<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 0-24988
LABORATORY SPECIALISTS OF AMERICA, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
OKLAHOMA 73-145065
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
101 PARK AVENUE, SUITE 810
OKLAHOMA CITY, OKLAHOMA 73102-7202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(405) 232-9800
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 10, 1998, 5,638,461 shares of issuer's Common Stock, $.001 par
value per share, were outstanding.
Transitional Small Business Disclosure Format (check one); Yes _____ No __X__
Total Sequentially Numbered Pages is 16
Index to Exhibits Appears on Sequentially Numbered Page 16
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
<TABLE>
Page
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<S> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1997 and June 30, 1998 (Unaudited) 3
Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 1997 and 1998 5
Consolidated Statements of Cash Flows (Unaudited)
Three and Six Months Ended June 30, 1997 and 1998 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
<PAGE>
PART I--FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,863,639 $4,776,869
Accounts receivable, net of allowances of $568,237 in
1997 and $494,989 in 1998 2,262,990 2,860,074
Income tax refund receivable 190,498 --
Inventories 109,929 72,172
Prepaid expenses and other 115,219 158,457
Deferred tax asset 160,709 160,709
----------- -----------
Total current assets 5,702,984 8,028,281
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,123,909 in 1997 and $1,281,817 in 1998 2,376,885 2,390,096
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $272,148 in
1997 and $316,592 in 1998 2,316,302 2,271,859
Customer list, net of accumulated amortization of $518,105
in 1997, and $695,913 in 1998 4,587,814 5,217,751
Deferred costs 32,595 45,051
----------- -----------
Total other assets 6,936,711 7,534,661
----------- -----------
Total assets $15,016,580 $17,953,038
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 742,292 $ 871,128
Accrued income tax -- 95,559
Accrued payroll 411,364 974,202
Accrued expenses 78,491 68,893
Accrued customer list installment payments 510,345 595,994
Obligations from discontinued operations 126,813 14,080
Current portion of long-term debt. 527,696 535,531
----------- -----------
Total current liabilities 2,397,001 3,155,387
----------- -----------
LONG-TERM DEBT, net of current portion 2,353,428 1,730,909
----------- -----------
DEFERRED INCOME TAXES 359,848 359,848
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares
authorized, 4,924,818 shares issued and
outstanding at 12/31/97 and 5,602,446 shares
issues and outstanding at 6/30/98 4,925 5,602
Paid in capital in excess of par, common stock 8,291,365 10,136,973
Retained earnings 1,610,013 2,564,319
----------- -----------
Total stockholders' equity 9,906,303 12,706,894
----------- -----------
Total liabilities and stockholders' equity $15,016,580 $17,953,038
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
-4-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30 , 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 3,423,760 $ 4,088,156 $ 6,010,982 $ 7,659,764
COST OF LABORATORY SERVICES 1,473,773 1,787,565 2,659,857 3,462,846
----------- ----------- ----------- -----------
GROSS PROFIT 1,949,987 2,300,591 3,351,125 4,196,918
----------- ----------- ----------- -----------
OPERATING EXPENSES:
SELLING 159,966 228,518 292,095 424,932
GENERAL AND ADMINISTRATIVE 903,464 933,024 1,599,080 1,786,052
DEPRECIATION AND AMORTIZATION 176,323 200,564 317,172 392,908
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,239,753 1,362,106 2,208,347 2,603,892
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 710,234 938,485 1,142,778 1,593,026
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (53,608) (52,294) (90,484) (98,438)
INTEREST INCOME 7,840 40,656 19,493 77,823
OTHER INCOME (231) 12,554 72 52,487
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (45,999) 916 (70,919) 31,872
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 664,235 939,401 1,071,859 1,624,898
INCOME TAX EXPENSE 275,622 386,655 449,243 670,592
----------- ----------- ----------- -----------
NET INCOME $ 388,613 $ 552,746 $ 622,616 $ 954,306
----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
SHARES OUTSTANDING 3,313,405 5,110,538 3,313,405 5,018,523
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON STOCK SHARE $ .12 $ .11 $ .19 $ .19
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS
SHARES OUTSTANDING 3,766,454 5,470,042 3,834,644 5,381,554
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON STOCK AND
COMMON STOCK EQUIVALENTS $ .10 $ .10 $ .16 $ .18
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-6-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 622,616 $ 954,306
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 317,172 392,908
Provision for bad debts and other 40,000 --
Gain from extinguishment of long-term debt -- (38,122)
Impact of changes in assets and liabilities:
Accounts receivable (627,671) (630,939)
Income tax refund receivable 241,243 190,498
Inventories 24,384 37,757
Prepaid expenses and other 53,759 (43,238)
Income tax payable -- 95,559
Accounts payable and accrued expenses 257,255 90,382
----------- -----------
Net cash provided by operating activities 928,758 1,049,111
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (481,957) (183,870)
