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 MARCH 31, 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 May 8, 1998, 4,941,318 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 15
Index to Exhibits Appears on Sequentially Numbered Page 15
LABORATORY SPECIALISTS OF AMERICA, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
Page
----
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998 (Unaudited).............. 3
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1997 and 1998.................... 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 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................................................. 12
ITEM 2. CHANGES IN SECURITIES............................................. 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 12
ITEM 5. OTHER INFORMATION................................................. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 13
SIGNATURES.................................................................. 14
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PART I-FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
---------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
ASSETS (UNAUDITED)
------
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 2,316,302 2,291,956
1997 and $296,494 in 1998
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
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
---------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------------
(UNAUDITED)
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
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
--------------- ---------------
(UNAUDITED)
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
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
----------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
--------------- ---------------
(UNAUDITED)
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-current (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 $ -- $ --
=========== ===========
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 MONTHS ENDED MARCH 31, 1997, AND MARCH 31, 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 were computed by 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 weighted average market 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 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 LSI's insurance carriers
-7-
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 Pathology Laboratories, Ltd. ("PLL") Purchase, LSI had
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 Accu-Path Medical Laboratory, Inc. ("Accu-Path")
Purchase, LSI has 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.
-8-
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.
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
twelve months ended December 31, 1996 and 1997, which are derived from the
audited consolidated financial statements of the Company and (ii) for the three
months ended March 31, 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.
For the Year Ended December 31, Three Months Ended March 31,
----------------------------------------- ------------------------------------------
1996 1997 1997 1998
------------------ ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
Revenues $8,726,799 100.0% $12,836,953 100.0% $2,587,222 100.0% $3,571,608 100.0%
Cost of revenues 3,816,114 43.7% 5,828,665 45.4% 1,186,084 45.9% 1,675,281 46.9%
---------- ----- ----------- ----- ---------- ----- ---------- -----
Gross profit 4,910,685 56.3% 7,008,288 54.6% 1,401,138 54.1% 1,896,327 53.1%
---------- ----- ----------- ----- ---------- ----- ---------- -----
Operating expenses:
Selling 601,945 6.9% 654,284 5.1% 132,129 5.1% 196,414 5.5%
General and 2,442,602 28.0% 3,230,117 25.1% 695,616 26.9% 853,028 23.9%
administrative
Depreciation and
amortization 504,123 5.8% 690,268 5.4% 140,849 5.4% 192,344 5.4%
Asset impairment 124,531 1.4% -- 0.0% -- 0.0% -- 0.0%
---------- ----- ----------- ----- ---------- ----- ---------- -----
Total operating expenses 3,673,201 42.1% 4,574,669 35.6% 968,594 37.4% 1,241,786 34.8%
---------- ----- ----------- ----- ---------- ----- ---------- -----
Income from operations $1,237,484 14.2% $ 2,433,619 19.0% $ 432,544 16.7% $ 654,541 18.3%
========== ===== =========== ===== ========== ===== ========== =====
During the three months ended March 31, 1998, LSI experienced a 4.0 percent
decrease in the price per specimen, compared to the three months ended March 31,
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 furthur automate the testing
process and employ additional technology to continue profitability, although
there can be no assurance that
-9-
such measures will assure profitability in the event of substantial price
reductions within the short term.
Comparison of Three-Month Periods Ended March 31, 1997 and 1998
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 PLL and
Accu-Path 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 $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 and
Accu-Path Asset Purchases. 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 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 acquisitions of PLL and Accu-Path
and the amortization of the PLL and Accu-Path 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.
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
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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 three months ended March 31, 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 $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
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.
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 for the acquisition
of PLL. 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 March 31, 1998, the
interest rate was 9 percent per annum and the outstanding principal amount of
such loan was approximately $1,303,333.
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 March 31, 1998, the
outstanding principal balance amount of such loan was approximately $682,650.
On December 1, 1997, the Company acquired from Accu-Path Medical Laboratory,
Inc. certain intangible assets pursuant to an Asset Purchase Agreement, dated
December 1, 1997. Pursuant to the Purchase Agreement, the Company agreed to
pay 180 percent of the 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 thirty days following the end of each quarter, and (iii)
the balance to be paid in four quarterly installments with the first payment due
thirty days following tht end of the first twelve month anniversary period from
the date of closing. The estimated gross revenues attributable to this customer
base was approximately $400,000. As of March 31, 1998, no payments have been
made toward the liability with Accu-Path.
On May 1, 1998, the Company acquired from HLI, certain intangible assets
pursuant to an Asset Purchase Agreement dated April 13, 1998. Pursuant to the
HLI Asset Purchase the Company (i) paid $500,000 at closing,
-11-
(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 payments have been made toward the liablitiy with HLI.
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 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.
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ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No.
-----------
10.1 Loan Agreement between Hibernia National Bank and
Laboratory Specialists, Inc., dated January 9, 1997.
10.2 Promissory Note issued by Laboratory Specialists,
Inc. to Hibernia National Bank, dated January 9, 1997.
10.3 The Asset Purchase agreement between the Registrant,
Laboratory Specialists, Inc., and Harrison
Laboratories, Inc., dated April 13, 1998 .
10.4 Employment Agreement between Roy D. Harrison,
Laboratory Specialists, Inc. and the Registrant.
27 Financial Data Schedules.
(b) Reports on Form 8-K
Not applicable
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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: May 11, 1998 By: /s/ Arthur R. Peterson, Jr.
-------------------------------
Arthur R. Peterson, Jr.
Treasurer
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INDEX TO EXHIBITS
-----------------
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE
----------- ------- ------------
10.1 Loan Agreement between Hibernia National 16
Bank and Laboratory Specialists, Inc., dated
January 9, 1997.
10.2 Promissory Note issued by Laboratory 40
Specialists, Inc. to Hibernia National Bank,
dated January 9, 1997.
10.3 The Asset Purchase Agreement between 45
the Registrant, Laboratory Specialists, Inc.,
and Harrison Laboratories, Inc., dated
April 13, 1998.
10.4 Employment Agreement between Roy D. 63
Harrison, Laboratory Specialists, Inc., and
the Registrant.
27 Financial Data Schedules. 68
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