U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 -QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________TO _________
Commission file number 0-25339
U. S. Laboratories Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0586167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7895 Convoy, Suite 18
San Diego, California 92111
(Address of principal executive offices)
619-715-5800
(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__ No X
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding as of September 30, 1999
Common Stock, $.01 par value per share 3,200,000
Transitional Small Business Disclosure Format: Yes_____ No X
1
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U.S. Laboratories Inc.
Index
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
For the Nine Months ended September 30, 1999 and 1998 5
and the Three Months ended September 30, 1999 and 1998
Consolidated Statements of Stockholders Equity
For the Nine Months Ended September 30, 1999 6
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits 21
2
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Part I - Financial Information
Item 1. Financial Statements
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998 and September 30, 1999 (unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, September. 30,
1998 1999
(unaudited)
<S> <C> <C>
Current assets
Cash ................................................ $ 121,782 $2,198,044
Accounts receivable, net of allowances for doubtful
accounts of $38,241 and $86,246, respectively 3,290,353 3,932,845
Work-in-process ..................................... 254,782 478,424
Prepaid expenses and other current assets .......... 45,602 189,876
---------- ----------
Total current assets ...................... 3,712,519 6,799,189
Furniture and equipment, net of accumulated depreciation
of $783,695 and $986,176, respectively ............. 748,059 824,686
Excess cost over fair value of net assets acquired, net
of accumulated amortization of $442,481 and $531,929,
respectively ........................................ 1,637,427 1,549,977
Deferred offering costs ................................... 552,738 --
Due from stockholder ...................................... -- 140,515
Other assets .............................................. 217,984 258,651
---------- ----------
Total assets ........................... $6,868,727 $9,573,018
========== ==========
</TABLE>
3
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<TABLE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET(Continued)
December 31, 1998 and September 30, 1999 (unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
December 31, September. 30,
1998 1999
(unaudited)
<S> <C> <C>
Current liabilities
Book overdraft ......................................... $ 125,635 $ --
Lines of credit ........................................ 697,744 --
Current portion of long-term debt ...................... 132,048 101,099
Current portion of capitalized lease obligations ....... 12,498 15,000
Current portion of notes payable ....................... 515,000 75,000
Accounts payable ....................................... 581,738 449,441
Accrued payroll and payroll taxes ...................... 222,641 304,602
Other accrued expenses ................................. -- 303,140
Due to stockholder ..................................... 81,461 --
Deferred income tax .................................... 1,123,606 1,123,606
Income tax payable ..................................... 162,708 302,953
---------- ----------
Total current liabilities ........................... 3,655,079 2,674,841
Long-term debt, net of current portion ....................... 211,383 291,904
Capitalized lease obligations, net of current portion ........ 5,580 6,000
Notes payable, net of current portion ........................ 1,165,000 150,000
---------- ----------
Total liabilities ................................... 5,037,042 3,122,745
---------- ----------
Commitment
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 and 3,200,000 shares issued and outstanding 22,000 32,000
Additional paid-in capital ............................ 970,252 5,193,199
Retained earnings .................................... 839,433 1,225,074
---------- ---------
Total stockholders' equity .......................... 1,831,685 6,450,273
---------- ---------
Total liabilities and stockholders' equity . $6,868,727 $9,573,018
========== ==========
</TABLE>
4
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<TABLE>
U.S. LABORATORIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1999 and 1998
(unaudited) And the Nine Months Ended September 30, 1999 and
September 30 , 1998 (unaudited)
<CAPTION>
For the Three Months Ended For the Nine Months Ended
Sept 30, Sept 30,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue ..................................... $ 4,245,299 $ 3,339,276 $ 11,230,000 $ 8,478,329
Cost of goods sold .......................... 2,147,135 1,780,516 5,698,711 4,432,509
------------ ------------ ------------ ------------
Gross profit ................................ 2,098,164 1,558,760 5,531,289 4,045,820
------------ ------------ ------------ ------------
Selling, general, and administrative expenses 1,790,362 1,120,502 4,906,210 3,215,256
------------ ------------ ------------ ------------
Income from operations ...................... 307,802 438,258 625,079 830,564
------------ ------------ ------------ ------------
Other income (expense)
Interest expense ......................... (6,947) (73,117) (75,767) (118,814)
Interest income .......................... 17,059 5,396 57,701 9,252
Other income ............................. 776 (31,157) 35,722 13,048
Other expense ............................ -- 119 -- --
------------ ------------ ------------ ------------
Total other income (expense) ........... 10,888 (98,759) 17,656 (96,514)
------------ ------------ ------------ ------------
Income before provision for income taxes .... 318,690 339,499 642,735 734,050
