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 SEPTEMBER 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 0-24988
LABORATORY SPECIALISTS OF AMERICA, INC.
(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 November 7, 1997, 4,857,318 shares of issuer's Common Stock, $.001 par
value per share, were outstanding.
Transitional Small Business Disclosure Format (check one); Yes ____ No X
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Total Sequentially Numbered Pages is 28
--
Index to Exhibits Appears on Sequentially Numbered Page 16
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LABORATORY SPECIALISTS OF AMERICA, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
PART I-FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 1997(Unaudited), and December 31, 1996......................... 3
Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 1996 and 1997...................... 5
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1996 and 1997................................ 6
Notes to Consolidated Financial Statements (Unaudited)............................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................... 10
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.................................................. 15
SIGNATURES............................................................................................. 15
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PART I-FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
-------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 727,381 $ 595,195
Accounts receivable, net of allowances of $597,499
in 1996 and $614,673 in 1997................................ 1,696,744 2,595,861
Income tax refund receivable.................................. 312,664 --
Inventories................................................... 99,754 110,913
Prepaid expenses and other.................................... 146,859 641,395
Deferred tax asset............................................ 211,078 211,078
---------- -----------
Total current assets........................................ 3,194,480 4,154,442
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $900,648 in 1996 and $1,040,240 in 1997....... 1,592,599 2,335,490
---------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $171,355 in...... 2,663,850 2,493,620
1996 and $247,803 in 1997
Customer list, net of accumulated amortization of $216,429
in 1996, and $437,082 in 1997............................... 1,863,061 4,307,820
Deferred costs................................................ 80,818 35,533
---------- -----------
Total other assets.......................................... 4,607,729 6,836,973
---------- -----------
Total assets................................................ $9,394,808 $13,326,905
========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
-------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.................................................... $ 521,705 $ 1,063,217
Accrued income tax.................................................. -- 188,250
Accrued payroll..................................................... 300,103 623,742
Accrued expenses.................................................... 57,310 77,554
Accrued customer list costs......................................... -- 441,728
Short-term debt..................................................... 410,293 89,279
Current portion of long-term debt................................... 118,085 518,734
Obligations from discontinued operations............................ 784,272 210,160
---------- -----------
Total current liabilities......................................... 2,191,768 3,212,664
---------- -----------
LONG-TERM DEBT, net of current portion................................ 1,245,690 2,491,780
---------- -----------
DEFERRED INCOME TAXES................................................. 307,100 307,100
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares authorized,
3,313,405 shares issued and outstanding at 12/31/96 and........... 3,313 3,694
3,694,498 shares issued and outstanding at 9/30/97
Paid in capital in excess of par, common stock...................... 5,366,027 5,947,172
Retained earnings................................................... 280,910 1,364,495
---------- -----------
Total stockholders' equity........................................ 5,650,250 7,315,361
---------- -----------
Total liabilities and stockholders' equity........................ $9,394,808 $13,326,905
========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
UNAUDITED
- ---------
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997
--------------- --------------- --------------- ---------------
REVENUES $2,292,705 $3,538,050 $6,532,412 $9,549,032
---------- ---------- ---------- ----------
COST OF LABORATORY SERVICES 959,810 1,586,256 2,816,344 4,246,113
---------- ---------- ---------- ----------
Gross profit 1,332,895 1,951,794 3,716,068 5,302,919
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling 148,333 166,126 462,829 458,221
General and administrative 616,774 772,655 1,748,379 2,371,735
Depreciation and amortization 136,902 184,058 358,346 501,230
---------- ---------- ---------- ----------
Total operating expenses 902,009 1,122,839 2,569,554 3,331,186
