[LOGO]
1999 ANNUAL REPORT
<PAGE>
U.S. LABORATORIES INC ......
REVENUES
$21,000,000
$18,000,000 $16,397,060
$15,000,000 $11,879,948 -----------
$12,000,000 $7,766,414 -----------
$9,000,000 ----------
$6,000,000
$3,000,000
$0
- --------------------------------------------------------
1997 1998 1999
INCOME AFTER TAX
$1,000,000 $650,201
$800,000 $570,021 ----------
$600,000 $364,156 ----------
$400,000 ----------
$200,000
$0
- --------------------------------------------------------
1997 1998 1999
STRONG YEAR END RESULTS
Year Ended December 31 1998 1999
- -----------------------------------------------------------------------------
Revenue $11,879,948 $16,397,060
- -----------------------------------------------------------------------------
Pre Tax Income $1,014,878 $1,149,201
- -----------------------------------------------------------------------------
Net Income $570,021 $650,201
- -----------------------------------------------------------------------------
Earnings per share (diluted) $0.26 $0.21
- -----------------------------------------------------------------------------
Weighted-average shares outstanding 2,200,000 3,062,810
- -----------------------------------------------------------------------------
... A CONTINUING HISTORY OF SUCCESS
<PAGE>
TO OUR STOCKHOLDERS, EMPLOYEES AND CUSTOMERS:
1999 was an eventful year for U.S. Laboratories. The year began with the
successful completion of our initial public offering, and ended with record
revenues and earnings.
Our success was not realized without major challenges, initially
balancing the transition from a privately held company to a publicly traded
entity, while managing record growth. This required the successful development
and implementation of an administrative infrastructure to support our strategic
growth while continuing profitable operations.
Our Company's model is decentralized management. We rely on our people.
We are a people business. U.S. Laboratories was founded on the independent
creative entrepreneurial skills of our principals and key executives. We
strongly encourage this principle throughout our Company. The success of U.S.
Laboratories is directly attributed to our unwavering belief that our motivated
employees will provide quality service with integrity, resulting in lasting
value for our clients and, in turn, our shareholders. Because we are dependent
on our people, it continues to be the Company's desire to provide ownership deep
into our employee base. Our goal is to make all our employees shareholders. This
was accomplished in 1999 through our Stock Option Plan, and we intend to
continue to compensate our employees with equity so that their interests are
aligned with our shareholders.
During the year, we successfully tested the strength of our
decentralized management model. We developed our infrastructure to support
growth in 2000, with expansion regionally, nationally and internationally.
Acquisitions are an integral part of our strategic plan. Decentralized
management allows the Company to continue to aggressively pursue acquisition
opportunities while maintaining a flat reporting structure.
A snapshot of U.S. Laboratories' accomplishments for 1999:
o Experienced record revenue and net income.
o Established a record backlog for 2000.
o Continued a balanced client base between public and private sector
clients.
o Diversified services to every major industry sector.
o Expanded investor relations resulting in improved stock market
exposure.
o Developed an infrastructure to capitalize on acquisition
opportunities.
We have assembled a successful group of well managed, profitable
companies with diverse yet complimentary services that comprise the U.S.
Laboratories family of companies. We are a people business, our product is our
people, our most prized asset is our people. We credit our record performance in
1999 to our engaged and energized people.
Speaking for all of our employees, I feel privileged to submit this
report to our shareholders. We look forward to another successful year in 2000
for our company and our shareholders.
Sincerely,
/s/ Dickerson Wright
Dickerson Wright
Chairman of the Board, President and Chief Executive Officer
<PAGE>
Business
U.S. Laboratories Inc. is a Delaware corporation formed in May 1993,
which 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.
In February, 1999, the Company completed its initial public offering. We
have used the proceeds to pay for the offering, retire debt, create some working
capital and have set aside the balance to expand through the acquisition of
similar inspection and testing operations. 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 without increasing
our fixed costs. This has resulted in substantial increases in our incremental
profit margin.
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, a balance of public sector and private
industry clients, expansion of international services, and expansion of domestic
geographic markets.