Provision for income taxes .................. 127,476 149,971 257,094 308,301
------------ ------------ ------------ ------------
Net income .................................. $ 191,214 $ 189,528 $ 385,641 $ 425,749
============ ============ ============ ============
Basic income per share ...................... $ 0.06 $ 0.09 $ 0.13 $ 0.19
============ ============ ============ ============
Diluted income per share .................... $ 0.06 $ 0.09 $ 0.13 $ 0.19
============ ============ ============ ============
Weighted average shares outstanding ......... 3,200,000 2,200,000 3,003,703 2,200,000
============ ============ ============ ============
</TABLE>
5
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<TABLE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 ( unaudited)
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1998 ............. 2,200,000 $ 22,000 $ 970,252 $ 839,433 $ 1,831,685
Issuance of common
stock through the
Initial Public Offering
on February 23,
1999 .................. 1,000,000 10,000 5,990,000 6,000,000
Deferred offering costs .. (1,767,053) (1,767,053)
Net income ............... 385,641 385,641
----------- ----------- ----------- ----------- -----------
Balance Sept. 30, 1999 ... 3,200,000 $ 32,000 $ 5,193,199 $ 1,225,074 $ 6,450,273
=========== =========== =========== =========== ===========
</TABLE>
6
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U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998 (unaudited)
For the Nine Months Ended
Sept. 30
1999 1998
(unaudited) (unaudited)
Cash flows from operating activities
Net income ................................. $ 385,641 $ 425,749
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization .............................. 87,450 90,384
Depreciation .............................. 225,113 182,240
(Increase) decrease in
Accounts receivable ....................... (326,708) (639,638)
Work in process ........................... (223,642) (81,843)
Prepaid expenses .......................... (144,274) 12,076
Other assets .............................. (40,667) (15,868)
Increase (decrease) in
Accounts payable .......................... (154,392) 93,679
Accrued payroll and payroll taxes ......... 81,961 33,606
Other accrued expenses .................... 273,140 (15,785)
Income tax payable ........................ 140,245 308,301
--------- --------
Net cash provided by operating
activities ..................................... 303,867 392,901
--------- ---------
Cash flows from investing activities
Purchase of furniture and equipment (net) . (174,861) (189,838)
Investment in Wyman Enterprises,
Inc., net of cash acquired ................ -- (296,730)
Investment in Professional
Service Industries, Inc. .................. -- (13,900)
Investment in Jupiter Division
of Fraser Engineering & Testing ........... -- (35,000)
Investment in Buena Engineers, Inc. ....... (184,178) --
--------- ---------
Net cash provided (used in) investing activities (359,039) (535,468)
--------- ---------
7
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U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998 (unaudited)
For the Nine Months Ended
Sept. 30
1999 1998
(unaudited) (unaudited)
Cash flows from financing activities
Increase (decrease) in book
overdraft ..................................... $ (125,635) $ 7,351
Line of credit, (net) ......................... (1,877,744) (98,176)
Due to stockholders, (net) .................... (221,976) (486,782)
Payments on long-term debt, capitalized
lease obligations and notes payable ........... (428,896) (105,135)
Proceeds from the initial stock offering
net of the deferred offering costs ............ 4,785,685 --
Due from Wyman Testing
Laboratories, Inc. ............................ -- (25,000)
Deferred offering costs ....................... -- (317,825)
Increase in notes payable ..................... -- 1,218,993
----------- -----------
Net cash provided by
financing activities ............................ 2,131,434 193,426
Net increase (decrease) in cash ................. 2,076,262 50,859
----------- -----------
Cash, beginning of period ....................... 121,782 94,132
----------- -----------
Cash, end of period ............................. $ 2,198,044 $ 144,991
=========== ===========
Supplemental disclosures of cash flow information
Interest paid ................................. $ 75,767 $ 118,814
=========== ===========
Income taxes paid ............................. $ 111,800 $ 135
=========== ===========
8
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U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and September 30, 1999 and for
the Nine Months Ended September 30, 1999 and 1998 (unaudited)
(The information with respect to the nine months ended
September 30, 1999 and 1998 is unaudited.)
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, Florida and Nevada and grants
credit to customers in those states.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
As contemplated by the Securities and Exchange Commission under Item
310 (b) of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all
disclosures required by generally accepted accounting principles. The
interim financial data are unaudited, however, in the opinion of the
Company the interim data include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
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") were capitalized and subsequently recorded as a
reduction to additional paid-in capital upon the completion of the IPO.
9
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U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 1998 and September 30, 1999 and for
the Nine Months Ended September 30, 1999 and 1998 (unaudited)
(The information with respect to the nine months ended
September 30, 1999 and 1998 is unaudited.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 service 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.