---------- ---------- ---------- ----------
Income from operations 430,886 828,955 1,146,514 1,971,733
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (20,059) (61,983) (49,384) (152,467)
Interest income 10,882 17,619 30,554 37,112
Other income 50,340 1,058 50,847 1,130
---------- ---------- ---------- ----------
Total other income (expense) 41,163 (43,306) 32,017 (114,225)
---------- ---------- ---------- ----------
Income before income taxes 472,049 785,649 1,178,531 1,857,508
INCOME TAX EXPENSE 188,354 324,680 483,752 773,923
---------- ---------- ---------- ----------
Net income $ 283,695 $ 460,969 $ 694,779 $1,083,585
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE:
Weighted Average Number Of Common Stock
And Common Stock Equivalents Outstanding 3,313,405 3,464,014 3,313,887 3,403,693
========== ========== ========== ==========
Net Income Per Common Stock And
Common Stock Equivalents $.09 $.13 $.21 $.32
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Weighted Average Number OF Common Stock
And Common Stock Equivalents Outstanding 3,824,205 4,024,120 3,973,491 3,866,119
========== ========== ========== ==========
Net Income Per Common Stock And
Common Stock Equivalents $.07 $.11 $.17 $.28
========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
-5-
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1997
--------------- ---------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 694,779 $ 1,083,585
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 358,346 501,230
Provision for bad debts and other 80,000 17,175
Impact of changes in assets and liabilities:
Accounts receivable (625,232) (916,292)
Inventories 26,890 (11,159)
Income tax receivable (payable) 158,030 500,914
Prepaid expenses and other (147,383) 47,356
Accounts payable and accrued expenses (25,824) 373,918
----------- -----------
Net cash provided by operating activities 519,606 1,596,727
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,718) (913,498)
Purchase of NPLI Stock, net of cash acquired (1,022,597) --
Purchase of PLL Customer List -- (2,215,210)
Acquisition costs (252,422) (99,587)
----------- -----------
Net cash used in investing
-------------- --------------
activities (1,375,737) (3,228,295)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings (551,425) (452,554)
Payments on long-term borrowings (91,638) (323,261)
Proceeds from long-term borrowings -- 2,385,485
Warrant offering costs -- (110,288)
----------- -----------
Net cash (used in) provided by financing
activities (643,063) 1,499,382
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,499,194) (132,186)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning
of period 2,411,051 727,381
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 911,857 $ 595,195
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 46,290 $ 152,467
=========== ===========
Cash paid during the period for taxes $ 377,564 $ 521,000
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY
-------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996, AND
SEPTEMBER 30, 1997, 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, 1996, 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 April 22, 1997. The
financial data for the interim periods presented may not necessarily reflect the
results to be expected for the full year.
2. PLL ASSET PURCHASE
On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd., a
Mississippi corporation ("PLL"), certain intangible assets 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 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 PLL Purchase Agreement, (i) the Company paid $1,600,000 at
closing and (ii) the Company 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. Furthermore, the Company agreed to make four
additional installment payments to PLL within 60 days following the end of each
three month period during the 12 months ending January 31, 1998, as follows:
(i) the first installment payment being equal to 75 percent of Forensic Testing
Revenues (as defined below) during the first three month period ending April 30,
1997, in excess of $400,000; (ii) the second installment payment being equal to
75 percent of Forensic Testing Revenues during the six month period ending July
31, 1997, in excess of the aggregate sum of the prior installment payment and
$800,000, (iii) the third installment payment being equal to 85 percent of
Forensic Testing Revenues during the nine month period ending October 30, 1997,
in excess of the aggregate sum of the prior installment payments and $1,200,000,
and (iv) the fourth installment being equal to Forensic Testing Revenues during
the 12 month period ended January 31, 1998, in excess of the aggregate sum of
the prior installment payments and $1,600,000. Under the PLL Purchase
Agreement, "Forensic Testing Revenues" are defined as the gross revenues during
the calendar quarter or 12 month period ending January 31, 1998, directly
attributable to each customer comprising the customer base of PLL acquired by
the Company. As of September 30, 1997, total payments of $518,272 were recorded
as reductions in the liability owed to PLL for the first and second
installments. These payments consisted of $342,404 in cash paid from June 30,
1997 through September 30, 1997 plus $175,868 in advances and other costs
previously paid.
