 $390,008
Deferred. . . . . . . . . . . . . . 57,829 (166,115) (8,735)
-------- --------- --------
748,745 415,352 381,273
State. . . . . . . . . . . . . . . . . . 204,519 111,819 93,132
-------- --------- --------
Total . . . . . . . . . . $953,264 $ 527,171 $474,405
-------- --------- --------
-------- --------- --------
</TABLE>
The results of the discontinued operation for the year ended December 31, 1996,
include a tax benefit of $747,324.
Deferred tax liabilities (assets) at December 31, 1997 and 1996, are composed of
the following:
<TABLE>
1997 1996
--------- ---------
<S> <C> <C>
Net current deferred tax asset:
Allowance for doubtful accounts $(133,660) $(134,273)
Accrued liabilities (58,564) (105,180)
Deferred taxable revenue, short-term 4,848 28,375
Customer list, net of amortization, short-term 26,667 --
--------- ---------
(160,709) (211,078)
--------- ---------
Net non-current deferred tax liability:
Accelerated depreciation 42,515 (69,748)
Customer list, net of amortization, long-term 317,333 372,000
Deferred taxable revenue, long-term -- 4,848
--------- ---------
359,848 307,100
--------- ---------
Total deferred taxes $ 199,139 $ 96,022
--------- ---------
--------- ---------
</TABLE>
In the following table, the U.S. Federal income tax rate is reconciled to the
Company's 1997, 1996 and 1995 effective tax rates from continuing operations for
income as reflected in the consolidated statements of income.
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate. . . . . . 34.0% 34.0% 34.0%
Increases resulting from--
State income taxes . . . . . . 6.1 6.1 5.4
Goodwill amortization. . . . . 1.5 2.9 1.2
Other. . . . . . . . . . . . . 0.2 0.4 0.7
---- ---- ----
41.8% 43.4% 41.3%
---- ---- ----
---- ---- ----
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
CONTINGENT LIABILITIES
Incidental to its business, the Company from time to time is sued by individuals
who have tested positive for drugs of abuse, generally arising from LSI's
alleged failure to properly administer drug urinalysis tests. LSI is currently
a defendant in several such lawsuits. Based upon prior successful defense of
similar-type lawsuits, the Company believes it has valid defenses to each of
such lawsuits, and intends to vigorously defend itself in such actions.
Although LSI
F-21
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
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 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.
F-22
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
JUDICIAL DECISIONS AND GOVERNMENT POLICY
Employee drug testing by federal agencies and certain private employers is
subject to regulation by certain federal agencies. Legislation currently exists
in a number of states regulating the circumstances under which employers may
test employees and the procedures under which such tests must be conducted. In
addition, the circumstances under which drug testing can legally be required by
employers is subject to court precedent and judicial review.
HAZARDOUS MATERIALS
Certain testing procedures employed by the Company require the use of hazardous
materials. Failure to comply with current or future federal, state or local
environmental laws or regulations could have a material adverse effect on the
Company.
10. STOCK OPTION PLANS:
LSAI established the 1994 Stock Option Plan (the "1994 Plan") on May 10, 1994.
On October 30, 1996, the 1994 Plan was amended, and the total number of shares
of common stock authorized and reserved for issuance was increased from 225,000
to 425,000. The 1994 Plan provides for the issuance of both incentive stock
options ("ISO Options") and nonqualified stock options with or without stock
appreciation rights ("SARs") to directors, executive officers, key employees and
independent contractors and consultants of the Company and its subsidiaries.
ISO Options may be granted only to employees of the Company and its
subsidiaries.
On October 1, 1997, LSAI established the 1997 Non-Qualified Stock Option Plan
(the "1997 Plan"), with 400,000 shares of common stock authorized to be granted.
The 1997 Plan provides for the issuance of non-qualified stock options, with
stock appreciation rights attached, to directors, executive officers, key
employees and independent contractors and consultants of the Company and its
subsidiaries.