Purchase of PLL Customer List (1,894,184) (42,033)
Purchase of Accu-Path Customer List -- (92,692)
Purchase of Harrison Customer List -- (553,515)
Acquisition costs (37,514) (12,456)
----------- -----------
Net cash used in investing activities (2,413,655) (884,566)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings (11,667) --
Payments on long-term borrowings (199,533) (576,562)
Proceeds from long-term borrowings 1,682,293 --
Proceeds from exercise of warrants and stock options -- 49,400
Proceeds from private offering -- 2,275,847
Warrant offering costs (10,420) --
----------- -----------
Net cash provided by financing activities 1,460,673 1,748,685
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,224) 1,913,230
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 727,381 2,863,639
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 703,157 $ 4,776,869
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 90,484 $ 110,573
----------- -----------
----------- -----------
Cash paid during the period for income taxes $ 190,000 $ 384,535
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-7-
<PAGE>
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997,
AND JUNE 30, 1998, IS UNAUDITED.)
1. GENERAL
The consolidated financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission for interim reporting and include all adjustments which
are, in the opinion of management, necessary for a fair presentation. These
financial statements have not been audited by an independent accountant. The
consolidated balance sheet at December 31, 1997, has been derived from the
audited balance sheet of the Company.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures are adequate to
make the information presented not misleading. However, these financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Annual Report on Form 10-KSB filed by the
Company with the Securities and Exchange Commission on March 27, 1998. The
financial data for the interim periods presented may not necessarily reflect
the results to be expected for the full year.
2. EARNINGS PER COMMON SHARE
Both Basic and Diluted Earnings per common share were computed using the
weighted average number of common shares outstanding. Diluted earnings per
share also reflect the dilutive effect, if any, of the conversion of stock
options, outstanding warrants and contingent shares. In the diluted earnings
per share calculation the outstanding warrants were calculated using the
weighted average market price during the term of the warrants.
Income from continuing operations for purposes of computing both basic earnings
per share and diluted earnings per share was $552,746 and $388,613 for the
three months ended June 30, 1998 and 1997, respectively, and $954,306 and
$622,616 for the six months ended June 30, 1998 and 1997, respectively. A
reconciliation of the average shares outstanding used to compute basic earnings
per share to the shares used to compute diluted earnings per share for both
periods is presented below:
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average shares outstanding-basic 5,110,538 3,313,405 5,018,523 3,313,405
Dilutive effect of stock options 263,698 47,571 268,107 58,429
Dilutive effect of warrants 95,806 251,174 94,924 308,506
Dilutive effect of contingent shares related
to NPL purchase -- 154,304 -- 154,304
--------- --------- --------- ---------
Average shares outstanding assuming dilution 5,470,042 3,766,454 5,381,554 3,834,644
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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<PAGE>
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 effect on the results of operations in a
particular reporting period.
4. CONTINGENT LIABILITIES
Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse or who allege that
improper analysis has been performed, generally arising from Laboratory
Specialists, Inc.'s, the company's wholly owned subsidiary ("LSI"), alleged
failure to properly administer drug urinalysis tests. LSI is currently a
defendant in several such lawsuits. Based upon prior successful defense of
similar-type lawsuits, the Company believes it has valid defenses to each of
such lawsuits, and intends to vigorously defend in such actions. Although LSI
maintains insurance to protect itself against such liability, and LSIs
insurance carriers have assumed the defense of LSI in connection with certain
actions, the extent of such insurance coverage is limited, both in terms of
types of risks covered by the policies and the amount of coverage. In the
opinion of the Company's management and it's legal counsel, these suits and
claims should not result in judgments or settlements which would have a
material adverse effect on the Company's results of operations or financial
position. Although LSI has not experienced any material liability related to
such claims, there can be no assurance that LSI, and possibly LSAI, will not at
some time in the future experience significant liability in connection with
such claims and such liability may exceed the extent of such insurance
coverage, both in terms of risks covered by the policies and the amount of
coverage, which could have a material adverse effect upon the results of
operations and financial condition of the Company.
5. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the purchase of assets from Pathology Laboratories, Ltd.