On July 11, 1997, both the Company and PLL agreed to amend the PLL Purchase
Agreement as follows: In exchange for a reduction in the overall purchase price
from 100 percent to 90 percent of the Forensic Testing Revenues during
-7-
the First Anniversary Period, the Company will pay 100 percent of the amount
calculated for the first three installments as opposed to 75 percent of the
first and second installments and 85 percent of the third installment.
3. EARNINGS PER COMMON SHARE
Both Primary and Fully 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 fully diluted earnings per share calculation the
outstanding warrants were calculated using the lowest possible exercise price
during the term of the warrants.
4. 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.
5. 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 LSI's insurance carriers have assumed the
defense of LSI in connection with certain actions, the extent of such insurance
coverage is limited, both in terms of types of risks covered by the policies and
the amount of coverage. In the opinion of the Company's management and it's
legal counsel, these suits and claims should not result in judgments or
settlements which would have a material adverse effect on the 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.
6. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the Pathology Laboratories, Ltd. Purchase (see Item 2), LSI
has recorded a liability of $960,000 based upon estimated future quarterly
payments. As of September 30, 1997, total payments of $518,272 were recorded as
reductions in the liability owed to PLL for the first and second installments.
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
-8-
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, are non-cash transactions and have been
excluded from the accompanying statements of cash flows.
On September 3, 1997, the Company elected to redeem the 1994 warrants for $.01
per warrant at 5:00 p.m., New York City time, on October 14, 1997. Each of the
1994 warrants were exercisable on or before the redemption date for the purchase
of two shares of Common Stock at the price of $2.00 per share. As of September
30, 1997, 136,480 warrants had been exercised and 277,760 shares issued. In
total, the Company issued 1,440,580 shares of Common Stock in connection with
the 720,290 warrants that were exercised and received approximately $2,500,000
in net proceeds from the warrant redemption. The proceeds of the warrant
redemption through September 30, 1997 have been recorded as a receivable, thus
the effect of this transaction recorded by LSAI has been excluded from the
accompanying statements of cash flows
7. ACCOUNTING PRONOUNCEMENTS
In March, 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which specifies the computation, presentation, and disclosure
requirements for earnings per share. This statement is effective for financial
statements with periods ending after December 15, 1997. Management has not
determined the impact this standard will have on earnings per share.
In June, 1997, the FASB issued SFAS No. 130, which requires that all items
required to be 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 a balance within a separate component
of stockholders' equity, be reported in a financial statement that is displayed
with the same prominence as other financial statements. The company does not
believe that comprehensive income will differ materially from net income.
8. SUBSEQUENT EVENTS
On September 16, 1997, a letter of intent was entered into between Laboratory
Specialists of America, Inc. and the shareholders of Accu-Path Medical
Laboratory, Inc. that confirms in principle an agreement pursuant to which
Laboratory Specialists of America, Inc. will acquire certain assets of Accu-Path
Medical Laboratory. The agreement is subject to the execution of a definitive
agreement and due diligence.
On October 1, 1997, the Company granted 340,000 stock options for the purchase
of the Common Stock of Laboratory Specialists of America, Inc. to certain
officers, directors and employees. The stock options have an exercise price of
$3.18 per share, which represented the fair market value on October 1, 1997, and
are exercisable at any time after April 1, 1998, for a period of ten years from
the date of issue.
On October 14, 1997, the Company issued 144,058 warrants to Barber & Bronson,
Incorporated (and/or its assigns and designees), the Managing Agent for the
Company's redemption of the 1994 warrants. The warrants are for the purchase of
Common Stock at an exercise price of $2.20 per share, subject to adjustment, and
are exercisable for a period of three years from the date of issue.
