<PAGE>
As filed with the Securities and Exchange Commission on February 5, 1999
File Number 333-66173
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
________________
U.S. LABORATORIES INC.
(Name of small business issuer as specified in its charter)
Delaware 8734 33-0586167
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
7895 Convoy Court, Suite 18
San Diego, California 92111
(619) 715-5800
(Address and telephone number of principal executive offices)
Dickerson Wright, Chief Executive Officer
U.S. Laboratories Inc.
7895 Convoy Court, Suite 18
San Diego, California 92111
(619) 715-5800
(Name, address, and telephone number of agent for service)
Copies to:
Evelyn Arkebauer, Esq. Thomas R. Blake, Esq.
Joseph Lesko, Esq. Camner, Lipsitz and Poller, P.A.
Foley & Lardner 550 Biltmore Way, Suite 700
402 W. Broadway, Suite 2300 Coral Gables, Florida 33134
San Diego, California 92101 (305) 442-4994
(619) 234-6655
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act of 1933, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed under Rule 462(c) under the
Securities Act of 1933, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed under Rule 462(d) under the
Securities Act of 1933, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made under Rule 434, please
check the following box. [ ]
<PAGE>
SUBJECT TO COMPLETION DATED FEBRUARY , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
U.S. LABORATORIES INC.
1,100,000 UNITS
1,100,000 SHARES OF COMMON STOCK AND
REDEEMABLE WARRANTS TO PURCHASE 1,100,000 SHARES
[LOGO]
OF COMMON STOCK
$6.00 PER UNIT
U.S. Laboratories Inc.
7895 Convoy Court, Suite 18
San Diego, California 92111
Telephone number (619) 715-5800
THE OFFERING
<TABLE>
<CAPTION>
PER UNIT TOTAL
----------- ------------
<S> <C> <C>
Public Price $ 6.00 $ 6,600,000
Underwriting discounts $ .60 $ 660,000
Proceeds to U.S. Labs $ 5.40 $ 5,940,000
</TABLE>
The underwriters have the option to purchase an additional 165,000 units,
subject to certain terms and conditions. See "Underwriting."
This is our initial public offering, and no public market currently exists for
our units, the underlying shares of common stock, or the warrants. The offering
price may not reflect the market price of our shares of common stock or warrants
after the offering.
Proposed Trading Symbols
Nasdaq SmallCap Market
Common Stock--USLB
Warrants--USLBW
Our application with Nasdaq is currently pending.
------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE UNITS
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. PROSPECTIVE BUYERS
SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
[CARDINAL CAPITAL MANAGEMENT, INC.]
JANDA & GARRINGTON LLC
[FAS WEALTH MANAGEMENT SERVICES, INC.]
February , 1999
<PAGE>
Inside Cover Page -- Blank
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT
IS IMPORTANT TO YOU. TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND FINANCIAL
STATEMENTS.
THE COMPANY
U.S. Laboratories Inc. is a Delaware corporation that offers quality
construction control services from conception to completion of a building
project in order to verify that the project conforms to construction
specifications. We analyze the soil that will be built upon to determine
whether it can hold the structure. We also analyze the structural strength of
the concrete, masonry, and steel materials to be used during construction. We
use universally recognized test procedures and laboratory equipment to
perform the analyses, and all construction in the field is verified by our
licensed inspectors. Our projects involve every type of construction:
high-rises, low-rises, shopping centers, residential, schools, hospitals,
bridges, tunnels, highways, stadiums, airports, military facilities, and many
other types of public and private improvements. We work for government
agencies, real estate developers, general contractors, school districts, and
other types of landowners.
Since 1993, we have implemented a strategy designed to establish a national
infrastructure of offices and diversify our service offerings. We believe that
we are achieving these objectives by pursuing strategic acquisitions, targeting
premium national accounts, increasing infrastructure accounts, balancing public
sector and private sector services, and expanding our geographic markets.
A key component of our growth is based on our belief that the industry for
engineering services is fragmented and that there are opportunities to acquire
local engineering services companies. We estimate that there are 3,500 companies
whose businesses are complementary to ours and believe that the expertise we
have developed in identifying, completing, and integrating acquisitions provides
us with a competitive advantage in entering new geographical markets. We plan to
apply our expertise in assimilating acquired companies' personnel and branch
operations into our existing infrastructure and expanding acquired companies'
service and product offerings to existing clients. This will strengthen our
position as an industry consolidator through acquisitions that meet our
operating, financial, and geographic criteria. Although we frequently
investigate potential acquisitions in the industry, we are not currently engaged
in material negotiations nor do we have any agreements to acquire another
business.
U.S. Labs currently services the northeast, southwest, and southeast
regional engineering and building construction inspection markets through its
subsidiaries. In California, we operate San Diego Testing Engineers, Inc., and
Los Angeles Testing Engineers, Inc. In Florida, we operate Professional
Engineering & Inspection Company, Inc. and in New Jersey, we operate U.S.
Engineering Laboratories, Inc. We wholly own all our subsidiaries reflected in
the table below.
[CHART]
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Units Offered. . . . . . . . . . . . . . . . 1,100,000 units at $6.00 per
unit, each unit consisting of
one share of common stock and
one warrant to purchase one
share of common stock for
$7.80 per share
Common Stock Offered . . . . . . . . . . . . 1,100,000 shares
Common Stock to be outstanding
after the offering . . . . . . . . . . . . . 3,300,000 shares
Shares Excluded from Common Stock to
be Outstanding after the Offering. . . . . . The common stock to
be outstanding after the
offering is based on shares
outstanding as of December
31, 1998. This number
excludes:
- 1,100,000 shares of common
stock issuable upon the
exercise of the warrants
issued to the purchasers of
the units in the offering at
an exercise price of $7.80;
- 110,000 shares of common
stock underlying the warrants
comprising a portion of the
units and 110,000 shares of
common stock comprising a
portion of the units, which
units are issuable upon the
exercise of the underwriters'
warrants at an exercise price
equal to 143% of the initial
public offering price of the
units offered hereby;
- 150,000 warrants issued to
our various employees,
exercisable at $6.00 per
share; and
- 395,000 shares of common
stock subject to outstanding
options under our 1998 Stock
Option Plan, exercisable at
$6.00 or $6.60 per share. See
"Capitalization" and
"Description of Securities."
Warrants Offered . . . . . . . . . . . . . . 1,100,000
Exercise Terms . . . . . . . . . . . . . . . Exercisable, at any time,
each to purchase one share of
common stock at a price of
$7.80, subject to adjustment
in certain circumstances. See
"Description of Securities."
Expiration Date . . . . . . . . . . . . . . . February __, 2004 (five years
following the date of this prospectus)
Redemption . . . . . . . . . . . . . . . . . The warrants are redeemable
by us at any time, upon
notice of not less than 30
days, at a price of $.01 per
warrant, if the closing bid
quotation of the common stock
on all 20 trading days ending
on the third trading day
prior to the day on which we
give notice of redemption has
been at least 200% (currently
$12, subject to adjustment)
of the public offering price.
The warrants will be
exercisable until the close
of business on the date fixed
for redemption. See
"Description of Securities."
Use of Proceeds. . . . . . . . . . . . . . . Repay lines of credit,
current and long-term
portions of notes payable,
acquisitions, and working
capital. See "Use of
Proceeds."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Nasdaq SmallCap
Symbol . . . . . . . . . . . . . . . . . . . USLB for the common stock and
USLBW for the warrants
</TABLE>
RECENT DEVELOPMENTS
On January 1, 1998, we purchased all of the remaining issued and
outstanding stock of Professional Engineering, San Diego Testing, and U.S.
Engineering held by certain of our employees and managers of our subsidiaries in
exchange for shares of our common stock. As a result of these transactions,
439,664 of our shares of common stock were issued to these employees and
managers, and we increased our percentage ownership of Professional Engineering,
San Diego Testing, and U.S. Engineering to 100%.
On March 25, 1998, one of our subsidiaries, Wyman Testing, acquired
substantially all the assets and certain liabilities of Wyman Enterprises, Inc.,
an engineering inspection and testing business in southern California, for a
purchase price of $830,620. On May 30, 1998, Wyman Testing merged into San
Diego Testing, with each share of Wyman Testing stock being converted into 1/2
share of San Diego Testing stock.
On May 30, 1998, we split our common stock by converting the 100 shares of
common stock that were issued and outstanding prior to the purchase into
2,032,400 shares of common stock. In addition, on November 9, 1998, we effected
a one-for-0.8413 reverse stock split. The purpose of these stock splits was to
adjust the capitalization of U.S. Labs to have 2,200,000 shares outstanding in
order to facilitate the offering of 1,100,000 units. We replaced the
outstanding options and warrants with new options and warrants in connection
with the stock splits.
Finally, our directors and stockholders approved an amended and restated
Certificate of Incorporation, increasing the number of authorized shares of our
common stock from 3,000 shares to 50,000,000 shares and authorizing 5,000,000
shares of blank-check preferred stock. See "Description of Securities."
RISK FACTORS
The units involve a high degree of risk and you should carefully consider
the factors described under the heading "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
We have set forth in the table, for the periods and at the dates indicated,
certain of our summary financial information. This data is derived from, and you
should read it in conjunction with, our financial statements, including the
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA
The pro forma statement of operations data in the table below presents
the accounts of U.S. Labs and Wyman Testing as if the acquisition of Wyman
Testing took place on January 1, 1997 and as if the purchase of the minority
interest of our subsidiaries took place on January 1, 1997.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Years Ended December 31, (unaudited)
---------------------------------------- -----------------------
Pro Forma
1996 1997 1997 1997 1998
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue $4,963,090 $7,766,414 $10,968,403 $5,507,806 $8,478,329
Cost of goods sold 2,635,263 4,476,952 6,158,775 3,158,483 4,432,509
---------- ---------- ----------- ---------- ----------
Gross profit 2,327,827 3,289,462 4,809,628 2,349,323 4,045,820
Selling, general & administrative
expenses 1,853,318 2,431,770 3,711,161 1,704,547 3,215,256
---------- ---------- ----------- ---------- ----------
Income from operations 474,509 857,692 1,098,467 644,776 830,564
---------- ---------- ----------- ---------- ----------
Interest expense (84,390) (130,605) (160,026) (90,520) (118,814)
Interest income 8,430 7,277 7,277 4,371 9,252
Forgiveness of note receivable (9,976) --- --- 1,738 ---
Other income --- 100,000 100,000 100,000 ---
Other expense --- (100,000) (100,000) (100,000) ---
Gain (loss) on sale of fixed asset (3,873) 4,912 16,912 --- ---
Rental income 4,598 25,160 25,160 20,918 13,048
Gain on sale of minority interest --- 25,229 25,229 25,229 ---
Income before provision for income taxes and
minority interest 389,298 789,665 1,013,019 606,512 734,050
Provision for income taxes 202,921 345,256 381,902 264,545 308,301
---------- ---------- ----------- ---------- ----------
Income before minority interest 186,377 444,409 631,117 341,967 425,749
Minority interest (33,664) (80,253) --- (62,851) ---
---------- ---------- ----------- ---------- ----------
Net income $ 152,713 $ 364,156 $ 631,117 $ 279,116 425,749
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Basic income per share $ 0.07 $ 0.17 $ 0.29 $ 0.13 $ 0.19
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Diluted income per share $ 0.07 $ 0.17 $ 0.29 $ 0.13 $ 0.19
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Weighted average shares outstanding 2,200,000 2,200,000 2,200,000 2,200,000 2,200,000
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
6
<PAGE>
CONSOLIDATED BALANCE SHEET DATA
The as adjusted column in the table below gives effect to the sale of
1,100,000 units offered hereby at the offering price of $6.00 per unit and
the application of the net proceeds therefrom, after deducting the
underwriting discount and estimated offering expenses payable by us. See "Use
of Proceeds."
<TABLE>
<CAPTION>
Actual As Adjusted
---------- -----------
<S> <C> <C>
Cash . . . . . . . . . . . . . . . $ 144,991 $3,495,338
Working capital. . . . . . . . . . 375,366 4,733,366
Total assets . . . . . . . . . . . 6,216,205 9,566,552
Total long-term debt . . . . . . . 1,493,790 473,790
Retained earnings. . . . . . . . . 695,161 695,161
Total stockholders' equity . . . . $1,687,413 $7,065,413
</TABLE>
7
<PAGE>
RISK FACTORS
YOUR PURCHASE OF THE UNITS INVOLVES A SIGNIFICANT AND SUBSTANTIAL NUMBER OF
SIGNIFICANT RISKS, WHICH YOU SHOULD CONSIDER PRIOR TO MAKING A DECISION TO
PURCHASE THE UNITS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS
WELL AS OTHER RISK FACTORS IN THIS PROSPECTUS.
POTENTIAL RISK OF LIMITED GROWTH OF U.S. LABS DUE TO LACK OF ACQUISITIONS
One of our primary strategies is to pursue the acquisition of other
companies or assets that either complement or expand our existing business.
We cannot predict the likelihood of a material acquisition being completed in
the future. If we cannot identify and complete acquisitions in the future,
this may have an adverse affect on our future operations and financial
results. See "Business - Business Strategy."
POTENTIAL PROBLEMS INTEGRATING ACQUISITIONS
Although we have successfully completed several acquisitions, there can
be no assurance that we will profitably manage additional companies or
successfully integrate these additional companies into our operations.
Acquisitions may involve a number of special risks, including adverse effects
on our reported operating results, substantial burdens on our management
resources and financial controls, dependence on retention and hiring of key
personnel, risks associated with unanticipated problems or legal liabilities,
and amortization of acquired intangible assets, some or all of which could
have a material adverse effect on our operations and financial performance.
See "Business - Business Strategy."
MANAGEMENT DISCRETION IN THE APPLICATION OF A SUBSTANTIAL PERCENTAGE OF
NET PROCEEDS FOR ACQUISITIONS
U.S. Labs intends to use approximately 46% of the net proceeds from the
offering for acquisitions. This means that our management will have
discretion in the selection and structure of any acquisitions, and therefore
in the application of these proceeds. See "Use of Proceeds."
POTENTIAL LIABILITY FROM AND INSURANCE FOR OUR ENGINEERING SERVICES
Due to the nature of our engineering advisory services, we are exposed
to a risk of professional liability for structural failure, property damage,
personal injury, or economic loss that may substantially exceed the fees
derived from these services. We maintain various insurance policies that
cover these risks. Because customers may require that we maintain liability
insurance, the possible future unavailability of this insurance could
adversely affect our ability to compete effectively. See "Business -
Insurance."
POTENTIAL ADVERSE EFFECT ON OUR BUSINESS FROM THE FAILURE TO ESTIMATE RESOURCES
REQUIRED FOR FIXED-PRICE CONTRACTS
If we fail to accurately estimate the resources required for a
fixed-price project or fail to complete our contractual obligations in a
manner consistent with the project plan upon which its fixed-price contract
was based then our results of operations, and business and financial
condition, could be adversely affected. For example, we may establish a price
before the design specifications are finalized, which could result in a fixed
price that turns out to be too low and therefore adversely affects our
business, financial condition, and results of operations. See "Business -
Contractual Arrangements."
POTENTIAL ADVERSE EFFECT ON OUR BUSINESS FROM THE COMMITMENT OF UNANTICIPATED
ADDITIONAL RESOURCES TO PROJECTS
We may be required to commit unanticipated additional resources to
complete certain projects, which may negatively affect the profitability
generated on such projects. We may have to revise project plans during the
project or change project managers to ensure projects are completed on
schedule. Failure to anticipate these needs could have a material adverse
effect on our business, financial condition, and results of operations. See
"Business - Contractual Arrangements."
8
<PAGE>
DEPENDENCE OF U.S. LABS ON A LIMITED NUMBER OF KEY PERSONNEL
We depend on the efforts and abilities of our senior management,
particularly those of Dickerson Wright and the key officers at our
subsidiaries to manage our company in a way that provides profitability and
continued growth. The loss of any of these key officers could have a material
adverse affect on our business. See "Management" and "Business - Insurance."
POTENTIAL NEGATIVE EFFECT ON OUR OFFERING DUE TO THE LIMITED UNDERWRITING
HISTORY OF OUR UNDERWRITERS
The managing underwriter in this offering, Cardinal Capital Management,
Inc., has not participated previously in any firm commitment underwritten
offerings. You should consider the underwriters' lack of experience in
considering an investment in our units. See "Underwriting."
OUR REVENUES AND PROFITS ARE SUBJECT TO SEASONAL FLUCTUATIONS
Due primarily to more holidays and inclement weather conditions, our
operating results during January, February, and December are generally lower
in comparison to other months. This means that our revenues and profits in
the quarters ending December 31 and March 31 may be lower than in our other
quarters. See "Business - Seasonal Factors."
ADDITIONAL FINANCING MAY NOT BE AVAILABLE IF REQUIRED
We believe that there will be adequate funds available from the net
proceeds of the offering and from our operating cash to fund our business
operations and obligations at least through the next twelve months. If
additional funds are not available when we need them, your investment in the
units may be adversely affected because we will not be able to grow through
acquisitions or internal operations. Either of these situations may adversely
affect our financial results and therefore cause the trading price of our
common stock and warrants to decrease. Note, however, that we may be able to
issue additional securities or borrow from banks to obtain funds. If we issue
additional shares of our common stock, you will suffer a dilutive effect on
your percentage ownership.
POTENTIAL LACK OF LIQUIDITY FOR OUR SECURITIES DUE TO LIMITED PUBLIC MARKET
Prior to the offering, there has been no public trading market for our
securities and we cannot assure you that a liquid market will develop or be
sustained after the closing of the offering. See "Description of Securities."
DETERMINATION OF OUR OFFERING PRICE IS AN ESTIMATE BECAUSE OF LACK OF CURRENT
TRADING MARKET TO ESTABLISH FAIR MARKET VALUE OF UNITS
Because there is no trading market to establish the fair market value of
our units, the price you paid may be below or above the price established once
our securities start trading in the market. The risk for you is that we set the
price of our units above the trading price that will develop in the market for
our common stock and warrants, and therefore you will suffer an immediate
loss in your investment. See "Underwriting."
POTENTIAL LOSS OF APPRECIATION IN OUR COMMON STOCK FROM THE REDEMPTION OF
OUR WARRANTS
We may redeem the warrants, at any time, upon notice of not less than 30
days, at a price of $.01 per warrant, provided that the closing bid quotation of
the common stock on all 20 trading days ending on the third trading day prior to
the date the warrant has been called for redemption is at least 200% (currently
$12, subject to adjustment) of the public offering price. The warrants will be
exercisable until the close of business on the date fixed for redemption. Since
we presently intend to call the warrants at the earliest possible date, you
should assume that we would call the warrants for redemption if the criteria
were met. This right will, if exercised, force you to either exercise your
warrants at a possibly unfavorable time or to lose the benefits that may accrue
to them as a result of the increase, if any, in the market price of our common
stock. See "Description of Securities."
9
<PAGE>
POTENTIAL ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK BY OUR BOARD OF
DIRECTORS
Our corporate documents authorize our board of directors to issue shares
of preferred stock without the approval of our common stockholders. This
means that our board may approve the issuance of preferred stock that would
grant dividend preferences, liquidation preferences, voting or other rights
to preferred stockholders that are greater than the rights you have as a
common stockholder. This also means that our board may issue preferred stock
to delay or prevent a change in control of U.S. Labs, even if a change in
control would result in you receiving payment for your shares above their
then current market value. See "Description of Securities."
POTENTIAL LACK OF LIQUIDITY IN OUR COMMON STOCK DUE TO LOW OFFERING PRICE OF
UNITS AND PENNY STOCK REGULATIONS
Because our units are being offered at $6.00 per unit, there is a risk
that the initial trading price of our common stock may be close to $5.00 per
share. If our common stock trades below $5.00 per share, and it is no longer
quoted on The Nasdaq SmallCap Market(SM), it may become subject to the penny
stock regulations. If our shares are subject to the penny stock rules, the
market liquidity for them could be adversely affected because the rules
require broker-dealers to make a special suitability determination for the
purchaser and have received the purchaser's written consent to the
transaction prior to sale. This makes it more difficult administratively for
broker-dealers to buy and sell stock subject to the penny stock regulations
on behalf of their customers. Consequently, the rule may affect the ability
of broker-dealers to sell our shares or warrants and may affect the ability
of holders to sell them in the secondary market. See "Description of
Securities."
LACK OF CURRENT PROSPECTUS MAY PREVENT YOU FROM EXERCISING OUR WARRANTS
We have undertaken to maintain a current registration statement that will
permit the public sale of the common stock underlying the warrants upon exercise
of the warrants. The maintenance of a current registration statement could
result in substantial expense to us. We cannot assure you that we will maintain
a current prospectus covering the shares of common stock underlying the
warrants. You will have the right to exercise the warrants for the purchase of
shares of common stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states.
LIMITED STATE REGISTRATION MAY PREVENT EXERCISE OF WARRANTS
Although we intend to qualify the shares of common stock underlying the
warrants for sale in those states where the securities are offered, except when
to do so would require us to qualify as a foreign corporation, there is no
assurance that we will obtain these qualifications. Moreover, even if such
qualifications are obtained, if you subsequently move to a state in which shares
of common stock underlying the warrants are not qualified, you may not have the
right to exercise the warrants. Consequently, you may be deprived of any value
if a current prospectus covering the shares underlying the warrants is not kept
effective or if such underlying shares are not or cannot be registered in the
applicable state.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
SPECIFIED IN THE FORWARD-LOOKING STATEMENTS BECAUSE OF CERTAIN FACTORS,
INCLUDING THOSE SPECIFIED IN THE RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
YOU MUST BE PREPARED FOR THE POSSIBLE LOSS OF YOUR ENTIRE INVESTMENT IN OUR
COMPANY.
10
<PAGE>
USE OF PROCEEDS
After deducting the underwriting discounts, commissions, and all the
offering's expenses, we expect to receive approximately $5,378,000 from the
offering.
We have two lines of credit and a note payable from two separate lenders
with commitments in the aggregate of $2,200,000. We have a $500,000 demand loan
with North County Bank that is due in May 1999.
We also owe $1,180,000 on a note payable to North County Bank that is
due over five years beginning in January 1999. The proceeds from this loan
were used to repay two separate credit facilities in the amount of $1.55
million, and the balance was used for working capital. We also have a line of
credit with Bank of America of $500,000 that is due July 2000. All of the
borrowings accrue interest at each bank's prime rate. We will use the
offering's proceeds to repay outstanding balances on these borrowings. We
estimate that at the closing of the offering the outstanding balances owed on
these borrowings will be $1,905,000.
We will also use the proceeds to repay $245,000 of the debt that was
incurred in connection with the acquisition of substantially all of the
assets and certain liabilities of Wyman Enterprises, Inc. Of this amount, we
owe $37,500 to Donald Alford, who is presently an officer and director of
U.S. Labs. Approximately $150,000 of these notes mature the earlier of
October 1, 1999 or 30 days following the offering and the remaining $20,000
is payable on demand. The balance is due in four equal annual payments of
$75,000 beginning in March 1999. These notes are non-interest bearing.
Pending application of the proceeds, we intend to invest the net proceeds
in short-term, interest-bearing securities, including money market funds.
In general, the net proceeds will be used as described below.
<TABLE>
<CAPTION>
Use Dollar Amount Percentage
- --- ------------- ----------
<S> <C> <C>
Bank of America loan, maturity July 2000, accruing interest at
the prime rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000 6%
North County Bank loan, maturity May 1999, accruing interest at
the prime rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 425,000 8%
North County Bank loan, maturity December 2003, accruing interest
at the prime rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,180,000 22%
Wyman Enterprises, Inc., notes due March 1999, accruing no interest. . . . . . . . . $ 75,000 1%
Wyman Enterprises, Inc., note due the earlier of the date 30 days
after our public offering or October 1999, accruing no interest. . . . . . . . . . . $ 150,000 2%
Wyman Enterprises, Inc., demand note, accruing no interest . . . . . . . . . . . . . $ 20,000 1%
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000 46%
Working Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 728,000 14%
----------- ---
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,378,000 100%
----------- ---
----------- ---
</TABLE>
We believe that our available cash and cash equivalents as well as cash
generated from operations and our available credit line will be sufficient to
meet our cash requirements for at least the next twelve months.