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.
Interim Unaudited Financial Information
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in
the opinion of management, are necessary to fairly state the Company's
financial position, the results of operations, and cash flows for the
periods presented. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of results for the
entire fiscal year ending December 31, 1999.
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.
10
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U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1998 and September 30, 1999 and for
the Nine Months Ended September 30, 1999 and 1998 (unaudited)
(The information with respect to the nine months ended
September 30, 1999 and 1998 is unaudited.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Risk
The Company sells products and provides contract services to
construction companies and the military, primarily in California, New
Jersey, Florida, and Nevada. 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 nine months ended September 30, 1999 and 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 during the
accounting period. 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.
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,
Nevada, 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 and September 30, 1999, uninsured portions of
balances held at banks aggregated to $27,026 and $1,744,813,
respectively. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk
on cash.
11
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U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Continued)
As of December 31, 1998 and September 30, 1999 and for
the Nine Months Ended September 30, 1999 and 1998 (unaudited)
(The information with respect to the nine months ended
September 30, 1999 and 1998 is unaudited.)
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
December 31, September 30,
1998 1999
Automobile and trucks...............................$ 621,719 $ 753,998
Furniture and fixtures .............................. 291,199 270,628
Office hardware and software ........................ 91,918 171,092
Machinery and equipment ............................. 423,846 485,305
Leasehold improvements .............................. 103,072 129,839
---------- ----------
1,531,754 1,810,862
Less accumulated depreciation and amortization ...... 783,695 986,176
---------- ----------
Total ...................................... $ 748,059 $ 824,686
========== ==========
Depreciation and amortization expense for the nine months ended
September 30, 1998 and 1999 was $182,240 and $225,113, respectively.
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following at September 30, 1999:
Note payable to stockholder of Wyman Enterprises,
Inc. in connection with the acquisition.
The amount is to be paid in three annual
installments of $37,500 beginning March 25,
2000................................................... $ 112,500
Note payable to stockholder of Wyman Enterprises,
Inc. in connection with the acquisition.
The amount is to be paid in three annual
installments of $37,500 beginning March 25,
2000 .................................................. 112,500
----------
225,000
Less current portion................................... 75,000
----------
Long-term portion................................... $ 150,000
----------
NOTE 6 - 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.
Due from Stockholder
At September 30, 1999, the company had amounts due from the majority
stockholder of $140,515. The amounts are due in three annual equal
installments and are non - interest bearing.
12
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U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1998 and September 30 , 1999
and for the Nine Months Ended September 30, 1999 and 1998 (unaudited)
(The information with respect to the nine months ended September 30,
1999 and 1998 is unaudited.)
NOTE 6 - RELATED PARTY TRANSACTIONS (Continued)
Stockholder Management Fees
During the nine months ended September 30, 1998, the Company expensed
$137,063 in management fees to a stockholder. The management fees are
based upon 5% of net sales of a subsidiary.
NOTE 7 - 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. In June 1999,
the Board of Directors and the stockholders approved an increase in the
number of shares reserved under the Option Plan to bring the total
number of shares reserved to 810,000. Options under this plan may be
granted to employees, officers, and 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 5 years. In September 1999, the Company had 395,000 stock
options outstanding at an exercise price ranging from $6.00 to $6.60
per share, of which 238,632 stock options were exercisable. The Board
of Directors also approved the grant of an additional 62,500 options to
various employees under the plan.
NOTE 8 - 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 of November 9, 2003.
NOTE 9 - INITIAL PUBLIC OFFERING
On February 23, 1999 the Company completed an initial public offering
that generated net cash of $4,825,000 in the first quarter. The
offering was for the sale of 1,000,000 shares of common stock which
represent 31.l25% of the post offering common stock. A part of the
proceeds of the offering was used to retire debt in the approximate
amount of $2,150,000.
NOTE 10 - 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.
13
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U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1998 and September 30, 1999
and for The Nine Months Ended September 30, 1999 and 1998 (unaudited)
(The information with respect to the nine months ended September 30,
1999 and 1998 is unaudited.)
NOTE 11 - COMMITMENT
During 1999, we signed a three year office building lease with a
related party to lease office space in New Jersey for the companies financial
and mergers and acquisition staff.
The rental payments are $1,600 per month plus utilities.
NOTE 12 - LINES OF CREDIT
In the third quarter 1999, the Company entered into a $4,000,000
revolving working capital line of credit facility as part of its ongoing efforts
to ensure appropriate levels of liquidity. At the end of September 30, 1999,
this working capital line of credit was unused and available for future use.
