UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB*
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number: 0-25339
U. S. LABORATORIES INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 33-0586167
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7895 Convoy, Suite 18
San Diego, 92111
California (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 715-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State issuer's revenues for its most recent fiscal year. $11,879,948
State the aggregate market value of the voting and non-voting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.). $3,791,524
Number of shares of the registrant's common stock outstanding at May 10,
1999: 3,200,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
*The Annual Report on Form 10-KSB is being filed pursuant to Rule 15d-2 under
the Securities Exchange Act of 1934 and contains only certified financial
statements as required by Rule 15d-2.
<PAGE>
Explanatory Page
On February 23, 1999, U.S. Laboratories Inc. completed its initial public
offering of 1,000,000 units, each unit consisting of one share of common stock,
par value $.01 per share, and a warrant to purchase one share of common stock.
We sold the units for $6.00 per unit.
A detailed description of the offering is included in the registration
statement (SEC No. 333-66173) filed with the Securities and Exchange Commission.
Rule 15d-2 under the Securities Exchange Act of 1934, as amended,
provides generally that if a company files a registration statement under the
Securities Act of 1933, as amended, which does not contain certified financial
statements for the company's last full fiscal year (or for the life of the
company if less than a full fiscal year), then the company must, within 90 days
after the effective date of the registration statement, file a special report
furnishing certified financial statements for the last full fiscal year or other
period as the case may be. Rule 15d-2 further provides that the special
financial report is to be filed under cover of the facing sheet appropriate for
annual reports of the company.
Our Form SB-2 registration statement did not contain the certified
financial statements contemplated by Rule 15d-2, therefore, as required by Rule
15d-2, these are being filed with the SEC under cover of the facing page of an
annual report on Form 10-KSB.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) List of Financial Statements filed as part of the Form 10-K
The following financial statements of U.S. Laboratories Inc. are filed as
part of this Form 10-KSB. Page numbers refer to this Form 10-KSB: See table of
contents included with the financial statements.
(a)(2) List of Financial Statement Schedules filed as part of this Form
10-KSB
None.
(b) Reports on Form 8-K
Not applicable to this filing.
(c) Exhibits
None.
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONTENTS
December 31, 1998
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6 - 7
Notes to Consolidated Financial Statements 8 - 19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
U.S. Laboratories Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of U.S. Laboratories
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Laboratories
Inc. and subsidiaries as of December 31, 1998, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 7, 1999
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 121,782
Accounts receivable, net of allowance for doubtful accounts
of $38,241 3,290,353
Work-in-process 254,782
Prepaid expenses and other current assets 45,602
----------
Total current assets 3,712,519
Furniture and equipment, net of accumulated depreciation
and amortization of $783,695 748,059
Excess cost over fair value of net assets acquired, net
of accumulated amortization of $442,481 1,637,427
Deferred offering costs 552,738
Other assets 217,984
----------
Total assets $6,868,727
==========
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Book overdraft $ 125,635
Lines of credit 697,744
Current portion of long-term debt 132,048
Current portion of capitalized lease obligations 12,498
Current portion of notes payable 515,000
Accounts payable 581,738
Accrued payroll and payroll taxes 222,641
Due to stockholder 81,461
Deferred income tax 1,123,606
Income tax payable 162,708
----------
Total current liabilities 3,655,079
Long-term debt, net of current portion 211,383
Capitalized lease obligations, net of current portion 5,580
Notes payable, net of current portion 1,165,000
----------
Total liabilities 5,037,042
----------
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value
5,000,000 shares authorized
none issued and outstanding -