-9-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
PLL ASSET PURCHASE. On January 31, 1997, the Company acquired from Pathology
Laboratories, Ltd., a Mississippi corporation ("PLL"), certain intangible
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 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 PLL Purchase Agreement, (i) the Company paid $1,600,000 at
closing and (ii) the Company 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. Furthermore, the Company agreed to make four
additional installment payments to PLL within 60 days following the end of each
three month period during the 12 months ending January 31, 1998, as follows:
(i) the first installment payment being equal to 75 percent of Forensic Testing
Revenues (as defined below) during the first three month period ending April 30,
1997, in excess of $400,000; (ii) the second installment payment being equal to
75 percent of Forensic Testing Revenues during the six month period ending July
31, 1997, in excess of the aggregate sum of the prior installment payment and
$800,000, (iii) the third installment payment being equal to 85 percent of
Forensic Testing Revenues during the nine month period ending October 30, 1997,
in excess of the aggregate sum of the prior installment payments and $1,200,000,
and (iv) the fourth installment being equal to Forensic Testing Revenues during
the 12 month period ended January 31, 1998, in excess of the aggregate sum of
the prior installment payments and $1,600,000. Under the PLL Purchase
Agreement, "Forensic Testing Revenues" are defined as the gross revenues during
the calendar quarter or 12 month period ending January 31, 1998, directly
attributable to each customer comprising the customer base of PLL acquired by
the Company.
On July 11, 1997, both the Company and PLL agreed to amend the PLL Purchase
Agreement as follows: In exchange for a reduction in the overall purchase price
from 100 percent to 90 percent of the Forensic Testing Revenues during the First
Anniversary Period, the Company will pay 100 percent of the amount calculated
for the first three installments as opposed to 75 percent of the first and
second installments and 85 percent of the third installment.
RESULTS OF OPERATIONS
The following table sets forth selected results of operations for (i) the
three months ended September 30, 1996 and 1997, which are derived from the
unaudited financial statements of the Company and (ii) for the nine months ended
September 30, 1996 and 1997, which are derived from the unaudited 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.
-10-
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ------------------------------------------
1996 1997 1996 1997
-------------- ------------------ --------------------- ---------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ----------
Revenues $2,292,705 100.0% $3,538,050 100.0% $6,532,412 100.0% $9,549,032 100.0%
Cost of revenues 959,810 41.9% 1,586,256 44.8% 2,816,344 43.1% 4,246,113 44.5%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit 1,332,895 58.1% 1,951,794 55.2% 3,716,068 56.9% 5,302,919 55.5%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling 148,333 6.5% 166,126 4.7% 462,829 7.1% 458,221 4.8%
General and 616,774 26.9% 772,655 21.8% 1,748,379 26.8% 2,371,735 24.8%
administrative
Depreciation and
amortization 136,902 5.9% 184,058 5.2% 358,346 5.4% 501,230 5.3%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating expenses 902,009 39.3% 1,122,839 31.7% 2,569,554 39.3% 3,331,186 34.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income from operations $ 430,886 18.8% $ 828,955 23.5% $1,146,514 17.6% $1,971,733 20.6%
========== ===== ========== ===== ========== ===== ========== =====
During the three and nine months ended September 30, 1997, LSI experienced a
1.3 percent and 3.2 percent decrease respectively in the price per specimen,
compared to the three and nine months ended September 30, 1996, 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. As a result of the PLL Asset Purchase, the price per specimen
increased by 1.6 percent during the nine months ended September 30, 1997 as
compared to December 31, 1996. However, there can be no assurance that price
per specimen will not decline during 1997.
