<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM____TO____
Commission file number 0-25339
U.S. Laboratories Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 33-0586167
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
7895 Convoy Court, Suite 18
San Diego, California 92111
---------------------------
(address of principal executive offices)
858-715-5800
------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes___ No X
-
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding as of November 13, 2000
----- -----------------------------------
Common Stock, $0.1 par value per share 3,201,065
Transitional Small Business Disclosure Format: Yes_____ No X
-
<PAGE>
U.S. Laboratories Inc.
Index
<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Income
For the Nine Months ended September 30, 2000 and 1999 (unaudited) 5
And the Three Months ended September 30, 2000 and 1999 (unaudited)
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2000 (unaudited) 6
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II - Other Information
Item 2. Changes in Securities 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits 24
</TABLE>
2
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents................... $ 515,092 $1,217,527
Accounts receivable, net of allowance for
doubtful accounts of $607,121 and $209,956,
respectively.............................. 8,324,469 4,783,095
Work-in-progress............................ 769,341 329,899
Prepaid expenses and other current
assets...................................... 284,127 85,147
Notes receivable-related party,
current portion........................... 46,905 46,905
----------- ----------
Total current assets............... 9,939,934 6,462,573
Furniture and equipment, net of accumulated
depreciation of $1,461,659 and $1,077,836,
respectively.............................. 1,726,255 1,102,149
Goodwill, net of accumulated amortization of
$719,511 and $575,420, respectively....... 2,730,088 1,629,826
Notes receivable-related party, net of
current portion........................... 93,959 93,809
Other assets................................ 393,776 303,420
----------- ----------
Total assets........................... $14,884,012 $9,591,777
=========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 2000 and December 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Current liabilities
Lines of credit....................... $ 2,237,231 $ 63,641
Notes payable, current portion....... 356,346 290,075
Accounts payable...................... 1,986,156 736,540
Accrued liabilities................... 885,313 313,723
Deferred income taxes................. 478,355 306,203
Income taxes payable.................. 398,275 777,434
----------- -----------
Total current liabilities........ 6,341,676 2,487,616
Notes payable, net of current portion. 543,187 508,173
----------- -----------
Total liabilities................ 6,884,863 2,995,789
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
3,201,065 and 3,200,000 shares
issued and outstanding, respectively 32,010 32,000
Treasury stock,at cost................... (4,327) (114,088)
Additional paid-in capital.............. 5,244,354 5,188,442
Retained earnings .................... 2,727,112 1,489,634
----------- -----------
Total stockholders' equity......... 7,999,149 6,595,988
----------- -----------
Total liabilities and stockholders'
equity.............................. $14,884,012 $ 9,591,777
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 2000 and 1999(unaudited)
And the Nine Months Ended September 30,2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue...................................... $9,517,387 $4,245,299 $25,459,345 $11,230,000
Cost of goods sold........................... 5,614,641 2,147,135 14,589,936 5,698,711
--------- --------- ---------- -----------
Gross profit................................. 3,902,746 2,098,164 10,869,409 5,531,289
--------- --------- ---------- -----------
Selling, general, and
administrative expenses.................... 3,041,263 1,790,362 8,443,943 4,906,210
--------- --------- ---------- -----------
Income from operations....................... 861,483 307,802 2,425,466 625,079
--------- --------- ---------- ---------
Other income (expense)
Interest expense............................. (77,210) (6,947) (204,224) (75,767)
Interest income.............................. 52 17,059 10,273 57,701
Other, net................................... (24,146) 776 (46,241) 35,722
--------- --------- ---------- ---------
Total other income (expense)............. (101,304) 10,888 (240,192) 17,656
Income before provision for income taxes..... 760,179 318,690 2,185,274 642,735
Provision for income taxes................... 329,649 127,476 947,796 257,094
--------- --------- ---------- ---------
Net income................................... 430,530 $191,214 $1,237,478 $ 385,641
========= ========= ========== =========
Basic and diluted income per share........... .14 $ .06 $ .39 $ .13
========= ========= ========== =========
Weighted average shares outstanding.......... 3,201,065 3,200,000 3,201,065 3,003,703
========= ========= ========== =========
</TABLE>
See accompanying notes
5
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional
Common Stock Treasury Paid-In Retained
Shares Amount Stock Capital Earnings Total
Balance,12/31/99................. 3,200,000 $32,000 $(114,088) $5,188,442 $1,489,634 $ 6,595,988
Adjustment to
balance to
reflect acquisition
of subsidiary.................... 30,000 30,000
Issuance of 20,000
treasury shares
for purchase of
AGS, Inc......................... 63,613 16,387 80,000
Issuance of 15,000
treasury shares
for purchase of
Sage Engineering,
Inc.............................. 50,475 9,525 60,000
Issuance of common