Common stock, $0.01 par value
50,000,000 shares authorized
2,200,000 shares issued and outstanding 22,000
Additional paid-in capital 970,252
Retained earnings 839,433
----------
Total stockholders' equity 1,831,685
----------
Total liabilities and stockholders' equity $6,868,727
==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
----------- ----------
Revenue $11,879,948 $7,766,414
Cost of goods sold 6,641,110 4,476,952
----------- ----------
Gross profit 5,238,838 3,289,462
Selling, general, and administrative expenses 4,100,510 2,431,770
----------- ----------
Income from operations 1,138,328 857,692
----------- ----------
Other income (expense)
Interest expense (177,231) (130,605)
Interest income 9,252 7,277
Other income 27,795 100,000
Other expense - (100,000)
Gain on sale of furniture and equipment 4,094 4,912
Rental income 12,640 25,160
Gain on sale of minority interest - 25,229
----------- ----------
Total other income (expense) (123,450) (68,027)
----------- ----------
Income before provision for income taxes and
minority interest 1,014,878 789,665
Provision for income taxes 444,857 345,256
----------- ----------
Income before minority interest 570,021 444,409
Minority interest - (80,253)
----------- ----------
Net income $ 570,021 $ 364,156
=========== ==========
Basic income per share $ 0.26 $ 0.17
=========== ==========
Diluted income per share $ 0.26 $ 0.17
=========== ==========
Weighted-average shares outstanding 2,200,000 2,200,000
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
--------------------------- Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1996 1,709,858 $ 17,099 $ 380,901 $ (94,744)$ 303,256
Net income 364,156 364,156
------------ ------------- ------------ ------------- -------------
Balance, December
31, 1997 1,709,858 17,099 380,901 269,412 667,412
Issuance of common
stock in exchange
for shares held by
minority interest
holders 490,142 4,901 589,351 594,252
Net income 570,021 570,021
------------ ------------- ------------ ------------- -------------
Balance, December
31, 1998 2,200,000 $ 22,000 $ 970,252 $ 839,433 $ 1,831,685
============ ============= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
----------- ----------
Cash flows from operating activities
Net income $ 570,021 $ 364,156
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization 110,754 84,724
Depreciation 215,660 181,552
Gain on sale of furniture and equipment - (4,912)
Recovery of expenses - (100,000)
Minority interest - 80,253
Distributions to minority interests - (20,000)
Gain on sale of subsidiary stock - 9,771
Deferred income tax 444,857 275,918
(Increase) decrease in
Accounts receivable (1,065,457) (750,149)
Work in process (73,010) 24,826
Prepaid expenses 31,797 21,008
Other assets (63,573) (63,486)
Increase (decrease) in
Accounts payable 267,698 49,476
Accrued payroll and payroll taxes 34,817 46,362
Other accrued expenses (30,085) (1,251)
Income tax payable - 69,338
----------- ----------
Net cash provided by operating activities 443,479 267,586
----------- ----------
Cash flows from investing activities
Purchase of furniture and equipment (196,259) (83,798)
Proceeds from sale of furniture and equipment - 34,291
Investment in Wyman Enterprises, Inc., net of
cash acquired (296,729) -
Investment in Professional Services
Industries, Inc. (13,900) -
Investment in Jupiter, Division of Fraser
Engineering & Testing, Inc. (35,000) -
----------- ----------
Net cash used in investing activities (541,888) (49,507)
----------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
----------- ----------
Cash flows from financing activities
Increase (decrease) in book overdraft $ 116,245 $ (69,095)
Line of credit, net 15,907 322,229
Due to stockholders, net (502,820) (130,421)
Payments on long-term debt (115,507) (97,660)
Payments on capitalized lease obligations (9,021) -
Payments on notes payable - (149,000)
Deferred offering costs (552,738) -
Increase in notes payable 1,230,000 -
Due from Wyman Testing Laboratories, Inc. (56,007) -
----------- ----------
Net cash provided by (used in)
financing activities 126,059 (123,947)
----------- ----------
Net increase in cash 27,650 94,132
Cash, beginning of year 94,132 -
----------- ----------
Cash, end of year $ 121,782 $ 94,132
=========== ==========
Supplemental disclosures of cash flow information
Interest paid $ 177,231 $ 130,605
=========== ==========
Income taxes paid $ 2,064 $ 2,000
=========== ==========
Supplemental schedule of non-cash investing and financing activities
During the years ended December 31, 1998 and 1997, the Company acquired an
automobile and trucks of $225,897 and $124,469, respectively, under note payable
agreements.