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; Las Vegas, Nevada and the surrounding area; 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, Ft. Myers/Naples and Orlando, Florida. Prior to 1999, we had completed
a total of five acquisitions, and during 1999 we successfully completed an
additional three acquisitions.
o In May 1999, we entered into an asset purchase agreement to acquire
substantially all the assets of Buena Engineers, Inc. ("Buena"), which is
headquartered in Las Vegas, Nevada, one of the most explosive growth
markets in the nation. Buena is a stand-alone operation, and came with an
experienced management team, a solid reputation, and a well established
client base. The engineering services provided by Buena duplicate those we
provide the gaming industry in Atlantic City through our New Jersey
subsidiary, and our presence in two of the major entertainment centers in
the U.S. will create a positive synergy for our customers located in both
markets. We paid approximately $320,000 for the operation.
o In October 1999, we acquired Advanced Geo-Materials Services, Inc. ("AGS"),
a long standing engineering services firm in the Ft. Myers/Naples, Florida
region. With offices already in Orlando, Jupiter, Palm Beach, and
Plantation, the addition of an operation on the west coast of Florida now
enables PEICO, the U. S. Labs subsidiary in Florida, to offer services
statewide. AGS has been successfully merged into the PEICO operation. AGS
was acquired for approximately $250,000.
o 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. ("BDI") for a purchase
price of $30,000 in cash, which has been paid. An additional amount up to
$50,000 will be paid at a later date to be determined after December 31,
1999.
-1-
<PAGE>
During the first quarter of 2000, we have completed four acquisitions.
o In January 2000, our company entered into a stock purchase agreement to
purchase all the outstanding shares of BTC Laboratories, Inc. ("BTC") for a
total purchase price of $1,200,000 payable for $500,000 in cash, which has
been paid. The buyer will pay to stockholders cash equal to the collections
of accounts receivable and work-in-process during the six months immediately
following the closing date up to a maximum amount of $700,000. BTC was
established over 50 years ago in Ventura, California to service the rapidly
growing Northern Los Angeles area.
o In January 2000, Buena entered into an asset purchase agreement with Stewart
Environmental, Inc. ("Stewart") to purchase substantially all of the assets
for a purchase price of $60,000. Stewart has been merged with Buena.
o In January 2000, San Diego Testing Engineers, Inc. ("TESD"), a wholly-owned
subsidiary of U.S. Laboratories, entered into a asset purchase agreement to
purchase substantially all the assets of SAGE Engineering, Inc. ("SAGE") for
a total purchase price of $50,000 in cash and 15,000 shares of common stock.
SAGE has been merged into TESD.
o In February 2000, our company entered into an asset purchase agreement with
Intertek Technical Services, which will operate under the name Unitek
Technical Services, Inc., for a total purchase price of $1,650,000 in cash,
which has been paid. Unitek is headquartered in Fairfax County, Virginia,
and provides source inspection services on a national and international
basis. Unitek will spearhead U.S. Laboratories' entry into the e-commerce
world.
Current Listing of Subsidiaries and Geographic Markets.
o BTC
BTC Laboratories, Inc.
Ventura, California
o BUENA
Buena Engineers, Inc.
Las Vegas, Nevada
o PEICO
Professional Engineering and Inspection Company
Fort Meyers, Florida
Jupiter, Florida
Orlando, Florida
Plantation, Florida
o USEL
U.S. Engineering Laboratories, Inc.
Rahway, New Jersey
Atlantic City, New Jersey
West Berlin, New Jersey
o TESD
Testing Engineers-San Diego, Inc.
San Diego, California
o TELA
Testing Engineers-Los Angeles, Inc.
Irvine, California
o UNITEK
Unitek Technical Services, Inc.