("PLL"), a liability of $960,000 was recorded based upon estimated future
quarterly installment payments to be made to PLL. As of June 30, 1998, all
installment payments, totaling $751,688 had been made and the remaining balance
of the liability, approximately $208,312, was treated as a reduction in the
carrying value of the PLL customer list since it will not be paid pursuant to
the purchase agreement.
In connection with the purchase of assets from Accu-Path Medical Laboratory,
Inc. ("Accu-Path"), a liability of $260,000 was recorded based upon estimated
future quarterly installment payments to be made to Accu-Path. As of June 30,
1998, the first and second installment payments, totaling $90,151, had been
made, with two quarterly installment payments to be made.
-8-
<PAGE>
In connection with the purchase of assets from Harrison Laboratories, Inc.
("HLI"), a liability of $460,000 was recorded based upon the estimated future
payment obligation. As of June 30, 1998, no payments have been made on this
liability; however, a $33,855 reduction was recorded as a result of the offset
of an account receivable owed to Laboratoary Specialists, Inc. by HLI.
The above transactions, except the reductions in the liability owed to PLL,
Accu-Path and HLI, are non-cash transactions and have been excluded from the
accompanying statements of cash flows.
6. SUBSEQUENT EVENTS
On July 1, 1998, the Company acquired from Toxworx Laboratories, Inc. ("TLI"), a
California corporation, a customer list pursuant to an Asset Purchase Agreement
dated June 8, 1998, ("TLI Asset Purchase"). In connection with the TLI Asset
Purchase, the Company paid $2,400,000 at closing. The purchase price of the
customer list was recorded as an intangible asset, which is being amortized
over 15 years.
On July 20, 1998, the Company granted 525,000 stock options for the purchase of
Common Stock of Laboratory Specialists of America, Inc. to certain officers,
directors, and employees. The stock options have an exercise price of $4.25
per share, which represented the fair market value on the date of the grant,
and are exercisable at any time after January 20, 1998, and on or before July
20, 2008.
On July 21, 1998, the Company issued 36,015 shares of Common Stock to Steven
Jacobs in connection with the exercise of certain warrants.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
On January 31, 1997, the Company acquired from Pathology Laboratories,
Ltd. ("PLL"), certain forensic drug testing assets (the "PLL Asset Purchase")
pursuant to an Asset Purchase Agreement dated January31, 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, the
Company (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.
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").
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 30 days
following
-9-
<PAGE>
the end of the first 12 month anniversary period from the date of closing.
The estimated gross revenues attributable to this customer base was
approximately $360,000. As of June 30, 1998, the first and second installment
payments, totaling $90,151, had been made to Accu-Path and two installments
remain to be paid.
On May 1, 1998, the Company acquired from Harrison Laboratories, Inc.
("HLI") a customer list pursuant to an Asset Purchase Agreement, dated April 13,
1998 (the "HLI Asset Purchase"). In connection with the HLI Asset Purchase, the
Company (i) paid $500,000 at closing and agreed to pay on or before May 30,
1999, an amount equal to the revenues attributable to the customer list during
the one-year period ending April 30, 1999, in excess of $500,000, (ii) assumed
HLI's obligations under a five-year lease with Linc Quantum Analytics, Inc.,
dated November 11, 1997, and acquired the related equipment, and (iii) entered
into a three-year employment agreement with the principal shareholder of HLI as
a sales representative, providing for a base salary of $50,000 per year,
monthly bonuses equal to 3.5 percent of revenues attributable to the customer
list, and other benefits. The purchase price of the customer list was recorded
as an intangible asset, which is being amortized over 15 years.
On June 4, 1998, LSAI completed the offering of 555,222 shares of
Common Stock for estimated net proceeds of $2,285,600 (the "1998 Private
Offering"). Furthermore, LSAI paid Jesup & Lamont Securities Corporation (the
"Jesup & Lamont") a placement fee of $174,650 and issued the warrants to Jesup &
Lamont and its designees (the "Jesup & Lamont Group Warrants"). In connection
with the 1998 Private Offering, LSAI agreed to (i) file a registration
statement under the 1933 Act with respect to the Common Stock offered and
underlying the Jesup & Lamont Group Warrants within 30 days of termination of
such offering, (ii) obtain effectiveness of such registration statement within
90 days following such termination or within five days of the clearance by the
Commission to allow acceleration of effectiveness, and (iii) maintain the
effectiveness of the registration statement for a minimum of six years. A
penalty, in the form of warrants representing five percent the shares of Common
Stock sold pursuant to the 1998 Private Offering applies for each 30-day period
in which LSAI fails to file or obtain effectiveness of the registration
statement. Pursuant to such agreement, LSAI filed the registration statement
on July 2, 1998.