In the third quarter 1999, the Company entered into a $200,000 capital
purchases line of credit facility. This line of credit is used for equipment
purchases of the company and at the end of one year this facility will convert
to a five year term loan. At the end of September 30, 1999, this capital
purchases line of credit was unused and available for
future use.
In the third quarter, 1999, the Company entered into a $350,000 term
loan facility to refinance existing equipment debt. At the end of September 30,
1999, this term loan facility was unused and available for future use.
All of these credit facilities are secured with the assets of the
company and its subsidiaries and bear interest at the variable prime rate.
The Company also has a line of credit with Bank of America in the
amount of $500,000. Dickerson Wright and his spouse guarantee this line of
credit. It is an unsecured note that is all due in July 2000. The note bears
interest at the prime rate. This line of credit is still in place and has been
reduced to a zero outstanding balance since the end of 1998. The company does
not intend to use this credit facility in the future.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition and Results of Operations
Nine Months Ended September 30, 1999 and 1998
Revenue. Revenue for the nine months ended September 30, 1999 was
$11,230,000, an increase of 33% over the same period in 1998. The increase is
primarily attributable to an internal growth rate of approximately 29%, with the
remaining 4% attributed to the expansion of operations through the acquisition
of an engineering consulting services company in the second quarter 1999.
Gross Profit. Gross profit for the nine months ended 1999 was
$5,531,289, an increase of 37% over the same period in 1998. This increase in
gross profit was due primarily to the increase in revenues described above.
Income Before Provision for Income Taxes. Income before provision for
income taxes for the nine months ended September 30, 1999 was $642,735, an
decrease of 12% over the same period in 1998. The profit decreased due to an
increase in selling, general and administrative expenses. Specifically,
increased costs for travel and due diligence to locate potential acquisition
candidates, for upgrading computer systems and increased costs to operate as a
public company that were not incurred in 1998.
Interest Expense. Interest expense was $75,767 in the nine months
ended September 30, 1999, an decrease of 36% over the same period in 1998. This
decrease was due primarily to reduced debt associated with the funding of the
initial public offering.
Net Income. Net income for the nine months ended September 30, 1999
was $385,641, a decrease of 9% over the same period in 1998. The decrease in net
income was primarily due to the increase in selling, general and administrative
expenses described above.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, our net cash
provided by operating activities was $303,867, a decrease of 23% over the same
period in 1998 primarily due to the payment of estimated federal and state taxes
in the second and third quarters of 1999.
In the third quarter 1999, we entered into a $4,000,000 revolving
working capital line of credit facility as part of its ongoing efforts to ensure
appropriate levels of liquidity. At the end of September 30, 1999, this working
capital line of credit was unused and available for future use.
In the third quarter 1999, we entered into a $200,000 capital
purchases line of credit facility. This line of credit is used for equipment
purchases of the company and at the end of one year this facility will convert
to a five year term loan. At the end of September 30, 1999, this capital
purchases line of credit was unused and available for future use.
In the third quarter, 1999 we entered into a $350,000 term loan
facility to refinance existing equipment debt. At the end of September 30, 1999,
this term loan facility was unused and available for future use.
All of these credit facilities are secured with the assets of our
company and our subsidiaries and bear interest at the variable prime rate.
15
<PAGE>
Liquidity and Capital Resources (Continued)
We also have a line of credit with Bank of America in the amount of
$500,000. Dickerson Wright and his spouse guarantee this line of credit. It is
an unsecured note that is all due in July 2000. The note bears interest at the
prime rate. This line of credit is still in place and has been reduced to a zero
outstanding balance since the end of 1998. We do not intend to use this credit
facility in the future.
We currently intend to use approximately $2 million of the proceeds
from our initial public offering to fund acquisitions. Additionally, we intend
to make acquisitions through other financing mechanisms such as notes and other
instruments. Historically, we have been able to make acquisitions with
approximately 20-50% of the purchase price in cash and the balance in
non-interest bearing purchase notes over extended time frames. Although it is
not our intention to use significant amounts of U.S. Laboratories Inc. stock as
consideration while making acquisitions, from time to time it may be necessary
to do so.
We believe that our available cash and cash equivalents as well as
cash generated from operations will be sufficient to meet our cash requirements
for at least the next twelve months. We are, nevertheless, currently negotiating
with a number of lenders to secure credit facilities that can be used to finance
additional acquisitions. During 1999, we intend to actively continue our search
for acquisitions in order to expand our geographical representation and enhance
our technical capabilities.
Related Party Transactions
During 1999, we signed a three year office building lease with a
related party to lease office space in New Jersey for the companies financial
and mergers and acquisition staff. The rental payments are $1,600 per month plus
utilities.