11
<PAGE>
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock. We do not
anticipate paying any cash dividends in the foreseeable future. Payments of
future dividends, if any, will be at the discretion of our Board of Directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs, and plans for expansion.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth, at September 30, 1998:
- our actual capitalization and
- as adjusted to give effect to our sale of 1,100,000 units offered
hereby, at an offering price of $6.00 per unit and the application of
the estimated net proceeds therefrom after deducting the estimated
underwriting discounts and commissions and other estimated offering
expenses. See "Use of Proceeds."
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included elsewhere in this prospectus.
The following table is based on shares outstanding as of September 30,
1998. The following table excludes:
- 1,100,000 shares of common stock issuable upon the exercise of the
warrants issued to the purchasers of the units in the offering at an
exercise price of $7.80;
- 110,000 shares of common stock underlying the warrants comprising a
portion of the units and 110,000 shares of common stock comprising a
portion of the units, which units are issuable upon the exercise of
the underwriters' warrants at an exercise price equal to 143% of the
initial public offering price of the units offered hereby;
- 150,000 warrants issued to our various employees, exercisable at $6.00
per share; and
- 395,000 shares of common stock subject to outstanding options under
our 1998 Stock Option Plan, exercisable at $6.00 or $6.60 per share.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------
Actual As Adjusted
---------- -----------
<S> <C> <C>
Lines of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 583,660 $ 0
Current portion of notes payable . . . . . . . . . . . . . . . . . . . . . . . 423,993 0
Notes payable, net of current portion. . . . . . . . . . . . . . . . . . . . . 1,245,000 225,000
---------- ----------
Stockholders' equity
Preferred Stock, $0.01 par value; 5,000,000
shares authorized, none issued and outstanding, actual or as adjusted. . . . . --- ---
common stock, $0.01 par value, 50,000,000 shares authorized;
2,200,000 actual shares issued and outstanding; 3,300,000 as
adjusted shares issued and outstanding(1). . . . . . . . . . . . . . . . . . . 22,000 33,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 970,252 6,337,252
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695,161 695,161
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 1,687,413 7,065,413
---------- ----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,940,066 $7,290,413
---------- ----------
---------- ----------
</TABLE>
12
<PAGE>
DILUTION
Our net tangible book value as of September 30, 1998 was $132,526, or
$0.06 per share. Net tangible book value per share of common stock represents
the amount of our total tangible assets less our total liabilities divided by
the number of shares of the common stock outstanding.
After giving effect to the sale of the 1,100,000 shares of the common
stock underlying the units offered hereby at a public offering price of $6.00
per unit, and after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book value as of
September 30, 1998 was $5,510,526 or $1.67 per share of common stock. This
represents an immediate increase in net tangible book value per share of
common stock of $5,378,000 or $1.61 per share to existing stockholders and
immediate dilution in net tangible book value of $4.33 per share to you. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................................... $6.00
Net tangible book value per share of common stock at September 30, 1998.... $0.06
Increase per share attributable to new investors........................... $1.61
-----
Net tangible book value per share of common stock after the offering............ $1.67
-----
Dilution per share to new investors(1).......................................... $4.33
-----
-----
Percent of dilution............................................................. 72%
-----
-----
</TABLE>
___________________
(1) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $4.16.
The following table summarizes, as of September 30, 1998, the number of
shares of common stock purchased from us, the total consideration paid and the
average price per share paid by the existing stockholders and by you
(before deduction of underwriting discounts and commissions and estimated
offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------- --------------------- Average Price
Number Percent Amount Percent per Share
---------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 2,200,000 67% $ 992,252 13% $0.45
New investors 1,100,000 33% $6,600,000 87% $6.00
--------- ---- ---------- ----
Total 3,300,000 100% $7,592,252 100%
--------- ---- ---------- ----
--------- ---- ---------- ----
</TABLE>
All of the above computations assume no exercise of 1,100,000 shares of
common stock issuable upon the exercise of the warrants issued to the purchasers
of the units in the offering at an exercise price of $7.80 and 110,000 shares of
common stock underlying the warrants comprising a portion of the units and
110,000 shares of common stock comprising a portion of the units, which units
are issuable upon the exercise of the underwriters' warrants at an exercise
price equal to 143% of the initial public offering price of the units offered
hereby. All of the above computations also assume no exercise of outstanding
options or warrants to purchase common stock. As of September 30, 1998, options
to purchase 395,000 shares of common stock were outstanding at a weighted
average exercise price of approximately $6.22 per share under our 1998 Stock
Option Plan and 150,000 employee warrants were outstanding at an exercise price
of $6.00 per share. If any options or warrants become vested and are exercised,
you will suffer further dilution.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
U.S. Labs intends to continue to grow through internal expansion and
acquisitions. We acquire businesses that have a history of positive performance
and have experienced key management personnel operating the business. This
allows us to obtain a foothold in the marketplace and add competent
professionals to our staff. After an acquisition, we immediately provide
executive administrative support in the area of sales, human resources, and
accounting functions. In some cases, the acquisition is integrated into another
of our operating units. Historically, our acquisitions have contributed
increased sales volume, and in many cases, the acquisitions have not increased
our fixed costs. This has resulted in substantial increases in our incremental
profit margin.
In addition to growing through acquisitions, we plan to continue to grow
internally by increasing our market share in different geographical areas of the
United States and by balancing the percentage of our services provided between
the government sector and private industry. With this diverse geographical
market and customer base, we attempt to insulate ourselves against economic
downturns.
On June 6, 1998, the President signed the Transportation Equity Act for
the 21st Century, which authorized approximately $204 billion for
transportation infrastructure projects over the next six years. Of this
amount, approximately $165 billion has been earmarked for highway
improvements. Management estimates that approximately 3% percent of this $165
billion, or $4.9 billion, will be spent on engineering services. We
understand that there is some risk that future Congresses may not appropriate
these funds, but the legislation contains provisions that are designed to
prevent this. Additionally, the amount appropriated may change due to
fluctuations in revenue flow into the Highway Trust Fund.
We believe that we will receive additional work from the approximately
$165 billion authorized under the TEA-21 for highway construction and related
services. We have a strong presence in California, which expects to receive
$2.5 billion in funds over the next six years, or $800 million more than
under the previous legislation. Additionally, our laboratories in California
and New Jersey are certified by the American Association of State Highway &
Transportation Officials. This certification is often required to bid on
larger projects. However, we have no guaranty that we will secure contracts
funded by the TEA-21. See "Business - Description of Engineering Services -
Infrastructure Engineering Services."
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from our consolidated statement of operations, expressed as a
percentage of revenue. We cannot assure you that the trends in revenue growth
or operating results shown below will continue in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------- --------------------
PRO FORMA
1996 1997 1997 1997 1998
------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold. . . . . . . . . . . . . . . . . . 53.1 57.6 56.2 57.3 52.3
----- ----- ----- ----- -----
Gross profit. . . . . . . . . . . . . . . . . . . . . 46.9 42.4 43.8 42.7 47.7
Selling, general & administrative expenses. . . . . . 37.3 31.4 33.8 31.0 37.9
----- ----- ----- ----- -----
Income from operations. . . . . . . . . . . . . . . . 9.6 11.0 10.0 11.7 9.8
Interest expense. . . . . . . . . . . . . . . . . . . 1.7 1.7 1.5 1.6 1.4
Interest income . . . . . . . . . . . . . . . . . . . .2 .1 .1 -- 0.1
Forgiveness of note receivable. . . . . . . . . . . . (.2) -- -- -- --
Other income. . . . . . . . . . . . . . . . . . . . . -- 1.3 0.9 1.8 --
Other expense . . . . . . . . . . . . . . . . . . . . -- (1.3) (0.9) (1.8) --
Gain (loss) on sale of fixed asset. . . . . . . . . . (.1) .1 .2 -- --
Rental income . . . . . . . . . . . . . . . . . . . . .1 .3 .2 0.4 0.1
Gain on sale of minority interest . . . . . . . . . . -- .3 .2 0.5 --
Income before provision for income taxes
and minority interest . . . . . . . . . . . . . . . . 7.9 10.1 9.2 11.0 8.6
Provision for income taxes. . . . . . . . . . . . . . 4.1 4.4 3.5 4.8 3.6
Income before minority interest . . . . . . . . . . . 3.8 5.7 5.7 6.2 5.0
Minority interest . . . . . . . . . . . . . . . . . . .7 1.0 -- 1.1 --
----- ----- ----- ----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . 3.1% 4.7% 5.7% 5.1% 5.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
AMORTIZATION OF GOODWILL
On January 1, 1998, we issued 439,664 shares of our common stock to
minority interest holders in exchange for all of their shares in our
subsidiaries. In connection with this purchase, we recorded additional goodwill
of $194,924.
On March 25, 1998, we acquired all of the assets and certain liabilities
of Wyman Enterprises, Inc. for $830,620. We 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.
The net affect of these two transactions is to increase the amortization of
goodwill, which is a non-cash charge, and which will reduce future net income
after depreciation and amortization by $47,075 annually over the next fifteen
years.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE. Revenue for the nine months ended September 30, 1998 was
$8,478,329, an increase of 54% over the same period last year. The increase
was primarily attributable to internal growth and marketing, and to a lesser
extent, to the acquisition of Wyman Enterprises, Inc. in late March 1998.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1998 was
$4,045,820, an increase of 72% over the same period last year, a portion of
which was attributable to the acquisition of Wyman Enterprises, Inc., and the
balance of which was due to increased volume through internal growth and
marketing. Our gross margins were up for the nine months ended September 30,
1998 as a result of the economies associated with the higher sales volume.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. Income
before provision for income taxes and minority interest for the nine months
ended September 30, 1998 was $734,050, up 21% from the same period last year.
The income before provision for income taxes and minority interest was 8.6% of
sales versus 11% for the same period in the prior year. This percentage became
more favorable during the summer and fall months before dropping off again in
the holiday season.
INTEREST EXPENSE. Interest expense was $118,814 for the nine months ended
September 30, 1998 or a 31% increase over the same period in the prior year.
This increase was due primarily to increased debt associated with business
acquisitions and the use of operating lines of credit.
NET INCOME. Net income for the nine months ended September 30, 1998 was
$425,749, a 53% increase over the same period ended September 30, 1997. The
increase was due primarily to the higher sales volume and the associated
efficiencies. A portion of the increase in sales volume was attributable to the
acquisition of Wyman Enterprises, Inc.
YEARS ENDED 1997 AND 1996
REVENUE. Revenue for the year ended 1997 was $7.77 million, an increase
of 56% over 1996. This increase of revenues was due primarily to the
recognition of a full year's revenues of San Diego Testing in 1997, which was
acquired in late 1996. Other factors contributing to the increase in revenues
were internal growth through marketing efforts and the favorable business
climate.
GROSS PROFIT. Gross profit for the year ended 1997 was $3.3 million, an
increase of 41% over 1996. This increase in gross profit was due primarily to
the recognition of revenues from San Diego Testing in 1997. The gross profit
margin was down approximately 4% as a percentage of sales due to more
aggressive marketing and pricing tactics employed in 1997 as well as costs
associated with the startup of new operations in Florida. Although the gross
margins were down as a result of these tactics, the operating income was up
as a percentage of sales due to the economies of scale associated with the
increased volume.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. Income
before provision for income taxes and minority interest in 1997 was $789,665,
an increase of 103% over 1996. The increase in profits was due primarily to
the economies associated with the higher sales volume as well as to the
recognition of revenues from San Diego Testing for the full year in 1997.
INTEREST EXPENSE. Interest expense was $130,605 in 1997, an increase of 55%
over 1996. This increase was due primarily to increased debt associated with
business acquisitions and the use of operating lines of credit.
NET INCOME. Net income for 1997 was $364,156, an increase of 138% over
1996. The increase was due primarily to the recognition of net income from
San Diego Testing for the full year in 1997 and to the greater sales volume
and the resulting economies of scale.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, our net cash provided
by operating activities was $392,901, an increase of 39% over the same period
in 1997. In 1997, our net cash provided by operating activities was $267,586,
an increase of 400% over 1996. The increase in cash provided by operations in
the nine months ended September 30, 1998, compared to the same period in 1997
was due primarily to our higher earnings and improved working capital. The
increase in fiscal 1997 compared to 1996 was due primarily to the same
factors. The improved working capital primarily reflected an improvement in
the days sales held in receivables, including collections of retentions on
certain federal projects nearing completion, and, to a lesser extent, higher
trade payables.
We entered into a $1.7 million line of credit with North County Bank in May
1998. In October 1998, the $1.7 million line of credit was refinanced into a
$1,200,000 note payable and a $500,000 line of credit. The $500,000 line of
credit expires in May 1999. The note payable is due over a sixty-month period,
beginning in January 1999, with principal reductions scheduled at the rate of
$20,000 per month. At December 31, 1997, we had borrowings under other lines of
credit that were paid in full with this new line of credit in May 1998. There
was approximately $180,000 available to us under the new line of credit as of
September 30, 1998.
This new credit agreement is personally guaranteed by Dickerson Wright and
his spouse, and secured by our assets, including our accounts receivable. The
maximum amount of the loan may not exceed 75% of our accounts receivable that
are less than 90 days old. Interest on the loan is payable on a monthly basis at
the prime rate. Further, the loan provides that we must meet certain covenants
relating to, among other things, financial performance and the maintenance of
certain financial ratios.
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. There is $235,000 available on this line as of September 30, 1998.
As set forth in Use of Proceeds, we plan to pay down our interest-bearing
lines of credit to zero. This will reduce our interest expense by approximately
$125,000 annually, which will positively impact income before provision for
income taxes.
We also have commercial debt that is collateralized by certain equipment in
the amount of $203,258 and $351,598 at December 31, 1997 and September 30, 1998,
respectively.
During the nine months ended September 30, 1998, we invested $830,620 in
cash and notes and in the purchase of capital assets, including acquisitions. We
did not purchase any capital assets or make any acquisitions in 1997. We
invested $62,500 in the purchase of capital assets, including acquisitions, in
1996.
During the nine months ended September 30, 1998, our net cash provided by
financing activities was $193,426, which primarily consisted of drawing down an
operating line of credit. For the same period in 1997, we used net cash of
$19,246 for financing activities, which primarily consisted of repaying an
operating line of credit. In 1997, we used net cash of $123,947 for
financing activities, which again primarily consisted of repaying an operating
line of credit. Our net cash provided by financing activities was $67,422 in
fiscal 1996, which primarily consisted of drawing down an operating line of
credit.
Accounts receivable as a percentage of sales increased from December 31,
1997 to September 30, 1998 due to the acquisition of Wyman Enterprises, Inc.
Generally accepted accounting principles required us to add the accounts
receivable for Wyman Enterprises, Inc., but did not allow us to add the sales of
Wyman Enterprises, Inc. The allowance for doubtful accounts decreased from
December 31, 1997 to September 30, 1998 due to the write-off of certain accounts
early in this fiscal year.
We currently intend to use approximately $2.5 million of the proceeds to
fund acquisitions. Additionally, we intend to make acquisitions through other
financing mechanisms such as notes and other instruments. Historically, we
17
<PAGE>
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.
We believe that our available cash and cash equivalents as well as cash
generated from operations and our available credit line will be sufficient to
meet our cash requirements for at least the next twelve months. During 1999, we
intend to actively continue our search for acquisitions to expand our
geographical representation and enhance our technical capabilities.
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. See "Business - Information Systems and the Year 2000."
INFLATION
Inflation does not currently affect our operations, and we do not expect
inflation to affect them in the foreseeable future.
18
<PAGE>
BUSINESS
OVERVIEW
U.S. Laboratories Inc. is a Delaware corporation that offers quality
construction control services from conception to completion of a building
project in order to verify that the project conforms to construction
specifications. We analyze the soil that will be built upon to determine
whether it can hold the proposed structure. We also analyze the structural
strength of the concrete, masonry, and steel materials to be used during
construction. We use universally recognized test procedures and laboratory
equipment to perform the analyses, and all construction in the field is
verified by our licensed inspectors. Our projects involve every type of
construction: high-rises, low-rises, shopping centers, residential, schools,
hospitals, bridges, tunnels, highways, stadiums, airports, military
facilities, and many other types of public and private improvements. We work
for government agencies, real estate developers, general contractors, school
districts, and other types of landowners.
INDUSTRY OVERVIEW
Numerous specialty services are provided to the construction and the
related engineering and architectural design industries. We provide services
in the areas of construction materials testing and engineering, geotechnical
engineering and consulting services, and infrastructure engineering services,
and to a lesser extent, environmental assessment services.
Construction of a significant structure or building improvement
represents a major permanent investment for any owner, whether commercial or
governmental. The primary driver for materials testing, inspection services,
and soil and earth analysis is an owner's concern to protect his or her
investment through quality construction materials and workmanship that meet
design specifications. Government agencies, architects, and engineering firms
require that the quality of construction materials and on-site soil
conditions be monitored in order to verify compliance with the project design
conditions.
19
<PAGE>
Government agencies, owners, contractors, architects, and engineers hire
materials testing and geotechnical consultants to test materials such as
concrete, structural and reinforcing steel, and soil and aggregate both prior to
commencing design and during the construction phase of a project. The quality of
materials and their ability to conform to design specifications are critical to
the future life and constructability of the facility. Three common types of
construction materials and geotechnical tests are:
- soil tests for moisture content and compaction density;
- concrete tests for compressive strength; and
- structural and reinforcing steel tests for tensile strength and
connection strength.
The construction materials testing and engineering industry is driven by
national and local economic conditions. Most of the construction materials
testing and engineering services that we provide are for projects generally
within 100 miles of the office. Geotechnical engineering and consulting
services are less sensitive to geographical constraints. Construction
activities can develop from commercial, industrial, institutional, and
governmental entities. Construction materials testing and engineering
services and geotechnical engineering and consulting services are considered
mature markets, and a project award is generally based on service,
reputation, price, client relationship, and local competition. Delivery of
services on a national basis through a network of offices is a factor
considered by national clients. Expansion of construction materials testing
and engineering services and geotechnical engineering and consulting services
to new markets can be achieved through the acquisition of local service
firms.
In general, it has been our experience that independent engineering and
consulting services for construction projects are required by owners on all
new commercial and public construction projects over $1 million. Frequently,
testing and inspection requirements also apply to renovation and repair
projects as well. According to ENGINEERING NEWS-RECORD, a recognized trade
magazine for the construciton industry, select markets in the United States
are experiencing strong growth in commercial, residential, and government
construction. In particular, southern California and Florida are currently
experiencing an annual growth in construction spending in excess of 20%.
Since 1992, total construction revenues have increased by 9% annually. This
growth is expected to continue with total construction having been forecast
for 1998 at $355.7 billion. Typically, testing, inspection, and geotechnical
services equate to approximately 2% of total construction costs, or $7
billion.
The infrastructure market includes public projects in numerous areas,
including the construction or remediation of highways, public transportation
systems, railroads, bridges, dams, and airports. Recent federal legislation
has appropriated funds for transportation infrastructure projects over the
next six years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview." We currently offer
infrastructure engineering services to highway construction and remediation
projects. Local, state, and federal government spending heavily influence the
market for engineering services in the infrastructure sector.
Demand for environmental services is currently driven by economic and
liability management considerations. Asset preservation, liability, and
health related considerations have increasingly driven demand in the
environmental services industry, while regulation has decreased as a factor.
As a result of these market dynamics, environmental administration has become
an integral component of day-to-day property management activities. Today
many companies insist that environmental improvement expenditures not only
satisfy regulatory compliance, but also be justifiable on other grounds, such
as protecting assets, increasing workplace safety, reducing health risks,
improving public relations, minimizing waste, preventing pollution, and
reducing financial liabilities. We believe that we will benefit from certain
rapidly growing sectors of environmental services
20
<PAGE>
industry. ENGINEERING NEW-RECORD estimates this sector to be approximately
$16 billion annually. In addition, this industry segment is highly fragmented
and management believes that the industry presents many favorable
opportunities for growth through acquisitions.
BUSINESS STRATEGY
Our strategic goal is to be a leading provider of construction materials
testing and engineering services, geotechnical engineering and consulting
services, and infrastructure engineering services through the consolidation
of independent companies and internal growth. We achieve our business
objectives through strategic acquisitions, emphasis on premium national
accounts, expansion of infrastructure engineering services, the balance of
public sector and private industry clients, expansion of international
services, and expansion of domestic geographic markets.
PURSUE STRATEGIC ACQUISITIONS. We believe that the industry for
engineering services is fragmented and that there are opportunities to
acquire local engineering services companies. We anticipate that one or more
acquisition opportunities may become available in the near future. If so, we
intend to pursue them actively. We estimate that there are 3,500 companies
whose businesses are complementary to ours. We further believe that our
existing infrastructure provides a platform for tuck in acquisitions of
regional and local companies. A tuck in acquisition is one in which we
integrate the acquisition with our existing regional management.
We believe our expertise in identifying, completing, and integrating
acquisitions provides us with a competitive advantage in entering new
geographical markets. We plan to apply our expertise in assimilating acquired
companies' personnel and branch operations into our existing infrastructure
and expanding acquired companies' service and product offerings to existing
clients. This will strengthen our position as an industry consolidator
through acquisitions that meet our operating, financial, and geographic
criteria. Since 1993, we have followed a strategy of controlled growth through
acquisitions by completing three acquisitions in the first half of 1998 and
one acquisition in 1996. Since 1993, we have completed a total of five
acquisitions. We have also expanded our service mix by adding building
condition surveys, construction administrative services, and environmental
assessment services.
For example, in 1998, we made a tuck in acquisition in Jupiter, Florida.
We paid $35,000 for a client base that our management anticipates will
generate in excess of $500,000 in annual sales. Additionally, we secured the
services of a key employee to run that satellite operation. In New Jersey, we
made an acquisition of two satellite offices from a national competitor in
May 1998. We estimate that the client base acquired in this transaction
should generate in excess of $750,000 in annual sales and annual net profits
of $75,000 to $110,000.
In analyzing new acquisitions, we normally pursue acquisitions that
either provide the critical mass to function as a profitable, stand-alone
operation, or are geographically situated so that they can be integrated into
our existing locations. If we acquire a stand-alone operation, it must
possess an experienced management team thoroughly committed to going forward
with us. We also must identify how the profitability of a new acquisition can
be improved as part our operations through the integration of the new
personnel into our management systems as well as the expansion of the service
and product offerings to existing clients. We believe we can improve the
operations of our acquisitions by providing superior marketing and sales
support, customer service, cash management, financial controls, and human
resources support.
Since 1993, we have implemented this strategy, the key elements of which
are designed to establish a national infrastructure of branch office
locations and diversify our service offerings. We currently operate
facilities serving San Diego, Riverside, San Bernardino, Orange, and Los
Angeles counties in southern California; the New York City metropolitan area
and northern New Jersey; Atlantic City and central New Jersey; Philadelphia
and southwest New Jersey; and Miami, Fort Lauderdale, Palm Beach, Jupiter,
and Orlando, Florida.
TARGET PREMIUM NATIONAL ACCOUNTS. As a result of our acquisition
strategy, we expanded our service offerings and client base. This has
resulted in our ability to attract premium national accounts such as Home
Depot, Marriott, Target, Wal-Mart, Disney, and Nordstroms. We expect these
opportunities to continue at an accelerated rate.
INCREASE INFRASTRUCTURE ACCOUNTS. The successful implementation of
strategies designed to increase service offerings has resulted in our ability
to capitalize on certain high-growth market opportunities. We believe that we
are well positioned to take advantage of the approximately $165 billion
authorized under the TEA-21 for highway construction and related services.
Our advantages include a strong presence in California, which expects to
receive
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$2.5 billion in funds over the next six years, or $800 million more than
under the previous legislation. However, we have no guaranty that we will
secure contracts funded by the TEA-21.
BALANCE PUBLIC SECTOR AND PRIVATE INDUSTRY SERVICES. We continue to
successfully maintain a balance between business from the public sector and
private industry clients. The private industry sector allows us to take
advantage of increases in private construction during times of economic
expansion. The public sector clients provide us a continued revenue source
during times of economic slowing because public sector projects are not as
sensitive to downturns in the economy as private industry projects.