stock............................. 1,065 10 10
Purchase of 1,065
shares of treasury
stock, at cost.................... (4,327) (4,327)
Net income........................ 1,237,478 1,237,478
--------- -------- -------- ---------- ---------- -----------
Balance, 9/30/00.................. 3,201,065 $ 32,010 $ (4,327) $5,244,354 $2,727,112 $ 7,999,149
========= ======== ======== ========== ========== ===========
</TABLE>
See accompanying notes
6
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
2000 1900
---- ----
(unaudited) (unaudited)
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income.......................................................... $1,237,478 $385,641
Adjustments to reconcile net income
to net cash (used in) provided by operating
activities
Amortization of Goodwill............................................ 145,175 87,450
Depreciation........................................................ 419,250 225,113
Deferred Income Taxes............................................... 800 -
Changes in assets and liabilities, excluding
the effects of businesses acquired
Accounts receivable................................................. (1,434,412) (326,708)
Work in progress.................................................... (255,361) (223,642)
Prepaid expenses.................................................... (139,551) (144,274)
Other assets........................................................ (29,232) (40,667)
Accounts payable.................................................... 741,555 (280,027)
Accrued liabilities................................................. 480,878 355,101
Income tax payable.................................................. (379,159) 140,245
---------- ---------
Net cash provided by operating
activities......................................................... 787,421 178,232
---------- ---------
Cash flows from investing activities
Purchase of furniture and equipment, net
of disposals....................................................... (609,952) (174,861)
Acquisitions of businesses,net of cash
acquired........................................................... (3,097,105) (184,178)
Note receivable-related party....................................... (148) -
----------- ---------
Net cash (used in) investing activities............................. (3,707,205) (359,039)
------------ ----------
</TABLE>
See accompanying notes
7
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30
--------------------------------
2000 1999
---------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities
Lines of credit,(net).............................................. $2,173,590 $(1,877,744)
Due to stockholders,(net).......................................... - (221,976)
Repayments of notes payable........................................ (7,836) (428,896)
Proceeds from the initial stock offering
net of the deferred offering costs............................... - 4,785,685
Issuance of common & treasury stock,
net of purchases................................................. 51,595 -
---------- ------------
Net cash provided by
financing activities............................................. 2,217,349 2,257,069
---------- ------------
Net (decrease) increase in cash...................................... (702,435) 2,076,262
Cash, beginning of period............................................ 1,217,527 121,782
---------- ------------
Cash, end of period.................................................. $ 515,092 $ 2,198,044
Supplemental disclosures of cash flow
information
Interest paid....................................................... $ 204,224 $ 75,767
========== ===========
Income taxes paid................................................... $ 746,350 $ 111,800
========== ===========
</TABLE>
Supplemental Disclosure of Financing Activities:
In the first quarter 2000, the Company issued treasury stock of $114,088 as the
initial payment for the purchase of Sage Engineering Inc. and as an installment
payment for AGS Inc., purchased in 1999, in accordance with the respective
purchase agreements.
See accompanying notes
8
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 (unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS
U.S. Laboratories Inc. and its subsidiaries (collectively the "Company")
offers engineering and design services,project management, construction
quality control, structural engineering and design, environmental
engineering and inspection and testing to construction companies and U.S.
government agencies. The Company has facilities in California, New Jersey,
Florida, Nevada and Virginia. Readers of this report should refer to
additional information in the annual report filed on Form 10K-SB for
December 31, 1999.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Interim Unaudited Financial Information
-------------------------------------------------
As contemplated by the Securities and Exchange Commission under Item 310(b)
of Regulation S-B, the accompanying financial statements and footnotes have
been condensed and therefore do not contain all disclosures required by
generally accepted accounting principles. The interim financial data is
unaudited. However, in the opinion of the Company the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the financial position and results for the interim
periods. The Company's interim results are not necessarily indicative of
the results to be expected for the full year.
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
-------------------------
The Company considers all highly-liquid investments purchased with original
maturities of three months or less to be cash equivalents.
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 ranging from 3 to 7 years.