The Board of Directors interprets both Plans and establishes certain committees
to administer the Plans. These committees or the Board of Directors have
authority to grant options to all eligible employees and determine the types of
options granted, with or without SARs, the terms, restrictions and conditions of
the options at the time of grant, and whether SARs, if granted, are exercisable
at the time of the exercise of the option to which the SAR is attached. Under
both Plans, the option price of the common stock is determined by the Board of
Directors or the various committees. The price may not be less than 85% of the
fair market value of the shares on the date of the grant of the option, with the
exception of ISO options, which may not be less than the fair market value of
the shares on the date of grant. The Company's stock options are fixed-price
options generally granted at the fair market value of the underlying common
stock on the date of grant. Generally, the options vest and become exercisable
six months from the grant date and expire five to ten years after the grant
date.
F-23
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The following table shows the activity for options issued under the Plans as
well as other options issued:
<TABLE>
1994 PLAN AND
OTHER OPTIONS ISSUED 1997 PLAN
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE EXERCISE PRICE
OPTIONS PER OPTION OPTIONS PER OPTION
-------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Balance outstanding December 31, 1994 -- -- -- --
Options granted. . . . . . . . . . 125,000 3.00 -- --
-------- -------
Balance outstanding December 31, 1995 125,000 3.00 -- --
Options granted. . . . . . . . . . 185,000 2.75 -- --
-------- -------
Balance outstanding December 31, 1996 310,000 2.85 -- --
Options cancelled. . . . . . . . . (250,000) 2.82 -- --
Options granted. . . . . . . . . . 250,000 2.00 340,000 3.18
Options exercised. . . . . . . . . (7,500) 2.00 -- --
-------- -------
Balance outstanding December 31, 1997 302,500 2.20 340,000 3.18
-------- -------
-------- -------
Options exercisable--
December 31, 1995. . . . . . . . . 10,000 3.00 -- --
December 31, 1996. . . . . . . . . 125,000 3.00 -- --
December 31, 1997. . . . . . . . . 302,500 2.20 -- --
</TABLE>
Following is the range of exercise prices, the weighted-average remaining life
of all stock options outstanding at December 31, 1997, and the weighted-average
price within each price range of those options outstanding and those options
exercisable at December 31, 1997.
<TABLE>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 DECEMBER 31, 1997
------------------------------------------------------ ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
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, the estimated weighted-average,
grant-date fair value would have been $0.94, $1.14 and $1.23 per option for
those
F-24
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
options granted in 1997, 1996 and 1995, respectively, and the resulting
compensation expense would have reduced net income and earnings per share as
shown in the following pro forma amounts. These amounts may not be
representative of compensation expense that might be expected to result in
future years using the fair-value method of accounting for employee stock
options, as the number of options granted in a particular year may not be
indicative of the number of options granted in future years.
<TABLE>
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Net income (loss) available
for common stockholders:
As reported . . . . . . . . $1,329,103 $(585,711) $661,216
Pro forma . . . . . . . . . 1,053,706 (673,516) 614,771
Earnings (loss) per share:
Basic, as reported. . . . . $ 0.36 $ (0.18) $ 0.20
Diluted, as reported. . . . 0.31 (0.15) 0.17
Basic, pro forma. . . . . . 0.29 (0.20) 0.19
Diluted, pro forma. . . . . 0.24 (0.17) 0.16
</TABLE>
The fair value of each option granted in 1997, 1996 and 1995 was estimated as of
the grant date using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected life (years) . . . . 5 5 5
Risk-free interest rate . . . 6% 6% 6%
Expected dividend yield . . . -- -- --
Expected volatility . . . . . 38% 35% 35%
</TABLE>
11. COMMON STOCK WARRANTS:
In connection with the Company's public offering on October 11, 1994, the
Company issued 660,000 warrants. No warrants had been exercised at December 31,
1996. Until April 15, 1997, each warrant could be exercised to purchase two
shares of common stock for $3.50 per share. After April 15, 1997, each warrant
could be exercised to purchase two shares of common stock for $2.00 per share.
On September 3, 1997, LSAI gave notice to the holders of these warrants of the
Company's election to redeem the outstanding warrants at $0.01 each on October
14, 1997, unless extended, at the sole discretion of the Company, to a date not
later than November 7, 1997 (the "Warrant Redemption"). As a result, 658,290 of
the warrants were exercised in September and October 1997, and the remaining
1,710 warrants were redeemed.