Management Indebtedness
At September 30, 1999, we had amounts due from a majority stockholder
in the amount of $140,515. This amount was evidenced by a promissory note and
the principal payments are due in three equal annual installments and are
non-interest bearing.
Year 2000 Compliance
We believe that the software packages we currently use and expect to
use, and those used by our vendors prior to the year 2000, are Year 2000
compliant. We do not expect the financial impact of required modifications to
this software will be material to our financial position, cash flows, or results
of operations.
Inflation
Inflation does not currently affect our operations, and we do not
expect inflation to affect them in the foreseeable future.
Subsequent Event
On October 15, 1999, we acquired certain assets and liabilities of an
engineering firm in Naples, Ft. Myers, Florida. The purchase price was of
$100,000 in cash, plus 20,000 shares of U.S. Laboratories Inc. common stock and
notes payable of $100,000. The Agreement provides for the company to reduce
these payments if the seller does not meet a minimum net book value or maintain
certain operating goals.
16
<PAGE>
Backlog
As at September 30, 1999, our backlog has reached approximately $10 million.
This figure has increased approximately 38% or $2.8 million from $7.2 million at
September 30, 1998.
New contract awards to our strategically located subsidiaries in the northeast,
southeast and southwest regions of the United States are combined in the total
backlog.
The following major new contracts cover projects from all the subsidiary
regions.
o The Philadelphia Eagles Football Team's new practice facility
o The Dolphin Mall, retail and entertainment complex near Miami Airport
o Deguardiola Development Ventures Abacoa Town Center in Jupiter, Florida
o The Ocean Spray Distribution Center and various projects for Boyd
Gaming in Las Vegas, Nevada
o The Del Mar Marriott, Sea World Attraction 2000 and Hollywood Water
Quality Improvement Project in California
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained
herein, statements contained in this Form 10-QSB (including statements in the
Year 2000 discussion above) may constitute `forward looking statements' within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements involve a number of risks, uncertainties and other factors that could
cause actual results to differ materially, including the company's failure to
continue to develop and market new and innovative products and services and to
keep pace with technological change; competitive pressures; failure to obtain or
protect intellectual property rights; the ultimate impact of the various Year
2000 issues on the company's business, financial condition or results of
operations; quarterly fluctuations in revenues and volatility of stock prices;
the company's ability to attract and retain key personnel; currency and customer
financing risks; dependence on certain suppliers; changes in the financial or
business condition of the company's distributors or resellers; the company's
ability to successfully manage acquisitions and alliances; legal, political and
economic changes and other risks, uncertainties and factors discussed in the
company's other filings with the Securities and Exchange Commission, and in
materials incorporated therein by reference.
17
<PAGE>
Part II
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Our registration statement on Form SB-2 was made effective by the
Securities and Exchange Commission on February 23, 1999. We sold 1,000,000
units, each consisting of one share of common stock, $.01 par value per share,
and one redeemable warrant to purchase one share of common stock at an exercise
price of $7.80. We sold the units on February 23, 1999. Our managing
underwriters were Cardinal Capital Management, Inc. and Janda & Garrington LLC.
After deducting the underwriting discounts, commissions, and all the offering's
expenses, we received approximately $4,275,000 from the offering.
As of November 10, 1999, we have used the net proceeds as described in
the table below.
Use Amount
Acquisitions $305,000
Repayment of Debt $2,150,000
Working Capital for Operations $650,000
Item 5. Other Information
The Board of Directors authorized a stock buyback program for the
repurchase of up to 100,000 shares of our common stock on November 2, 1999. The
open market transactions will be made from time to time as determined by us.
Repurchases will be made in compliance with applicable rules and regulations
utilizing corporate earnings, and may be discontinued at any time.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
27 Financial Data Schedule
(EDGAR version only)
b. Reports on Form 8-K
The company did not file a Current Report on Form 8-K during
the quarter ended September 30, 1999.
19
<PAGE>
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.
U.S. Laboratories Inc.
Date: November 12, 1999 /S/ Dickerson Wright
------------------------------------
Dickerson Wright, President
Date: November 12, 1999 /S/ Joseph M. Wasilewski
------------------------------------
Joseph M. Wasilewski,
Vice President and Chief Financial Officer
20
<PAGE>
Exhibit Index
Exhibit Number
27 Financial Data Schedule
(EDGAR version only)
21
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF U.S. LABORATORIES, INC. AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
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<PERIOD-END> SEP-30-1999
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<RECEIVABLES> 4019091
<ALLOWANCES> (86246)
<INVENTORY> 478424
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<INCOME-PRETAX> 642735
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