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.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i)
the three months ended June 30, 1997 and 1998, which are derived from the
unaudited consolidated financial statements of the Company and (ii) for the six
months ended June 30, 1997 and 1998, which are derived from the unaudited
consolidated financial statements of the Company which include, in the opinion
of management of the Company, all normal recurring adjustments which management
of the Company considers necessary for a fair statement of the results for such
periods The results of operations for the periods presented are not
necessarily indicative of the Company's future operations.
<TABLE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
1997 1998 1997 1998
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $3,423,760 100.0% $4,088,156 100.0% $6,010,982 100.0% $7,659,764 100.0%
Cost of revenues 1,473,773 43.0% 1,787,565 43.7% 2,659,857 44.2% 3,462,846 45.2%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit 1,949,987 57.0% 2,300,591 56.3% 3,351,125 55.8% 4,196,918 54.8%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling 159,966 4.7% 228,518 5.6% 292,095 4.9% 424,932 5.6%
General and administrative 903,464 26.4% 933,024 22.8% 1,599,080 26.6% 1,786,052 23.3%
Depreciation and amortization 176,323 5.1% 200,564 4.9% 317,172 5.3% 392,908 5.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses 1,239,753 36.2% 1,362,106 33.3% 2,208,347 36.8% 2,603,892 34.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations $ 710,234 20.8% $ 938,485 23.0% $1,142,778 19.0% $1,593,026 20.8%
---------- ----- ---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- ----- ---------- -----
</TABLE>
-10-
<PAGE>
During the three and six months ended June 30, 1998, LSI experienced a
2.4 percent and 3.2 percent decrease in the price per specimen, compared to the
three and six months ended June 30, 1997, principally due to increased price
competition amongst providers of drug testing services, price per specimen
being an important factor in obtaining and maintaining clients. 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 price per specimen will not decline during 1998.
In the event price stabilization does not occur, LSI will, as it has in the
past, take appropriate measures to downsize its drug testing personnel and
possibly further automate the testing process and employ additional technology
to continue profitability, although there can be no assurance that such
measures will assure profitability in the event of substantial price reductions
within the short term.
COMPARISON OF THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998
Revenues increased to $7,659,764 in the six months ended June 30, 1998
(the "1998 Interim Period"), from $6,010,982 in the six months ended June 30,
1997 (the "1997 Interim Period"), an increase of 27.4 percent. Revenues
increased to $4,088,156 in the three months ended June 30, 1998 (the "1998
Second Quarter"), from $3,423,760 in the three months ended June 30, 1997 (the
"1997 Second Quarter"), and increase of 19.4 percent. The increase in revenues
was due to a 31.1 percent and 21.4 percent increase, respectively, in the
number of specimens analyzed during the 1998 Interim Period as compared to the
1997 Interim Period and the 1998 Second Quarter as compared to the 1997 Second
Quarter, although partially offset by a decrease of 3.2 percent and 2.4
percent, respectively, in the average price per specimen. The increase in
number of specimens analyzed was attributable to the Accu-Path and HLI Asset
Purchases as well as LSI's normal sales and marketing efforts. The decrease in
the average price per specimen was principally due to increased price
competition among providers of drug testing services, price per specimen being
an important factor in obtaining and maintaining clients.
Cost of revenues increased $802,989 from $2,659,857 in the 1997 Interim
Period to $3,462,846 in 1998 Interim Period and $313,792 from $1,473,773 in the
1997 Second Quarter to $1,787,565 in the 1998 Second Quarter, increases of 30.2
percent and 21.3 percent, respectively. Gross profit on revenues decreased as
a percentage of revenues from 55.8 percent in the 1997 Interim Period to 54.8
percent in 1998 Interim Period and from 57.0 percent in the 1997 Second Quarter
to 56.3 percent in the 1998 Second Quarter. The decrease was primarily due to
the decrease in the price per specimen.