As a portion of the public offering underwriting compensation, the Company also
issued warrants to purchase 66,000 units at $7.32 per unit, consisting of two
shares of common stock and one warrant for two additional shares of common
stock, exercisable during a four-year period commencing on October 11, 1995 (the
"Underwriter Warrants"). The warrants included within each unit were
exercisable under the same terms as the warrants issued in connection with the
public offering as described above. As a result of the Warrant Redemption,
62,000 of these warrants were exercised for $0.12 per warrant plus $2.00 per
share in September and October 1997, and the remaining 4,000 warrants were
redeemed. After the Warrant Redemption, the holders of the Underwriter Warrants
continue to have the right to exercise the Underwriter Warrants with respect to
the two shares of common stock comprising the unit for $7.20. In November 1997,
30,000 of the Underwriter Warrants were exercised with respect to the two shares
of common stock
F-25
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
comprising the unit for $7.20. The remaining 36,000 of the Underwriter
Warrants with respect to the two shares of common stock had not been exercised
and were outstanding at December 31, 1997. The proceeds from the exercise of
all warrants during 1997 are included in "net proceeds from exercise of
warrants and stock options" in the accompanying consolidated statement of cash
flows and was approximately $2.7 million, net of commissions and other
offering expenses.
In connection with the Warrant Redemption, LSAI issued warrants to purchase
144,058 shares of common stock to various investment bankers as a portion of
their compensation for serving as managers of the Warrant Redemption and certain
other services. These warrants have an exercise price per share of $2.20 and
expire on October 14, 2000. Both the number of shares and the exercise price
per share are subject to adjustment under certain circumstances. The value of
these warrants, recognized as compensation paid to the investment bankers for
services provided, was treated as a reduction in the recognized net proceeds to
the Company from the Warrant Redemption. The value of the outstanding warrants
is included in paid in capital in excess of par and entirely offsets the
recognized compensatory value of the warrants, resulting in no net effect on
stockholders' equity.
F-26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representation not contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or by any of the Underwriters. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, by any
person in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstance, create any implication that there
has been no change in the affairs of the Company since the date hereof.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 15
Price Range of Common Stock; Dividends . . . . . . . . . . . . . . . . 17
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Selected Financial Information . . . . . . . . . . . . . . . . . . . . 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 20
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 39
Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . . . . . . . 40
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . 41
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . 44
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 45
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-1
------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
34,000 UNITS
(EACH UNIT CONSISTING OF
TWO SHARES OF
COMMON STOCK)
ISSUABLE UPON EXERCISE
OF WARRANTS
194,058 SHARES
COMMON STOCK
ISSUABLE UPON EXERCISE OF
STOCK OPTIONS AND WARRANTS
LABORATORY SPECIALISTS
OF AMERICA, INC.
------------------------
PROSPECTUS
------------------------
ANY REQUESTS FOR INFORMATION CONCERNING THIS 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 $ 207.00
N.A.S.D. Filing Fees 927.00
*State Securities Laws (Blue Sky) Legal Fees 12,000.00
*State Securities Laws Filing Fees 10,000.00
*Printing and Engraving 15,000.00
*Legal Fees 47,000.00
*Accounting Fees and Expenses 10,000.00
*Transfer and Warrant Agent's Fees 2,000.00
*Miscellaneous 1,866.00
-----------
Total $100,000.00
-----------
-----------
</TABLE>
- -----------------------------
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
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.
<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>
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
<TABLE>
EXHIBIT NO.
-----------
<S> <C>
2.1 The Exchange Agreement, among Registrant, Arthur R. Peterson,
Jr., MBf USA, Inc., John Simonelli and Larry E. Howell,
dated June 30, 1994.(3)
2.2 The Asset Purchase Agreement with National Drug Assessment
Corporation, dated November 30, 1994.(4)
2.3 The Stock Purchase Agreement with National Psychopharmacology
Laboratory, Inc., Haroutune K. Dekirmenjian and Kenneth O.
Jobson, dated January 1, 1996.(5)
2.3 Settlement Agreement and General Release amongst Registrant,
National Psychopharmacology Laboratory, Inc., Kenneth O.