EXPAND GEOGRAPHIC MARKETS. We are targeting ten geographical areas for
expansion. We believe that one key executive can efficiently manage an
operation with $10 million in annual sales. Additionally, as each operating
division grows, it will continue to reduce overhead as a percentage of sales.
Further, because we provide ancillary administrative support necessary to run
each division, our division level executives are encouraged to manage these
operations in a more decentralized fashion. Consequently, our division level
managers can react to regional business practices and traditions. We are
committed to future expansion and have targeted the West Coast and the
Mid-Atlantic regions for expansion.
DESCRIPTION OF ENGINEERING SERVICES
Our service to clients begins before an actual construction project
commences. We evaluate construction sites, building plans, and designs to
assure compliance with the approved construction documents for the proposed
facility. Our licensed engineers perform structural evaluations with a
licensed engineer. We assess the building site by testing the soil and the
materials. We also evaluate the impact on the environment. We do this to
detect any potential problems with the proposed site that could prevent or
complicate the successful completion of the project. In addition, we evaluate
the onsite building conditions and recommend optimum methods and materials
for building foundations, site preparation, and excavation. We provide these
services on an integrated start to finish basis designed to guide clients
through each phase of a construction project. We become an integral part
of the client's project team, offer a comprehensive quality control program,
and create value by delivering quality control and problem solving in a
cost-effective manner to meet clients' time and budget requirements.
When construction commences, we begin onsite consulting by monitoring
construction quality. We visually inspect each phase of the construction
project, including excavation, foundations, structural framing, mechanical
heating and air conditioning systems, electrical systems, underground
utilities, and roofing. Where applicable, we may use additional methods to
test materials and work quality. Testing of the metals, concrete, and other
materials used in construction continues through each phase of the project.
We are comprehensively involved during the construction phase to assure
compliance with the design specifications and to monitor the overall quality
of work.
During construction, we actively maintain contact with client project
managers. Problems detected or anticipated are identified, and we assist
clients in determining appropriate, cost effective solutions. We periodically
provide construction progress inspections and assessment reports. When a
project is complete, we prepare an evaluation report of the project and
certify the inspections for the client. We will also perform final
inspections to determine the moisture resistance of windows, doors,
foundations, and roofing. After construction, we offer periodic building
inspection services to assure that the building is being maintained in
accordance with applicable building codes to assure maximum building life. We
may also perform indoor air and water quality tests during this period.
CONSTRUCTION MATERIALS TESTING AND ENGINEERING SERVICES. We provide
testing and client representative services related to concrete and steel
materials used in the construction industry. From the preconstruction stage
of evaluating materials to the completion of the project, our range of
services supporting construction projects include quality assurance and
quality control, construction specifications, test evaluations, materials
performance documentation, and problem solving. We conduct these services in
our laboratories prior to and during construction, in the fabrication plant,
and at the construction site.
Our expertise in these areas provide valuable assistance to clients in
the construction of major buildings of all types and sizes including
industrial, office, retail, medical, school, military, and governmental, as
well as highways, railroads, dams, bridges, transmission towers, airports
runways, water supply facilities, wastewater treatment facilities, dock and
waterway facilities, solid waste landfills, power plants, and many other
structures. Potential clients include
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architects, engineers, contractors, commercial developers, local, state, and
federal government agencies, corporations, and other user-owners.
We provide testing of concrete and structural and reinforcing steel
through proven systematic methods and procedures of quality control
management. We customize project work to meet our clients' specific needs. We
deliver materials testing services on-site for the duration of a construction
project, giving us a competitive advantage over other providers. Concrete is
tested during and after placement to measure the consistency and strength of
concrete. Architects or engineers develop specifications for the design of
the structure or foundation, and we verify them during construction.
We also test steel structures for compliance. While many steel tests and
inspections are performed at the project site, tests and inspections are also
done at the steel fabrication plant, where the process can be monitored and
imperfections can be corrected before shipment to the project. Concrete and
steel samples collected in the field are transported back to our local
laboratory for analysis. Field representatives are deployed to the job site
from the nearest area office providing these services. Typically, a 100-mile
radius is the most economically feasible distance for providing these
services. Therefore, we only provide these services in areas with
construction activities to support the necessary operational resources.
Periodically, field offices are established to accommodate large projects.
All our field personnel work directly under the supervision of licensed
civil/geotechnical engineers. These engineers actively participate in
American Society of Civil Engineers, American Council of Independent
Laboratories, American Public Works Association, and other similar
professional groups in order to remain current with changes in the industry.
As members of the International Conference of Building Officials, our
personnel receive notification of all code changes. All field personnel must
maintain and renew licenses in their respective areas of inspection. All
laboratories are inspected biannually by the Cement and Concrete Reference
Laboratory of the National Institute of Standards and Measures. Additionally,
our laboratories participate in proficiency programs conducted by CCRL and
the American Association of State Highway & Transportation Officials.
INFRASTRUCTURE ENGINEERING SERVICES. We provide inspection and testing
services similar to those provided to our construction materials testing and
engineering services and geotechnical engineering services clients. These
services are provided to support the planning and construction of the
transportation network including highways, bridges, piers, tunnels, airports,
and other similar structures; dams, drainage basins, and storm water
facilities; waste treatment facilities; and utility transfer systems. One
advantage we have is that our laboratories in California and New Jersey have
been certified by the American Association of State Highway & Transportation
Officials. This AASHTO certification is often required in order to bid on
infrastructure projects, especially the larger projects. We believe that
demand for these services will increase in the future as the country repairs
its deteriorating infrastructure and as funding becomes available as a result
of Congress' recent TEA-21 funding package authorizing approximately $165
billion for highway and infrastructure improvements. As we have become
active in providing infrastructure engineering services, we believe we will
receive additional work from the substantially increased expenditures
projected for transportation construction.
GEOTECHNICAL ENGINEERING AND CONSULTING SERVICES. Our geotechnical
engineering and consulting services involve the analysis of soil data and
design of structures supported on or within the earth. Geotechnical services
begin with the project planning and design phase of a project, extend through
construction, and often continue through the service life of a structure.
Geotechnical engineers, geologists, and earth scientists conduct tests on the
soil, rock, and groundwater to determine whether sites are suitable for the
proposed new construction. Our professionals have expertise in soil and rock
mechanics, geophysics, and earthquake engineering. The design of a subsurface
program requires familiarity with local geology and a thorough knowledge of
economical construction methods. Our offices are staffed by professionals
with local expertise in a wide variety of soil conditions.
Soil tests are performed to determine soil compaction characteristics
both before foundation design and after excavation or soil placement have
taken place. The purpose of these tests is to determine the stability and
load-bearing characteristics of a soil before, during, and after
construction. We use the expertise of our geotechnical engineers, geologists,
and experienced field drilling personnel to design a field exploratory
program. The field data and samples are brought to our soil laboratories for
further testing and evaluation. The information obtained during the
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field exploration and laboratory testing is used to provide the client with
cost-effective designs for high-rise building foundations, site improvements,
tunnels, dams, manufacturing facilities, landfills, bridges, and many other
structures. We also provide specific recommendations to avoid delays and cost
overruns during construction, particularly in the weather-dependent site
preparation phase of a project. An engineering report is prepared under the
direction and review of a licensed professional engineer familiar with the
particular geologic conditions and engineering requirements for the project.
OTHER SERVICES AND PRODUCTS
In addition to the core services described above, we maintain
specialized services that can be integrated with the overall needs of our
clients. This is part of our overall business strategy to build and maintain
client relationships while adjusting to the market demand for professional
services. Most of these services have either developed within the last five
years or been obtained through recent acquisitions. The following is a
description of some of the non-core services we offer to complement our core
business.
BUILDING CONDITION SURVEYS. As part of our integrated service strategy
for commercial and industrial clients, we also offer building condition
surveys. As a general rule, building condition surveys involve an evaluation
of the facility's heating, ventilation, and lighting systems, water services,
roofing system, and structural or architectural construction or both. This
service is frequently associated with the purchase of real estate where the
purchaser requires an evaluation of operation and maintenance exposures of
property prior to closing. These services are also integrated with our other
commercial and industrial project services such as Phase I and Phase II
environmental assessments, asbestos assessments, and indoor air quality
consulting. We are in the process of promoting and developing building
condition surveys on a national level.
CONSTRUCTION ADMINISTRATIVE SERVICES. Our services also include
construction administrative services. These services range from acting as the
client's field representative during construction to overall responsibility
for the project's quality issues. The client representative assures that the
construction is done according to the plans and specifications developed by
either the architect or engineer. These services are typically billed on
either daily rates or hourly rates plus expense reimbursement.
An example of these services is a recent long-term contract to act as
the Orange County, Florida's school district field representative for all of
its new construction and building maintenance. In the case of this school
district, which encompasses the entire city of Orlando, we act like a
building department: reviewing plans, conducting inspections, and certifying
compliance with codes.
ENVIRONMENTAL ASSESSMENT SERVICES. The majority of our project
activities within this segment focus on identifying potential environmental
hazards and risk exposures. We provide environmental consulting services to
corporate and governmental clients. Many of these clients are large regional
and national corporations with multi-site consulting needs. Client
relationships and quality of service delivery primarily drive the market for
these services.
CONTRACTUAL ARRANGEMENTS
We often provide services for our major clients under arrangements
involving continuing service agreements. These arrangements are usually on a
time-and-materials, cost-plus-fixed-fee, or a fixed-price basis, and are
usually terminable on advance notice by either party. In 1998, approximately
60% of our projects were on a time-and-materials basis, under which we billed
our clients at fixed hourly rates plus subcontracted services and materials
used. In 1998, an additional 25% of our work was performed under
cost-plus-fixed-fee agreements where we and the client agreed to a budgeted
contract, but the client covered overruns and was credited for any savings
realized under budget.
Fixed-price arrangements, under which we perform a stated service for a
set price regardless of the time and materials cost involved, represented
approximately 15% of our business in 1998. This percentage may significantly
change from time to time in the future. Although this type of contract does
carry the risk that the cost to us for performing the agreed-upon services
may exceed the set price, a fixed-price also has the benefit of potentially
higher profit created by all savings under the contract amount. With military
projects, we have used fixed-price contracts very
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successfully where very detailed project plans and specifications are
available. When quoting a fixed-price contract, our marketing personnel
provide detailed breakdowns of all phases of the work specified including
man-hours, tests, and construction schedule assumptions. The fixed-price
contract is thus based upon a clearly defined scope of work and contract
duration. During the course of the project this scope of work and contract
duration is constantly monitored, and any expansion of the scope of work or
contract duration is billed as an extra to the contract.
We have undertaken, and may undertake in the future, projects in which
we guarantee performance based upon defined operating specifications or
guaranteed delivery dates or both. Unsatisfactory performance or
unanticipated difficulties in completing these projects may result in client
dissatisfaction and a reduction in payment to us or payment of damages by us
to our clients or other persons. Either of these results could have a
material adverse effect on our financial condition or results of operations.
Certain contracts involving government agencies are priced at cost or agreed
upon labor rates plus overhead. Our overhead rates are subject to audit and
could result in price reductions associated with disallowed overhead costs or
methods used to derive overhead rates.
MARKETING AND SALES
We provide our professional consulting, engineering, and testing
services in the construction industry to Fortune 500 companies, ENGINEERING
NEWS-RECORD top 400 contractors and construction engineering firms, small
companies, real estate property owners and managers, and federal, state, and
local governments. Our contracts are obtained by our sales staff through
relationship building followed by proposals and bidding. The current sales
staff consists of one to two sales representatives in each of our locations,
and estimators as well as clerical staff back up these sales personnel.
Referrals from existing and former clients, architects, and engineers are a
significant source of contract leads. Clients are often interested in more
than one of our services. We have been able to sell construction materials
testing and engineering services, geotechnical services, and environmental
services, to the same clients.
We presently market our services through our subsidiaries. Direct
marketing is accomplished by technical sales representatives, technical
personnel, and management personnel who routinely call on prospective
clients. We also utilize government and industry publications to identify
potential services and requests for project proposals for submission of
competitive bids.
Recent trends in the engineering and consulting market require that a
service provider commit considerable resources toward maintaining and
developing client relationships. This shift from project-specific to
long-term client relationship partnering requires a service provider to
dedicate both technical and marketing resources toward tailoring services for
a client. It also requires the provider to maintain a broad range of
responsive, quality services. The rewards of this client relationship
partnering and quality, service-focused programs are continued revenues from
repeat customers and, in many instances, sole source solicitation and award
of work to the firm.
KEY CLIENTS AND PROJECTS
Our services and products are applicable to a full range of business,
manufacturing, institutional, and government sectors. However, based on
demand for our services, existing relationships, and revenue generation
potential, we target real estate management and development firms, large
general contracting firms, large construction management firms, national
corporate owners/users, state transportation agencies, municipalities, public
school systems, public housing authorities, and the U.S. Department of
Defense as key client sectors for development.
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Our client list is comprised of hundreds of different customers. We
serve the private commercial market, the public sector, and a variety of
public interest or non-profit organizations. In 1998, no single customer
accounted for more than 5% of our revenues. The following is a representative
list of our clients.
<TABLE>
<S> <C>
PRIVATE COMMERCIAL CLIENTS
Wal-Mart Nordstroms
Neiman Marcus Home Depot
Saks Fifth Avenue Circuit City
Lord & Taylor Marriott
Hilton Hotels Walt Disney
Claridge Casino Atlantic City Bally's Park Place
Sea World San Diego Universal Studios Orlando
Lockheed Martin Sports Authority
Rite-Aid Target Stores
PUBLIC INTEREST CLIENTS
Giants Meadowlands California State Universities
San Diego Qualcomm Stadium Princeton University
Florida Panthers Ice Hockey University of California
PUBLIC SECTOR CLIENTS
New Jersey Turnpike Authority Port Authority New York
New Jersey Transit Authority Port Authority New Jersey
New Jersey Sports & Expositions CalTrans
City of Los Angeles City of San Diego
San Diego County Los Angeles County
United States Navy Port Authority of San Diego
</TABLE>
One marketing and operational goal we have worked towards is an equal
balance between private industry and public sector work. We have maintained this
goal although the percentage breakdown in the three regional areas we serve has
varied. In Southern California, the split between private industry and public
sector work has been evenly split. In the New Jersey area, approximately 25% of
the work has been private industry and 75% public sector. In Florida, our market
has been approximately 75% private industry and 25% public sector.
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The following is a representative list of the projects for which we have
provided engineering services.
<TABLE>
<CAPTION>
NEW JERSEY FLORIDA SOUTHERN CALIFORNIA
<S> <C> <C>
OFFICE BUILDINGS/HIGH-RISES
Hoffman-LaRoche IBM Sony
Merck & Company Motorola Uniden
Liberty Plaza Kemper Insurance Johnson & Johnson
REGIONAL SHOPPING MALLS
Monmouth Mall Plantation Fashion Mall Fashion Valley Mall
Sheridan Plaza Hollywood Mall Horton Plaza
Garden State Plaza Sawgrass Mills Mall Seaport Village
Paramus Park Pembroke Lakes Mall University Towne Centre
Jersey Garden Mall North County Fair
HOTELS/AMUSEMENT PARKS
Bally's Park Place Universal Studios Sea World
Caesar's Hotel/Casino Disney World Marriott Towers
Six Flags Great Adventure Marriott Inns Hyatt Regency Aventine
Claridge Hotel & Casino Loew's Miami Beach Sheraton Torrey Pines
UNIVERSITIES
Princeton University Palm Beach College California State University
Farleigh Dickenson University Broward Community College University of California
Rutgers University Florida Atlantic University University of San Diego
GOVERNMENT/MUNICIPALITIES/SCHOOL DISTRICTS
FAA Homestead Air Force Base MCAS Miramar
Casino Development Authority Florida Department of Transportation NAS North Island
New Jersey Transit Orange County Schools MCS Camp Pendleton
New Jersey Veterans Administration Ft. Lauderdale Museum San Diego Unified Schools
New Jersey Water District Miami/Dade County Schools Coronado Schools
Plantation City Hall
Kravis Center Performing Arts
HOSPITALS
Englewood Hospital Kendall Reg. Center Children's Hospital
Hackensack University Hospital Holy Cross Cancer Kaiser Hospital
Passaic General Hospital Sunrise Medical Center Scripps Clinic
Palisades General Hospital Holy Redeemer Hospital UCSD Hospital
Morristown Memorial Hospital Balboa Naval Hospital
Scripps Memorial Hospital
PUBLIC FACILITIES
Princeton Stadium Florida Panther Arena San Diego Qualcomm Stadium
Giants Meadowlands Stadium San Diego Convention Center
</TABLE>
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EXAMPLE OF CLIENT ENGAGEMENT
One of our recent high profile projects was the expansion and
redevelopment of Fashion Valley Regional Shopping Mall, a $200 million,
two-year project in San Diego. The client was the owner of the shopping
center, a partnership between Lend Lease Development, an international real
estate conglomerate, and Equitable Life. We provided geotechnical services,
and construction materials inspections and testing for seven parking
structures and the construction of a second retail level over the existing
shopping mall. Geotechnical services involved compaction testing for
foundations and footings, trenches, and driveways. The parking structures
were poured in place concrete and precast concrete panel construction over
driven concrete piles. Not only were concrete quality control inspection and
compression testing required, but masonry and structural steel inspections
were also needed. The second story mall was of steel frame construction, and
therefore sophisticated welding and structural steel inspections were
required as well as concrete, masonry, fireproofing, roofing, and
waterproofing inspection and testing.
Because the existing business within the mall remained open for business
during construction, much of the concrete and structural steel work was
completed between 10:00 p.m. and when the stores opened the following
morning. In addition to providing services for the parking structures and the
mall expansion, we also contracted with Nordstroms to provide similar
services for the reconstruction of this anchor tenant. Our total fees on the
project approached one million dollars. All work was performed on a time and
materials basis at negotiated rate levels and estimated budgets. On peak
activity days as many as eight of our inspectors or technicians worked at
Fashion Valley supported by the engineering and laboratory staffs.
INFORMATION SYSTEMS AND THE YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries
to distinguish 21st century dates from 20th century dates. As a result, in
less than two years, computer systems or software or both may need to be
upgraded to comply with Year 2000 requirements. We have assessed our
management information systems and do not currently expect that any material
expenditure will be required in connection with the modifications that will
be required for these systems. Moreover, we have recently implemented or are
in the process of implementing new systems that are already Year 2000
compliant and we do not believe that the total cost of any potential
modification of such management information systems will be material. There
can be no assurance that we or our vendors will be able to successfully
modify on a timely basis our or their respective management information
systems to comply with Year 2000 requirements.
We are currently converting our accounting and management information
systems to a system consisting of new hardware and packaged software recently
purchased from a large recognized industry vendor, Sage Software, Inc., who
has represented that these systems are Year 2000 compliant. Our remaining
operations are generally dependent only on personal computers and
off-the-shelf commercial word processing, drafting, spreadsheet, and
engineering software. Year 2000 compliant versions of these systems are
currently available, and we will convert to these compliant systems over the
next year and a half as we upgrade our operational personal computer systems
in the ordinary course to the most recently issued software releases.
We have expanded substantially over the past several years, primarily as
a result of acquisitions. The process of integrating acquired businesses has
placed significant demands on our management information systems. To address
these demands, we are in the process of upgrading and replacing our
management information systems. This process of upgrading and replacing our
management information systems has required, and will continue to require,
substantial attention from members of senior management. We are within 90
days of completing systems upgrades to our management information systems,
and the upgrade is 60% complete, but no assurance can be given that such
system upgrade will be completed successfully. Our failure to successfully
upgrade our management information systems could have a material adverse
effect on our results of operations.
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OFFICE AND SUPPORT SERVICES
We operate through eight offices located in three states. The office is
our basic economic and functional unit through which all services are
provided. Personnel located in each office are experienced in developing and
implementing solutions, which meet the requirements of local regulations. We
monitor all offices through a subsidiary president. Each of our subsidiaries
is responsible for introducing new services to customers, managing projects
within budget, and meeting pre-established quality control standards. Each
subsidiary also has dedicated sales and marketing staff. We provide each
subsidiary with accounting, administration, and human resources support.
BACKLOG
Backlog includes anticipated revenue from services on major long-term
contracts or continuing service agreements that provide for authorization of
funding on a task or fiscal period basis. Excluded from backlog are
anticipated revenues from smaller projects done without long-term contracts
or service agreements. At September 30, 1998, we had approximately $7.2
million of gross revenue backlog compared to $4.2 million at September 30,
1997. The September 30, 1997 backlog figure includes the backlog of Wyman
Enterprises, Inc. before our acquisition of all of its assets and certain of
its liabilities.
We bill for our services monthly for work completed during the previous
month. All billing is done on the regional level, and all accounts receivable
responsibilities are also handled on the regional level with overall
supervision from our headquarters. Collection periods for our receivables
range between 70 and 75 days. An allowance for doubtful accounts is typically
established equivalent to one percent of gross revenues.
SEASONAL FACTORS
Due primarily to more holidays and inclement weather conditions, our
operating results during January, February, and December are generally lower
in comparison to other months. Because all field and most lab personnel are
paid on an hourly basis, we can reduce expenses for direct labor as the
workload decreases. Historically enough work exists during the slow months to
retain the hourly work force at reduced levels until volume increases after
the winter months.
COMPETITION
The services that we provide are subject to intense competition. In
addition to the thousands of small consulting and testing firms operating in
the United States, we compete with several national engineering and
consulting firms including Law Companies Group, Inc.; Harding Lawson
Associates Group, Inc.; Dames & Moore, Inc.; and Professional Service
Industries, Inc.
Certain of our present and future competitors may have greater financial,
technical, and personnel resources than us. We cannot predict the extent of
competition that we will encounter in the near future as construction materials
testing and engineering, infrastructure, geotechnical and environmental services
industries continue to mature and consolidate. Historically, competition has
been based primarily on the quality, timeliness, and costs of services. Our
ability to compete successfully will depend upon our marketing efforts, our
ability to accurately estimate costs, the quality of the work we perform, our
ability to hire and train qualified personnel, and the availability of
insurance.
ORGANIZATION
We were established in 1993 as a Delaware corporation to acquire
regional engineering services firms. Currently, we are comprised of four
operating units and the holding company.
Professional Engineering is a Florida corporation that was founded in 1984
and is located in south Florida. Professional Engineering's core business is to
provide geo-technical engineering, construction testing and inspection,
structural engineering and design services. Over the past ten years Professional
Engineering has successfully provided
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professional services on over 2,000 projects with construction budgets from
$500,000 to $200,000,000. U.S. Labs acquired Professional Engineering in 1994.
U.S. Engineering is a Delaware corporation that has three locations in New
Jersey and was founded 1993 to provide construction engineering, inspection, and
testing services to northeast clients. At present U.S. Engineering is one of the
largest operations of its type serving the Metropolitan New York, New Jersey,
and Philadelphia region.
San Diego Testing is a Delaware corporation that was founded in 1946 and
has provided engineering and consulting services to the Southern California
construction industry for over 50 years. San Diego Testing was acquired by us in
1996 and provides engineering, testing, and inspection services identical to
those provided by Professional Engineering and U.S. Engineering.
Wyman Enterprises, Inc. was founded in 1973, and currently serves the
southern California and Mexican border market and is licensed in Nevada.
Substantially all the assets and certain of the liabilities of Wyman
Enterprises, Inc. were acquired by Wyman Testing, a subsidiary of ours, in
1998, and Wyman Testing was subsequently merged into the operations of San
Diego Testing.
In August 1998, we formed another subsidiary, Los Angeles Testing
Engineers, Inc., for a new office in Irvine, California. This subsidiary has not
made a material contribution to our results of operations.
INSURANCE
We have a claims made professional liability insurance policy, which
includes contractor's pollution liability coverage. The professional
liability insurance policy has a two-year term, ending in November 1999,
which is subject to biennial renewal, with a two-year, per-claim, and
aggregate limit of $2 million, and a deductible of $20,000 per claim.