Operating expenses increased from $2,208,347 in the 1997 Interim Period
to $2,603,892 in the 1998 Interim Period and from $1,239,753 in the 1997 Second
Quarter to $1,362,106 in the 1998 Second Quarter, increases of 17.9 percent and
9.9 percent respectively, and decreased as a percentage of revenues from 36.8
percent to 34.0 percent and 36.2 percent to 33.3 percent, respectively. The
increase in operating expenses was attributable to the increase in selling
expenses of $132,837 for the Interim Period and $68,552 for the Second Quarter,
general and administrative expenses of $186,972 for the Interim Period and
$29,560 for the Second Quarter and depreciation and amortization of $75,736 for
the Interim Period and $24,241 for the Second Quarter. The increase in general
and administrative expenses was principally the result of (i) an increase in
executive officer compensation, (ii) the addition of several key positions at
LSI and (iii) the addition of certain overhead costs associated with the PLL,
Accu-Path and HLI Asset Purchases. The increase in selling expenses was due to
several additions to the sales force during late 1997 and early 1998, to assist
in maintaining forensic clients acquired as part of the PLL, Accu-Path and HLI
Asset Purchases, as well as additional business development in other areas of
the United States. Depreciation increased due to the renovation of the new
laboratory and purchase of additional equipment at LSI, while amortization
increased due to the customer list acquisitions from PLL, Accu-Path and HLI and
the amortization of the purchase price of such customer lists.
-11-
<PAGE>
Income from operations increased from $1,142,788 in the 1997 Interim
Period to $1,593,026 in the 1998 Interim Period, a 39.4 percent increase, and
from $710,234 in the 1997 Second Quarter to $938,485 in the 1998 Second
Quarter, a 32.1 percent increase. Operating income increased as a percentage
of revenues from 19.0 percent to 20.8 percent in the Interim Period and from
20.8 percent to 23.0 percent in the Second Quarter.
Interest expense increased 8.8 percent from $90,484 in the 1997 Interim
Period to $98,438 in 1998 Interim Period, but decreased 2.5 percent from
53,608 in the 1997 Second Quarter to $52,294 in the 1998 Second Quarter. The
overall increase in interest expense was due to the obtaining of the bank
loans during 1997 associated with the PLL Asset Purchase and the purchase and
renovation of the new laboratory building, while partially offset by a
decrease late in the first quarter of 1998 related to the repayment in full
of the note payable to MBf USA, Inc. Interest income increased from $19,493
in the 1997 Interim Period to $77,823 in the 1998 Interim Period, a 299.2
percent increase, and from $7,840 in the 1997 Second Quarter to $40,656 in
the 1998 Second Quarter, a 418.6 percent increase. These increases were due
to additional funds on deposit primarily from the exercise of stock warrants
late in 1997 and the 1998 Private Offering during the second quarter of 1998.
Other income increased from $72 in the 1997 Interim Period to $52,487 in the
1998 Interim Period and from ($231) in the 1997 Second Quarter to $12,554 in
the 1998 Second Quarter. The increase in other income is primarily due to a
one-time gain realized due to the early payout of the note payable to MBf
USA, Inc. in addition to the recovery of bad debts previously written off.
Net income, after provision for income taxes, increased from $622,616 in the
1997 Interim Period to $954,306 in the 1998 Interim Period, a 53.3 percent
increase, and from $388,613 in the 1997 Second Quarter to $552,746 in the
1998 Second Quarter, a 42.2 percent increase.
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
the testing work force are relatively fixed over the short term, margins tend
to increase in periods of higher testing volume and decrease in periods of
lower testing volume. These effects are not always apparent because of the
impact and timing of the startup of new businesses and other factors such as
the timing and amount of price increases or decreases. Nevertheless, the
results of operations for a particular quarter may not be indicative of the
results to be expected during other quarters.
INCOME TAXES
Income taxes accrued for the six months ended June 30, 1998, were based
on an effective combined federal and state corporate income tax rate of
approximately 40 percent of pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1,049,111 in the six
months ended June 30, 1998, and $928,758 in the six months ended June 30,
1997. As of June 30, 1998, LSAI had working capital of $4,872,894, compared
to working capital of $3,305,983, at December 31, 1997.
-12-
<PAGE>
FUTURE OPERATIONS AND LIQUIDITY
On January 9, 1997, LSI entered into a loan agreement with Hibernia
National Bank (the "bank") for a term loan of $1,700,000 to be used to fund the
PLL Asset Purchase. This loan is payable in 59 monthly principal
installments of approximately $28,333, with a final principal payment
becoming due on January 10, 2002, of approximately $28,547. The outstanding
principal balance of this loan bears interest at the Citibank N.A. Rate. As
of June 30, 1998, the interest rate was 9 percent per annum and the
outstanding principal amount of such loan was approximately $1,218,333.