Jobson and Haroutune K. Dekirmenjian, dated August 25,
1997.(2)
3.1 Registrant's Certificate of Incorporation.(3)
<PAGE>
3.2 Registrant's Bylaws.(3)
4.1 Form of Certificate of Common Stock of Registrant.(6)
4.2 Form of 1994 Warrant.(6)
4.3 Form of Warrant Agreement between Registrant and Liberty Bank
and Trust Company of Oklahoma City, N.A.(6)
4.4 Form of Representative's Warrants ("Barron Chase Group
Warrants").(6)
4.5 Form of Warrant for Purchase of Common Stock (the "Barber
Bronson Group Warrants").(2)
4.6 Laboratory Specialists of America, Inc. 1994 Stock Option
Plan, adopted May 10, 1994.(3)
4.7 Laboratory Specialists of America, Inc. 1994 Stock Option
Plan (Amended and Restated October 30, 1996).(2)
4.8 Common Stock Purchase Warrant issued to The Equity Group,
Inc., dated December 1, 1995 (the "EGI Stock Option).(2)
4.9 Laboratory Specialists of America, Inc. 1997 Non-Qualified
Stock Option Plan.(11)
4.10 Form of Warrant Certificate evidencing warrants sold to
Jesup & Lamont Securities Corporation, dated June 4,
1988.(11)
4.11 The Registration Rights Agreement with Jesup & Lamont
Securities Corporation and the Selling Shareholders
identified in the Prospectus, dated June 4, 1998.(1)
5.1 Opinion of Dunn Swan & Cunningham, A Professional
Corporation, counsel to Registrant, regarding legality of
the securities covered by this Registration Statement.(2)
10.1 Employment Agreement with John Simonelli, as amended and
restated September 26, 1997.(10)
10.2 Employment Agreement with Larry E. Howell, as amended and
restated September 26, 1997.(10)
10.3 Employment Agreement between Arthur R. Peterson, Jr. and
Laboratory Specialists, Inc.,as amended and restated
September 26, 1997.(10)
10.4 Standard Oklahoma Business Complex Lease with 101 Park
L.L.C., dated June 25, 1996.(7)
10.5 Garden Offices Building Lease Agreement between Swiss/M Ltd
Partners and Laboratory Specialists, Inc., dated July 22,
1996.(7)
10.6 Credit Sale Agreement among Hugh O'Connor, Laboratory
Specialists, Inc. and Laboratory Specialists of America,
Inc., dated December 3, 1996.(8)
10.7 Standard Form of Agreement between Owner and Contractor among
Kerry O'Connor General Contractor, Inc., Laboratory
Specialists, Inc. and Laboratory Specialists of America,
Inc.(8)
10.8 The Stock Purchase Agreement with National Psychopharmacology
Laboratory, Inc., Haroutune K. Dekirmenjian and Kenneth O.
Jobson, dated January 1, 1996.(5)
<PAGE>
10.9 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated December 27, 1995.(8)
10.10 Promissory Note issued by Laboratory Specialists, Inc. to
Hibernia National Bank, dated December 27, 1995.(8)
10.11 Investment Banking Agreement between Laboratory Specialists
of America, Inc. ("Registrant") and Barber & Bronson
Incorporated, dated June 5, 1997.(2)
10.12 Amendment to Asset Purchase Agreement between Pathology
Laboratories, Ltd. and Laboratory Specialists of America,
Inc., dated June 30, 1997.(2)
10.13 Loan Agreement between Hibernia National Bank and Laboratory
Specialists, Inc., dated July 2, 1997.(9)
10.14 Promissory Note issued by Laboratory Specialists, Inc. to
Hibernia National Bank, dated July 2, 1997.(9)
10.15 Employment Severance Agreement between Robert A. Gardebled,
Jr. and Laboratory Specialists, Inc., dated November 20,
1997.(10)
10.16 Asset Purchase Agreement amongst Harrison Laboratories,
Inc., Roy D. Harrison, Laboratory Specialists, Inc. and
Registrant, dated April 13, 1998.(11)
10.17 Employment Agreement amongst Roy D. Harrison, Laboratory
Specialists, Inc. and Registrant dated May 1, 1998.(11)
10.18 The Selling Agreement with Jesup & Lamont Securities
Corporation, dated June 4, 1988.
10.19 Asset Purchase Agreement amongst TOXWORX Laboratories,
Inc., Kingsley Labrosse and Registrant dated June 8,
1998.(11)
22.1 Subsidiary of Registrant.(2)
23.1 Consent of Arthur Andersen LLP, dated July 8, 1998.
23.2 Consent of Deloitte & Touche LLP, dated August 26, 1997.(2)
23.3 Consent of Dunn Swan & Cunningham, A Professional
Corporation, dated July 7, 1998.