During the year ended December 31, 1997, the Company recovered expenses in the
amount of $100,000 and reduced the note payable to the sellers (see Note 14).
On January 1, 1998, the Company issued 490,142 shares of the Company's common
stock to minority interest holders in exchange for all of their shares in the
subsidiaries. In connection with the purchase, the Company recorded additional
goodwill of $194,924.
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
U.S. Laboratories Inc. and subsidiaries (collectively, the "Company")
offers engineering and design services, project management, construction
quality control, structural engineering and design, environmental
engineering and inspection, and testing. The Company has facilities in
California, New Jersey, and Florida and grants credit to customers in
those states.
Acquisitions
In January 1998, the Company purchased all of the shares held by minority
stockholders in its subsidiaries for $533,052. The Company issued an
aggregate of 439,664 shares of common stock in exchange for the purchase
price. The shares were valued using a method similar to previous Company
acquisitions. The Company recorded $194,924 in excess of cost over fair
value of net assets acquired which is being amortized on a straight-line
basis over fifteen years.
On March 25, 1998, Wyman Testing Laboratories, Inc. ("Wyman"), a
majority-owned subsidiary of U.S. Laboratories Inc., acquired certain
assets and liabilities of Wyman Enterprises, Inc. The purchase price for
the assets was $830,620. The purchase price was paid as follows: (i)
$300,000 cash paid upon the closing, (ii) $468,993 notes payable issued
to the stockholders of Wyman Enterprises, Inc., and (iii) 50,478 shares
of U.S. Laboratories Inc.'s common stock issued to a stockholder of Wyman
Enterprises, Inc. valued at $61,200, using a method similar to previous
company acquisitions. Wyman recorded $511,200 in excess of cost over fair
value of net assets acquired which is being amortized on a straight-line
basis over fifteen years. For financial statement purposes, the
acquisition occurred on March 31, 1998. The assets acquired were as
follows:
Cash $ 22,690
Accounts receivable 577,681
Prepaids 29,985
Furniture and equipment 96,952
Goodwill 511,200
Liabilities (407,888)
----------
Total $ 830,620
==========
Subsequent to the year ended December 31, 1998, the Company agreed to
give Wyman Enterprises, Inc. an additional $31,007 relating to the
purchase price and $71,904 of accounts receivable. Upon this agreement,
the Company recorded additional goodwill of $102,911.
In May 1998, Wyman merged into San Diego Testing Engineers, Inc., a
majority-owned subsidiary of the Company, which is the surviving
corporation. Each share of Wyman was converted into one-half share of the
surviving corporation.
In May 1998, the Company acquired certain equipment of Professional
Services Industries, Inc. ("PSI") for a purchase price of $13,900 which
has been paid.
In May 1998, the Company acquired certain equipment of Jupiter, Division
of Fraser Engineering & Testing, Inc. ("Jupiter") for a purchase price of
$35,000 which has been paid.
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of U.S.
Laboratories Inc. and its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents/Book Overdraft
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents. Book overdraft represents the bank
balance at period end, plus deposits in transit, less outstanding checks.
Furniture and Equipment
Furniture and equipment, including equipment under capital leases, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives as follows:
Automobile and trucks 3 to 5 years
Furniture and fixtures 5 to 7 years
Office hardware and software 5 years
Machinery and equipment 5 to 7 years
Leasehold improvements 5 years
Maintenance, repairs, and minor renewals are expensed as incurred.
Expenditures for additions and major improvements are capitalized. Gains
and losses on disposals are included in the statements of operations.
Intangibles
Intangibles consist of goodwill which is being amortized over a
fifteen-year period. The Company continually evaluates whether events or
circumstances have occurred that indicate the remaining estimated value
of goodwill may not be recoverable. When factors indicate that the value
of goodwill may be impaired, the Company estimates the remaining value
and reduces the goodwill to that amount.