Increased limits have been obtained on a specific endorsement basis to meet
the needs of particular clients or contracts. A claims made policy only
insures against claims filed during the period in which the policy is in
effect. This policy covers both errors and omissions.
We currently have no professional liability claims pending and we are
unaware of any other claims that will have a material adverse effect of our
operations or financial condition. Although various claims have been made in
the past against our professional liability policy, to date no such claim has
ever resulted in an uninsured loss.
We also carry an occurrence basis general liability insurance policy in
the amount of $2 million, with a $5 million umbrella. This coverage includes
products/completed operations. The general liability insurance policy has a
one-year term, ending in January 2000 and is subject to annual renewal. Our
policies have been renewed in each of the years that they have been in
effect.
In addition, we have secured a claims made directors and officers'
liability insurance policy with an aggregate limit of $2 million, which will
increase to $6 million at the initial public offering. This policy has a
one-year term that expires in October 1999. We can make no assurance that
insurance coverage will continue to be renewed or available in the future or
offered at rates similar to those under the current policies.
In August 1998, we obtained key person life insurance policies on the
lives of Dickerson Wright, Martin Lowenthal, Mark Baron, Christopher
O'Malley, and Gary Elzweig. According to the provisions of those policies,
our company is the beneficiary in the amount of $2,650,000, $650,000,
$300,000, $300,000, and $1,000,000, on the lives of Messrs. Wright,
Lowenthal, Baron, O'Malley, and Elzweig, respectively.
GOVERNMENT REGULATION
Except for state licensure requirements for the engineering component,
there is limited regulation of the construction materials testing and
engineering or geotechnical consulting service industries. Industry standards
are set by agencies, including the American Society of Testing Material, the
American Association of State Highway & Transportation Officials, the
American Concrete Institute, and the American Welding Society. State and
local building codes, the stringency of which varies by location, however,
govern construction projects themselves.
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PERSONNEL
We employ approximately 200 regular, full-time employees, including 170
engineers, inspectors, and field lab technicians and 30 administrative
personnel. None of our employees are presently represented by a labor union.
We believe that relations with our employees are good.
FACILITIES
We own no real estate, and all of our locations are leased from
independent third parties as follows:
<TABLE>
<CAPTION>
LOCATION FOOTAGE LEASE EXPIRATION
- -------- ------- ----------------
<S> <C> <C>
South Coast Florida Office: 7,600 July 2000
4350 West Sunrise Boulevard
Plantation, Florida
Central Coast Florida Office: 1,600 June 2000
1001 Jupiter Park Drive
Jupiter, Florida
Central Florida Office: 3,000 Month-to-month
6220 South Orange Blossom Trail
Orlando, Florida
North New Jersey Office: 7,000 June 1999
903 E. Hazelwood Avenue
Rahway, New Jersey
New Jersey Coast Office: 2,000 March 1999
2511 Fire Road
Egg Harbor, New Jersey
South New Jersey Office: 3,700 May 2001
443 Commerce Lane
West Berlin, New Jersey
Southern California Offices: 11,000 May 2003
7895 Convoy Court
San Diego, California
17905 Skypark Circle 3,200 August 2001
Irvine, California
</TABLE>
LEGAL PROCEEDINGS
As of the date of this prospectus, we are not a party to any material legal
proceedings. Notwithstanding this, from time to time, we may be involved in
material litigation.
31
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their ages and positions held
with us are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ----------
<S> <C> <C>
Dickerson Wright(1). . . . . . . . 52 Chief Executive Officer, President,
and Chairman of the Board of
Directors
Gary H. Elzweig. . . . . . . . . . 43 Executive Vice President and
Director
Donald C. Alford . . . . . . . . . 54 Executive Vice President and
Director
Mark Baron . . . . . . . . . . . . 43 Executive Vice President and
Director
Martin B. Lowenthal. . . . . . . . 42 Executive Vice President and
Director
James D. Wait. . . . . . . . . . . 45 Chief Financial Officer, Secretary,
and Director
Thomas H. Chapman. . . . . . . . . 68 Director
James L. McCumber. . . . . . . . . 51 Director and Member of Audit Committee
Robert E. Petersen . . . . . . . . 52 Director and Member of Audit and Compensation Committees
Noel Schwartz. . . . . . . . . . . 71 Director and Member of Compensation Committee
Irvin Fuchs. . . . . . . . . . . . 72 Director
</TABLE>
Each of our directors is elected at the annual meeting of stockholders
and serves until the next annual meeting and until his successor is elected
and qualified, or until his earlier death, resignation, or removal. The
underwriters have the right to observe board meetings for a period of five
years following the offering. We intend to maintain at least two independent
directors on our board.
Dickerson Wright, P.E., is our founder and has served as our chairman of
the board of directors and president since our incorporation in October 1993.
Mr. Wright is a registered professional engineer with a history of building
and managing engineering service companies and over 25 years experience in
the independent testing and inspection industry. Prior to founding our
company, he was the co-owner and executive vice president of American
Engineering Laboratories and a senior executive with Professional Service
Industries. Mr. Wright also served as president and chief executive officer
of Western State Testing, as national group vice president of United States
Testing Company, and as executive vice president of Professional Service
Industries during this period of time.
Gary H. Elzweig, P.E., is a co-founder of Professional Engineering and
has served as president of Professional Engineering since its incorporation in
March 1987. Mr. Elzweig has served as our executive vice president and
director since May 1998. He is a registered professional engineer with over
20 years of experience in engineering, design, and testing. Mr. Elzweig
earned his Bachelor's Degree from Columbia University, School of Engineers in
1977. Mr. Elzweig also serves as Chairman of Broward County's Board of Rules
and Appeals Foundations Subcommittee, and Building Envelope Subcommittee.
Donald C. Alford has served as our executive vice president and director
since May 1998. Mr. Alford was an owner of Wyman Enterprises, Inc. and served as
its vice president and chief financial officer from April 1996 until its
32
<PAGE>
acquisition by U.S. Labs. Mr. Alford continued to work for U.S. Labs as an
officer of Wyman Testing after the acquisition of Wyman Enterprises, Inc. Mr.
Alford was co-founder of Cornerstone Development, a real estate company that
developed approximately 20 major projects in the San Diego area from 1983 to
1991. From October 1991 to June 1994, Mr. Alford served as president of
Procom Supply Corporation, a wholesale distributor of telephone equipment.
Mr. Alford also served as managing partner of S.A. Assets, LLC, a real estate
development company, from July 1994 to September 1996.
Mark Baron has been president and director of San Diego Testing since
May 1998 and has served as our executive vice president and director since
May 1998. Mr. Baron also was employed in the position of manager of business
development with Professional Service Industries from November 1989 to
October 1996. He has over 20 years experience in the construction industry.
Mr. Baron is a certified OSHPD Class A Construction Inspector.
Martin B. Lowenthal is president and a director of U.S. Engineering and
has served as our executive vice president and director since May 30, 1998.
Mr. Lowenthal has served as president and director of U.S. Engineering since
November 1994 and as secretary of U.S. Engineering since its incorporation in
October 1993. Mr. Lowenthal has 16 years of management experience in the
engineering and testing industry. He has overseen engineering and testing
operations in six states, including New Jersey, New York, Delaware,
Pennsylvania, Maryland, and Virginia.
James D. Wait has served as our chief financial officer, vice
president - finance and treasurer and director since May 1998. Prior to
joining us, Mr. Wait served as president of Tayside Development, a real
estate consulting firm, from January 1993 to December 1996. Mr. Wait also
served as treasurer of Horizon Communities, Inc., a real estate development
company, from December 1996 to October 1997 and as treasurer of The Encinas
Group, a real estate development company, from November 1997 to April 1998.
Prior to 1993, Mr. Wait acted as the chief financial officer and treasurer
for 16 years for R.B. McComic, Inc. and The Gentry Company. Mr. Wait is a
certified public accountant, licensed in the state of California since 1981.
Thomas H. Chapman, R.C.E., has served as a director of San Diego Testing
since March 1997 and has served as one of our directors since May 1998. Mr.
Chapman previously served as president of San Diego Testing from March 1997
to May 1998 and has been employed by San Diego Testing since May 1997. Mr.
Chapman originally joined the predecessor to San Diego Testing in 1968 and
eventually left San Diego Testing in 1989 when he went to work for Law
Engineering. He served as the office manager for Law Engineering until he
rejoined San Diego Testing in 1997. He is currently a vice president of San
Diego Testing. Mr. Chapman has been involved in several notable projects in
San Diego, including the San Diego Convention Center, the Hyatt Regency
Hotel, the City Front Terrace, and One Harbor Drive. Mr. Chapman earned his
degree in Civil Engineering from San Diego State University and is a
California Registered Civil Engineer.
James L. McCumber is the chairman, chief executive officer, and founder
of McCumber Golf, an internationally recognized firm noted for the design and
construction of landmark golf courses. McCumber Golf was founded in 1971. Mr.
McCumber has been one of our directors since May 1998. Additionally, he
serves as a committee man for the United States Golf Association.
Robert E. Petersen has served as one of our directors since May 1998.
Mr. Petersen has served as president of Asset Management Group, a retail and
industrial property management firm, since October 1983. Mr. Petersen has
also served as senior vice president and chief financial officer of Collins
Development Co. and vice president of La Jolla Development Co., both of which
of are real estate development companies, since October 1983.
Noel Schwartz has been one of our directors since July 1998. Mr.
Schwartz has served in the engineering and research industry since 1952.
Between 1952 and his retirement in 1988, Mr. Schwartz held positions with
United States Testing Company such as consumer research division manager,
director of research, vice president of operations-laboratory group, senior
vice president-laboratory services division and finally, president-laboratory
services division. During his tenure at United States Testing Company, a
publicly traded corporation, he was a member of the board of directors.
Irvin Fuchs is a registered professional engineer (retired). Mr. Fuchs
has been one of our directors since July 1998. Mr. Fuchs has served in the
engineering and research industry since the early 1950's. Before his
retirement in
33
<PAGE>
1992, Mr. Fuchs held several positions with United States Testing Company,
including division manager-engineering services, division manager-commercial
engineering and testing, senior vice president-engineering services group,
and president-engineering services group. During his tenure at United States
Testing Company, a publicly traded corporation, he was a member of the board
of directors.
DIRECTOR COMPENSATION
We reimburse our directors for all reasonable and necessary travel and
other incidental expenses incurred in connection with their attendance at
meetings of the board. Beginning in December 1998, we began compensating
non-employee directors $500 for each board meeting attended. In 1998, under
the 1998 Stock Option Plan, each non-employee director received an option to
purchase 5,000 shares of common stock at an exercise price of $6.00 per
share. Directors who are members of our subsidiaries' boards received an
additional grant of an identical option to purchase 5,000 shares for each
board membership. In the future, a director who is first elected to the
board may receive an option to purchase shares of common stock for the first
year of the director's board term. The board has not yet determined the
number of option shares that each director will receive for each additional
year the director remains on the board. These options will have an exercise
price equal to 100% of the fair market value of the common stock on the grant
date.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a standing compensation committee currently composed of Messrs.
Wright, Petersen, and Schwartz. The compensation committee reviews and acts
on matters relating to compensation levels and benefit plans for our
executive officers and key employees, including salary and stock options. The
committee is also responsible for granting stock awards, stock options, stock
appreciation rights, and other awards to be made under our existing incentive
compensation plans. We also have a standing audit committee composed of
Messrs. McCumber and Petersen. The audit committee assists in selecting our
independent auditors and in designating services to be performed by, and
maintaining effective communication with, those auditors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation provides that our
directors will not be personally liable to us or you for monetary damages for
breach of fiduciary duty as a director except for liability:
- for any breach of the director's duty of loyalty to us or you;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, which
relates to unlawful payment of dividends or unlawful stock purchase
or redemption; or
- for any transaction from which the director derived any improper
personal benefit.
Our amended and restated certificate of incorporation also provides
that we will indemnify our directors, officers, employees, and agents to the
fullest extent permitted by Section 145 of the Delaware General Corporation
Law. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of U.S.
Labs pursuant to the foregoing provisions, or otherwise, U.S. Labs has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In addition, we have secured a claims made directors and officers'
liability insurance policy with an aggregate limit of $2 million, which will
increase to $6 million at the initial public offering. This policy has a
one-year term that expires in October 1999. We can make no assurance that
insurance coverage will continue to be renewed or available in the future or
offered at rates similar to those under the current policies.
34
<PAGE>
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Wright, Elzweig,
Alford, Baron, Lowenthal, and Wait. Each of these agreements has a term of
three years, and provides that we may terminate any of the agreements with or
without cause. These employment agreements also provide for 12 months of
severance pay at the rate of 50% of the applicable executive's compensation
in the event the executive is terminated other than for cause prior to the
end of the three-year term.
Mr. Wright's employment agreement provides salary in the amount of
$175,000 per annum and if U.S. Labs reports at least $1,200,000 in pre-tax
profit for the 1998 calendar year then Mr. Wright will be entitled to a bonus
of 7% of our pre-tax profit. If we earned $1,200,000 in pre-tax profit in
1998, Mr. Wright will be entitled to $84,000. Mr. Elzweig's employment
agreement provides salary in the amount of $125,000 per annum and if
Professional Engineers has at least pre-tax profits of $450,000 for the 1998
calendar year, then Mr. Elzweig will be entitled to a bonus of 3% of the
pre-tax profit for U.S. Labs. For example, if U.S. Labs earned $1,000,000 in
pre-tax profit in 1998, Mr. Elzweig will be entitled to $30,000.
Additionally, if Professional Engineers meets its business goals for 1998,
then Professional Engineers will be entitled to a bonus pool of up to 5% of
its pre-tax profit, which will be distributed at Mr. Elzweig's discretion.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation paid or accrued for the fiscal year ended December 31, 1998 by
us to or for the benefit of our chief executive officer and our only other
executive officer whose total annual compensation for 1998 exceeded $100,000
(the "Named Executive Officer").
In accordance with Instruction to Item 402(b) of Regulation S-B
promulgated by the SEC, information with respect to fiscal years prior to
1998 has not been included because we were not a reporting company under
Section 13(a) or 15(d) of the Securities Exchange Act and the information has
not been previously reported to the SEC in response to a filing requirement.
Until July 1998, Mr. Elzweig was not our employee, but provided
management services to us as an independent contractor. Of the $171,567
reflected in the above table, Mr. Elzweig received 5% of the net sales of
Professional Engineering, or $92,052, in exchange for these management
services.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ -------------------
SECURITIES
UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION SALARY AND WARRANTS
- --------------------------- ------------ -------------------
<S> <C> <C>
Dickerson Wright
Chief Executive Officer. . . . . . . . . $175,000 170,000
Gary H. Elzweig
Executive Vice President . . . . . . . . $171,567 65,000
</TABLE>
STOCK OPTION PLAN. On May 30, 1998, our board of directors adopted the
U.S. Laboratories Inc. 1998 Stock Option Plan, under which the board or the
compensation committee may issue incentive stock options and non-qualified
stock options to purchase an aggregate of 500,000 shares of common stock.
Currently, we have 395,000 stock options outstanding under the plan.
Additionally, we have indicated to certain employees that upon the successful
completion of our offering, we will grant 62,500 stock options to them.
Options may be issued under the plan to our employees, officers, directors,
advisors, or consultants. We will only grant stock options with an exercise
price at least equal to the fair market value of the common stock on the date
of grant. The compensation committee administers the plan.
35
<PAGE>
On November 9, 1998, the board of directors authorized the issuance,
under the terms of the plan, of:
- incentive stock options to purchase an aggregate of 145,000 shares of
common stock for an exercise price of $6.60 to Dickerson Wright and
Gary Elzweig;
- incentive stock options to purchase an aggregate of 205,000 shares of
common stock for an exercise price of $6.00 to certain of our officers
and employees; and
- non-qualified stock options to purchase an aggregate of 45,000
shares of common stock for an exercise price of $6.00 to certain of
our non-employee directors and certain other non-employees who have
provided services to us.
All of these stock options are subject to vesting schedules described in
stock option agreements between us and the recipients of the stock options.
These option grants replaced the previous grants made on May 30, 1998, which
were cancelled.
WARRANTS. On November 9, 1998, the board of directors authorized the
issuance to certain of our officers and employees warrants to purchase an
aggregate of 150,000 shares of common stock for an exercise price of $6.00 per
share. These grants replaced the previous grants made on May 30, 1998, which
were cancelled.
The repricing of the above options and warrants was undertaken to
facilitate the offering. All outstanding options and warrants were repriced in
the same manner.
The following table provides the specified information concerning grants
of options and warrants to purchase our common stock made during the year
ended December 31, 1998 to persons named in the Summary Compensation Table.
The options and warrants that were scheduled to expire on May 30, 2003 were
cancelled on November 9, 1998 in connection with the recapitalization of U.S.
Labs in preparation for the offering.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION
NAME GRANTED IN FISCAL YEAR PRICE ($/Sh) DATE
- ---- -------------------- -------------------- ----------------- ------------
<S> <C> <C> <C> <C>
Dickerson Wright 170,000 31.2% $5.00 - $5.50 5/30/03
170,000 31.2% $6.00 - $6.60 11/9/03
Gary H. Elzweig 65,000 11.9% $5.00 - $5.50 5/30/03
65,000 11.9% $6.00 - $6.60 11/9/03
</TABLE>
36
<PAGE>
The following table provides information concerning exercises of options
and warrants to purchase our common stock in the fiscal year ended December 31,
1998, and unexercised options and warrants held at fiscal year end by the
persons named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
ACQUIRED VALUE OPTIONS AND WARRANTS AT MONEY OPTIONS AND WARRANTS
NAME ON EXERCISE REALIZED DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
- ---- ------------ --------- --------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dickerson Wright 0 $0 75,151 98,849 $0 $0
Gary H. Elzweig 0 $0 45,151 19,849 $0 $0
</TABLE>
__________________
(1) Calculated by determining the difference between the initial public
offering price of $6.00 per unit and the exercise price of the options and
warrants.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 1998, and as adjusted to
reflect the sale of the units offered by us, by:
- each person who is known to own beneficially more than 5% of the
outstanding shares of our common stock;
- each of our directors;
- Named Executive Officer; and
- all our directors and executive officers as a group.
The persons listed below have sole voting and investment power with
respect to all shares of common stock shown as being beneficially owned by
them, subject to community property laws, where applicable. The number of
shares column in the table includes shares issuable upon exercise of options
and warrants exercisable within 60 days of December 31, 1998. The number of
options and warrants exercisable within 60 days of December 31, 1998 are
listed in the shares issuable upon exercise of options or warrants column.
The address of all stockholders is care of U.S. Laboratories Inc., 7895
Convoy Court, Suite 18, San Diego, California 92111.
<TABLE>
<CAPTION>
Shares Issuable
Name and Address of Number of Prior to After Upon Exercise of
Beneficial Owner Shares Offering Offering Options or Warrants
- ---------------- ---------- ---------- --------- -------------------
<S> <C> <C> <C> <C>
Dickerson Wright......... 1,772,389 71.8% 49.7% 75,151
Gary H. Elzweig ......... 360,638 14.6% 10.1% 45,151
Martin B. Lowenthal...... 82,192 3.3% 2.3% 26,666
Donald C. Alford......... 77,144 3.1% 2.2% 26,666
Mark Baron............... 60,318 2.4% 1.7% 26,666
Thomas H. Chapman........ 45,727 1.9% 1.3% 21,666
James D. Wait............ 26,666 1.1% * 26,666
James L. McCumber........ 5,000 * * 5,000
Robert E. Petersen....... 5,000 * * 5,000
Noel Schwartz............ 5,000 * * 5,000
Irvin Fuchs.............. 5,000 * * 5,000
All current directors
and officers as a
group (11 persons)....... 2,445,074 99.0% 68.5% 268,632
</TABLE>
_____________________
* Represents less than 1%
38
<PAGE>
RELATED TRANSACTIONS
All ongoing present and future transactions with our affiliates have been,
and will continue to be, on terms no less favorable to us than could have been
obtained from unaffiliated parties, and will be approved by a majority of no
less than two of our independent directors. These independent directors will not
have an interest in those transactions and will have access, at our expense, to
our counsel, or independent legal counsel.
At December 31, 1997 and September 30, 1998, we owed Dickerson Wright,
the Chief Executive Officer and majority stockholder, $584,281 and $97,499,
respectively. The amounts are non-interest bearing and are payable upon
demand. Mr. Wright loaned these amounts to us through the use of his personal
line of credit that was personally guaranteed by Mr. Wright and his spouse.
In May 1998, we repaid a portion of that line of credit by borrowing under a
new $1,700,000 line of credit that is also personally guaranteed by Mr.
Wright and his spouse.
In October 1998, the $1,700,00 line of credit was refinanced into a
$1,200,000 note payable and a $500,000 line of credit, both of which are
guaranteed by Mr. Wright and his spouse. In July 1998, we also entered into a
$500,000 line of credit that is personally guaranteed by Mr. Wright and his
spouse. We used this $500,000 line of credit to repay in full to the bank the
$480,000 loan made to us through the use of Mr. Wright's personal line of
credit.
As part of the consideration for the acquisition of Wyman Enterprises,
Inc.'s assets, we issued a non-interest-bearing note payable to Donald C.
Alford in the principal amount of $150,000. The note payments are due in four
equal annual installments of $37,500 beginning in March 1999.
During the years ended December 31, 1997 and 1996 and the nine months
ended September 30, 1998 and 1997, we paid $181,067, $169,594, $92,052, and
$137,063, respectively, in management fees to Gary Elzweig. The management
fees were based on 5% of net sales of a subsidiary.
On January 1, 1998, we issued (a) 315,488 shares of our common stock to
Gary H. Elzweig in exchange for 100 shares of the common stock of
Professional Engineering; (b) 55,526 shares of our common stock to Martin B.
Lowenthal in exchange for 18.5 shares of the common stock of U.S.
Engineering; (c) 33,652 shares of our common stock to Mark Baron in exchange
for 1.67 shares of the common stock of San Diego Testing; and (d) 24,061
shares of our common stock to Thomas H. Chapman in exchange for 5.67 shares
of the common stock of San Diego Testing.
On January 1, 1998, we issued 10,937 shares of our common stock to
Christopher O'Malley, Vice President of U.S. Engineering under the terms of a
restricted stock agreement containing restrictions on the disposition of the
common stock. The common stock was issued in exchange for a capital
contribution made by Mr. O'Malley to U.S. Engineering.
On April 1, 1998, we issued 50,478 shares of our common stock to Donald
C. Alford in exchange for 25 shares of the common stock of Wyman Enterprises,
Inc.
39
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the underwriting
agreement, Cardinal Capital Management, Inc.; Janda & Garrington LLC; and FAS
Wealth Management Services, Inc., have agreed to purchase from us, and we
have agreed to sell to the underwriters, 1,100,000 units. Each unit consists
of one share of common stock and one Warrant to purchase one share of common
stock at $7.80 per share. We granted the underwriters an overallotment option
to purchase an additional 165,000 units, subject to certain terms and
conditions, some of which are specified below.
The underwriters are committed to take and pay for all of the 1,100,000
units, if any are taken. The underwriters have advised us that they propose
to offer the units to the public at the initial public offering price of
$6.00 per Unit. The underwriters will purchase the units at a discount of
10%. The underwriters initially propose to offer part of the units directly
to the public at the initial public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of 6.5% of the initial public offering
price. The underwriters may change the initial public offering price,
concession, and discount to dealers after the units are released for sale to
the public.
The underwriters have informed us that they do not intend to confirm
sales to any account over which they exercise discretionary authority.
We will also pay the underwriters a 3% non-accountable expense
allowance, of which $40,000 has been paid to date.
Upon completion of the offering, we will grant to the underwriters
warrants to purchase 110,000 units which equals 10% of the 1,100,000 units.
These underwriters' warrants will entitle the underwriters to purchase units
at a price equal to 143% of the offering price to the public for a period
commencing one year after the effective date of the registration statement
and ending five years after that date. The units offered to the underwriters
will contain warrants to purchase common stock on terms identical to the
warrants issued to the public. These warrants may not be transferred except
to the underwriters' officers and employees, who are also stockholders of the
underwriters or by will, under the laws of descent and distribution, or by
the operation of law. The exercise price of these warrants may not be reduced
after the effective date of the registration statement except in accordance
with the terms of a stock dividend; stock split; or merger, consolidation,
reclassification, reorganization, recapitalization, or a sale of the
Company's assets. We have agreed to pay all costs and expenses incident to
the registration and qualification of the units with the SEC, the NASD, and
such state securities regulatory agencies as the underwriters may reasonably
request.
