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, 1998
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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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 12, 1998, 5,745,964 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 47
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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
Page
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1997 and September 30, 1998 (Unaudited)......... 3
Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 1997 and 1998...... 5
Consolidated Statements of Cash Flows (Unaudited)
Three and Nine Months Ended September 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.....................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................15
SIGNATURES........................................................................15
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING INFORMATION
Certain statements contained in this Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategies that involve risks and uncertainties. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, levels of activity,
performance or achievements of Laboratory Specialists of America, Inc. and
its subsidiaries, or industry results, to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. As a result of the foregoing and
other factors, no assurance can be given as to future results, levels of
activity and achievements and neither Laboratory Specialists of America, Inc.
nor any other person assumes responsibility for the accuracy and completeness
of these statements.
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PART I FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
12/31/97 9/30/98
------------------ ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 2,863,639 $ 2,512,843
Accounts receivable, net of allowances of $568,237 in
1997 and $521,880 in 1998................................ 2,262,990 3,203,077
Income tax refund receivable................................... 190,498 --
Inventories.................................................... 109,929 64,284
Prepaid expenses and other..................................... 115,219 98,599
Deferred tax asset............................................. 160,709 160,709
------------------ ------------------
Total current assets......................................... 5,702,984 6,039,512
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,123,909 in 1997 and $1,379,859 in 1998...... 2,376,885 2,555,202
------------------ ------------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $272,148 in
1997 and $338,813 in 1998.................................... 2,316,302 2,249,638
Customer list, net of accumulated amortization of $518,105
in 1997 and $834,507 in 1998................................. 4,587,814 7,496,412
Deferred costs................................................. 32,595 36,400
------------------ ------------------
Total other assets........................................... 6,936,711 9,782,450
------------------ ------------------
Total assets................................................. $ 15,016,580 $ 18,377,164
------------------ ------------------
------------------ ------------------
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
12/31/97 9/30/98
------------------ ------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 742,292 $ 962,316
Accrued income tax............................................. -- 302,477
Accrued payroll................................................ 411,364 436,149
Accrued expenses............................................... 78,491 176,538
Accrued customer list installment payments..................... 510,345 549,539
Obligations from discontinued operations....................... 126,813 14,730
Current portion of long-term debt.............................. 527,696 539,570
------------------ ------------------
Total current liabilities.................................... 2,397,001 2,981,319
------------------ ------------------
LONG-TERM DEBT, net of current portion........................... 2,353,428 1,594,820
------------------ ------------------
DEFERRED INCOME TAXES............................................ 359,848 359,848
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Commonstock, $0.001 par value, 20,000,000 shares authorized,
4,924,818 shares issued and outstanding at 12/31/97 and
5,729,091 shares issues and outstanding at 9/30/98........ 4,925 5,729
Paid in capital in excess of par, common stock.................. 8,291,365 10,384,710
Retained earnings............................................... 1,610,013 3,050,738
------------------ ------------------
Total stockholders' equity................................... 9,906,303 13,441,177
------------------ ------------------
Total liabilities and stockholders' equity................... $ 15,016,580 $ 18,377,164
------------------ ------------------
------------------ ------------------
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
UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------------- ----------------------------------
9/30/97 9/30/98 9/30/97 9/30/98
---------------- --------------- --------------- ----------------
REVENUES ............................. $ 3,538,050 $ 4,379,390 $ 9,549,032 $ 12,039,154
COST OF LABORATORY SERVICES .......... 1,586,256 1,975,506 4,246,113 5,438,352
------------ ------------ ------------ ------------
Gross profit ....................... 1,951,794 2,403,884 5,302,919 6,600,802
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling ............................ 166,126 295,687 458,221 720,619
General and administrative ......... 772,655 1,025,829 2,371,735 2,811,881
Depreciation and amortization ...... 184,058 258,857 501,230 651,765
------------ ------------ ------------ ------------