Deferred Offering Costs
Amounts paid for costs associated with an anticipated initial public
offering ("IPO") are capitalized and will be recorded as a reduction to
additional paid-in capital upon the completion of the IPO. The IPO was
completed in March 1999.
Revenue Recognition
Revenue from services performed, including fixed-price and unit-price
contracts, is recorded as earned over the lives of the contract. Revenue
from services is recognized when services have been performed and
accepted. At the time a loss or a contract becomes known, the entire
amount of the estimated ultimate loss is recognized in the financial
statements. The Company has not experienced any material losses on these
contracts.
Advertising
The Company expenses advertising costs as incurred. Advertising costs for
the years ended December 31, 1998 and 1997 were $42,882 and $15,699,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
9
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the
tax payable for the period and the change during the period in deferred
tax assets and liabilities.
Stock Split
Effective May 30, 1998, the Company effected a 20,324-for-one stock split
and on November 9, 1998, effected a one-for-0.8413 reverse stock split.
The options and warrants to acquire common stock were unaffected by the
reverse stock split. All share and per share data have been retroactively
restated to reflect the stock split.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash,
accounts receivable, accounts payable, and other accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
The amounts shown for long-term debt and capital lease obligations also
approximate fair value because current interest rates and terms offered
to the Company for similar long-term debt and capital lease obligations
are substantially the same.
Concentrations of Risk
The Company sells products and provides contract services to construction
companies and the military, primarily in California, New Jersey, and
Florida. It also extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses
and maintains allowances for anticipated losses.
Net Income Per Share
For the year ended December 31, 1998, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing
net income to common stockholders by the weighted-average number of
common shares outstanding.
Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common
shares were dilutive.
The accompanying notes are an integral part of these
consolidated financial statements.
10
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity
(net assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net income,
include foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financials statements since the Company did
not have any of the items of comprehensive income in any period
presented.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to have
a material effect, if any, on its financial position or results of
operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," is effective for financial statements with the first fiscal
quarter beginning after December 15, 1998. The Company does not expect
adoption of SFAS No. 134 to have a material effect, if any, on its
financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the Company.
NOTE 3 - CASH
The Company maintains cash deposits at banks located in California,
Florida, and New Jersey. Deposits at each bank are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of December 31, 1998,
uninsured portions of balances held at banks aggregated to $53,778. The
Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk on cash.
The accompanying notes are an integral part of these
consolidated financial statements.
11
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1998 consisted of the following:
Automobile and trucks $ 621,719
Furniture and fixtures 291,199
Office hardware and software 91,918
Machinery and equipment 423,846
Leasehold improvements 103,072
----------
1,531,754
Less accumulated depreciation and amortization 783,695
----------
Total $ 748,059
==========
Depreciation and amortization expense for the years ended December 31,
1998 and 1997 was $215,660 and $181,552, respectively.
NOTE 5 - LINES OF CREDIT
Amounts due on the lines of credit at December 31, 1998 are as follows:
In May 1998, the Company entered into a
$1,700,000 line of credit with a bank,
maturing on May 1, 1999. Interest is
payable on a monthly basis at prime
(7.75% at December 31, 1998). The
maximum advance rate is 75% of accounts
receivable aged 90 days or less. The
line is guaranteed by a UCC-1 financing
statement, covering a majority of the
Company's assets, dated May 27, 1998,
and personally guaranteed by the
majority stockholder. In November 1998,
the Company refinanced the line of
credit into a $1,200,000 note payable
(see Note 7) and remaining $500,000 as a
line of credit with the above terms. $ 413,160
In July 1998, the Company entered into a
$500,000 line of credit with a bank,
payable upon demand, but no later than
July 1, 2000. Interest is payable on a
monthly basis at the bank's reference
rate. A portion of the line is
guaranteed by the majority stockholder
and the majority of the Company's
assets. 284,584
----------
Total $ 697,744
==========
The accompanying notes are an integral part of these
consolidated financial statements.