Comparison of Three-Month and Nine-Month Periods Ended September 30, 1996 and
1997
Revenues increased to $9,549,032 in the nine months ended September 30, 1997
(the "1997 Interim Period"), from $6,532,412 in the nine months ended September
30, 1996 (the "1996 Interim Period"), an increase of 46.2 percent. Revenues
increased to $3,538,050 in the three months ended September 30, 1997 (the "1997
Third Quarter"), from $2,292,705 in the three months ended September 30, 1996
(the "1996 Third Quarter"), an increase of 54.3 percent. The increase in
revenues was due to a 51.2 percent and 57.5 percent increase respectively in the
number of specimens analyzed during the 1997 Interim Period as compared to the
1996 Interim Period and 1997 Third Quarter as compared to the 1996 Third
Quarter, although partially offset by a decrease of 3.2 percent and 1.3 percent,
respectively in the average price per specimen. The increase in number of
specimens analyzed was attributable to the PLL Asset Purchase as well as LSI's
normal sales and marketing efforts. The decrease in the average price per
specimen was principally due to increased price competition among providers of
drug testing services, price per specimen being an important factor in obtaining
and maintaining clients.
Cost of revenues for the 1997 Interim Period and 1997 Third Quarter increased
$1,429,769 and $626,446 from $2,816,344 in the 1996 Interim Period to $4,246,113
in 1997 Interim Period and from $959,810 in the 1996 Third Quarter to $1,586,256
in the 1997 Third Quarter, respectively. Gross profit on revenues decreased as
a percentage of revenues from 56.9 percent in the 1996 Interim Period to 55.5
percent in 1997 Interim Period and from 58.1 percent in the 1996 Third Quarter
to 55.2 percent in the 1997 Third Quarter.
Operating expenses increased from $2,569,554 in the 1996 Interim Period to
$3,331,186 in the 1997 Interim Period and from $902,009 in the 1996 Third
Quarter to $1,122,839 in the 1997 Third Quarter, an increase of 29.6 percent and
24.5 percent, respectively, and decreased as a percentage of revenues from 39.3
percent to 34.9 percent and 39.3 percent to 31.7 percent, respectively. The
increase in operating expenses was attributable to the increase in general and
administrative expenses of $623,356 for the Interim Period and $155,881 for the
Third Quarter while selling expense decreased by $4,608 for the Interim Period
but increased by $17,793 for the Third Quarter and depreciation and amortization
increased by $142,884 for the Interim Period and by $47,156 for the Third
Quarter. The increase in
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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. The decrease in selling expenses for the Interim Period was due
to the temporary reduction in the sales force for part of the first quarter of
1997, although partially offset by the addition of one sales representative to
assist in maintaining forensic clients acquired in the PLL Asset Purchase.
Depreciation increased due to the renovation of the new laboratory and purchase
of additional equipment at LSI, while amortization increased due to the
acquisition of PLL and the amortization of the PLL customer list.
Income from operations increased from $1,146,514 in the 1996 Interim Period to
$1,971,733 in the 1997 Interim Period, a 72.0 percent increase and from $430,886
in the 1996 Third Quarter to $828,955 in the 1997 Third Quarter a 92.4 percent
increase. Operating income increased from 17.6 percent of revenues in the 1996
Interim Period to 20.6 percent of revenues in the 1997 Interim Period and from
18.8 percent of revenues in the 1996 Third Quarter to 23.5 percent of revenues
in the 1997 Third Quarter.
Interest expense increased from $49,384 in the 1996 Interim Period to $152,467
in 1997 Interim Period, a 208.7 percent increase, and from $20,059 in the 1996
Third Quarter to $61,983 in the 1997 Third Quarter, a 209.0 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
$30,554 in the 1996 Interim Period to $37,112 in the 1997 Interim Period and
from $10,882 in the 1996 Third Quarter to $17,619 in the 1997 Third Quarter.