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 to
which LSI's laboratory has been relocated. This loan is payable in 36 monthly
installments of approximately $9,800, followed by 23 monthly installments of
approximately $6,000, with a final payment becoming due on July 2, 2002, of
approximately $484,700. The outstanding principal balance of this loan bears
interest at a rate of 8.65 percent per annum. As of June 30, 1998, the
outstanding principal balance amount of such loan was approximately $668,208.
On December 1, 1997, the Company completed the Accu-Path Asset Purchase
and pursuant thereto 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 December 31, 1998. The
estimated gross revenues attributable to this customer base was approximately
$360,000. As of June 30, 1998, total payments of $90,151 have been recorded
as reductions in the liability owed to Accu-Path for the first and second
quarterly installments.
On May 1, 1998, the Company completed the HLI Asset Purchase and
pursuant thereto (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, May 30, 1999, in an amount equal to 100 percent of the
gross revenues directly attributable to each customer comprising the customer
base of HLI for the year ended April 30, 1999, exceeding $533,855. The
estimated gross revenues attributable to the customer base, for the year
ended December 31, 1997, was approximately $960,000. As of June 30, 1998, no
cash payments have been made toward the liability owed to Harrison, but a
reduction has been recorded in the amount of $33,855 for receivables owed to
LSI by HLI and offset against the amount due.
On June 26, 1998, 480,000 stock options were exercised by officers of
the Company. Pursuant to the stock option plan, the exercise price of the
stock options and the payroll taxes associated with the exercise of the stock
options were paid to the Company in the form of previously issued fully
mature shares of Common Stock of the Company. As a result of the
transaction, 105,906 additional shares of Common Stock were issued on June
26, 1998, and the Company paid approximately $478,962 in related payroll
taxes on July 16, 1998. The payroll taxes had been accrued as part of the
payroll tax liability on the balance sheet as of June 30, 1998.
On July 1, 1998, the Company acquired from Toxworx Laboratories, Inc.
("TLI"), a California corporation, a customer list pursuant to an Asset
Purchase Agreement dated June 8, 1998, ("TLI Asset Purchase"). In connection
with the TLI Asset Purchase, the Company paid $2,400,000 at closing. The
purchase price of the customer list was recorded as an intangible asset,
which is being amortized over 15 years.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL. 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 lists may be
impaired, the carrying value of goodwill or customer lists 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
-13-
<PAGE>
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. In the event management of
the Company determines that goodwill or the customer list has become
impaired, the adjustment for impairment and recoverability will most likely
occur during a period of operations in which the Company has sustained losses
or has only marginal profitability from operations, and the impairment and/or
increased amortization amount will either increase such losses from
operations or further reduce profitability.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the pending litigation previously reported in the Annual
Report on Form 10-KSB filed with the Commission on March 27, 1998, 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
such claims. Based upon the prior successful defense of similar-type
litigation, LSI believes they have valid defenses to the plaintiffs claims in
all pending litigation, and LSI intends to vigorously defend themselves in
such litigation. LSI is not currently a defendant party in any other 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 coverage is adequate with respect to the pending litigation
and, in general, for the business of LSI.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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<PAGE>
<TABLE>
Exhibit No.
-----------
<S> <C>
27 Financial Data Schedules.
</TABLE>
(b) Reports on Form 8-K
Not applicable
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LABORATORY SPECIALISTS OF
AMERICA, INC.
(Registrant)
Date: August 10, 1998 By: /s/ Arthur R. Peterson, Jr.
-------------------------------
Arthur R. Peterson, Jr.
Treasurer
-15-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
Sequentially
Exhibit No. Numbered
- ----------- ------------
<S> <C>
27 Financial Data Schedules. 17
</TABLE>
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,776,869
<SECURITIES> 0
<RECEIVABLES> 3,355,063
<ALLOWANCES> 494,989
<INVENTORY> 72,172
<CURRENT-ASSETS> 8,028,281
<PP&E> 3,671,913
<DEPRECIATION> 1,281,817
<TOTAL-ASSETS> 17,953,038
<CURRENT-LIABILITIES> 3,155,387
<BONDS> 1,730,909
0
0
<COMMON> 5,602
<OTHER-SE> 12,701,292
<TOTAL-LIABILITY-AND-EQUITY> 17,953,038
<SALES> 0
<TOTAL-REVENUES> 7,659,764
<CGS> 0
<TOTAL-COSTS> 3,462,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,438
<INCOME-PRETAX> 1,624,898
<INCOME-TAX> 670,592
<INCOME-CONTINUING> 954,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 954,306
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