Centreville, Virginia (Washington D.C. metro area)
-2-
<PAGE>
Market for Common Equity and Related Stockholder Matters
Our company's common stock has been quoted on the Nasdaq SmallCap market
under the symbol "USLB" since the completion of its initial public offering in
February 1999. Average high and low bid prices, as reported on Nasdaq, for each
quarter within the last fiscal year were as follows:
1999 High Low
---------------------- ------------ ----------
From February 23, 1999 $5.438 $3.750
2nd Quarter $4.000 $3.000
3rd Quarter $3.688 $2.500
4th Quarter $3.453 $2.500
--------------------- ------------ ----------
These quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions. These
quotations do not include intra-day highs and lows. On December 31, 1999, there
were approximately 35 owners of record and approximately 800 beneficial owners
of our company's common stock.
No cash dividends have been declared to date on our company's common
stock. We expect that all earnings, if any, will be retained to finance the
growth of our company and that no cash dividends will be paid for the
foreseeable future.
Additionally, our company has publicly traded warrants to purchase our
common stock that were originally issued in our initial public offering. We sold
1,000,000 units, each consisting of one share of common stock, and one
redeemable warrant to purchase one share of common stock at an exercise price of
$7.80. Each warrant entitles a holder to purchase at any time over a five-year
period from February 23, 1999, one share of common stock at a price of $7.80,
subject to adjustment in accordance with certain anti-dilution provisions. The
warrants are traded separately on Nasdaq SmallCap under the symbol USLBW.
On October 15, 1999, we entered into an agreement to acquire AGS/PEICO.
As part of the consideration for this acquisition, we issued 20,000 shares of
common stock to two stockholders of AGS/PEICO in March 2000. We issued these
securities under the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
Our registration statement on Form SB-2 was made effective by the
Securities and Exchange Commission on February 23, 1999. We sold 1,000,000
units, each consisting of one share of common stock, $.01 par value per share,
and one redeemable warrant to purchase on share of common stock at an exercise
price of $7.80. We sold the units on February 23, 1999. Our managing
underwriters were Cardinal Capital Management, Inc. and Janda & Garrington LLC.
After deducting the underwriting discounts, commissions, and all the offering's
expenses, we received approximately $4,233,000 from the offering.
As of December 31, 1999, we have used the net proceeds from our initial
public offering as described in the table below.
------------------------------------ --------------------
Use Amount
------------------------------------ --------------------
Acquisitions $ 405,000
------------------------------------ --------------------
Repayment of Debt $2,150,000
------------------------------------ --------------------
Working Capital for Operations $ 630,000
------------------------------------ --------------------
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<PAGE>
Management's Discussion and Analysis of Financial Statements and
Results of Operations
Financial Condition and Results of Operations
Revenue. Revenue for the fiscal year ended December 31, 1999 was
$16,397,060, an increase of 38% over fiscal year 1998. The increase is primarily
attributable to an internal growth rate of approximately 31%, with the remaining
7% attributed to the expansion of operations through the acquisitions of
engineering consulting services companies in the second and fourth quarters of
1999.
Gross Profit. Gross profit for the fiscal year ended December 31, 1999
was $8,154,185, an increase of 56% over fiscal year 1998. This increase in gross
profit was due primarily to the increase in revenues described above.
Income Before Provision for Income Taxes. Income before provision for
income taxes for the fiscal year ended December 31, 1999 was $1,149,201, an
increase of 13% over fiscal year 1998.
Interest Expense. Interest expense was $90,632 in the fiscal year ended
December 31, 1999, a decrease of 49% over fiscal year 1998. This decrease was
due primarily to reduced debt associated with the funding of the initial public
offering.
Income Taxes. The Company has provided for taxes of $499,000 for fiscal
year 1999. The effective tax rates for fiscal year 1999 and 1998 were 43.4% and
43.8%, respectively.
Net Income. Net income for the fiscal year ended December 31, 1999 was
$650,201, an increase of 14% over fiscal year 1998. The increase in net income
was primarily due to the acquisition and internal growth referenced above.
Liquidity and Capital Resources
During the fiscal year ended December 31, 1999, our net cash used in
operating activities was $68,019, a decrease of 115% over fiscal year 1998
primarily due to the payment of federal and state taxes in the second and third
quarter of 1999.