Maintenance, repairs, and minor renewals are expensed as incurred.
Expenditures for additions and major improvements are capitalized. Gains
and losses on disposals are included as other income (expense) in the
statements of income.
9
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2000 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
Goodwill
--------
Goodwill is being amortized over a period not exceeding twenty years. 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.
Revenue Recognition
-------------------
Revenue from services performed, including fixed-price and unit-price
contracts, is recorded as earned over the duration of the contract. Revenue
from services is recognized when service has been performed and accepted.
At the time losses on 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 its contracts.
The Company records work-in-progress revenue on a percentage of completion
method whereby income is recognized by a comparison of the work completed
with the total estimate of work to be completed. All work-in-progress is
expected to be billed within one year.
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 law 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.
10
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2000 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 provides contract services to construction companies and U.S.
government agencies, primarily in California, New Jersey, Florida, Nevada
and Virginia. 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 three months and nine months ended September 30, 1999 and 2000,
basic earnings per share is computed by dividing net income to common
stockholders by the weighted-average number of common shares outstanding
during the accounting period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potential common shares had been issued and if the
additional common shares were dilutive.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and No.
138, this pronouncement is effective for financial statements of fiscal
years beginning after June 15, 2000. SFAS No. 133 and SFAS No. 137,
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. The Company does not expect adoption of SFAS No.
133 as amended to have a material effect, if any, on its interim or annual
financial position or results of operations.
Reclassifications
-----------------
The Company has reclassified certain prior year financial statement
accounts to conform to current year presentations.
NOTE 3 - CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California, Nevada,
Florida, Virginia and New Jersey. Deposits at each bank are insured by the
Federal Deposit Insurance Corporation up to $100,000. The Company has not
experienced any uninsured losses in such accounts and believes it is not
exposed to any significant credit risk on cash.
11
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2000 (unaudited)
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -------------
<S> <C> <C>
Automobiles and trucks.......... $1,336,941 $ 963,259
Furniture and fixtures.......... 380,647 319,136
Office hardware and software.... 490,409 168,735
Machinery and equipment......... 801,230 596,337
Leasehold improvements.......... 178,687 132,518
---------- ----------
3,187,914 2,179,985
Less:accumulated depreciation... 1,461,659 1,077,836
---------- ----------
Total.............. $1,726,255 $1,102,149
========== ==========
</TABLE>
NOTE 5 - LINES OF CREDIT
In the third quarter 1999, the Company entered into a $4,000,000 revolving
working capital line of credit facility as part of its ongoing efforts to
ensure appropriate levels of liquidity. At September 30, 2000, this working
capital line of credit balance was $2,237,231 and at December 31, 1999 the
balance was $63,641.
In the third quarter 1999, the Company entered into a $200,000 capital
purchases line of credit facility. This line of credit is used for
equipment purchases of the Company and at the end of one year this facility
will convert to a five year term loan. At September 30, 2000, this capital
purchases term loan balance was $196,432; included in long term debt was
$157,146 and $39,286 was included as short term debt.
In the third quarter 1999, the Company entered into a $350,000 term loan
facility to refinance existing equipment debt. At September 30, 2000, this
term loan facility was unused and available for future use.
In the second quarter 2000, the Company entered into a $500,000 commercial
lease line of credit. This line of credit is used for vehicle financing and
at September 30, 2000, this vehicle line of credit was unused and available
for future use.
All of these credit facilities are secured by the assets of the Company and
its subsidiaries and bear interest at the variable prime rate.
The company had a line of credit with Bank of America in the amount of
$500,000. The Company's majority shareholder and his spouse have personally
guaranteed any borrowings against this line of credit. It was an unsecurred
note that was due in July, 2000 and has expired. The Company does not
intend to use this credit facility in the future.
12
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2000 (unaudited)
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Acquisitions Notes
Note payable to stockholder of Wyman
Enterprises,Inc. The amount is
to be paid in two annual installments
of $75,000 beginning March 25, 2001.............. $150,000 $225,000
Note payable to stockholder of Advanced
Geo Materials Inc. The amount is to be
paid in installments commencing
October 15, 2000................................. 89,504 157,325
Note payable to stockholders of BTC Associates,
Inc.The amount is to be paid on
October 15, 2000................................. 3,433 -
Note payable to stockholders of Sage Engineering
Inc.in connection with the acquisition.