Total operating expenses ......... 1,122,839 1,580,373 3,331,186 4,184,265
------------ ------------ ------------ ------------
Income from operations ........... 828,955 823,511 1,971,733 2,416,537
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ................... (61,983) (49,555) (152,467) (147,993)
Interest income .................... 17,619 28,813 37,112 106,636
Other income ....................... 1,058 24,568 1,130 77,055
------------ ------------ ------------ ------------
Total other income (expense) ..... (43,306) 3,826 (114,225) 35,698
------------ ------------ ------------ ------------
Income before income taxes ....... 785,649 827,337 1,857,508 2,452,235
INCOME TAX EXPENSE ................... 324,680 340,918 773,923 1,011,510
------------ ------------ ------------ ------------
Net income ....................... $ 460,969 $ 486,419 $ 1,083,585 $ 1,440,725
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE:
Weighted Average Number Of Common
Stock Shares Outstanding ........... 3,371,266 5,667,815 3,332,904 5,237,332
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Income Per Common Stock Share .... $ 0.14 $ 0.09 $ 0.33 $ 0.28
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE:
Weighted Average Number Of Common
Stock Shares And Common Stock
Equivalents Outstanding ............ 4,024,120 5,767,139 3,866,119 5,502,783
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Income Per Common Stock And
Common Stock Equivalents ........... $ 0.11 $ 0.08 $ 0.28 $ 0.26
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 NINE MONTHS ENDED
----------------------------------------
9/30/97 9/30/98
------------- ------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 1,083,585 $ 1,440,725
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization ................... 501,230 651,765
Provision for bad debts and other ............... 17,175 30,000
Gain from extinguishment of long-term debt ...... -- (38,123)
Impact of changes in assets and liabilities:
Accounts receivable ......................... (916,292) (1,003,942)
Income tax refund receivable ............... 500,914 190,498
Inventories ................................. (11,159) 45,645
Prepaid expenses and other .................. 47,356 12,815
Income tax payable .......................... -- 302,477
Accounts payable and accrued expenses ........ 373,918 230,774
----------- -----------
Net cash provided by operating activities ....... 1,596,727 1,862,634
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................ (913,498) (447,017)
Purchase of PLL Customer List ....................... (2,215,210) (42,033)
Purchase of Accu-Path Customer List ................. -- (139,147)
Purchase of Harrison Customer List .................. -- (553,515)
Purchase of Toxworx Customer List ................... -- (2,417,256)
Acquisition costs ................................... (99,587) --
----------- -----------
Net cash used in investing activities ........... (3,228,295) (3,598,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings ................... (452,554) --
Payments on long-term borrowings .................... (323,261) (708,610)
Proceeds from long-term borrowings .................. 2,385,485 --
Proceeds (payments) from exercise of warrants and
stock options, net of related taxes paid .......... -- (150,941)
Proceeds from private offering ...................... -- 2,245,090
Warrant offering costs .............................. (110,288) --
----------- -----------
Net cash provided by financing activities ....... 1,499,382 1,385,539
----------- -----------
(DECREASE) IN CASH AND CASH EQUIVALENTS ............... (132,186) (350,795)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period ........ 727,381 2,863,639
----------- -----------
CASH AND CASH EQUIVALENTS, end of period .............. $ 595,195 $ 2,512,844
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............ $ 152,467 $ 160,129
----------- -----------
----------- -----------
Cash paid during the period for income taxes ........ $ 521,000 $ 518,535
----------- -----------
----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND
SEPTEMBER 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 (with the exception of the 525,000 stock options issued on July 20,
1998 and rescinded effective with the date of grant), 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 $486,419 and $460,969
for the three months ended September 30, 1998 and 1997, respectively, and
$1,440,725 and $1,083,585 for the nine months ended September 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:
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
9/30/98 9/30/97 9/30/98 9/30/97
-------------- --------------- -------------- ---------------
Average shares outstanding-basic................... 5,667,815 3,371,266 5,237,332 3,332,904
Dilutive effect of stock options................... 53,825 92,748 187,872 70,789
Dilutive effect of warrants........................ 45,499 494,961 77,579 371,962
Dilutive effect of contingent shares related to
NPL purchase................................... -- 65,145 -- 90,464
-------------- --------------- -------------- ---------------
Average shares outstanding assuming dilution....... 5,767,139 4,024,120 5,502,783 3,866,119
-------------- --------------- -------------- ---------------
-------------- --------------- -------------- ---------------
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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 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 September 30, 1998,
all installment payments, totaling $751,688 had been made and the remaining
balance of the liability of $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
September 30, 1998, the first three installment payments, totaling
approximately $136,606, had been made, with one quarterly installment payment
remaining to be paid.