We paid Janda & Garrington LLC $22,500 in fees for services rendered
in the acquisition of Wyman Enterprises, Inc. in July 1998.
We have filed an application with the NASD to obtain a Nasdaq SmallCap
Market (SM) listing for the common stock and the warrants.
The underwriting agreement provides that the obligations of the
Underwriter to pay for and accept delivery of the units are subject to the
approval of certain legal matters by counsel and to certain other conditions.
In connection with the offering, the underwriters may engage in certain
transactions that stabilize the price of the common stock or the warrants.
These transactions consist of bids or purchases for the purpose of pegging,
fixing, or maintaining the price of the common stock or the warrants.
40
<PAGE>
If the underwriters create a short position in the common stock or the
warrants in connection with the offering, the underwriters may reduce that
short position by purchasing common stock or the warrants in the open market.
The underwriters may also elect to reduce any short position by exercising
all or part of the overallotment option. In general, purchases of a security
for the purpose of stabilization or to reduce a short position could cause
the price of the security to be higher than it might be in the absence of
such purchases.
Neither the underwriters nor we make any representation or prediction as
to the direction or magnitude of any effect that the transactions described
above may have on the price of the units. Also, neither we nor any of the
underwriters make any representation that the underwriters will engage in
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
We granted the underwriters, for a period of 45 days following the
effective date of the registration statement, an overallotment option to
purchase any or all of the 165,000 units at the initial public offering price
set forth on the cover page hereof, less underwriting discounts and
commissions. The underwriters may exercise this option to purchase solely for
the purpose of covering over-allotments, if any, incurred in the sale of the
units.
We determined the units' purchase price by mutual agreement with our
underwriters after consideration of a number of objective and subjective
factors, and that price does not necessarily relate to our assets, book
value, results of operations, or other established criteria of our value.
Among the factors considered in determining the initial public offering
price were our future prospects and our business in general, sales, earnings,
our capital requirements, certain other of our financial and operating
information in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities, and certain other financial and operating
information of companies engaged in activities similar to ours. We did not
prepare a valuation or appraisal for our business or our potential business
expansion. The units' price does not necessarily indicate current market
value for our assets. We did not prepare a valuation or appraisal for our
business or our potential business.
We agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
The underwriters may impose a penalty bid on certain underwriters and
selling group members. This means that if the underwriters purchase units in
the open market to reduce the underwriters' short position or to stabilize
the price of the units, they may reclaim the amount of the selling
concessions from the underwriters and the selling group members who sold
those units in the offering.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OR THE WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES.
DESCRIPTION OF SECURITIES
UNITS
Each unit we offer consists 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. The common stock and the warrant comprising
each unit will be separately transferable upon issuance.
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of common stock, par
value $.01 per share. As of the date of this prospectus, there were 2,200,000
shares of common stock issued and outstanding, held of record by ten
stockholders. You are entitled to one vote for each share held of record on
each matter submitted to a vote at a meeting of stockholders. Except as
provided by resolutions of our board of directors providing for the issuance
of any class or series of preferred stock, the exclusive voting power for all
purposes is vested in the holders of common stock.
Except as otherwise indicated in this prospectus, all information
contained in this prospectus:
- assumes no exercise of the underwriters' over-allotment option and
41
<PAGE>
- gives effect to a 20,324-for-one split of our common stock, par value
$.01 per share, and a one-for-0.8413 reverse stock split of the common
stock
These stock splits were undertaken in order to facilitate the offering.
Subject to the preferential rights of holders of preferred stock as
provided by resolutions of our board of directors authorizing the issuance of
any class of preferred stock, you are entitled to receive your pro rata
share, based upon the number of shares held by you, of such dividends or
other distributions as may be declared by the board of directors. In the
event of our liquidation, dissolution, or winding up, you are entitled to
share ratably in all assets remaining after the payment or provision of our
debts and other liabilities and the liquidation preference of any outstanding
preferred stock. You have no preemptive rights and have no rights to convert
your common stock into any other securities. The outstanding shares of common
stock are, and the shares of common stock offered hereby will be, when
issued, validly issued, fully paid, and nonassessable.
After completion of the offering, 3,300,000 shares of common stock will
be issued and outstanding assuming no exercise of the underwriters'
overallotment option, the warrants, the underwriters' warrants and other
outstanding rights to acquire the common stock.
WARRANTS
GENERAL. The following is a brief summary of certain provisions of the
warrants included in the units offered hereby. This summary does not purport
to be complete and is qualified in all respects by reference to the actual
terms and provisions of the agreement between us and North American Transfer
Co. that appoints North American as our warrant agent. A copy of the
agreement is filed as an exhibit to the registration statement of which this
prospectus is a part. See "Additional Information."
EXERCISE PRICE AND TERMS. Each warrant entitles you to purchase at any
time over a five-year period commencing on the effective date of the
registration statement of which this prospectus is a part, one share of
common stock at a price of $7.80, subject to adjustment in accordance with
the anti-dilution and other provisions referred to below. The exercise price
of the warrants bears no relation to any objective criteria of value, and
should in no event be regarded as an indication of any future market price of
the securities offered hereby. You have the right to exercise your warrants
for the purchase of shares of common stock only if a current prospectus
relating to such shares is then in effect and only if such shares are
qualified for sale, or deemed to be exempt from qualification, under
applicable state securities laws. We will use our best efforts to maintain a
current prospectus relating to such shares of common stock at all times when
the market price of the common stock exceeds the exercise price of the
warrants until the expiration date of the warrants, although there can be no
assurance that we will be able to do so.
In order to exercise the warrants, you must surrender the warrant
certificate evidencing the warrants, complete, execute and deliver to North
American the exercise form on the reverse side of the warrant certificate,
together with payment to us of the exercise price with respect to the
warrants then being exercised and an amount equal to any applicable transfer
tax and, if requested by us, any other taxes or governmental charges which we
may be required by law to collect. Payment of the exercise price and other
amounts may be made in cash, or by certified or official bank check to the
order of U.S. Laboratories Inc. No adjustment will be made for any cash
dividends, whether paid or declared, on any securities issuable upon exercise
of a warrant. If you exercise fewer than all of the warrants evidenced by the
warrant certificate, North American will deliver to the registered holder a
new warrant certificate evidencing the number of warrants not exercised.
ANTI-DILUTION ADJUSTMENTS. If we issue a stock dividend, engage in a
stock split or reverse stock split, or reclassify the common stock, the
number of shares of common stock purchasable upon exercise of the warrant
will be adjusted so that you will be entitled to receive the same number of
securities that you would have been entitled to receive if the warrant had
been exercised before the stock dividend, stock split or reverse stock split,
or reclassification. No adjustment will be made, however, unless the
adjustment would result in a 1% change in the number of shares of common
stock issuable under the warrant. If an adjustment is made, the exercise
price of the warrant will be adjusted so that the total price for exercising
the warrant will be the same after the adjustment as it was before the
adjustment.
42
<PAGE>
For example, if the anti-dilution adjustment increases the number of
shares issuable under the warrant from one share to two shares, the exercise
price will decrease from $7.80 per share to $3.90 per share. Whenever the
number of shares of common stock issuable under the warrants is adjusted as
described above, we will file with North American a certificate of certain of
our officers setting forth the adjusted number of shares purchasable and
adjusted per share purchase price, certifying compliance with the terms of
the agreement and setting forth a brief description of the adjustments. After
filing such certificate, we or North American will deliver a brief summary of
the adjustments to you.
REDEMPTION PROVISIONS. We have the option to redeem the outstanding
warrants in whole at any time or in part from time to time, on not more than
60 days' nor less than 30 days' written notice to you at a price equal to
$0.01 per warrant so long as the closing price for the common stock on Nasdaq
exceeds 200% of the public offering price of units under the offering for 20
consecutive trading days ending on the third trading day prior to the day on
which we give notice of redemption. You will have the right to exercise the
warrants under the terms described above until the redemption date. On the
redemption date, if you are the registered holder of unexercised warrants,
you are entitled to payment of the redemption price upon surrender of the
redeemed warrants to us at the stock transfer office of North American. If we
redeem fewer than all of the outstanding warrants, we will designate those
warrants to be redeemed pro rata or by lot.
After the redemption date, all your rights except the right to receive
the redemption price terminates, but only if
- on or prior to the redemption date we have irrevocably deposited with
North American a sufficient amount to pay the redemption price for all
warrants called for redemption, and
- the notice of redemption has stated the name and address of the
North American and our intention to deposit this amount with North
American on or before the redemption date.
NO PRIOR TRADING MARKET AND PENNY STOCK REGULATION
Prior to the offering, there has been no public market for our shares or
warrants. The offering price for the shares and warrants was determined
through negotiations between us and the underwriters and may not be
indicative of the market price of the shares and warrants after the offering.
The Nasdaq SmallCap Market(SM) is considering our applications to list our
common stock and warrants with them and we believe that we will be able to
satisfy and maintain their current and proposed entry and maintenance
standards when we complete this offering. If we are unable to satisfy the
requirements for continued listing on Nasdaq, our shares and warrants will
not be traded in those markets.
If our shares or warrants are not listed as contemplated, trading, if
any, would be conducted in the over-the-counter market in the so-called pink
sheets or the OTC Bulletin Board, established for securities that do not
meet the Nasdaq SmallCap Market(SM) listing requirements. Consequently, the
liquidity of our securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts' and the news media's
coverage of U.S. Labs, and lower prices and larger differences in bid and ask
prices for our securities.
If our securities are not listed on the Nasdaq SmallCap Market(SM), they
may become subject to Rule 15g-9 under the Securities Exchange Act, which
imposes additional sales practice requirements on broker-dealers which sell
such securities to persons other than established customers. For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the rule may affect
the ability of broker-dealers to sell our shares and may affect the ability
of holders to sell our shares in the secondary market.
The SEC's regulations define a penny stock to be any equity security
that has a market price less than $5.00 per share or with an exercise price
of less than $5.00 per share, subject to certain exceptions. The penny
stock restrictions will not apply to our shares or warrants if they are
listed on The Nasdaq SmallCap Market(SM) and we
43
<PAGE>
provide certain price and volume information on a current and continuing
basis or meet required minimum net tangible assets or average revenue
criteria. We cannot assure you that our shares or warrants will qualify for
exemption from these restrictions. If our shares or warrants were subject to
the penny stock rules, the market liquidity for them could be severely
adversely affected.
PREFERRED STOCK
Our corporate documents authorize the board of directors to provide by
resolution for the issuance from time to time of up to 5,000,000 shares of
preferred stock in one or more class or series, with such special rights and
preferences, including but not limited to dividend or liquidation
preferences, voting rights and redemption rights, anti-dilution rights or
conversion rights, as the Board may specify. U.S. Labs will not issue
preferred stock to its promoters except of the same terms as it is offered to
all other of its existing stockholders or new stockholders, or unless the
issuance of preferred stock is approved by a majority of U.S. Labs'
independent directors who did not have an interest in the transaction and who
have access, at U.S. Labs' expense, to U.S. Labs' or independent legal
counsel.
As of the date of this prospectus, the board of directors has not
authorized the issuance of any class or series of preferred stock and no
shares of preferred stock are issued or outstanding.
TRANSFER AGENT
The transfer agent and registrar for the common stock and warrants is
North American Transfer Co.
SHARES ELIGIBLE FOR FUTURE SALE
Assuming no exercise of options, warrants, underwriters' overallotment
option, or other convertible securities or issuances of common stock
subsequent to December 31, 1998, after the offering, we will have 3,300,000
shares of common stock outstanding. The 1,100,000 shares of common stock sold
in the offering will be freely tradable without restriction or further
registration under the Act, except that any shares purchased by our
affiliates, as that term is defined in Rule 144 under the Securities Act, may
generally be sold only in compliance with certain limitations of Rule 144
described below.
The remaining 2,200,000 shares of common stock are deemed restricted
shares under Rule 144. None of the restricted shares are eligible for sale in
the public market immediately after the offering under Rule 144(k) under the
Securities Act. Restricted shares in the amount of 1,697,238 may be eligible
for sale in the public market in accordance with Rule 144 under the
Securities Act beginning 90 days after the date of this prospectus.
The holders of these restricted shares have agreed not to sell or
otherwise dispose of any of these shares for a period of 18 months after the
date of this prospectus without the prior written consent of Cardinal Capital
Management, Inc. Cardinal may, in its sole discretion, and at any time
without notice, release all or any portion of the securities subject to
lock-up agreements.
Additionally, our six largest stockholders have agreed to sign an
agreement with several of the states not to sell or otherwise dispose of a
substantial amount of their shares for a period of 12 months after the date
of this prospectus, and they have agreed not to sell more than 2.5% of their
shares in each quarter for the period from 12 months to 24 months after the
date of this prospectus.
Upon expiration of the various lock-up agreements, 2,200,000 shares of
common stock will become available for sale in the public market subject to
volume limitations and certain other conditions imposed by Rule 144. This total
does not include 388,632 shares issued or issuable upon the exercise of vested
options and warrants outstanding as of December 31, 1998.
Under Rule 144, beginning approximately 90 days after the effective date of
the Registration Statement of which this prospectus is a part, a stockholder,
including an affiliate, who has beneficially owned his or her restricted
44
<PAGE>
securities for at least one year from the later of the date such securities
were acquired from us or an affiliate, is entitled to sell, within any
three-month period the greater of:
- 1% of the then outstanding shares of common stock, approximately
33,000 immediately after the offering, or
- the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale was
filed under Rule 144.
These sales may occur only if certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied.
In addition, under Rule 144(k), if a period of at least two years has
elapsed between the later of the date restricted securities were acquired
from us or the date they were acquired from one of our affiliates, a
stockholder who is not one of our affiliates at the time of sale and has not
been one of our affiliates for at least three months prior to the sale is
entitled to sell the shares immediately without compliance with the foregoing
requirements under Rule 144.
Securities issued in reliance on Rule 701 are also restricted securities
and, beginning 90 days after the date of this prospectus, may be sold by
stockholders other than one of our affiliates subject only to the manner of
sale provisions of Rule 144 and by one of our affiliates under Rule 144
without compliance with its one-year holding period requirement. Rule 701
applies to securities issued in compensation plans.
Prior to the offering, there has been no public market for the common
stock or the warrants. We cannot predict the effect, if any, that market
sales of shares or the availability of shares for sale will have on the
market price of the common stock or the warrants prevailing from time to
time. We cannot estimate the number of shares that may be sold in the public
market under Rule 144, since this will depend on the market price of the
common stock, the personal circumstances of the sellers, and other factors.
Nevertheless, sales of significant amounts of our common stock in the public
market could adversely affect the market price of the common stock or the
warrants and could impair our ability to raise capital through an offering of
equity securities.
EXPERTS
Our consolidated financial statements at December 31, 1996 and 1997 and
for each of the two years in the period ended December 31, 1997 appearing in
this prospectus and the Registration Statement have been audited by Singer
Lewak Greenbaum Goldstein LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement
and are included in reliance upon this report given upon the authority of
this firm as experts in accounting and auditing.
The financial statements of Wyman Testing Laboratories, Inc. at December
31, 1997 and for the year then ended appearing in this prospectus and the
Registration Statement have been audited by Singer Lewak Greenbaum Goldstein
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement and are included in
reliance upon this report given upon the authority of this firm as experts in
accounting and auditing.
LEGAL MATTERS
On our behalf, Foley & Lardner, San Diego, California and Chicago,
Illinois will pass upon the validity of the issuance of the securities being
offered by this prospectus. Camner, Lipsitz and Poller, P.A., Coral Gables,
Florida will pass upon certain legal matters for the underwriters.
45
<PAGE>
ADDITIONAL INFORMATION
We have filed a Registration Statement on Form SB-2 under the Securities
Act with the SEC in Washington, D.C. with respect to the securities offered
hereby. This prospectus, which is part of the registration statement, does
not contain all of the information set forth in the registration statement
and the exhibits and schedules thereto. For further information about us and
the securities offered hereby, you should refer to the registration statement
and the exhibits and schedules filed as a part thereof. Statements contained
in this prospectus as to the contents of any agreement or any other document
referred to are not necessarily complete, and in each instance, if such
agreement or document is filed as an exhibit, you should refer to the copy of
the agreement or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by reference to the
exhibit.
The registration statement, including exhibits and schedules thereto,
may be inspected and copied at the principal office of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices at 7 World Trade Center, New York, New York 10048, and
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of material may also be obtained at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, we are required to file electronic versions of these
documents with the SEC through the SEC Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC. Prior to this offering, U.S. Labs was not a reporting company under the
Securities Exchange Act.
46
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
U.S. LABORATORIES INC. AND SUBSIDIARIES
<S> <C>
Report of Singer Lewak Greenbaum Goldstein LLP, Independent Auditors.......................................F-2
Consolidated Balance Sheets at December 31, 1997 and
at September 30, 1998 (unaudited)..........................................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1997
and 1996 and the nine months ended September 30, 1998 and 1997 (unaudited).................................F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 and the nine months ended September 30, 1998 (unaudited)........................F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1997
and 1996 and the nine months ended September 30, 1998 and 1997 (unaudited).................................F-7
Notes to Consolidated Financial Statements................................................................F-10
WYMAN TESTING LABORATORIES, INC.
Report of Singer Lewak Greenbaum Goldstein LLP, Independent Auditors......................................F-24
Balance Sheet at December 31, 1997........................................................................F-25
Statement of Operations for the year ended December 31, 1997..............................................F-27
Statement of Stockholders' Equity for the year ended December 31, 1997....................................F-28
Statement of Cash Flows for the year ended December 31, 1997..............................................F-29
Notes to Financial Statements.............................................................................F-31
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Pro Forma Balance Sheet...................................................................................F-39
Pro Forma Statement of Operations.........................................................................F-41
Note to Pro Forma Financial Statements....................................................................F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
U.S. Laboratories Inc.
We have audited the accompanying consolidated balance sheet of U.S. Laboratories
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1997. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of U.S. Laboratories
Inc. and subsidiaries as of December 31, 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 4, 1998 (except for
Note 7, as to which the date
is October 21, 1998)
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Current assets
Cash ............................................................. $ 94,132 $ 144,991
Accounts receivable, net of allowances for doubtful
accounts of $40,927 and $57,755, respectively...................... 1,719,120 2,936,439
Work-in-process........................................................ 181,772 263,615
Prepaid expenses and other current assets.............................. 47,414 65,323
--------------- ----------------
Total current assets.......................................... 2,042,438 3,410,368
Furniture and equipment, net of accumulated depreciation
of $564,217 and $718,873, respectively................................. 395,711 762,846
Excess cost over fair value of net assets acquired, net
of accumulated amortization of $331,725 and $422,109,
respectively .......................................................... 939,147 1,554,887
Deferred offering costs..................................................... - 317,825
Other assets .......................................................... 154,411 170,279
--------------- ----------------
Total assets.............................................. $ 3,531,707 $ 6,216,205
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Current liabilities
Book overdraft......................................................... $ 9,390 $ 16,741
Lines of credit........................................................ 484,335 583,660
Current portion of long-term debt...................................... 84,526 109,617
Current portion of capitalized lease obligations....................... - 10,285
Current portion of notes payable....................................... - 423,993
Accounts payable....................................................... 273,620 422,019
Accrued payroll and payroll taxes...................................... 115,214 221,430
Other accrued expenses................................................. 14,612 -
Due to stockholder..................................................... 584,281 97,499
Deferred income tax.................................................... 678,749 678,749
Income tax payable..................................................... 162,708 471,009
--------------- ---------------
Total current liabilities.......................................... 2,407,435 3,035,002
Long-term debt, net of current portion...................................... 118,732 241,981
Capitalized lease obligations, net of current portion....................... - 6,809
Notes payable, net of current portion....................................... - 1,245,000
--------------- ---------------
Total liabilities............................................. 2,526,167 4,528,792
--------------- ---------------
Minority interest .......................................................... 338,128 -
--------------- ---------------
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
1,709,858 and 2,200,000 shares issued and outstanding.............. 17,099 22,000
Additional paid-in capital............................................. 380,901 970,252
Retained earnings...................................................... 269,412 695,161
--------------- ---------------
Total stockholders' equity.................................... 667,412 1,687,413
--------------- ---------------
Total liabilities and stockholders' equity................ $ 3,531,707 $ 6,216,205
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months Ended
December 31, September 30,
--------------------------------- ---------------------------------
1997 1996 1998 1997
--------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue ................................... $ 7,766,414 $ 4,963,090 $ 8,478,329 $ 5,507,806
Cost of goods sold.......................... 4,476,952 2,635,263 4,432,509 3,158,483
--------------- ---------------- --------------- ----------------
Gross profit................................ 3,289,462 2,327,827 4,045,820 2,349,323
Selling, general, and administrative
expenses................................. 2,431,770 1,853,318 3,215,256 1,704,547
--------------- ---------------- --------------- ----------------
Income from operations...................... 857,692 474,509 830,564 644,776
--------------- ---------------- --------------- ----------------
Other income (expense)
Interest expense......................... (130,605) (84,390) (118,814) (90,520)
Interest income.......................... 7,277 8,430 9,252 4,371
Forgiveness of note receivable........... - (9,976) - 1,738
Other Income............................. 100,000 -- -- 100,000
Other Expense............................ (100,000) -- -- (100,000)
Gain (loss) on sale of fixed asset....... 4,912 (3,873) - -
Rental income............................ 25,160 4,598 13,048 20,918
Gain on sale of minority interest........ 25,229 - - 25,229
--------------- ---------------- --------------- ----------------
Total other income (expense)........... (68,027) (85,211) (96,514) (38,264)
---------------- ---------------- -------------- ----------------
Income before provision for income
taxes and minority interest.............. 789,665 389,298 734,050 606,512
Provision for income taxes.................. 345,256 202,921 308,301 264,545
--------------- ---------------- --------------- ----------------
Income before minority interest............. 444,409 186,377 425,749 341,967
Minority interest........................... (80,253) (33,664) - (62,851)
--------------- ---------------- --------------- ----------------
Net income.................................. $ 364,156 $ 152,713 $ 425,749 $ 279,116
=============== ================ =============== ================
Basic income per share...................... $ 0.17 $ 0.07 $ 0.19 $ 0.13
=============== ================ =============== ================
Diluted income per share.................... $ 0.17 $ 0.07 $ 0.19 $ 0.13
=============== ================ =============== ================
Weighted Average shares outstanding......... 2,200,000 2,200,000 2,200,000 2,200,000
=============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1995................ 1,709,858 $ 17,099 $ 380,901 $ (247,457) $ 150,543
Net income................. 152,713 152,713
--------------- --------------- ---------------- --------------- ----------------
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 (unaudited)..... 490,142 4,901 589,351 594,252
Net income (unaudited)..... 425,749 425,749
--------------- --------------- ---------------- --------------- ----------------
Balance, September 30,
1998 (unaudited) ....... 2,200,000 $ 22,000 $ 970,252 $ 695,161 $ 1,687,413
=============== =============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months Ended
December 31, September 30,
--------------------------------- ---------------------------------
1997 1996 1998 1997
--------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income............................... $ 364,156 $ 152,713 $ 425,749 $ 279,116
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization......................... 84,724 84,724 90,384 63,543
Depreciation......................... 181,552 145,980 182,240 142,756
Loss (gain) on sale of fixed asset... (4,912) 3,873 - -
Recovery of expenses................. (100,000) - - (100,000)
Minority interest.................... 80,253 33,664 - 62,851
Distributions to minority interests.. (20,000) (251,327) - -
Gain on sale of subsidiary stock..... 9,771 - - 9,771
Deferred income tax.................. 275,918 109,551 - -
(Increase) decrease in
Accounts receivable.................... (750,149) (325,311) (639,638) (577,868)
Work in process........................ 24,826 (21,344) (81,843) 99,704
Prepaid expenses....................... 21,008 7,571 12,076 27,500
Other assets........................... (63,486) (34,300) (15,868) (8,893)
Increase (decrease) in
Accounts payable....................... 49,476 (2,965) 93,679 (10,523)
Accrued payroll and payroll taxes...... 46,362 41,447 33,606 31,168
Other accrued expenses................. (1,251) 15,863 (15,785) (1,498)
Income tax payable..................... 69,338 93,370 308,301 264,545
--------------- ---------------- --------------- ----------------
Net cash provided by operating
activities.................................. 267,586 53,509 392,901 282,172
--------------- ---------------- --------------- ----------------
Cash flows from investing activities
Purchase of furniture and equipment...... (83,798) (93,142) (189,838) (60,293)
Proceeds from sale of fixed assets....... 34,291 4,801 - -
Investment in the San Diego division
of CH&A Corporation.................... - (62,500) - -
Investment in Wyman Enterprises,
Inc., net of cash acquired............. - - (296,730) -
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....... (49,507) (150,841) (535,468) (60,293)
--------------- ---------------- --------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months Ended
December 31, September 30,
--------------------------------- ---------------------------------
1997 1996 1998 1997
--------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Increase (decrease) in book
overdraft.............................. $ (69,095) $ 46,792 $ 7,351 $ (78,485)
Line of credit, net...................... 322,229 162,106 (98,176) 293,582
Due to stockholders, net................. (130,421) 161,443 (486,782) (11,014)
Payments on long-term debt............... (97,660) (64,919) (95,130) (74,329)
Payments on capitalized lease
obligations............................ - - (10,005) -
Payments on notes payable................ (149,000) (238,000) - (149,000)
Deferred offering costs.................. - - (317,825) -
Increase in notes payable................ - - 1,218,993 -
Due from Wyman Testing
Laboratories, Inc...................... - - (25,000) -
--------------- ---------------- --------------- ----------------
Net cash provided by (used in)
financing activities ...................... (123,947) 67,422 193,426 (19,246)
--------------- ---------------- --------------- -----------------
Net increase (decrease) in cash............. 94,132 (29,910) (50,859) 202,633
Cash, beginning of period................... - 29,910 94,132 -
--------------- ---------------- --------------- ----------------
Cash, end of period......................... $ 94,132 $ - $ 144,991 $ 202,633
=============== ================ =============== ================
Supplemental disclosures of cash flow
information
Interest paid............................ $ 130,605 $ 84,390 $ 118,814 $ 90,520
=============== ================ =============== ================
Income taxes paid........................ $ 2,000 $ 1,380 $ 135 $ 1,000
=============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Supplemental schedule of non-cash investing and financing activities
During the years ended December 31, 1997 and 1996 and the nine months ended
September 30, 1998 and 1997, the Company acquired an automobile and trucks of
$124,469, $105,679, $213,685, and $124,449, respectively, under note payable
agreements.