The amount is to be paid in installments
commencing February 1, 2001...................... 46,775 -
Other Notes
Notes payable to various motor credit
corporations, collateralized by
applicable equipment. Monthly payments
includes interest ranging from
7.75% to 13.5% per annum......................... 413,389 415,923
Note payable to Bank of America
in connection with the purchase
of equipment. The amount is to be
paid on starting September 30, 2000.............. 196,432 -
Less:current portion............................... 356,346 290,075
-------- ---------
Long term portion.................................. $543,187 $508,173
</TABLE>
Unless stated otherwise, notes payable bear interest at the prime rate at the
date of acquisition which range from 8% to 9%.
NOTE 7 - RELATED PARTY TRANSACTIONS
Due from Stockholder
At September 30, 2000 the Company had amounts due from the majority
stockholder of $140,863. The total amount is due on September 20, 2005 in
one payment and is non-interest bearing. At December 31, 1999 the amount
was $140,714.
On November 30, 1999, the Company entered into a stock purchase agreement
with a related party to purchase all of the issued and outstanding shares
of capital stock of the Building Department Inc. for a purchase price of
$30,000 in cash which was paid in 1999 and an additional payment of $63,000
paid in the first quarter, 2000.
13
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2000 (unaudited)
NOTE 8 - STOCK OPTION PLAN
In July 1998, the Board of Directors adopted and approved the 1998 Stock
Option Plan (the"Option Plan") under which a total of 500,000 shares of
common stock have been reserved for issuance. In June 1999, the Bard of
Directors and the stockholders approved an increase in the number of shares
reserved under the Option Plan to bring the total number of shares reserved
to 810,000. Options under this plan may be granted to employees, officers,
and directors and consultants of the Company. The exercise price of the
options is determined by the Bard of Directors, but the exercise price may
not be less than 100% of the fair market value on the date of grant.
Options vest over periods not to exceed 5 years. In September 2000, the
Company had 696,950 stock options outstanding at an exercise price ranging
from $6.00 to $6.60 per share, of which 575,280 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 9 - 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 at 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 any fiscal year are at least twice
the base period earnings of $841,041. The warrants expire upon termination
or November 9, 2003.
NOTE 10 - INITIAL PUBLIC OFFERING
On February 23, 1999, The Company completed an initial public offering that
raised net cash of $4,825,000 in the first quarter, 1999. The Company sold
1,000,000 shares of common stock, which represented 31% of the post-
offering common stock, in the offering. A part of the proceeds of the
offering was used to retire debt in the approximate amount of $2,150,000.
NOTE 11 - ACQUISITIONS
In January 2000, the Company entered into a stock purchase agreement to
purchase all the outstanding shares of BTC Laboratories, Inc. The Company
recorded goodwill of $609,380 in connection with this acquisition.
During January 2000, Buena Engineers Inc., a subsidiary of the Company,
entered into an asset agreement with Stewart Environmental Inc. to purchase
substantially all its assets for a purchase price of $60,000, of which
$30,000 was paid. In September 2000, the Company and the previous owner of
Stewart Environmental Inc., entered into a repurchase agreement. The
previous owner has agreed to repay to the Company the $30,000 in
installments which had been previously paid by the Company and to forgive
the $30,000 balance still owed by the Company to the previous owner. The
first installment was received in October, 2000.
14
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2000 (unaudited)
NOTE 11 - ACQUISITIONS (continued)
In January 2000, the Company, purchased substantially all the assets of
SAGE Engineering, Inc. for a total purchase price of approximately $110,000
which includes 15,000 shares of the Company's common stock. The Company
recorded goodwill of $35,145 in connection with this acquisition.
In February 2000, the Company purchased substantially all of the assets of
Intertek Technical Services, which will operate under the name Unitek
Technical Services, Inc., for a total purchase price of $1,650,000. The
Company recorded goodwill of $405,196 in connection with this acquisition.
In June 2000, the Company acquired certain assets of Moore Consulting for a
purchase price of $20,000, which was paid on June 23, 2000. The Company
recorded no goodwill in connection with this acquisition.
The above acquisitions were recorded by the Company under the purchase
method of accounting. Goodwill was recorded based on the excess of the
purchase price over the fair value of the net assets acquired, and is being
amortized over periods not exceeding twenty years.
NOTE 12 - INCOME TAXES
The Company has amended its previously filed 1996, 1997 and 1998 federal
tax returns during the third quarter, 2000 to apply for Research and
Development Credits (R&D) available to the Company. The Company expects to
file amended state tax returns in the fourth quarter, 2000 and apply for
R&D Credits at the state level in the states where the Company performed
its services from 1996 thru 1998.