12
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT
Long-term debt at December 31, 1998 consisted of the following:
Notes payable to Toyota Motor Credit Corporation,
collateralized by applicable equipment. The notes
are currently due in aggregate monthly payments of
$448 including interest from 9.19% to 11.9% per
annum. $ 3,132
Notes payable to General Motors Credit
Corporation, collateralized by applicable
equipment. The notes are currently due in
aggregate monthly payments of $3,694 including
interest from 7.95% to 13.5% per annum. 122,825
Notes payable to Barnett Bank, collateralized by
applicable equipment. The notes are currently due
in aggregate monthly payments of $3,911 including
interest from 7.74% to 10.74% per annum. 83,734
Notes payable to Ford Motor Credit Corporation,
collateralized by applicable equipment. The notes
are currently due in aggregate monthly payments of
$4,366 including interest from 7.99% to 12.66% per
annum. 133,740
----------
343,431
Less current portion 132,048
----------
Long-term portion $ 211,383
==========
The following is a schedule by years of future maturities of long-term
debt:
Year Ending
December 31,
------------
1999 $ 132,048
2000 74,160
2001 75,571
2002 50,277
2003 10,105
Thereafter 1,270
----------
Total $ 343,431
==========
The accompanying notes are an integral part of these
consolidated financial statements.
13
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1998.
Note payable to stockholder of Wyman Enterprises,
Inc. in connection with the acquisition. The
amount is to be paid in four annual installments
of $37,500 beginning March 25, 1999. Subsequent to
the IPO, $37,500 was paid. $ 150,000
Note payable to stockholder of Wyman Enterprises,
Inc. in connection with the acquisition. The
amount is to be paid in four annual installments
of $37,500 beginning March 25, 1999 with one lump
sum payment of $150,000 due at the earlier of
October 1, 1999, or the 30 days following the IPO.
Subsequent to the IPO, $187,500 was paid. 300,000
Note payable to stockholders of Wyman Enterprises,
Inc. in connection with the acquisition. The
amount is payable upon demand and non-interest
bearing. Subsequent to the IPO, the total amount
was paid. 50,000
Note payable to bank starting January 1999. The
note was interest only through December 31, 1998
at the prime rate. The amount is to be paid in
monthly installments of $20,000, plus interest at
the prime. The note is secured by substantially
all of the Company's assets and personally
guaranteed by the majority stockholder. Subsequent
to the IPO, the total amount was paid. 1,180,000
----------
1,680,000
Less current portion 515,000
----------
Long-term portion $1,165,000
==========
The following is a schedule by years of future maturities of notes
payable:
Year Ending
December 31,
1999 $ 515,000
2000 315,000
2001 315,000
2002 315,000
2003 220,000
----------
Total $1,680,000
==========
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS
Due to Stockholder
At December 31, 1998, the Company had amounts due to the majority
stockholder of $81,461. The amounts are non-interest bearing and are
payable upon demand.
Stockholder Management Fees
During the year ended December 31, 1998 and 1997, the Company expensed
$92,052 and $181,067, respectively, in management fees to a stockholder.
The management fees are based upon 5% of net sales of a subsidiary.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has entered into non-cancelable operating leases for its
corporate offices and facilities in California, New Jersey, and Florida.
The Company has the option to extend certain leases.
Future minimum rental commitments under lease agreements with initial or
remaining terms of one year or more at December 31, 1998 are as follows:
Year Ending
December 31,
------------
1999 $ 275,000
2000 231,000
2001 167,000
2002 116,000
2003 39,000
----------
Total $ 828,000
==========
Rent expense was approximately $301,598 and $316,685 for the years ended
December 31, 1998 and 1997, respectively.
Capitalized Lease Obligations
Upon the acquisition of Wyman Enterprises, Inc., the Company assumed
three capitalized lease obligations. The agreements are payable in
aggregate monthly payments of principal and interest of $1,477, expiring
through May 2000. The agreements are collateralized by applicable
equipment.
Litigation
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe that
the outcome of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.
Employment Agreements
In May 1998, the Company entered into three-year employment agreements
with certain key employees of the Company. The agreements require
aggregate monthly payments of approximately $59,000.