During the year ended December 31, 1997 and the nine months ended September
30, 1997, the Company recovered expenses in the amount of $100,000 and
reduced the note payable to the sellers (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.
F-9
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 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, and Florida and grants credit to customers in those states.
Acquisitions
On October 18, 1996, the Company acquired substantially all the furniture
and equipment of the San Diego division of CH&A Corporation. The purchase
price of the assets was $67,500 which was paid on the closing date.
On January 1, 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 US
Labs 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:
<TABLE>
<S> <C>
Cash $ 22,690
Accounts receivable 577,681
Prepaids 29,985
Furniture and equipment 96,952
Goodwill 511,200
Liabilities (407,888)
----------------
TOTAL $ 830,620
================
</TABLE>
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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 1 - ORGANIZATION AND BUSINESS (CONTINUED)
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.
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:
<TABLE>
<S> <C>
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
</TABLE>
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. In the event
that the IPO is not successful, the deferred offering costs will be charged
to expense.
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 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 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, 1997 and 1996 and the nine months ended
September 30, 1998 and 1997 were $15,699, $29,047, $36,140, and $12,305,
respectively.
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, 1998 are not necessarily indicative of results for the entire
fiscal year ending December 31, 1998.
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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, 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.
F-13
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements SFAS No. 130, "Reporting
Comprehensive Income," is effective for financial statements with fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The Company does not
expect adoption of SFAS No. 130 to have a material effect, if any, on its
financial position or results of operations.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements with fiscal years
beginning after December 15, 1997. This statement establishes standards for
the way that public entities report selected information about operating
segments, products, and services, geographic areas, and major customers in
interim and annual financial reports. The Company does not expect adoption
of SFAS No. 131 to have a material effect, if any, on its financial
position or results of operations.
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, 1997 and
September 30, 1998, uninsured portions of balances held at banks aggregated
to $27,026 and $0, respectively. 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.
F-14
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------------- ----------------
<S> <C> <C>
Automobile and trucks...................................... $ 465,614 $ 609,022
Furniture and fixtures..................................... 237,798 283,189
Office hardware and software............................... 35,666 80,645
Machinery and equipment.................................... 202,313 408,977
Leasehold improvements..................................... 18,537 99,886
--------------- ----------------
959,928 1,481,719
Less accumulated depreciation and amortization............. 564,217 718,873
--------------- ----------------
TOTAL.................................................. $ 395,711 $ 762,846
=============== ================
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997
and 1996 and the nine months ended September 30, 1998 and 1997 was
$181,552, $145,980, $182,240, and $142,756, respectively.
NOTE 5 - LINES OF CREDIT
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
The Company has a $800,000 line of credit from
a bank with interest payable on a monthly basis at the
30-day Commercial Paper Rate (5.75% at December 31,
1997) plus 3.15%. The line of credit is secured by
substantially all of the Company's assets and
personally guaranteed by the majority stockholder.
Subsequent to year end, amounts were repaid .......... $ 484,335 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
<TABLE>
<CAPTION>
NOTE 5 - LINES OF CREDIT (CONTINUED)
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
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 (8.5% at December 31,
1997). 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. Subsequent to
year-end, 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................................................ $ - $ 318,660
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............................................... - 265,000
------------ -------------
TOTAL............................................. $ 484,335 $ 583,660
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Notes payable to Toyota Motor Credit Corporation,
collateralized by applicable equipment. The notes are
currently due in aggregate monthly payments of $355
including interest at 9.19%
per annum.............................................. $ 5,788 $ 3,215
Notes payable to General Motors Credit Corporation,
collateralized by applicable equipment. The notes are
currently due in aggregate monthly payments of $2,167
including interest from 7.95% to 9.7% per
annum.................................................. 78,869 99,954
Notes payable to Barnett Bank, collateralized by applicable
equipment. The notes are currently due in aggregate
monthly payments of $4,644 including interest from 9.29%
to 14.5% per
annum.................................................. 68,099 85,380
Notes payable to Ford Motor Credit Corporation, collateralized
by applicable equipment. The notes are currently due in
aggregate monthly payments of $1,969 including interest
from
7.99% to 10.25% per annum.............................. 50,502 163,049
------------ -------------
203,258 351,598
Less current portion....................................... 84,526 109,617
------------ -------------
Long-term portion................................. $ 118,732 $ 241,981
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 6 - LONG-TERM DEBT (CONTINUED)
The following is a schedule by years of future maturities of long-term
debt:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<C> <C>
1998 $ 84,526
1999 66,577
2000 28,880
2001 20,250
2002 3,025
----------------
TOTAL $ 203,258
================
</TABLE>
Subsequent to year end, the Company entered into five note payable
agreements and assumed two note payable agreements upon the acquisition of Wyman
Enterprises, Inc. The notes are currently due in aggregate monthly payments of
$4,173 including interest from 8.75% to 13.5% per annum.
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at September 30, 1998. (All
balances were zero at December 31, 1997.):
<TABLE>
<S> <C>
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............... $ 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................ 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............................................ 18,993
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 7 - NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
Note payable to bank starting January 1999. The note is interest only
through December 31, 1998 at the prime rate (8.5% at December 31, 1997).
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................... $ 1,200,000
----------------
1,668,993
Less current portion........................................................... 423,993
----------------
Long-term portion..................................................... $ 1,245,000
================
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
Due to Stockholder
At December 31, 1997 and September 30, 1998, the Company had amounts due
to the majority stockholder of $584,281 and $97,499, respectively. The
amounts are non-interest bearing and are payable upon demand.
Stockholder Management Fees
During the year ended December 31, 1997 and 1996 and the nine months ended
September 30, 1998 and 1997, the Company expensed $181,067, $169,594,
$92,052, and $137,063, 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, 1997 are as follows:
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (continued)
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $ 195,622
1999 76,504
2000 38,946
2001 214,608
----------------
525,680
Less sublease 19,390
----------------
Total $ 506,290
================
</TABLE>
Rent expense was approximately $316,685, $153,250, $230,156, and $251,391
for the years ended December 31, 1997 and 1996 and the nine months ended
September 30, 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
2002. 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.
Lease Commitments
In May 1998, the Company entered into a non-cancelable operating lease
agreement for its facilities in California that expires in April 2003. The
agreement initially requires monthly payments of $8,230 with annual
increases.
In May 1998, upon the acquisition of PSI, the Company assumed PSI's lease
obligation in New Jersey. PSI will pay the monthly lease through November
30, 1998, and the Company will be responsible for the monthly lease
payments of $1,700 from December 1, 1998 to May 30, 2001.
In May 1998, upon the acquisition of Jupiter, the Company assumed Jupiter's
lease obligation in Florida. The Company is responsible for the monthly
lease payments of $1,198 through June 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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.
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, 1997 and 1996 were
$26,900 and $11,700, 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:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Income tax computed at federal statutory tax rate.............. 34.0% 34.0%
State taxes, net of federal benefit............................ 6.5 9.9
Non-deductible goodwill amortization and other................. 3.2 8.0
--------------- --------------
Total................................................... 43.7% 51.9%
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
NOTE 11 - INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
for income taxes for the year ended December 31, 1997 consisted of the
following:
<TABLE>
<S> <C>
Deferred tax assets
Accrued payroll and other expenses.................... $ 90,275
Other................................................. 1,400
----------------
91,675
----------------
Deferred tax liabilities
Accounts receivable................................... 667,648
Work-in-progress...................................... 72,708
Other................................................. 30,068
----------------
770,424
----------------
Net deferred tax liability....................... $ (678,749)
================
</TABLE>
The components of the income tax provision for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Current
Federal............................................... $ 24,938 $ 79,365
State................................................. 4,200 14,005
--------------- ----------------
29,138 93,370
--------------- ----------------
Deferred
Federal............................................... 214,302 93,118
State................................................. 61,616 16,433
--------------- ----------------
275,918 109,551
--------------- ----------------
Total attributable to income before
extraordinary item............................. $ 305,056 $ 202,921
--------------- ----------------
Current
Federal............................................... 34,000
State................................................. 6,200
--------------- --------------
Total attributable to extraordinary item........ 40,200
--------------- --------------
Total.................. $ 345,256 $ 202,921
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(The information with respect to the nine months ended September 30, 1998
and 1997 is unaudited.)
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, 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 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. The Board of Directors also
approved the grant of an additional 62,500 options to various employees
under the plan.
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 1, 2003.
NOTE 14 - OTHER INCOME (EXPENSES)
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 - SUBSEQUENT EVENTS (UNAUDITED)
Stock Option Plan and Warrants
In November 1998, the Company cancelled all of its outstanding options
and warrants.
In November 1998, 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.
In November 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 $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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Wyman Testing Laboratories, Inc.
We have audited the accompanying balance sheet of Wyman Testing Laboratories,
Inc. as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wyman Testing Laboratories,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 29, 1998
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
WYMAN TESTING LABORATORIES, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets
Cash..................................................................................... $ -
Accounts receivable....................................................................... 716,173
Prepaid assets............................................................................ 46,818
----------------
Total current assets.................................................................. 762,991
Furniture and equipment, net of accumulated depreciation
and amortization of $244,913.............................................................. 68,508
----------------
Total assets................................................................. $ 831,499
================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
WYMAN TESTING LABORATORIES, INC.
BALANCE SHEET (CONTINUED)
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities
Book overdraft............................................................................ $ 37,778
Revolving lines of credit................................................................. 197,501
Accounts payable.......................................................................... 38,488
Accrued payroll and payroll taxes......................................................... 40,114
Accrued stockholder's salaries............................................................ 48,375
Other accrued expenses.................................................................... 21,786
Due to stockholder........................................................................ 70,000
Deferred taxes............................................................................ 86,078
Current portion of long-term debt......................................................... 5,552
Current portion of capitalized lease obligations.......................................... 4,243
----------------
Total current liabilities............................................................. 549,915
Long-term debt, less current portion........................................................... 24,740
Capitalized lease obligations, less current portion............................................ 1,572
----------------
Total liabilities................................................................ 576,227
----------------
Commitments
Stockholders' equity
Common stock, no par value
3,000 shares authorized
100 shares issued and outstanding..................................................... 108,000
Stock subscription receivable............................................................. (1,000)
Retained earnings......................................................................... 148,272
----------------
Total stockholders' equity............................................................ 255,272
----------------
Total liabilities and stockholders' equity................................... $ 831,499
================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
WYMAN TESTING LABORATORIES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net sales...................................................................................... $ 3,201,989
Cost of sales.................................................................................. 1,681,823
----------------
Gross profit................................................................................... 1,520,166
Selling, general, and administrative expenses.................................................. 1,232,316
----------------
Income from operations......................................................................... 287,850
----------------
Other income (expense)
Interest expense............................................................................ (29,421)
Gain on sale of fixed asset................................................................. 12,000
----------------
Total other income (expense).............................................................. (17,421)
----------------
Income before provision for income taxes....................................................... 270,429
Provision for income taxes..................................................................... 36,646
----------------
Net income..................................................................................... $ 233,783
================
Basic income per share......................................................................... $ 2,337.83
================
Diluted income per share....................................................................... $ 2,337.83
================
Weighted-average shares outstanding............................................................ 100
================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
WYMAN TESTING LABORATORIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Retained
Common Stock Stock Earnings
--------------------------------- Subscription (Accumulated
Shares Amount Receivable Deficit) Total
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1996................ 100 $ 8,000 $ (1,000) $ (85,511) $ (78,511)
Capital contribution....... 100,000 100,000
Net income................. 233,783 233,783
--------------- --------------- ---------------- --------------- ----------------
Balance, December
31, 1997................ 100 $ 108,000 $ (1,000) $ 148,272 $ 255,272
=============== =============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
WYMAN TESTING LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income.................................................................................. $ 233,783
Adjustments to reconcile net income to net cash
used in operating activities..............................................................
Depreciation and amortization........................................................... 18,526
Gain on sale of fixed asset............................................................. (12,000)
Deferred taxes.......................................................................... 35,846
(Increase) decrease in
Accounts receivable....................................................................... (353,933)
Prepaid expenses.......................................................................... (8,741)
Increase (decrease) in
Accounts payable.......................................................................... (62,812)
Accrued payroll and payroll taxes......................................................... (26,796)
Accrued stockholder's salaries............................................................ (4,500)
Accrued management fee.................................................................... (64,286)
Other accrued expenses.................................................................... 5,821
----------------
Net cash used in operating activities.......................................................... (239,092)
----------------
Cash flows from investing activities
Purchase of property and equipment.......................................................... (12,069)
----------------
Net cash used in investing activities.......................................................... (12,069)
----------------
Cash flows from financing activities
Book overdraft.............................................................................. 37,778
Revolving lines of credit, net.............................................................. 130,000
Payments on long-term debt.................................................................. (37,312)
Payments on capitalized lease obligations................................................... (8,668)
Increase in capital contributions........................................................... 100,000
Due to stockholder, net..................................................................... 25,000
----------------
Net cash provided by financing activities...................................................... 246,798
----------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-29
<PAGE>
WYMAN TESTING LABORATORIES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net increase (decrease) in cash............................. $ (4,363)
Cash, beginning of period................................... 4,363
----------------
Cash, end of period......................................... $ -
----------------
----------------
Supplemental disclosures of cash flow information
Interest paid ........................................... $ 29,421
----------------
----------------
Income taxes paid ....................................... $ 800
----------------
----------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1997, the Company acquired an automobile
of $38,000 under note payable agreements.
The accompanying notes are an integral part of
these consolidated financial statements.
F-30
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 1 - ORGANIZATION AND BUSINESS
Wyman Testing Laboratories, Inc. (the "Company"), a Delaware corporation,
was incorporated in March 1998. The Company is engaged in testing for the
commercial construction industry.
Acquisition
On March 25, 1998, Wyman Testing Laboratories, Inc., 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. Wyman Testing Laboratories, Inc. 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. The assets acquired were as
follows:
<TABLE>
<S> <C>
Cash $ 22,690
Accounts receivable 577,681
Prepaids 29,985
Furniture and equipment 96,952
Excess of cost over fair value of net assets acquired 511,200
Liabilities (407,888)
-------------
Total $ 830,620
-------------
-------------
</TABLE>
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents/Book Overdraft
For purposes of the statement 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:
<TABLE>
<S> <C>
Automobile and trucks 3 to 5 years
Furniture and fixtures 7 years
Office hardware and software 5 years
Machinery and equipment 5 to 7 years
</TABLE>
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 statement of operations.
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue from services performed is recorded as earned over the lives of the
contract. Revenue from services is recognized when services have been
performed and accepted.
Advertising/Marketing
The Company expenses advertising costs as incurred. Advertising costs for
the year ended December 31, 1997 were $14,421.
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.
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
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments including cash, accounts receivable, accounts
payable, and 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 debt and lease
agreements are substantially the same.
Concentrations of Risk
The Company sells products and provides contract services to construction
companies and the military, primarily in the San Diego area. 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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing net
income 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 potential common shares
such as options had been issued and if the additional common shares were
dilutive. Since the Company has no stock options and warrants outstanding,
there are no dilutive common shares. Therefore, basic earnings per share
and diluted earnings per share are the same.
Recently Issued Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
The Company does not expect adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements with fiscal years
beginning after December 15, 1997. This statement establishes standards for
the way that public entities report selected information about operating
segments, products, and services, geographic areas, and major customers in
interim and annual financial reports. The Company does not expect adoption
of SFAS No. 131 to have a material effect, if any, on its financial
position or results of operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Automobile and trucks........................................................ $ 108,894
Furniture and fixtures....................................................... 22,597
Office hardware and software................................................. 16,891
Machinery and equipment...................................................... 151,148
Leased equipment............................................................. 13,891
----------------
313,421
Less accumulated depreciation and amortization............................... 244,913
----------------
Total.................................................................... $ 68,508
----------------
----------------
</TABLE>
Total depreciation and amortization expense for the year ended December
31, 1997 was $18,526.
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 4 - RELATED PARTY TRANSACTIONS
Due to Stockholder
At December 31, 1997, the Company had amounts due to a stockholder of
$70,000 for operating advances which are non-interest bearing and payable
upon demand. Amounts were repaid subsequent to December 31, 1997.
Accrued Stockholder Salaries
At December 31, 1997, the Company owed a stockholder $48,375 in salaries.
Amounts were repaid subsequent to December 31, 1997.
Stockholder Salaries and Management Fee
During the year ended December 31, 1997, the Company expensed $186,215 in
salaries and management consulting fees to two stockholders.
Capital Contribution
During the year ended December 31, 1997, one stockholder made an additional
capital contribution of $100,000.
NOTE 5 - REVOLVING LINES OF CREDIT
The Company has available two unsecured $100,000 revolving lines of credit
from a bank with interest payable on a monthly basis at the bank's index
rate (9.75% at December 31, 1997) plus 2.25%. The lines are guaranteed by a
first trust deed on vacant land owned by the majority stockholder and a
commercial security agreement dated September 3, 1996 which includes a
UCC-1 financing statement. The lines of credit matured on April 1, 1998. At
December 31, 1997, the amount drawn against the lines of credit were
$197,501. Subsequent to December 31, 1997, the amount was repaid.
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 6 - LONG-TERM DEBT
Notes payable at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Note payable - bank, collateralized by an
automobile, payable in monthly installments of
$93 including interest at 11.9% per annum.................................. $ 1,340
Note payable - financial institution, collateralized by an
automobile, payable in monthly installments of $434 including
interest at
13.5% per annum............................................................ 19,251
Note payable - financial institution, collateralized
by an automobile, payable in monthly installments
of $278 including interest at 11.99% per annum............................. 9,701
-----------
30,292
Less current portion.......................................................... 5,552
-----------
Long-term portion....................................................... $ 24,740
-----------
-----------
</TABLE>
The following is a schedule by years of future maturities of long-term
debt:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1998 $ 5,552
1999 4,734
2000 5,105
2001 5,900
2002 3,895
Thereafter 5,106
-----------
Total $ 30,292
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 7 - COMMITMENTS
Lease Commitments
The Company leases certain office equipment under non-cancelable capital
lease arrangements.
Future minimum payments under its non-cancelable capital leases with
initial or remaining terms of one year or more at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1998 $ 5,088
1999 1,672
2000 -
-------------
6,760
Less amount representing interest 945
5,815
Less current portion 4,243
-------------
Long-term portion $ 1,572
-------------
-------------
</TABLE>
Rent expense for the year ended December 31, 1997 was $49,368.
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 8 - 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 year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Income tax computed at federal statutory tax rate....................... 34.0%
State taxes, net of federal benefit..................................... 5.8
Valuation allowance..................................................... (26.8)
-----------------
Total............................................................... 13.0%
=================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for income taxes for the year ended December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets
Net operating loss carryforward..................................... $ 144,827
Accounts payable and accrued expenses............................... 54,893
Other............................................................... 16,455
---------------
Total deferred tax assets................................... 216,175
---------------
Deferred tax liability
Accounts receivable................................................. 286,469
Prepaid expenses and other.......................................... 14,984
---------------
Total deferred tax liability................................ 301,453
---------------
Net deferred tax liability.............................. $ 85,278
===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
WYMAN TESTING LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 8 - INCOME TAXES (CONTINUED)
The components of the income tax provision are as follows:
<TABLE>
<S> <C>
Current
Federal............................................................. $ -
State............................................................... 800
-------------
800
-------------
Deferred
Federal............................................................. 18,262
State............................................................... 17,584
-------------
35,846
-------------
Total....................................................... $ 36,646
=============
</TABLE>
The Company has net operating losses available to carry forward to future
periods for reduction of taxable income of approximately $393,000 for
federal income tax purposes and $127,000 for state income tax purposes.
These carryforwards begin to expire in 2020 and 2001 for federal and state
income taxes, respectively. Upon the acquisition, the Company will lose the
net operating loss carryforwards of Wyman Enterprises, Inc.
The valuation allowance has been decreased by approximately $72,000 during
the year ended December 31, 1997.
NOTE 9 - EMPLOYEE PROFIT SHARING PLAN
The Company established a 401(k) profit sharing plan covering substantially
all employees who meet the eligibility requirements of the plan. The
Company may match up to 10% of the employee contributions up to a total of
15% of the contributions which vest over six years. During the year ended
December 31, 1997, the Company made matching contributions of $1,958.
NOTE 10 - SUBSEQUENT EVENTS (UNAUDITED)
Capitalized Lease Obligation
The Company entered into a non-cancelable capital lease agreement. The
agreement is payable in monthly installments of $1,053, expiring in May
2000.
Employment Agreement
In March 1998, the Company entered into a two-year employment agreement
to pay an annual salary of $60,000 plus other benefits.
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES/
WYMAN TESTING LABORATORIES, INC.
PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
U.S. Wyman
Laboratories Testing
Inc. and Enterprises,
Subsidiaries Inc. Adjustments Total
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Current assets
Cash .................................. $ 94,132 $ - $ - $ 94,132
Accounts receivable...................... 1,719,120 716,173 - 2,435,293
Work-in-process.......................... 181,772 - - 181,772
Prepaid expenses and other current
assets................................. 47,414 46,818 - 94,232
------------- ------------- -------------- ------------
Total current assets................. 2,042,438 762,991 - 2,805,429
Furniture and equipment, net................ 395,711 68,508 - 464,219
Excess cost over fair value of net
assets acquired, net..................... a 511,200
939,147 - c 194,924 1,645,271
Other assets................................ 154,411 - - 154,411
------------- ------------- --------------- ------------
Total assets....................... $ 3,531,707 $ 831,499 $ 706,124 $ 5,069,330
============= ============= ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-39
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES /
WYMAN TESTING LABORATORIES, INC.