The Company has also applied for R&D Credits for 1999 with the filing of
its 1999 federal tax return during the third quarter, 2000 and is in the
process of amending its 1999 state tax returns in the states where the
Company performed its services in 1999.
The Company anticipates a reduction in its overall effective tax rates as a
result of R&D Credits and will record the impact through the provision for
income taxes when the Internal Revenue Service and the various states
accept the filings.
NOTE 13 - SEGMENT DISCLOSURE
The Company has adopted Statement of Financial Accounting Standards No.
131-Disclosure about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 supercedes Statement of Financial Accounting
Standards No. 14 - Financial Reporting for Segments of a Business
Enterprise ("SFAS 14"). SFAS 131 replaces the "industry approach"
definition of "segment" that was promulgated by SFAS 14 with the
"management approach" to identify an entity's reportable segments. Under
the management approach, an entity's reportable segments are determined by
the internal organization used by the entity's management for making
operating decisions and assessing performance. The Company's business is to
provide professional and technical services. The Company provides its
services from offices located primarily throughout the United States. In
accordance with the provisions of SFAS 131, the Company has concluded that
its operations may be aggregated into one reportable segment for purposes
of this disclosure.
15
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition and Results of Operations
Nine Months Ended September 30, 2000 and 1999 and the three months
ended September 30, 2000 and 1999.
Revenue. Revenue for the nine months ended September 30, 2000 was
$25,459,345, an increase of 127% over the same period in 1999. The increase was
due to growth from internal operations of $7,164,562 and to acquisitions of
$7,064,783. The Company experienced an internal growth rate of approximately
64%, with the remaining 63% attributed to the expansion of operations through
the acquisition of several engineering consulting services companies in the
first and second quarters of 2000. For the three months ended September 30,
2000, the Company experienced revenues of $9,517,387 which represents an
increase of 124% over the comparable three months period ended September 30,
1999. The Company increased its revenues through internal growth, the results of
earlier acquisitions and an influx of major contracts primarily in the New
Jersey, California and Virginia operations of the Company.
Gross Profit. Gross profit for the nine months ended September 30, 2000 was
$10,869,409, an increase of 97% over the same period in 1999. This increase in
gross profit was due primarily to the increase in revenues described above. For
the three months ended September 30, 2000, the Company experienced gross profit
of $3,902,746 which represents an increase of $1,804,582 or 86% over the
comparable three month period ended September 30, 1999. This increase is due
primarily to the added businesses from past acquisitions. Particularly, the
Unitek Technical Services Inc. business is primarily a high volume, low gross
margin business as compared to the Company's core inspection/testing business,
and as a result the gross margins declined to 41.0% from the third quarter 2000
a decrease of 8.4% over the comparable three months ended September 30, 1999.
Unitek was acquired in February 2000.
Income Before Provision for Income Taxes. Income before provision for
income taxes for the nine months ended September 30, 2000 was $2,185,274, an
increase of 240% over the same period in 1999. The profit increased due to the
completion of four acquisitions in the first and second quarters of 2000, while
selling, general and administrative ("SG&A") expenses decreased as a percentage
of revenues. For the three months ended September 30, 2000, the Company
experienced income before provision for taxes of $760,179, an increase of
$441,489 or 139% over the comparable three month period ended September 30,
1999. In the third quarter, 2000 the Company received a favorable outcome of a
$95,000 provision for 1998 penalties imposed by the IRS. This amount reduced
SG&A expenses in the third quarter, 2000, which had been previously recorded in
the second quarter, 2000.
For the three months ended September 30, 2000, the SG&A expenses for the
Company increased by $1,250,901 over the comparable three month period ending
September 30, 1999. This increase is primarily due to increased travel costs for
the mergers and acquisitions department and additional management personnel
required to manage the additional four acquisitions made in the first six months
of year 2000.
On a percentage basis the SG&A expenses decreased as a percentage of
revenue to 32% in the three month period ending September 30, 2000, from 42% in
the comparable three month period ended September 30, 1999.
Interest Expense. Interest expense was $204,224 for the nine months ended
September 30,2000,an increase of 170% over the same period in 1999. This
increase was due primarily to funding the cost of acquiring four companies in
the first and second quarters of 2000 whereas previously the Company had used
approximately $1,500,000 of the net proceeds from its initial public offering to
fund acquisitions. For the three months ended September 30, 2000 the Company
interest expense increased by $70,263 over the comparable period in the three
months ended September 30, 1999 for the same reasons mentioned above.