Other income decreased from $50,847 in the 1996 Interim Period to $1,130 in the
1997 Interim Period and from $50,340 in the 1996 Third Quarter to $1,058 in the
1997 Third Quarter. Net income, after provision for income taxes, increased
from $694,779 in the 1996 Interim Period to $1,083,585 in the 1997 Interim
Period, a 56.0 percent increase and from $283,695 in the 1996 Third Quarter to
$460,969 in the 1997 Third Quarter, a 62.5 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 nine months ended September 30, 1997, were based
on an effective combined federal and state corporate income tax rate of
approximately 40 percent of pretax income.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1,596,727 in the nine
months ended September 30, 1997, and $519,606 in the nine months ended September
30, 1996. As of September 30, 1997, LSAI had working capital of $941,778,
compared to working capital of $1,002,712, at December 31, 1996. 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 $595,195 at September 30,
1997) and borrowing. 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 December 27, 1996, LSI's revolving line credit facility with Hibernia
National Bank expired, at which time there were no outstanding borrowings. On
January 9, 1997, LSI entered in to a loan agreement with Hibernia National Bank
(the "Bank") which established a credit facility comprised of a five-year term
loan of up to $1,700,000 and a one-year revolving loan of $250,000 to be used
for the acquisition of Pathology Laboratories Limited. The term loan was fully
advanced upon execution of the loan agreement. Advances under 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 Citibank, N.A. rate 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.
On September 3, 1997, the Company elected to redeem the 1994 warrants for
$.01 per warrant. The Company issued 1,440,580 shares of Common Stock in
connection with the 720,290 warrants that were exercised and received
approximately $2,500,000 in net proceeds from the warrant redemption.
FUTURE OPERATIONS AND LIQUIDITY
On December 3, 1996, LSI purchased a building to be renovated for its new
laboratory. The purchase was financed by a note payable to the seller due on
June 3, 1997, with no stated interest rate. On July 2, 1997, LSI entered into a
loan agreement with Hibernia National Bank (the "bank") for a term loan of up to
$720,000 to refinance the purchase and construction of its new laboratory. The
loan was fully advanced upon execution of the loan agreement and the December 3,
1996 note payable was paid in full with a portion of the proceeds. The bank
note is payable monthly with the first 36 consecutive principal and interest
payments of approximately $9,811, then 23 consecutive principal and interest
payments of approximately $6,007, and a final payment due on July 2, 2002 of
approximately $484,666. The loan bears interest at the rate of 8.65 percent per
annum.
On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement dated
January 31, 1997 (the "Purchase Agreement"). Pursuant to the Purchase
Agreement, (i) the Company paid $1,600,000 at closing and (ii) the Company
assumed the obligations of PLL under a certain lease, dated September 16, 1996,
which requires monthly base rental payments of $2,083 and which expires on
September 16, 1999. Furthermore, the Company is required 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 90 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. The gross revenues attributable
to this customer base for the year ended December 31, 1996, were approximately
$3,200,000.
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The Company anticipates that existing cash and cash equivalent balances and
short-term investments, and funds to be generated from future operations will be
sufficient to fund operations, and budgeted capital expenditures of LSAI and LSI
through 1997.
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 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 April 22, 1997, 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
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No.
-----------
10.1 Employment Agreement with John Simonelli, dated
September 26, 1997.
10.2 Employment Agreement with Larry E. Howell, dated
September 26, 1997.
10.3 Employment agreement between Arthur R. Peterson, Jr.
and Laboratory Specialists, Inc., dated September
26, 1997.
27 Financial Data Schedules
(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: November 7, 1997 By: /s/ Arthur R. Peterson, Jr.
---------------------------
Arthur R. Peterson, Jr.
Treasurer
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INDEX TO EXHIBITS
-----------------
EXHIBIT NO. EXHIBIT PAGE
- ----------- ------- ----
10.1 Employment Agreement with
John Simonelli, dated September 26, 1997 17
10.2 Employment Agreement with
Larry E. Howell, dated September 26, 1997 21
10.3 Employment Agreement between
Arthur R. Peterson, Jr. and Laboratory
Specialists, Inc., dated September 26, 1997 25
27 Financial Data Schedules 29
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