25.1 Power of Attorney of John Simonelli, dated July 7, 1997.(2)
25.2 Power of Attorney of Larry E. Howell, dated July 7, 1997.(2)
25.3 Power of Attorney of Arthur R. Peterson, Jr.,July 7, 1997.(2)
25.4 Power of Attorney of Robert A. Gardebled, Jr., dated July 7,
1997.(2)
25.5 Power of Attorney of Jerome P. Welch, dated July 7, 1997.(2)
25.6 Power of Attorney of Michael E. Dunn, dated July 7, 1997.(2)
28.1 Stock Exchange Agreement between and among Laboratory
Specialists, Inc., MBf USA, Inc. and Arthur R. Peterson, Jr.,
dated February 23, 1994.(3)
28.2 Promissory Note issued to MBf USA, Inc. by Laboratory
Specialists, Inc., dated February 23, 1994.(3)
</TABLE>
- -------------------------------------------------------
<PAGE>
(1) To be furnished by amendment.
(2) Previously furnished.
(3) Incorporated by reference to Form SB-2 Registration Statement No.
33-82058-D as filed with the Central Regional Office of the Commission on
July 28, 1994.
(4) Incorporated by reference to Form 8-K, dated December 1, 1994, filed with
the Commission on December 15, 1994.
(5) Incorporated by reference to Form 8-K, dated January 2, 1996, filed with
the Commission on April 9, 1997.
(6) Incorporated by reference to Amendment No. 2 to Form SB-2 Registration
Statement No. 33-82058-D as filed with the Central Regional Office of the
Commission on September 21, 1994.
(7) Incorporated by reference to Form 10-QSB Quarterly Report for the
quarterly period ended June 30, 1996, filed with the Commission on August
15, 1996.
(8) Incorporated by reference to Form 10-KSB Annual Report for the year ended
December 31, 1995, filed with the Commission on April 15, 1996.
(9) Incorporated by reference to Form 10-QSB Quarterly Report for the three
months ended June 30, 1997, filed with the Commission on August 14, 1997.
(10) Incorporated by reference to Form 10-KSB Annual Report for the year ended
December 31, 1997, filed with the Commission on March 31, 1998.
(11) Incorporated by reference to Form SB-2 Registration Statement No.
333-58473 as filed with the Commission on July 2, 1998.
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
<PAGE>
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.
<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
Post-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned in the City of Oklahoma City, State of
Oklahoma, on the 8th day of July, 1998.
LABORATORY SPECIALISTS OF AMERICA, INC.
(Registrant)
By: /s/ LARRY E. HOWELL
----------------------------------------
Larry E. Howell, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated:
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN SIMONELLI Chairman of the Board, Chief July 8, 1998
- ----------------------------- Executive Officer, Secretary
John Simonelli and Director
/s/ LARRY E. HOWELL President and Chief Operating July 8, 1998
- ----------------------------- Officer and Director
Larry E. Howell
/s/ ARTHUR R. PETERSON, JR. Treasurer and Director July 8, 1998
- -----------------------------
Arthur R. Peterson, Jr.
/s/ ROBERT A. GARDEBLED, JR. Director July 8, 1998
- -----------------------------
Robert A. Gardebled, Jr.
/s/ MICHAEL E. DUNN Director July 8, 1998
- -----------------------------
Michael E. Dunn
/s/ JEROME P. WELCH Director July 8, 1998
- -----------------------------
Jerome P. Welch
</TABLE>
<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 Section4(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
<PAGE>
Jesup & Lamont Securities Corporation
June 4, 1998
Page 11
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim.
(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: /S/JOHN SIMONELLI
Name: JOHN SIMONELLI
Title: CHIEF EXECUTIVE OFFICER
Accepted and agreed to as of
this 4TH day of June, 1998
JESUP & LAMONT SECURITIES CORPORATION
By: /S/HOWARD CURD
Name: HOWARD CURD
Title: PRESIDENT
<PAGE>
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Oklahoma City, Oklahoma,
July 2, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF DUNN SWAN & CUNNINGHAM
Dunn & Swan, A Professional Corporation, hereby consents to the use of
its name under the heading "Legal Matters" in the Prospectus constituting a
part of this Registration Statement.
DUNN SWAN & CUNNINGHAM
A Professional Corporation
Oklahoma City, Oklahoma,
July 7, 1998