PRO FORMA BALANCE SHEET (CONTINUED)
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
U.S. Wyman
Laboratories Testing
Inc. and Enterprises,
Subsidiaries Inc. Adjustments Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Current liabilities
Book overdraft........................... $ 9,390 $ 37,778 $ - $ 47,168
Lines of credit.......................... 484,335 197,501 - 681,836
Current portion of long-term debt........ 84,526 5,552 - 90,078
Current portion of capitalized lease
obligations............................ - 4,243 - 4,243
Current portion of notes payable......... - - a 480,272 480,272
Accounts payable......................... 273,620 38,488 - 312,108
Accrued payroll and payroll taxes........ 115,214 40,114 - 155,328
Accrued stockholders' salaries........... - 48,375 - 48,375
Other accrued expenses................... 14,612 21,786 - 36,398
Due to stockholder....................... 584,281 70,000 - 654,281
Deferred income tax...................... 678,749 86,078 - 764,827
Income tax payable....................... 162,708 - - 162,708
--------------- ---------------- --------------- ----------------
Total current liabilities............ 2,407,435 549,915 480,272 3,437,622
Long-term debt, net of current portion...... 118,732 24,740 - 143,472
Capitalized lease obligations, net of
current portion........................ - 1,572 - 1,572
Notes payable, net of current portion....... - - a 225,000 225,000
--------------- ---------------- --------------- ----------------
Total liabilities.................... 2,526,167 576,227 705,272 3,807,666
--------------- ---------------- --------------- ----------------
Minority interest........................... 338,128 - c (338,128) -
--------------- ---------------- --------------- ----------------
Stockholders' equity
Preferred stock.......................... - - -
Common stock............................. a (108,000)
a 504
17,099 108,000 c 4,397 22,000
Stock subscription receivable............ - (1,000) a 1,000 -
Additional paid-in capital............... a 60,696
380,901 - c 528,655 970,252
Retained earnings........................ 269,412 148,272 a (148,272) 269,412
--------------- ---------------- --------------- ----------------
Total stockholders' equity........... 667,412 255,272 338,980 1,261,664
--------------- ---------------- --------------- ----------------
Total liabilities and
stockholders' equity............. $ 3,531,707 $ 831,499 $ 706,124 $ 5,069,330
=============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-40
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES /
WYMAN TESTING LABORATORIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
U.S. Wyman
Laboratories Testing
Inc. and Enterprises,
Subsidiaries Inc. Adjustments Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenue ................................... $ 7,766,414 $ 3,201,989 $ - $ 10,968,403
Cost of goods sold.......................... 4,476,952 1,681,823 - 6,158,775
--------------- ---------------- --------------- ----------------
Gross profit................................ 3,289,462 1,520,166 - 4,809,628
Selling, general, and administrative
expenses................................. b 34,080
2,431,770 1,232,316 d 12,995 3,711,161
--------------- ---------------- -------------- ----------------
Income from operations...................... 857,692 287,850 (47,075) 1,098,467
--------------- ---------------- --------------- ----------------
Other income (expense)
Interest expense......................... (130,605) (29,421) - (160,026)
Interest income.......................... 7,277 - - 7,277
Other income............................. 100,000 -- -- 100,000
Other expense............................ (100,000) -- -- (100,000)
Gain on sale of fixed asset.............. 4,912 12,000 - 16,912
Rental income............................ 25,160 - - 25,160
Gain on sale of minority interest........ 25,229 - - 25,229
--------------- ---------------- --------------- ----------------
Total other income (expense)........... (68,027) (17,421) - (85,448)
---------------- ---------------- --------------- -----------------
Income before provision for income
taxes and minority interest.............. 789,665 270,429 (47,075) 1,013,019
Provision for income taxes.................. 345,056 36,646 - 381,902
--------------- ---------------- --------------- ----------------
Income before minority interest............. 444,409 233,783 (47,075) 631,117
Minority interest........................... (80,253) - e 80,253 -
--------------- ---------------- -------------- ----------------
Net income.................................. $ 364,156 $ 233,783 $ 33,178 $ 631,117
=============== ================ =============== ================
Basic income per share...................... $ 0.27 $ 0.29
=============== ================
Diluted income per share................... $ 0.27 $ 0.29
=============== ================
Weighted-average shares
outstanding.............................. 2,200,000 2,200,000
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-41
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES /
WYMAN TESTING LABORATORIES, INC.
NOTE TO PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying pro forma balance sheet presents the accounts of U.S.
Laboratories Inc. and subsidiaries ("US Labs") and Wyman Testing
Laboratories, Inc. ("Wyman") as if the acquisition of the assets of Wyman
by US Labs occurred on December 31, 1997, and the pro forma statement of
operations presents the accounts of US Labs and Wyman as if the acquisition
took place on January 1, 1997.
If U.S. Labs actually acquired Wyman on December 31, 1997, the purchase
price would have been $766,472. The purchase price was paid as follows: (i)
$300,000 cash paid upon the closing, (ii) $405,272 notes payable issued to
the stockholders of Wyman Enterprises, Inc., and (iii) 50,478 shares of
U.S. Labs Common Stock issued to a stockholder of Wyman Enterprises, Inc.,
valued at $61,200, using a method similar to previous Company acquisitions.
The fair value of the assets acquired on December 31, 1997, which
approximates the book value were as follows:
<TABLE>
<S> <C>
Accounts receivable $716,173
Prepaids 46,818
Furniture and equipment 68,508
Goodwill 511,200
Liabilities (576,227)
----------
$766,472
</TABLE>
See NOTE 1 in U.S. Laboratories Inc. and subsidiaries consolidated
financial statements for actual purchase price and assets acquired on March
23, 1998.
a) To record purchase price allocation adjustment and corresponding note
payable in consideration of the assets acquired. In connection with
the purchase, the Company recorded $511,200 in excess of cost over
fair value of net assets acquired and issued 50,478 shares of US Labs
Common Stock.
b) To record amortization of excess of cost over fair value of net assets
acquired, which is being amortized on a straight-line basis over
fifteen years.
In addition, the accompanying pro forma balance sheet presents the purchase
of the minority interest by of US Labs as if the purchase of minority
interest occurred on December 31, 1997, and the pro forma statement of
operations as if the purchase of the minority interest took place on
January 1, 1997.
c) To record purchase of all of the shares held by minority stockholders
in the subsidiaries of US Labs for $533,052. In connection with the
purchase of the minority interest, the Company issued an aggregate
of 439,664 shares of Common Stock in exchange for the purchase
price and recorded $194,924 in excess of cost over fair value of
net assets acquired.
d) To record amortization of excess of cost over fair value of net assets
acquired, which is being amortized on a straight-line basis over
fifteen years.
e) To eliminate minority interest expense.
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE>
Inside back cover page -- Blank
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN
OFFER TO OR A SOLICITATION OF ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 12
Capitalization............................................................ 12
Dilution.................................................................. 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 14
Business.................................................................. 19
Management................................................................ 33
Principal Stockholders.................................................... 39
Related Transactions...................................................... 40
Underwriting.............................................................. 41
Description of Securities................................................. 42
Shares Eligible for Future Sale........................................... 45
Experts................................................................... 46
Legal Matters............................................................. 47
Additional Information.................................................... 47
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL MARCH , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,100,000 UNITS
U.S. LABORATORIES INC.
------------------
[LOGO]
------------------
[CARDINAL CAPITAL MANAGEMENT, INC.]
JANDA & GARRINGTON LLC
[FAS WEALTH MANAGEMENT SERVICES, INC.]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Act")
provides that subject to such standards and restrictions, if any, as are set
forth in its Certificate of Incorporation, a Delaware corporation has the power
to indemnify any person who is a party to a civil, criminal, administration or
investigative proceeding by reason of the fact that the person was a director,
officer, employee or agent of the corporation if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
The Company's Amended and Restated Certificate of Incorporation also
provides that the Company will indemnify the Company's directors, officers,
employees and agents to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law.
The Company's Amended and Restated Certificate of Incorporation also
provides that directors of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director except for liability:
- for any breach of the director's duty of loyalty to the Company or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law (relating to
unlawful payment of dividends or unlawful stock purchase or
redemption); or
- for any transaction from which the director derived any improper
personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee . . . . $ 4,684
NASD Filing Fee . . . . . . . . . . . . . . . . . . . 1,200
Blue sky fees and expenses. . . . . . . . . . . . . . 12,000
Printing and engraving expenses . . . . . . . . . . . 65,000
Accountants' fees and expenses. . . . . . . . . . . . 110,000
Nasdaq Listing Application Fee. . . . . . . . . . . . 45,000
Legal fees and expenses . . . . . . . . . . . . . . . 125,000
Underwriters' non-accountable expenses. . . . . . . . 198,000
Transfer Agent Fees . . . . . . . . . . . . . . . . . 1,000
Miscellaneous fees and expenses . . . . . . . . . . . --
--------
Total . . . . . . . . . . . . . . . . . . . $561,884
--------
--------
</TABLE>
The Company will pay all of the fees, costs and expenses set forth above.
Other than the SEC filing fee, all fees and expenses are estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On January 1, 1998, in reliance on an exemption under Section 4(2) of the
Securities Act of 1993 (the "Act"), the Company issued a total of 439,664 shares
of the Company's common stock to four executive officers of the Company or its
subsidiaries in exchange solely for common stock of the Company's subsidiaries.
No cash compensation was paid for the shares and no commissions were paid to any
person in connection with the transaction. Specifically, the Company issued (a)
315,488 shares of common stock to Gary H. Elzweig, executive vice president of
the Company, in exchange for 100 shares of the common stock of Professional
Engineering; (b) 55,526 shares of common stock to Martin B. Lowenthal, executive
vice president of the Company in exchange for 18.5 shares of the common stock of
U.S. Engineering; (c) 33,652 shares of common stock to Mark Baron, executive
vice president of the Company, in exchange for 1.67 shares of the common stock
of San Diego Testing; and (d) 24,061 shares of common stock to Thomas H.
Chapman, vice president of San Diego Testing, in exchange for 5.67 shares of the
common stock of San Diego Testing.
Each of the above exchanges was completed under the terms of a Share
Exchange Agreement that, during the period beginning on the date of issuance and
ending on the effective date of the offering, prohibited the transfer of the
common stock without the Company's prior written consent and granted the Company
an option to purchase the restricted common stock for the fair market value of
such shares as determined by the Company's independent public accountants. Each
Share Exchange Agreement also contained representations from the executive
officer that the officer was not acquiring the common stock with a view toward
any distribution or resale of such shares to any person except in accordance
with the provisions of the Act and applicable state securities laws
(collectively. the "Securities Laws"). The shares of common stock issued to the
executive officers bear a legend setting forth that the shares have not been
registered under the Securities Laws and may not be sold, transferred or
otherwise disposed of except under registration, exemption from registration, or
operation of law.
On January 1, 1998, in reliance on an exemption under Section 4(2) of the
Act, the Company also issued 10,937 shares of common stock to Christopher
O'Malley, vice president of U.S. Engineering Laboratories, Inc., under the terms
of a Restricted Stock Agreement containing restrictions on the disposition of
the common stock and representations of Mr. O'Malley that are similar to those
described above in the Share Exchange Agreements. The issues issued to Mr.
O'Malley also bear a restrictive legend similar to that described above.
On April 1, 1998, in reliance on an exemption under Section 4(2) of the
Act, pursuant to a Share Exchange Agreement, the Company issued 50,478 shares of
common stock to Donald C. Alford, Executive Vice President of the Company, in
exchange for 25 shares of the common stock of Wyman.
II-2
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
***1.1 Form of Underwriting Agreement
***1.2 Form of Selected Dealers Agreement
1.3 Form of Agreement Among Underwriters
***2.1 Asset Purchase Agreement between the Company and Wyman
Enterprises, Inc.
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated by-laws of the Company
***4.1 Warrant Agreement, including Form of Warrant
*4.2 Form of Underwriters' Warrant
*4.3 Form of Warrant Agency Agreement
***4.4 Specimen Certificate Representing Shares of Common Stock of the
Company
***4.5 Revised Form of Underwriters' Warrant
***4.6 Form of Promotional Shares Escrow Agreement
***5.1 Opinion of Foley & Lardner regarding legality
***10.1 Bank Loan Agreement between North County Bank and the Company in
Principal Amount of $500,000
***10.2 Bank Loan Agreement between Bank of America and the Company
***10.3 Lease for San Diego, California facility
**10.4 Bonus Employment Agreement of Dickerson Wright
**10.5 Bonus Employment Agreement of Gary Elzweig
**10.6 1998 Stock Option Plan
***10.7 Form of Incentive Stock Option Agreement
***10.8 Form of Non-Qualified Stock Option Agreement
**10.9 Share Exchange Agreement between the Company and Gary H. Elzweig
**10.10 Share Exchange Agreement between the Company and Martin B.
Lowenthal
**10.11 Share Exchange Agreement between the Company and Mark Baron
**10.12 Share Exchange Agreement between the Company and Thomas H.
Chapman
**10.13 Share Exchange Agreement between the Company and Donald C. Alford
***10.14 Employment Agreement of James D. Wait
10.15 Employment Agreement of Mark Baron
10.16 Employment Agreement of Martin B. Lowenthal
10.17 Employment Agreement of Dickerson Wright
10.18 Employment Agreement of Gary Elzweig
10.19 Employment Agreement of Donald C. Alford
10.20 Form of Employee Warrant Agreement
10.21 Bank Loan Agreement between North County Bank and the Company in
Principal Amount of $1,200,000
10.22 Bonus Employment Agreement of Martin B. Lowenthal
10.23 Bonus Employment Agreement of Mark Baron
10.24 Bank Loan Agreement between North County Bank and the Company in
the Principal Amount of $1,700,000
10.25 Acknowledgement of Termination and Replacement of Option(s) and
Warrant
***10.26 Loan Agreement between Merrill Lynch Business Financial Services
and the Company
*21 List of Subsidiaries
23.1 Consent of Foley & Lardner (included in Exhibit 5.1)
23.2 Consents of Singer Lewak Greenbaum & Goldstein, LLP.
*24.1 Power of Attorney relating to subsequent amendments
***27 Financial Data Schedule
</TABLE>
* Filed with the registration statement on Form SB-2 filed with the
Securities and Exchange Commission on October 29, 1998.
** Filed with Amendment No. 1 to the registration statement on Form SB-2,
filed with the Securities and Exchange Commission on January 8, 1999.
*** Filed with Amendment No. 2 to the registration statement on Form SB-2,
filed with the Securities and Exchange Commission on January 27, 1999.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned small business issuer hereby undertakes as follows:
(a) The small business issuer will:
(1) file, during any period in which offers or sales of securities are
being made, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. (Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus filed with the Commission under
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement.); and
(iii) Include any additional or changed material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) For the purpose of determining any liability under the Securities
Act of 1933, treat each post-effective amendment as a new Registration Statement
of the securities offered, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) The small business issuer will provide to the Underwriter (at the
closing specified in the underwriting agreement) certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
(c) The Company's Amended and Restated Certificate of Incorporation
provides that the small business issuer will indemnify its directors, officers,
employees and agents to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the small business issuer under the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore,
II-4
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the small business issuer will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against pubic policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this pre-effective
Amendment No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on this 5th day of February, 1999.
U.S. LABORATORIES INC.
By: /S/ DICKERSON WRIGHT
----------------------
Dickerson Wright, Chief Executive
Officer, President, and Chairman of the
Board
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ DICKERSON WRIGHT Chief Executive Officer, President, and February 5, 1999
- ----------------------------------------- Chairman of the Board
Dickerson Wright
/S/ * Executive Vice President and Director February 5, 1999
- -----------------------------------------
Gary Elzweig
/S/ * Executive Vice President and Director February 5, 1999
- -----------------------------------------
Donald C. Alford
/S/ * Executive Vice President and Director February 5, 1999
- -----------------------------------------
Mark Baron
/S/ * Executive Vice President and Director February 5, 1999
- -----------------------------------------
Martin B. Lowenthal
/S/ * Chief Financial Officer, Secretary, and February 5, 1999
- ----------------------------------------- Director (Chief Financial and
James D. Wait Accounting Officer)
/S/ * Director February 5, 1999
- -----------------------------------------
Thomas H. Chapman
/S/ * Director February 5, 1999
- -----------------------------------------
James L. McCumber
/S/ * Director February 5, 1999
- -----------------------------------------
Robert E. Petersen
/S/ * Director February 5, 1999
- -----------------------------------------
Noel Schwartz
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ * Director February 5, 1999
- -----------------------------------------
Irvin Fuchs
* By: /S/ DICKERSON WRIGHT
- -----------------------------------------
Dickerson Wright
Attorney-in-fact
</TABLE>
S-2
<PAGE>
EXHIBIT 1.3
FORM OF AGREEMENT AMONG UNDERWRITERS
_________ ____, 1999
CARDINAL CAPITAL MANAGEMENT, INC.
800 Douglas Road
Suite 340
Coral Gables, Florida 33134
Dear Sirs:
We understand that from time to time you may act as the Representative
or as one of the Representatives of the several underwriters of offerings of
securities of various issuers. This Agreement shall apply to any offering of
securities in which we elect to act as an underwriter after receipt of an
invitation from you which shall identify the issuer, contain information
regarding certain terms of the securities to be offered and specify the
amount of our proposed participation and the names of the other
Representatives, if any, and that our participation as an underwriter in the
offering shall be subject to the provisions of this Agreement. Your
invitation will include instructions for our acceptance of such invitation.
At or prior to the time of an offering, you will advise us, to the extent
applicable, as to the expected offering date, the expected closing date, the
initial public offering price, the interest or dividend rate (or the method
by which such rate is to be determined), the conversion price, the
underwriting discount, the management fee, the selling concession and the
reallowance, except that if the public offering price of the securities is to
be determined as contemplated by Rule 430A under the Securities Act of 1933,
as amended (the "Securities Act") (such procedure being hereinafter referred
to as "430A Pricing"), you shall so advise us and shall specify the maximum
underwriting discount, management fee and selling concession. Such
information may be conveyed by you in one or more communications (such
communications received by us with respect to the offering are hereinafter
collectively referred to as the "Invitation"). If the Underwriting Agreement
(as hereinafter defined) provides for the granting of an option to purchase
additional securities to cover over-allotments, you will notify us, in the
Invitation, of such option and of our maximum obligation upon exercise of
such option.
This Agreement, as amended or supplemented by the Invitation, shall
become effective with respect to our participation in an offering of
securities if you receive our oral or written acceptance and you do not
receive a written communication revoking our acceptance prior to the time and
date specified in the Invitation (our unrevoked acceptance after expiration
of such time and date being hereinafter referred to as our "Acceptance").
Our Acceptance will constitute our confirmation that, except as
<PAGE>
otherwise stated in such Acceptance, each statement included in the
Underwriters' Questionnaire set forth as Exhibit A hereto (or otherwise
furnished to us) is correct. The issuer of the securities in any offering of
securities made pursuant to this Agreement is hereinafter referred to as the
"Issuer." The securities to be purchased, including securities which may be
purchased pursuant to an over-allotment option, are hereinafter referred to
as the "Securities." If the Underwriting Agreement provides for an
over-allotment option, the securities the Underwriters (as hereinafter
defined) are initially obligated to purchase pursuant to the Underwriting
Agreement are hereinafter called the "Initial Securities" and any additional
securities which may be purchased upon exercise of the over-allotment option
are hereinafter called the "Option Securities." Any underwriters of
Securities under this Agreement, including the Representatives (as
hereinafter defined), are hereinafter collectively referred to as the
"Underwriters." All references herein to "you" or to the "Representatives"
shall mean Cardinal Capital Management, Inc. and the other firms, if any,
which are named as Representatives in the Invitation. The Securities to be
offered may, but need not, be registered for a delayed or continuous offering
pursuant to Rule 415 under the Securities Act.
The following provisions of this Agreement shall apply separately to
each individual offering of Securities. This Agreement may be supplemented
or amended by you by written notice to us and, except for supplements or
amendments set forth in an Invitation relating to a particular offering of
Securities, any such supplement or amendment to this Agreement shall be
effective with respect to any offering of Securities to which this Agreement
applies after this Agreement is so amended or supplemented.
Section 1. UNDERWRITING AGREEMENT; AUTHORITY OF REPRESENTATIVES. We
authorize you to execute and deliver an underwriting agreement and any
amendment or supplement thereto and any associated Terms Agreement or other
similar agreement (collectively, the "Underwriting Agreement") on our behalf
with the Issuer and/or any selling security holder with respect to the
Securities in such form as you determine. We will be bound by all terms of
the Underwriting Agreement as executed. We understand that changes may be
made in those who are to be Underwriters, and in the amount of Securities to
be purchased by them, but the amount of Securities to be purchased by us in
accordance with the terms of this Agreement, including the maximum amount of
Option Securities, if any, which we may become obligated to purchase by
reason of the exercise of any over-allotment option provided in the
Underwriting Agreement, shall not be changed without our consent except as
provided in the Underwriting Agreement.
As Representatives of the Underwriters, you are authorized to take such
action as you deem necessary or advisable to carry out this Agreement, the
Underwriting Agreement, and the purchase, sale and distribution of the
Securities, and to agree to any waiver or modification of any provision of
the Underwriting Agreement. To the
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extent applicable, you are also authorized to determine (i) the amount of
Option Securities, if any, to be purchased by the Underwriters pursuant to
any over-allotment option and (ii) with respect to offerings using 430A
Pricing, the initial public offering price and the price at which the
Securities are to be purchased in accordance with the Underwriting Agreement.
Cardinal Capital Management, Inc. may act on behalf of all Representatives.
If so specified in the Invitation, arrangements may be made for the sale
of Securities by the Issuer pursuant to delayed delivery contracts
(hereinafter referred to as "Delayed Delivery Contracts"). References herein
to delayed delivery and Delayed Delivery Contracts apply only to offerings to
which delayed delivery is applicable. The term "underwriting obligation," as
used in this Agreement with respect to any Underwriter, shall refer to the
amount of Securities, including any Option Securities (plus such additional
Securities as may be required by the Underwriting Agreement in the event of a
default by one or more of the Underwriters) which such Underwriter is
obligated to purchase pursuant to the provisions of the Underwriting
Agreement, without regard to any reduction in such obligation as a result of
Delayed Delivery Contracts which may be entered into by the Issuer.
If the Securities consist in whole or in part of debt obligations
maturing serially, the serial Securities being purchased by each Underwriter
pursuant to the Underwriting Agreement will consist, subject to adjustment as
provided in the Underwriting Agreement, of serial Securities of each maturity
in a principal amount which bears the same proportion to the aggregate
principal amount of the serial Securities of such maturity to be purchased by
all the Underwriters as the respective principal amount of serial Securities
set forth opposite such Underwriter's name in the Underwriting Agreement
bears to the aggregate principal amount of the serial Securities to be
purchased by all the Underwriters.
Section 2. REGISTRATION STATEMENT AND PROSPECTUS; OFFERING CIRCULAR.
In the case of an Invitation regarding an offer of Securities registered
under the Securities Act (a "Registered Offering"), you will furnish to us,
to the extent made available to you by the Issuer, copies of any registration
statement relating to the Securities which may be filed with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Act and
of each amendment thereto (excluding exhibits but including any documents
incorporated by reference therein). Such registration statement(s), as
amended, and the prospectus(es) relating to the sale of Securities by the
Issuer constituting a part thereof, including all documents incorporated
therein by reference, as from time to time amended or supplemented by the
filing of documents pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act or otherwise, are referred
to herein as the "Registration Statement" and the "Prospectus," respectively;
provided, however, that a supplement to the Prospectus filed with the
Commission pursuant to Rule 424 under the Securities act with respect to an
offering of Securities (a "Prospectus Supplement") shall be deemed to have
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supplemented the Prospectus only with respect to the offering of Securities
to which it relates.