16
<PAGE>
Financial Condition and Results of Operations (continued)
Net Income. Net income for the nine months ended September 30,2000 was
$1,237,478, an increase of 221% over the same period in 1999. The increase in
net income was primarily due to the inclusion of the results of operations for
the four acquisitions made in the first and second quarters of 2000 and the
decrease as a percentage of revenue in selling, general and administrative
expenses. For the three months ended September 30, 2000, the Company experienced
an increase of net income of $239,316 or 125% over the three month comparable
period ending September 30, 1999. The combined effective tax rate for the three
months and nine month periods ending September 30, 2000 was 43.4% whereas the
combined effective tax rate for the three months and nine months periods ending
September 30, 1999 was 40%.
As mentioned above, the SG&A expenses decreased to 32.0% as a percentage of
revenue in the three months ending September 30, 2000 from 42.1% in the
comparable three month period September 30, 1999 which is due primarily to the
decentralized management approach of the Company's operations which was also a
contributing factor to the increase in net income.
Liquidity and Capital Resources
During the nine months ended September 30, 2000, the Company's net cash
used in operating activities was $787,421, a increase of 342% over the same
period in 1999, primarily due to the profitability of the Company during the
summer months and several large projects which started in the second quarter of
fiscal 2000 and which were billed in the third quarter, 2000.
In the third quarter 1999, the Company entered into a $4,000,000 revolving
working capital line of credit facility as part of the Company's ongoing efforts
to ensure appropriate levels of liquidity. At September 30, 2000, this working
capital line of credit balance was $2,237,231, and is included as a current
liability.
In the third quarter 1999, the Company entered into a $200,000 capital
purchases line of credit facility. This line of credit was used for equipment
purchases of the company and at the end of August, 2000 this facility converted
to a five year term loan. At September 30, 2000, the balance was $196,432, with
$157,146 treated as long term debt and $39,286 treated as short term debt.
In the third quarter 1999, the Company entered into a $350,000 term loan
facility to refinance existing equipment debt. At September 30, 2000, and
December 31, 1999 this term loan facility was unused and available for future
use.
In the second quarter 2000, the Company entered into a $500,000 commercial
lease line of credit. This line of credit is used for vehicle financing and at
September 30, 2000, this vehicle line of credit was unused and available for
future use.
All of these credit facilities are secured by the assets of the Company and
its subsidiaries and bear interest at the variable prime rate.
Management believes that its available cash and cash equivalents as well as
cash generated from operations will be sufficient to meet its cash requirements
for at least the next twelve months. The Company, nevertheless, is currently
negotiating with a number of lenders to secure credit facilities that can be
used to finance additional acquisitions. During the remainder of 2000, the
Company intends to actively continue its search for acquisitions in order to
expand its geographical representation and enhance its technical capabilities.
17
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Liquidity and Capital Resources (continued)
Acquisitions
In January 2000, the Company entered into a stock purchase agreement to
purchase all the outstanding shares of BTC Laboratories, Inc. The Company
recorded goodwill of $609,380 in connection with this acquisition.
During January 2000, Buena Engineers Inc., a subsidiary of the Company,
entered into an asset agreement with Stewart Environmental Inc. to purchase
substantially all of its assets for a purchase price of $60,000, of which
$30,000 was paid.In September 2000, the Company and the previous owner of
Stewart Environmental, Inc., entered into a repurchase agreement. The previous
owner has agreed to repay to the Company the $30,000 in installments, which had
been previously paid by the Company and to forgive the $30,000 balance still
owed by the Company to the previous owner. The first installment was received in
October 2000.
In January 2000, the Company, purchased substantially all the assets of
SAGE Engineering, Inc. for a total purchase price of approximately $110,000
which includes 15,000 shares of common stock.
In February 2000, the Company purchased assets of Intertek Technical
Services, which operates under the Unitek Technical Services, Inc., for a total
purchase price of $1,650,000 in cash which has been paid as of February 22,
2000.
In June 2000, the Company acquired certain assets of Moore Consulting for a
purchase price of $20,000, which was paid on June 23, 2000.
The above acquisitions were recorded by the Company under the purchase
method of accounting. Goodwill was recorded based on the excess of the purchase
price over the fair value of the net assets acquired over a period of twenty
years.