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 September 30, 1998, no payments have been made on
this liability; however, a $33,855 reduction was recorded as a result of the
offset of amounts owed to Laboratoary Specialists, Inc. by HLI.
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The above transactions, except the reductions in the liabilities 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 October 15, 1998, the Company issued 1,500 shares of common stock to James
Cassel in connection with the exercise of certain warrants.
The Company rescinded 525,000 stock options that had been issued on July 20,
1998, effective with the date of grant.
On October 21, 1998, the Company entered into a definitive agreement to be
acquired by The Kroll-O'Gara Company (NASDAQ : KROG) for a purchase price of
approximately $5 per share, subject to certain conditions and payable in
Kroll-O'Gara common stock. Closing of the transaction is anticipated in
December, 1998 and is subject to the approval of the shareholders of the
Company.
On October 23, 1998, the Company issued 15,373 shares of common stock to
James Cassel 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 January 31, 1997 (the "PLL
Purchase Agreement"). The assets purchased included the customer list of PLL
and all related assets, and all assets owned by PLL used in connection with
the PLL office in Greenville, South Carolina. Pursuant to the PLL 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 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 September 30, 1998, the first three
installment payments, totaling approximately $136,606, had been made to
Accu-Path and one installment remains 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
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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 net proceeds of $2,312,647 (the "1998 Private Offering").
Furthermore, LSAI paid Jesup & Lamont Securities Corporation ("Jesup &
Lamont") a placement fee of $174,650 and issued 55,522 warrants to Jesup &
Lamont and its designees (the "Jesup & Lamont Group Warrants"). In connection
with the 1998 Private Offering, LSAI agreed to file a registration statement
under the 1933 Act with respect to the Common Stock offered and underlying
the Jesup & Lamont Group Warrants and maintain the effectiveness of the
registration statement for a minimum of six years. Pursuant to such
agreement, LSAI filed the registration statement on July 2, 1998, which
became effective September 2, 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.
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 September 30, 1997 and 1998, which are derived from the
unaudited consolidated financial statements of the Company and (ii) for the
nine months ended September 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.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------ ------------------------------------------------
9/30/97 9/30/98 9/30/97 9/30/98
------------------------ ---------------------- ----------------------- ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
Revenues .................. $ 3,538,050 100.0% $ 4,379,390 100.0% $ 9,549,032 100.0% $12,039,154 100.0%
Cost of revenues .......... 1,586,256 44.8% 1,975,506 45.1% 4,246,113 44.5% 5,438,352 45.2%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Gross profit .............. 1,951,794 55.2% 2,403,884 54.9% 5,302,919 55.5% 6,600,802 54.8%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Operating expenses:
Selling ................. 166,126 4.7% 295,687 6.8% 458,221 4.8% 720,619 6.0%
General and
administrative ....... 772,655 21.8% 1,025,829 23.4% 2,371,735 24.8% 2,811,881 23.3%
Depreciation and
amortization ......... 184,058 5.2% 258,857 5.9% 501,230 5.3% 651,765 5.4%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total operating expenses .. 1,122,839 31.7% 1,580,373 36.1% 3,331,186 34.9% 4,184,265 34.7%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Income from operations .... $ 828,955 23.5% $ 823,511 18.8% $ 1,971,733 20.6% $ 2,416,537 20.1%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
During the three and nine months ended September 30, 1998, LSI
experienced a 1.1 percent and 2.4 percent decrease in the price per specimen,
compared to the three and nine months ended September 30, 1997, principally
due to increased price competition amongst providers of drug testing
services, price per specimen being an important factor in obtaining
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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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND
1998
Revenues increased to $12,039,154 in the nine months ended September 30,
1998 (the "1998 Interim Period"), from $9,549,032 in the nine months ended
September 30, 1997 (the "1997 Interim Period"), an increase of 26.1 percent.