With respect to Securities for which no Registration Statement is filed
with the Commission, you will furnish to us, the extent made available to you
by the Issuer, copies of any private placement memorandum, offering circular
or other offering materials to be used in connection with the offering of the
Securities and of each amendment thereto (the "Offering Circular").
Section 3. OFFERING. The sale of the Securities shall commence as soon
as you deem advisable. We will not sell any Securities until they are
released by you for that purpose. When notified by you that the Securities
are released for sale, we will offer in conformity with the terms of the
offering set forth in the Prospectus or Offering Circular, such of the
Securities to be purchased by us as are not reserved for our account for sale
to Selected Dealers (as hereinafter defined) and others pursuant to Section
5. After the initial offering, the offering price and the concession and
discount therefrom may be changed by you by notice to the Underwriters, and
we agree to be bound by any such change.
If, in accordance with the terms of the offering set forth in the
Prospectus or Offering Circular, the offering of the Securities is not at a
fixed price but at varying prices set forth by individual Underwriters based
on market prices or at negotiated prices, the provisions above relating to
your right to change the offering price and concession and discount to
dealers shall not apply, and other references in this Section and elsewhere
in this Agreement to the offering price or Selected Dealers' concession shall
be deemed to mean the prices and concessions determined by you from time to
time in your discretion.
Unless otherwise permitted in the Invitation, we will not sell any
Securities to any account over which we have discretionary authority. We
will also comply with any other restrictions which may be set forth in the
Invitation.
The initial advertisement with respect to the Securities shall appear on
such date, and shall include the names of such of the Underwriters, as you
may determine. Thereafter, any Underwriter may advertise at its own expense.
Section 4. DELAYED DELIVERY ARRANGEMENTS. We authorize you to act on
our behalf in making all arrangements for the solicitation of offers to
purchase Securities from the Issuer pursuant to Delayed Delivery Contracts,
and we agree that all such arrangements will be made only through you
(directly or through Underwriters or Selected Dealers). You may allow to
Selected Dealers in respect of such Securities a commission equal to the
concession allowed to Selected Dealers pursuant to Section 5.
The obligations of the Underwriters shall be reduced in the aggregate by
the
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principal amount of Securities covered by Delayed Delivery Contracts made by
the Issuer, the obligation of each Underwriter to be reduced by the principal
amount of such Securities, if any, allocated by you to such Underwriter.
Your determination of the allocation of Securities covered by Delayed
Delivery Contracts among the several Underwriters shall be final and
conclusive, and we agree to be bound by any notice delivered by you to the
Issuer setting forth the amount of the reduction in our obligation as a
result of Delayed Delivery Contracts.
Upon receiving payment from the Issuer of the fee for arranging Delayed
Delivery Contracts, you will credit our account with the portion of such fee
applicable to the Securities covered by Delayed Delivery Contracts allocated
to us. You will charge our account with any commission allocated to Selected
Dealers in respect of Securities covered by Delayed Delivery Contracts
allocated to us.
Section 5. OFFERING TO SELECTED DEALERS AND OTHERS; MANAGEMENT OF
OFFERING. We authorize you, for our account, to reserve for sale and to sell
to dealers ("Selected Dealers"), among whom any of the Underwriters may be
included, such amount of Securities to be purchased by us as you shall
determine. Reservations for sales to Selected Dealers for our account need
not be in proportion to our underwriting obligation. The price to Selected
Dealers initially shall be the public offering price less a concession not in
excess of the Selected Dealers concession set forth in the Invitation.
Selected Dealers shall be actually engaged in the investment banking or
securities business and shall be either (i) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or (ii) dealers
with their principal place of business located outside the United States, its
territories and its possessions and not registered under the Exchange Act who
agree to make no sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein or
(iii) banks that are not eligible for membership in the NASD. Each Selected
Dealer shall agree to comply with the provisions of NASD Conduct Rule 2740
and IM-2740, and each foreign Selected Dealer or bank who is not a member of
the NASD also shall agree to comply with the NASD's interpretation with
respect to free-riding and withholding, to comply, as though it were a member
of the NASD, with the provisions of NASD Conduct Rules 2730 and 2750, and to
comply with NASD Conduct Rule 2420 and IM-2420-1 as that Rule and
Interpretative Material apply to a non-member foreign dealer or bank.
We agree to cooperate with the Representatives to the extent possible in
order to satisfy any undertakings the Representatives may make to any
national securities exchange in connection with the listing and distribution
of the Securities.
With your consent, the Underwriters may allow, and Selected Dealers may
reallow, a discount on sales to any dealer who meets the above NASD
requirements in an amount not in excess of the amount set forth in the
Invitation. Upon your request, we will advise you of the identity of any
dealer to whom we allow such a discount and
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any Underwriter or Selected Dealer from whom we receive a discount.
We also authorize you, for our account, to reserve for sale and to sell
Securities to be purchased by us at the offering price to others, including
institutions and retail purchasers. Except for such sales which are
designated by a purchaser to be for the account of a particular Underwriter,
such reservations and sales shall be made as nearly as practicable in
proportion to our underwriting obligation, unless you agree to a smaller
proportion at our request.
At or before the time the Securities are released for sale, you shall
notify us of the amount of Securities which (i) have not been reserved for
our account for sale to Selected Dealers and others and (ii) which are to be
retained by us for direct sale.
We will from time to time, upon your request, report to you the amount
of Securities retained by us for direct sale which remain unsold and, upon
your request, deliver to you for our account, or sell to you for the account
of one or more of the Underwriters, such amount of unsold Securities as you
may designate at the offering price less an amount determined by you not in
excess of the concession to Selected Dealers. You may also repurchase
Securities from other Underwriters and Selected Dealers, for the account of
one or more of the Underwriters, at prices determined by you not in excess of
the offering price less the concession to Selected Dealers.
You may from time to time deliver to any Underwriter, for carrying
purposes or for sale by such Underwriter, any of the Securities then reserved
for sale to, but not purchased and paid for by, Selected Dealers or others as
above provided, but to the extent that Securities are so delivered for sale
by such Underwriters, the amount of Securities then reserved for the account
of such Underwriter shall be correspondingly reduced. Securities delivered
for carrying purposes only shall be redelivered to you upon demand.
The Underwriters and Selected Dealers may, with your consent, purchase
Securities from and sell Securities to each other at the offering price less
a concession not in excess of the concession to Selected Dealers.
Section 6. REPURCHASE OF SECURITIES NOT EFFECTIVELY PLACED. In
recognition of the importance of distributing the Securities to bona fide
investors, we agree to repurchase on demand any Securities sold by us, except
through you, which are purchased by you in the open market or otherwise
during a period terminating as provided in Section 16, at a price equal to
the cost of such purchase, including accrued interest, amortization of
original issue discount or dividends, commissions and transfer and other
taxes, if any, on redelivery. The certificates delivered to us need not be
the identical certificates delivered to you in respect of the Securities
purchased. In lieu of requiring repurchase, you may, in your discretion,
sell such Securities for our account at such prices, upon such terms and to
such persons, including any of the other Underwriters,
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as you may determine, charging the amount of any loss and expense, or
crediting the amount of any net profit, resulting from such sale, to our
account, or you may charge our account with an amount determined by you not
in excess of the concession to Selected Dealers.
Section 7. STABILIZATION AND OVER-ALLOTMENT. In order to facilitate
the distribution of the Securities, we authorize you, in your discretion, to
purchase and sell Securities or any other securities of the Issuer or any
guarantor of the Securities specified in the Invitation in the open market or
otherwise, for long or short account, at such prices as you may determine,
and, in arranging for sales to Selected Dealers or others, to over-allot.
You may liquidate any long position or cover any short position incurred
pursuant to this Section at such prices as you may determine. You shall make
such purchases and sales (including over-allotments) for the accounts of the
Underwriters as nearly as practicable in proportion to their respective
underwriting obligations. It is understood that, in connection with any
particular offering of Securities to which this Agreement applies, you may
have made purchases of securities of the Issuer or securities of any
guarantor of the Securities for stabilizing purposes prior to the time when
we became one of the Underwriters, and we agree that any such securities so
purchased shall be treated as having been purchased for the respective
accounts of the Underwriters pursuant to the foregoing authorization. At the
close of business on any day our net commitment, either for long or short
account, resulting from such purchases or sales (including over-allotments)
shall not exceed 20% (or such other amount as may be specified in the
Invitation) of our underwriting obligation, except that such percentage may
be increased with the approval of a majority in interest of the Underwriters.
We will take up at cost on demand any Securities or other securities of the
Issuer or any securities of any guarantor of the Securities so sold or
over-allotted for our account, including accrued interest, amortization of
original issuance discount or dividends, and we will pay to you on demand the
amount of any losses or expenses incurred for our account pursuant to this
Section. In the event of default by any Underwriter in respect of its
obligations under this Section, each non-defaulting Underwriter shall assume
its share of the obligations of such defaulting Underwriter in the proportion
that its underwriting obligation bears to the underwriting obligations of all
non-defaulting Underwriters without relieving such defaulting Underwriter of
its liability hereunder.
If you effect any stabilizing purchase pursuant to this Section, you
shall promptly notify us of the date and time of the first stabilizing
purchase and the date and time when stabilizing was terminated. You shall
prepare and maintain such records as are required to be maintained by you as
manager pursuant to Rule 17a-2 under the Exchange Act.
Section 8. OPEN MARKET TRANSACTIONS. We represent and agree that in
connection with the offering of Securities we have complied and will comply
with the provisions of Rule 10b-6 under the Exchange Act with regard to
trading in the
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Securities. For purposes of the foregoing sentence, we agree that, in
addition to the Securities, other securities of the Issuer or securities of
any guarantor of the Securities or the right or option to purchase or
otherwise acquire any securities of the Issuer or any securities of any
guarantor of the Securities specified in the Invitation shall be considered
securities of the same class and series as the Securities.
Section 9. PAYMENT AND DELIVERY. At or before such time, on such dates
and at such places as you may specify in the Invitation, we will deliver to
you a certified or official bank check in such funds as are specified in the
Invitation, payable to the order of Cardinal Capital Management, Inc. (unless
otherwise specified in the Invitation) in an amount equal to, as you direct,
either (i) the offering price or prices plus accrued interest, amortization
of original issue discount or dividends, if any, set forth in the Prospectus
or Offering Circular less the concession to Selected Dealers in respect of
the amount of Securities to be purchased by us in accordance with the terms
of this Agreement, or (ii) the amount set forth in the Invitation with
respect to the Securities to be purchased by us. We authorize you to make
payment for our account of the purchase price for the Securities to be
purchased by us against delivery to you of such Securities (which may be in
temporary form), and the difference between such purchase price of the
Securities and the amount of our funds delivered to you therefor shall be
credited to our account.
Delivery to us of Securities retained by us for direct sale shall be
made by you as soon as practicable after your receipt of the Securities.
Upon termination of the provisions of this Agreement as provided in Section
16, you shall deliver to us any Securities reserved for our account for sale
to Selected Dealers and others which remain unsold at that time.
You are authorized to make appropriate arrangements for payment for
and/or delivery of the Securities to be purchased by us through the
facilities of The Depository Trust Company or any other depository or similar
facility, or, if we are not a member, settlement may be made through a
correspondent that is a member pursuant to our timely instructions to you.
Upon receiving payment for Securities sold for our account to Selected
Dealers and others, you shall remit to us an amount equal to the amount paid
by us to you in respect of such Securities and credit or charge our account
with the difference, if any, between such amount and the price at which such
Securities were sold.
In the event that the Underwriting Agreement for an offering provides
for the payment of a commission or other compensation to the Underwriters,
were authorize you to receive such commission or other compensation for our
account.
Section 10. MANAGEMENT COMPENSATION. As compensation for your services
in the management of the offering, we will pay you an amount equal to the
management
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fee specified in the Invitation in respect of the Securities to be purchased
by us pursuant to the Underwriting Agreement, and we authorize you to change
our account with such amount. If there is more than one Representative, such
compensation shall be divided among the Representatives in such proportions
as they may determine.
Section 11. AUTHORITY TO BORROW. We authorize you to advance your own
funds for our account, charging current interest rates, or to arrange loans
for our account or the account of the Underwriters, as you may deem necessary
or advisable for the purchase, carrying, sale and distribution of the
Securities. You may execute and deliver any notes or other instruments
required in connection therewith and may hold or pledge as security therefor
all or any part of the Securities which we or such Underwriters have agreed
to purchase. The obligations of the Underwriters under loans arranged on
their behalf shall be several in proportion to their respective participation
in such loans, and not joint. Any lender is authorized to accept your
instructions as to the disposition of the proceeds of any such loans. You
shall credit each Underwriter with the proceeds of any loans made for its
account.
Section 12. LEGAL QUALIFICATIONS. You shall inform us, upon request,
of the states and other jurisdictions of the United States in which it is
believed that the Securities are qualified for sale under, or are exempt from
the requirements of, their respective securities laws, but you assume no
responsibility with respect to our right to sell Securities in any
jurisdiction.
If we propose to offer Securities outside the United States, its
territories or its possessions, we will take, at our own expense, such
action, if any, as may be necessary to comply with the laws of each foreign
jurisdiction in which we propose to offer Securities.
If the Representatives inform us that the NASD views the offering as
subject to NASD Conduct Rules 2710 and 2720, we agree that we shall, to the
extent required, offer the Securities in compliance with such Rules and the
NASD's interpretation thereof.
If the Representatives inform us that the NASD views the Securities as
interests in a direct participation program, we agree that we shall, to the
extent required, offer the Securities in compliance with the NASD's
interpretation of NASD Conduct Rule 2810.
Section 13. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS,
INC.; FOREIGN UNDERWRITERS AND BANKS. We understand that you are a member in
good standing of the NASD. We confirm that we are actually engaged in the
investment banking or securities business and are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, it territories and its possessions and not
registered under the Exchange Act
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who hereby agrees to make no sales within the United States, its territories
or its possessions or to persons who are nationals thereof or residents
therein (except that we may participate in sales to Selected Dealers and
others under Section 5 of this Agreement) or (iii) a bank not eligible for
membership in the NASD. We hereby agree to comply with NASD Conduct Rule
2740 and IM-2740, and if we are a foreign dealer or a bank and not a member
of the NASD we also hereby agree to comply with the NASD's interpretation
with respect to free-riding and withholding, to comply, as though we were a
member of the NASD, with the provisions of NASD Conduct Rules 2730 and 2750,
and to comply with NASD Conduct Rule 2420 and IM-2420-1 as that Rule and
Interpretative Material apply to a non-member foreign dealer or bank.
Section 14. DISTRIBUTION OF PROSPECTUSES; OFFERING CIRCULARS. We are
familiar with Securities Act Release No. 4968 and Rule 15c2-8 under the
Exchange Act, relating to the distribution of preliminary and final
prospectuses, and we confirm that we will comply therewith, to the extent
applicable, in connection with any sale of Securities. Our acceptance of an
Invitation relating to an offering made pursuant to the provisions for
registration of offerings of Securities under the Securities Act shall
constitute our agreement that we shall furnish, if requested by the
Representatives, a copy of an amended or supplemented preliminary prospectus
to each person to whom we have furnished a previous preliminary prospectus
and, if requested by the Representatives, indicate to each such person the
changes reflected in such amended document. You shall cause to be made
available to us, to the extent made available to you by the Issuer, such
number of copies of the Prospectus as we may reasonably request for purposes
contemplated by the Securities Act, the Exchange Act and the rules and
regulations thereunder.
Our Acceptance of an Invitation relating to an offering made pursuant to
an Offering Circular shall constitute our agreement that, if requested by
you, we will furnish a copy of any amendment to a preliminary or final
Offering Circular to each person to whom we shall have furnished a previous
preliminary or final Offering Circular. Our Acceptance shall constitute our
confirmation that we have delivered and our agreement that we will deliver
all preliminary and final Offering Circulars required for compliance with the
applicable federal and state laws and the applicable rules and regulations of
any regulatory body promulgated thereunder governing the use and distribution
of offering circulars by underwriters and, to the extent consistent with such
laws, rules and regulations, our Acceptance shall constitute our confirmation
that we have delivered and our agreement that we will deliver all preliminary
and final Offering Circulars which would be required if the provisions of
Rule 15c2-8 (or any successor provision) under the Exchange Act applied to
such offering.
Section 15. NET CAPITAL. The incurrence by us of our obligations
hereunder and under the Underwriting Agreement in connection with the
offering of the Securities will not place us in violation of the net capital
requirements of Rule 15c3-1 under the Exchange Act, or, if we are a financial
institution subject to regulation by the Board
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of Governors of the Federal Reserve System, the Comptroller of the Currency
or the Federal Deposit Insurance Corporation, will not place us in violation
of the capital requirements of such regulator or any other regulator to which
we are subject.
Section 16. TERMINATION. With respect to each offering of Securities
pursuant to this Agreement, all limitations in this Agreement on the price at
which the Securities may be sold, the period of time referred to in Section
6, the authority granted by the first sentence of Section 7, and the
restrictions contained in Section 8 shall terminate at the close of business
on the 45th day after the commencement of the offering of such Securities.
You may terminate any or all of such provisions at any time prior thereto by
notice to the Underwriters. All other provisions of this Agreement shall
remain operative and in full force and effect with respect to such offering.
Section 17. EXPENSES AND SETTLEMENT. You may charge our account with
any transfer taxes on sales of Securities made for our account and with our
proportionate share (based upon our underwriting obligation) of all other
expenses incurred by you under this Agreement or otherwise in connection with
the purchase, carrying, sale or distribution of the Securities. With respect
to each offering of Securities pursuant to this Agreement, the respective
accounts of the Underwriters shall be settled as promptly as practicable
after the termination of all the provisions of this Agreement as provided in
Section 16, but you may reserve such amount as you may deem advisable for
additional expenses. Your determination of the amount to be paid to or by us
shall be conclusive. You may at any time make partial distributions of
credit balances or call for payment of debit balances. Any of our funds in
your hands may be held with your general funds without accountability for
interest. Notwithstanding any settlement, we will remain liable for any taxes
on transfers for our account and for our proportionate share (based upon our
underwriting obligation) of all expenses and liabilities which may be
incurred by or for the accounts of the Underwriters with respect to each
offering of Securities pursuant to this Agreement.
Section 18. INDEMNIFICATION. With respect to each offering of
Securities pursuant to this Agreement, we will indemnify and hold harmless
each other Underwriter and each person, if any, who controls each other
Underwriter within the meaning of Section 15 of the Securities Act, to the
extent that and on the terms upon which we agree to indemnify and hold
harmless the Issuer and other specified persons as set forth in the
Underwriting Agreement.
Section 19. CLAIMS AGAINST UNDERWRITER. With respect to each offering
of Securities pursuant to this Agreement, if at any time any person other
than an Underwriter asserts a claim (including any commenced or threatened
investigation or proceeding by any governmental agency or body) against one
or more of the Underwriters or against you as Representatives of the
Underwriters arising out of an alleged untrue statement or omission in the
Registration Statement (or any amendment thereto) or in any preliminary
prospectus or the Prospectus or any
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amendment or supplement thereto, or in any preliminary or final Offering
Circular, or relating to any transaction contemplated by this Agreement, we
authorize you to make such investigation, to retain such counsel for the
Underwriters and to take such action in the defense of such claim as you may
deem necessary or advisable. You may settle such claim with the approval of
a majority in interest of the Underwriters. We will pay our proportionate
share (based upon our underwriting obligation) of all expenses when and as
incurred by you (including the fees and expenses of counsel for the
Underwriters) in investigating and defending against such claim and our
proportionate share of the aggregate liability incurred by all Underwriters
in respect of such claim (after deducting any contribution or indemnification
obtained pursuant to the Underwriting Agreement, or otherwise, from persons
other than Underwriters), whether such liability is the result of a judgment
against one or more of the Underwriters or the result of any such settlement.
Any Underwriter may retain separate counsel at its own expense. A claim
against or liability incurred by a person who controls an Underwriter shall
be deemed to have been made against or incurred by such Underwriter. In the
event of default by any Underwriter in respect of its obligations under this
Section, the non-defaulting Underwriters shall be obligated to pay the full
amount thereof in the proportions that their respective underwriting
obligations bear to the underwriting obligations of all non-defaulting
Underwriters without relieving such defaulting Underwriter of its liability
hereunder.
Section 20. DEFAULT BY UNDERWRITERS. Default by any Underwriter in
respect of its obligations hereunder or under the Underwriting Agreement
shall not release us from any of our obligations or in any way affect the
liability of such defaulting Underwriter to the other Underwriters for
damages resulting from such default. If one or more Underwriters default
under the Underwriting Agreement, and if it is so provided in such
Underwriting Agreement, you may (but shall not be obligated to) arrange for
the purchase by others, which may include yourselves or other non-defaulting
Underwriters, of all or a portion of the Securities not taken up by the
defaulting Underwriters.
In the event that such arrangements are made, the respective
underwriting obligations of the nondefaulting Underwriters and the amounts of
the Securities to be purchased by others, if any, shall be taken as the basis
for all rights and obligations hereunder, but this shall not in any way
affect the liability of any defaulting Underwriter to the other Underwriters
for damages resulting from its default, nor shall any such default relieve
any other Underwriter of any of its obligations hereunder or under the
Underwriting Agreement except as herein or therein provided. In addition, in
the event of default by one or more Underwriters in respect of their
obligations under the Underwriting Agreement to purchase the Securities
agreed to be purchased by them thereunder and, to the extent that
arrangements shall not have been made by you for any person to assume the
obligations of such defaulting Underwriter or Underwriters, we agree, if it
is so provided in such Underwriting Agreement, to assume our proportionate
share, based upon our underwriting obligation, of the obligations of
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each such defaulting Underwriter (subject to the limitations contained in
such Underwriting Agreement) without relieving such defaulting Underwriter of
its liability therefor.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any securities
purchased, or to deliver any securities sold or over-allotted, by you for the
respective accounts of the Underwriters, or to bear their proportion of
expenses or liabilities pursuant to this Agreement, and to the extent that
arrangements shall not have been made by you for any persons to assume the
obligations of such defaulting Underwriter or Underwriters, we agree to
assume our proportionate share, based upon our respective underwriting
obligation, of the obligations of each defaulting Underwriter without
relieving any such defaulting Underwriter of its liability therefor.
Section 21. LEGAL RESPONSIBILITY. As Representatives of the
Underwriters, you shall have no liability to us except for your lack of good
faith and for obligations assumed by you in this Agreement and except that we
do not waive any rights that we may have under the Securities Act or the
Exchange Act or the rules and regulations thereunder. No obligations not
expressly assumed by you in this Agreement shall be implied herefrom.
Nothing herein contained shall constitute the Underwriters an
association, or partners, with you, or with each other, or, except as
otherwise provided herein or in the Underwriting Agreement, render any
Underwriter liable for the obligations of any other Underwriter; and the
rights, obligations and liabilities of the Underwriters are several in
accordance with their respective underwriting obligations, and not joint.
If the Underwriters are deemed to constitute a partnership for federal
income tax purposes, we elect to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as
amended, and agree not to take any position inconsistent with such election,
and you, as Representatives, are authorized, in your discretion, to execute
on behalf of the Underwriters such evidence of such election as may be
required by the Internal Revenue Service.
Unless we have promptly notified you in writing otherwise, our name as
it should appear in the Prospectus or Offering Circular and our address are
set forth on the signature page hereof.
Section 22. NOTICES. Any notice from you shall be deemed to have been
duly given if mailed or transmitted to us at our address appearing below.
Section 23. GOVERNING LAW. This Agreement shall be governed by the
laws of the State of Florida applicable to agreements made and to be
performed in said State.
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Please confirm this Agreement and deliver a copy to us.
Very truly yours,
Firm:
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By:
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Authorized Officer or Partner
Address:
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Confirmed as of the date
first above written.
CARDINAL CAPITAL MANAGEMENT, INC.
By:
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Hershel F. Smith, Jr., President
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EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 4, 1998 (except for Note 7, as to which
the date is October 21, 1998), accompanying the financial statements of U.S.
Laboratories Inc. and subsidiaries contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 5, 1999
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 29, 1998, accompanying the financial
statements of Wyman Testing Laboratories, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 5, 1999