Management Indebtedness
At September 30, 2000 the Company had amounts due from the majority
stockholder of $140,863. The total amount is due on September 20, 2005 in one
payment and is non interest bearing.
Inflation
Currently, inflation does not significantly affect our operations, and we
do not expect inflation to affect our operations materially in the foreseeable
future.
Backlog
As of September 30, 2000, the Company's backlog has reached approximately
$23.6 million. This amount has increased approximately 115% or $12.6 million
from $11.0 million at December 31, 1999.
The increase in backlog for the third quarter, 2000 can be attributed to
internal growth from new projects in the New Jersey, California and Nevada
offices and new contracts and renewals in the public sector. Also contributing
to this increase were backlog contributions from the acquisitions of BTC
Laboratories, Inc. and Unitek Technical Services, Inc. in the first quarter,
2000 and Sage Engineering and Moore Consulting in the second quarter, 2000.
18
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Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-QSB may constitute 'forward looking
statements' within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
Company's failure to continue to develop and market new and innovative products
and services and to keep pace with technological change; competitive pressures;
failure to obtain or protect intellectual property rights; financial condition
or results of operations; quarterly fluctuations in revenues and volatility of
stock prices; the Company's ability to attract and retain key personnel;
currency and customer financing risks; dependence on certain suppliers; changes
in the financial or business condition of the Company's distributors or
resellers; the Company's ability to successfully manage acquisitions and
alliances; legal, political and economic changes and other risks, uncertainties
and factors discussed in the Company's other filings with the Securities and
Exchange Commission, and in materials incorporated therein by reference.
Year 2000 Issue - Update
The Company has completed a comprehensive review of its computer systems to
identify the systems that could be affected by ongoing year 2000 problems.
Upgrades to systems judged critical to business operations have been
successfully installed. To date, no significant costs have been incurred in the
Company's systems related to the Year 2000. The Company continues to monitor
the impact of Year 2000 on its operations, and a contingency plan for critical
business applications and continuing project operations is in place in the
event unidentified issues cause business disruptions. The Company also
continues to monitor the Year 2000 readiness of its clients, suppliers,
subcontractors and vendors.
19
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Part II
Item 2. Changes in Securities.
(a) Not applicable
(b) Not applicable
(c) In January 2000, San Diego Testing Engineers, Inc., a subsidiary
of the Company, entered into an asset purchase agreement to purchase
substantially all the assets of SAGE Engineering, Inc. As part of the
consideration for this acquisition, the Company issued 15,000 shares of the
Company's common stock to stockholders in SAGE Engineering, Inc. The Company
issued these securities under the exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
20
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Item 5. Other Information
The Board of Directors authorized a stock buyback program for the
repurchase of up to 100,000 shares of the Company's common stock on November 2,
1999.The open market transactions are made from time to time in compliance with
applicable rules and regulations utilizing corporate earnings, and may be
discontinued at any time. Through September 30, 2000, the Company had
repurchased a total of 61,065 shares pursuant to this buyback program.
In January 2000, Buena Engineers Inc., a subsidiary of the Company, entered
into an asset agreement with Stewart Environmental Inc. to purchase
substantially all of its assets for a purchase price of $60,000, of which
$30,000 was paid. In September 2000, the Company and Keith Stewart, the previous
owner of Stewart Environmental, Inc. entered into a repurchase agreement. Keith
Stewart has agreed to repay to the Company the $30,000 in installments which had
been previously paid by the Company and to forgive the $30,000 balance still
owed by the Company to the previous owner. The first installment was received in
October, 2000.
21
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Item 6. Exhibits and Reports Form 8-K
a. Exhibits
10.l Employment Agreement with Joseph M. Wasilewski.
27 Financial Data Schedule
b. Reports on Form 8-K
(1) On October 2, 2000, the Company filed a Form 8-K(A) which
provided the required pro-forma financial information on the
combined effect of the Company's acquisition of Unitek Technical
Services, Inc.
22
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
U.S. Laboratories Inc.
Dated: November 13, 2000 /s/ Dickerson Wright
--------------------
Dickerson Wright, President
Dated: November 13, 2000 /s/ Joseph M. Wasilewski
-------------------------
Joseph M. Wasilewski,
Vice President and Chief Financial Officer
23
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Exhibit Index
Exhibit Number
--------------
10.1 Employment Agreement with Joseph M. Wasilewski.
27 Financial Data Schedule
24