In the third quarter of 1999, we entered into a $4,000,000 revolving
working capital line of credit facility as part of its ongoing efforts to ensure
appropriate levels of liquidity. As of December 31, 1999, this working capital
line of credit was unused and available for future use.
In the third quarter of 1999, we entered into a $200,000 capital
purchase 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. As of December 31, 1999, this capital purchases line
of credit had an outstanding balance of $63,641.
In the third quarter of 1999 we entered into a $350,000 term loan
facility to refinance existing equipment debt. As of December 31, 1999, this
term loan facility was unused and available for future use.
All of these credit facilities are secured with the assets of our
company and our subsidiaries and bear interest at the variable prime rate.
We are currently using approximately $2 million of the proceeds from our
initial public offering to fund acquisitions. Additionally, we intend to make
acquisitions through other financing mechanisms such as notes and other
instruments.
-4-
<PAGE>
Although it is not our intention to use significant amounts of U.S.
Laboratories Inc. stock as consideration while making acquisitions, from time to
time it may be necessary to do so. During 2000, we intend to actively continue
our search for acquisitions in order 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.
Inflation
Inflation does not currently affect our operations, and we do not expect
inflation to affect them in the foreseeable future.
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.
Backlog
As of December 31, 1999, our backlog has reached approximately $11
million. This figure has increased approximately 36% or $2.9 million from $8.1
million at December 31, 1998.
New contract awards to our strategically located subsidiaries in the
northeast, southeast and southwest regions of the United States are combined in
the total backlog.
The following major new contracts cover projects from all the subsidiary
regions.
o The Philadelphia Eagles Football Team's new practice facility
o The Dolphin Mall, retail and entertainment complex near Miami
Airport
o Deguardiola Development Ventures Abacoa Town Center in Jupiter,
Florida
o The Ocean Spray Distribution Center and various projects for
Boyd Gaming in Las Vegas, Nevada
o The Del Mar Marriott, Sea World Attraction 2000 and Hollywood
Water Quality Improvement Project in California
-5-
<PAGE>
Risks and Uncertainties
Potential Limited Growth of U.S. Labs due to our Inability to Identify and
Acquire Companies that will Expand or Complement our Business
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.
We may not Profitably Manage Additional Companies or Successfully Integrate Them
into our Operations
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.
Potential Professional Liability for Structural Failure, Property Damage,
Personal Injury, or Economic Loss may Substantially Exceed the Fees
Derived from 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.
Potential Adverse Effect on our Business if we Fix Prices that are too Low for
Fixed-Price Contracts or we Fail to Correctly 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 and financial
condition.
We may have to Revise Plans During the Course of a Project that will Cost us
Time and Resources and may Adversely Affect our Profitability
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.
Dependence of U.S. Labs on a Limited Number of Key Personnel to Manage our
Company in a way that Provides Profitability and Continued Growth
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.
-6-
<PAGE>
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.
Potential Adverse Effect on our Business if Additional Financing is not
Available to Finance Acquisitions or Internal Growth
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 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.
Special Note Regarding Forward-Looking Statements
We are a growth company, and as a result, a substantial number of
statements contained in this prospectus, including without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import, may constitute forward-looking statements. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
our company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among others, those discussed
under the captions "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," as well as
elsewhere in this annual report. Given these uncertainties, you are cautioned
not to place undue reliance on such forward-looking statements. Our company
disclaims any obligation to update any factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
U.S. Laboratories Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of U.S. Laboratories
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1999. These financial statements are the
responsibility of our company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Laboratories
Inc. and subsidiaries as of December 31, 1999, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 23, 2000
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<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,217,527
Accounts receivable, net of allowance
for doubtful accounts
of $209,956 4,783,095
Work-in-process 329,899
Prepaid expenses and other current assets 85,147
Current portion of notes receivable - related party 46,905
------------
Total current assets 6,462,573
Notes receivable - related party, net of current portion 93,809
Furniture and equipment, net of accumulated depreciation
and amortization of $1,077,836 1,102,149
Excess cost over fair value of net assets acquired,
net of accumulated
amortization of $575,420 1,629,826
Other assets 303,420
------------
Total assets $ 9,591,777
============
The accompanying notes are an integral part of these
consolidated financial statements.