Revenues increased to $4,379,390 in the three months ended September 30, 1998
(the "1998 Third Quarter"), from $3,538,050 in the three months ended
September 30, 1997 (the "1997 Third Quarter"), an increase of 23.8 percent.
The increase in revenues was due to a 30.2 percent and 28.6 percent increase,
respectively, in the number of specimens analyzed during the 1998 Interim
Period as compared to the 1997 Interim Period and the 1998 Third Quarter as
compared to the 1997 Third Quarter, although partially offset by a decrease
of 2.4 percent and 1.1 percent, respectively, in the average price per
specimen. The increase in number of specimens analyzed was attributable to
the Accu-Path, HLI, and TLI 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 $1,192,239 from $4,246,113 in the 1997 Interim
Period to $5,438,352 in 1998 Interim Period and $389,250 from $1,586,256 in
the 1997 Third Quarter to $1,975,506 in the 1998 Third Quarter, increases of
28.1 percent and 24.5 percent, respectively. Gross profit on revenues
decreased as a percentage of revenues from 55.5 percent in the 1997 Interim
Period to 54.8 percent in 1998 Interim Period and from 55.2 percent in the
1997 Third Quarter to 54.9 percent in the 1998 Third Quarter. The decrease
was primarily due to the decrease in the price per specimen.
Operating expenses increased from $3,331,186 in the 1997 Interim Period
to $4,184,265 in the 1998 Interim Period and from $1,122,839 in the 1997
Third Quarter to $1,580,373 in the 1998 Third Quarter, increases of 25.6
percent and 40.7 percent respectively, but decreased as a percentage of
revenues from 34.9 percent to 34.7 percent in the Interim Period, and
increased as a percentage of revenues from 31.7 percent to 36.1 percent in
the Third Quarter . The increase in operating expenses was attributable to
the increase in selling expenses of $262,398 for the Interim Period and
$129,561 for the Third Quarter, general and administrative expenses of
$440,146 for the Interim Period and $253,174 for the Third Quarter and
depreciation and amortization of $150,535 for the Interim Period and $74,799
for the Third 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, HLI
and TLI 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, HLI and
TLI 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, HLI and TLI and the amortization of the purchase price of such
customer lists.
Income from operations increased from $1,971,733 in the 1997 Interim
Period to $2,416,537 in the 1998 Interim Period, a 22.6 percent increase, but
decreased from $828,955 in the 1997 Third Quarter to $823,511 in the 1998
Third Quarter, a 0.7 percent decrease. Operating income decreased as a
percentage of revenues from 20.6 percent to 20.1 percent in the Interim
Period and from 23.5 percent to 18.8 percent in the Third Quarter.
Interest expense decreased 2.9 percent from $152,467 in the 1997 Interim
Period to $147,993 in 1998 Interim Period and 20.1 percent from 61,983 in the
1997 Third Quarter to $49,555 in the 1998 Third Quarter. The decrease in
interest expense was due in part to the repayment in full of the note payable
to Mbf USA, Inc. during the first quarter of 1998 as well as
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the gradual reduction in the monthly interest expense related to the bank
loans acquired during 1997 associated with the PLL Asset Purchase and the
purchase and renovation of the new laboratory building. Interest income
increased from $37,112 in the 1997 Interim Period to $106,636 in the 1998
Interim Period, a 187.3 percent increase, and from $17,619 in the 1997 Third
Quarter to $28,813 in the 1998 Third Quarter, a 63.5 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 $1,130 in the 1997
Interim Period to $77,055 in the 1998 Interim Period and from $1,058 in the
1997 Third Quarter to $24,568 in the 1998 Third 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 $1,083,585 in the 1997 Interim Period to $1,440,725 in
the 1998 Interim Period, a 33.0 percent increase, and from $460,969 in the
1997 Third Quarter to $486,419 in the 1998 Third Quarter, a 5.5 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, 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 $1,858,689 in the nine
months ended September 30, 1998, and $1,596,727 in the nine months ended
September 30, 1997. As of September 30, 1998, LSAI had working capital of
$3,058,193, compared to working capital of $3,305,983, at December 31, 1997.