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Incentive Programs
In July 1998, the Company entered into incentive program agreements with
certain members of Company management. The agreements call for bonuses of
3% and 7% of pre-tax profits based upon the Company's performance.
Additionally, up to 5% of individual subsidiary pre-tax profits may be
distributed to employees based on performance of those subsidiaries. As
of December 31, 1998, accrued bonuses amounted to $40,000, which were
paid in 1999.
NOTE 10 - PROFIT SHARING PLAN
The Company has a voluntary profit sharing plan which covers
substantially all eligible full-time employees who meet the plan
requirements. Annual employer contributions are based on a years of
service vesting schedule. Employer contributions for the years ended
December 31, 1998 and 1997 were $19,525 and $26,900, respectively.
NOTE 11 - INCOME TAXES
A reconciliation of the expected income tax computed using the federal
statutory income tax rate to the Company's effective income tax rate for
the years ended December 31 is as follows:
1998 1997
--------- ----------
Income tax computed at federal statutory
tax rate 34.0% 34.0%
State taxes, net of federal benefit 5.6 6.5
Non-deductible goodwill amortization and other 4.2 3.2
--------- ----------
Total 43.8% 43.7%
========= ==========
Significant components of the Company's deferred tax assets and
liabilities for income taxes for the year ended December 31, 1998
consisted of the following:
Deferred tax assets
Accrued payroll and other expenses $ 333,978
Net operating loss 15,010
State taxes 74,372
------------
423,360
------------
Deferred tax liabilities
Accounts receivable 1,366,155
Work-in-progress 105,785
Depreciation 11,334
Other - property 63,692
------------
1,546,966
------------
Net deferred tax liability $ (1,123,606)
============
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- ------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
The components of the income tax provision for the years ended December
31 are as follows:
1998 1997
----------- ----------
Current
Federal $ - $ 58,938
State 800 10,400
----------- ----------
800 69,338
----------- ----------
Deferred
Federal 357,000 214,302
State 87,057 61,616
----------- ----------
444,057 275,918
----------- ----------
Total $ 444,857 $ 345,256
=========== ==========
NOTE 12 - STOCK OPTION PLAN
In July 1998, the Board of Directors adopted and approved the 1998 Stock
Option Plan (the "Option Plan") under which a total of 500,000 shares of
common stock have been reserved for issuance. Options under this plan may
be granted to employees, officers, directors, and consultants of the
Company. The exercise price of the options is determined by the Board of
Directors, but the exercise price may not be less than 100% of the fair
market value on the date of grant. Options vest over periods not to
exceed five years. In July 1998, the Company had 395,000 stock options
outstanding at an exercise price ranging from $5.00 to $5.50 per share,
of which 238,632 stock options were exercisable.
In November 1998, the Company cancelled all of its outstanding options,
and the Board of Directors approved the grant of 395,000 stock options at
an exercise price ranging from $6.00 to $6.60 per share, of which 238,632
stock options are exercisable. The Board of Directors also approved the
grant of an additional 62,500 options to various employees under the
plan.
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its plans and does not recognize compensation expense
for its stock-based compensation plans other than for restricted stock
and options/warrants issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at
the grant date for awards under its plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and earnings per
share would be reduced to the pro forma amounts indicated below for the
years ended December 31, 1998 and 1997:
1998 1997
------------ ------------
Net income
As reported $ 570,021 $ 364,156
Pro forma $ 25,455 $ 364,156
Basic earnings per common share
As reported $ 0.26 $ 0.17
Pro forma $ 0.01 $ 0.17
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTION PLAN (Continued)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the year ended
December 31, 1998. (There were no options granted during the year ended
December 31, 1997.): dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 4.3%, and expected life of three years. The
weighted-average fair value of options granted during the year ended
December 31, 1998 for which the exercise price equals the market price on
the grant date was $4.16, and the weighted-average exercise price was
$6.00. The weighted-average fair value of options granted during the year
ended December 31, 1998 for which the exercise price was greater than the
market price on the grant date was $4.07, and the weighted-average
exercise price was $6.60.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The following summarizes the stock option transactions under the stock
option plan:
Weighted-
Stock Average
Options Exercise
Outstanding Price
----------- --------
Balance, December 31, 1997 - $ -
Granted 395,000 $ 6.22
------------
Balance, December 31, 1998 395,000 $ 6.22
===========
Exercisable, December 31, 1998 238,632 $ 6.08
===========
The weighted-average remaining contractual life of the options is two
years at December 31, 1998.
NOTE 13 - WARRANTS
In July 1998, the Board of Directors approved the grant of 150,000 stock
warrants to certain employees of the Company. The warrants entitle the
holder to purchase Company common stock at a price of $5.00 per share.
The warrants are exercisable the earlier of (i) the date on which the
closing price of a share of the Company's common stock as reported on
the NASDAQ Small-Cap Market is greater than $12.00 or (ii) the date on
which the audited consolidated earnings for the fiscal year ending
December 31, 1998, or any fiscal year thereafter, are at least twice the
base period earnings of $841,041. The warrants expire upon termination
or November 9, 2003.
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
NOTE 13 - WARRANTS (Continued)
In November 1998, the Company cancelled all of its outstanding warrants,
and the Board of Directors approved the grant of 150,000 stock warrants
to certain employees of the Company. The warrants entitle the holder to
purchase Company common stock at a price of $6.00 per share. The
warrants are exercisable the earlier of (i) the date on which the
closing price of a share of the Company's common stock as reported on
the NASDAQ Small-Cap Market is greater than $12.00 or (ii) the date on
which the audited consolidated earnings for the fiscal year ending
December 31, 1998, or any fiscal year thereafter, are at least twice the
base period earnings of $841,041. The warrants expire upon termination
or November 9, 2003.
NOTE 14 - OTHER INCOME (EXPENSE)
On January 31, 1994, U.S. Laboratories Inc. purchased 80% of
Professional Engineering & Inspection Company, Inc. ("PEICO") for a
purchase price of $1,500,000. The purchase price was paid as follows:
$750,000 cash paid upon the closing, and the remaining $750,000 payable
$250,000 per year starting January 31, 1995. In 1997, certain
liabilities arose after the sale of PEICO, which were recoverable from
the sellers by the Company. The Company negotiated with the sellers a
reduction of $100,000 in the final payment due to the sellers.
NOTE 15 - YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 Issue
and is developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data
or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management does not believe
the cost of implementation will be material to the Company's financial
position and results of operations.
NOTE 16 - SUBSEQUENT EVENTS
In March 1999, the Company completed an IPO in which it sold 1,000,000
shares of common stock at $6.00 per share. Gross proceeds from the sale
were $6,000,000.
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 10, 1999.
U. S. LABORATORIES INC.
By /S/ DICKERSON WRIGHT
Dickerson Wright
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ DICKERSON WRIGHT Chief Executive Officer, President, May 10, 1999
Dickerson Wright and Chairman of the Board
/S/GARY ELZWEIG Executive Vice President and Director May 10, 1999
Gary Elzweig
/S/ DONALD C. ALFORD Executive Vice President and Director May 10, 1999
Donald C. Alford
/S/ MARK BARON Executive Vice President and Director May 10, 1999
Mark Baron
/S/ MARTIN B. LOWENTHAL Executive Vice President and Director May 10, 1999
Martin B. Lowenthal
/S/ JAMES D. WAIT Chief Financial Officer, Secretary, May 10, 1999
James D. Wait and Director (Chief Financial and
Accounting Officer)
/S/ THOMAS H. CHAPMAN Director May 10, 1999
Thomas H. Chapman
/S/ JAMES L. MCCUMBER Director May 10, 1999
James L. McCumber
/S/ ROBERT E. PETERSEN Director May 10, 1999
Robert E. Petersen
/S/ NOEL SCHWARTZ Director May 10, 1999
Noel Schwartz
/S/ IRVIN FUCHS Director May 10, 1999
Irvin Fuchs
</TABLE>