On August 25, 1998, LSI entered into a revolving line of credit loan
agreement with Hibernia National Bank (the "Bank"), which will mature on
August 25, 2000, under which LSI may draw up to $1,000,000 (the "Revolving
Loan"). As of September 30, 1998, there were no borrowings outstanding under
the Revolving Loan. It is anticipated that any advances on the Revolving Loan
will be based upon LSI's liquid assets including its accounts receivable.
Amounts drawn under the Revolving Loan bear interest at Citibank, N.A. rate.
The Revolving Loan is secured by the accounts receivable, intangible assets,
and by a mortgage on the building owned by LSI, and is guaranteed by LSAI.
The loan agreement contains various covenants, including certain financial
ratios.
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 September 30, 1998, the interest rate was 9 percent per annum and the
outstanding principal amount of such loan was approximately $1,133,333.
On July 2, 1997, LSI entered into a loan agreement with the bank for a
term loan in the principal amount of $720,000,
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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 September 30, 1998, the outstanding principal balance amount of
such loan was approximately $653,443.
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 September 30, 1998, total payments of $136,606 have been
recorded as reductions in the liability owed to Accu-Path for the first three
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 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 September 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 amounts 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 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.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE. The Company has two primary
computer systems both of which were developed employing six digit date
structures. Where date logic requires the year 2000 or beyond, such
structures may produce inaccurate results. Management has substantially
completed the implementation of a program to comply with year 2000
requirements on a system-by-system basis including information technology
("IT") and non-IT systems (e.g.
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microcontrollers). Management expects the program to be complete during 1998
at which time the Company's computer systems are expected to be year 2000
compliant.
Management has evaluated its in-house supported IT systems and found no
instances of date dependent calculations or operations that are affected by
this six digit date structure. The Company's vendor-supported IT system has
been updated and certified year 2000 compliant by the vendor. Non-IT systems
including all personal computers will be evaluated by a third party
contractor, updated if necessary, and certified as compliant during 1998. The
Company's risks associated with the year 2000 are mainly its ability to
communicate with its distributors, take orders for and ship products and pay
its employees, distributors and vendors. Although management's evaluation is
complete and vendor certifications are being obtained, a failure of the
Company's computer systems or other support systems to function adequately
with respect to the year 2000 issues could have a material effect on the
Company's operations. Based on progress to date, there is no need for a
contingency plan and such a plan has not been developed. The Company
estimates that the total cost of its program to make the Company's computer
system year 2000 compliant is less than $25,000.
The Company is in the early process of contacting its major suppliers to
determine if their systems will be year 2000 compliant on a timely basis. In
the event that the Company experiences product unavailability or supply
interruptions due to year 2000 non-compliance by its suppliers, management
believes that it would be able to obtain alternative sources of its products.
A significant delay or reduction in availability of products, however, could
also have a material adverse effect on the Company's operations.
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 August 25, 1998.
10.2 Commercial Guarantee between Hibernia National Bank
and Laboratory Specialists of America, Inc., dated
August 25, 1998.
27 Financial Data Schedules.
(b) Reports on Form 8-K
On July 14, 1998, the Registrant filed a Form 8-K reporting
the acquisition of certain assets of Toxworx Laboratories, Inc. under Item 2.
Acquisition or Disposition of Assets. The Registrant was not required to
include any financial statements under Item 7. Financial Statements and
Exhibits of the Form 8-K. See "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations-General" of this Report.
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 12, 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 Bank 17
and Laboratory Specialists, Inc., dated August 25,
1998.
10.2 Commercial Guarantee between Hibernia National 37
Bank and Laboratory Specialists of America, Inc.,
dated August 25, 1998.
27 Financial Data Schedules.
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