-9-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 63,641
Current portion of long-term debt 132,750
Capitalized lease obligations 4,966
Current portion of notes payable 157,325
Accounts payable 736,540
Accrued payroll and payroll taxes 308,757
Deferred income tax 306,203
Income tax payable 777,434
----------
Total current liabilities 2,487,616
Long-term debt, net of current portion 283,173
Notes payable, net of current portion 225,000
----------
Total liabilities 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
3,200,000 shares issued and outstanding 32,000
Treasury stock, at cost (114,088)
Additional paid-in capital 5,188,442
Retained earnings 1,489,634
----------
Total stockholders' equity 6,595,988
----------
Total liabilities and stockholders' equity $ 9,591,777
==========
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1999 1998
Revenue $ 16,397,060 $ 11,879,948
Cost of goods sold 8,242,875 6,641,110
----------- ----------
Gross profit 8,154,185 5,238,838
Selling, general, and administrative expenses 7,047,988 4,100,510
----------- ----------
Income from operations 1,106,197 1,138,328
----------- ----------
Other income (expense)
Interest expense (90,632) (177,231)
Interest income 97,720 9,252
Other income 32,752 27,795
Gain on sale of furniture and equipment 3,164 4,094
Rental income -- 12,640
----------- ----------
Total other income (expense) 43,004 (123,450)
----------- ----------
Income before provision for income taxes 1,149,201 1,014,878
Provision for income taxes 499,000 444,857
----------- ----------
Net income $ 650,201 $ 570,021
=========== ==========
Basic income per share $ 0.21 $ 0.26
=========== ==========
Diluted income per share $ 0.21 $ 0.26
=========== ==========
Weighted-average shares outstanding 3,062,810 2,200,000
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
<TABLE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Additional
Common Stock Treasury Paid-In Retained
Shares Amount Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,709,858 $ 17,099 $ -- $ 380,901 $ 269,412 $ 667,412
Issuance of common stock in exchange for
shares held by minority interest holders 490,142 4,901 -- 589,351 -- 594,252
Net income -- -- -- -- 570,021 570,021
--------- --------- --------- ---------- ---------- ---------
Balance, December 31, 1998 2,200,000 22,000 -- 970,252 839,433 1,831,685
Issuance of common stock in connection with
initial public offering 1,000,000 10,000 -- 5,990,000 -- 6,000,000
Offering costs -- -- -- (1,767,053) -- (1,767,053)
Purchase of 60,000 shares of treasury stock,
at cost -- -- (201,927) -- -- (201,927)
Issuance of 26,065 shares of treasury stock
to employees -- -- 87,839 (4,757) -- 83,082
Net income -- -- -- -- 650,201 650,201
--------- --------- --------- ---------- ---------- ---------
Balance, December 31, 1999 3,200,000 $ 32,000 $ (114,088) $ 5,188,442 $ 1,489,634 $ 6,595,988
========= ========= ========= ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
<TABLE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income $ 650,201 $ 570,021
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization 132,939 110,754
Depreciation 325,441 215,660
Deferred income tax (177,432) 444,857
Gain on sale of furniture and equipment 3,164 4,094
Reissuance of treasury stock 83,082 --
(Increase) decrease in
Accounts receivable (1,011,045) (1,065,457)
Work-in-process (75,117) (73,010)
Prepaid expenses and other current assets (34,435) 31,797
Other assets (85,436) (63,573)
Increase (decrease) in
Accounts payable 76,255 267,698
Accrued payroll and payroll taxes 79,297 34,817
Other accrued expenses (9,688) (30,085)
Income tax payable (25,245) --
---------- ---------
Net cash provided by (used in)
operating activities (68,019) 447,573
---------- ---------
Cash flows from investing activities
Purchase of furniture and equipment (357,614) (200,353)
Note receivable - related party (140,714) --
Investment in Wyman Enterprises, Inc.,
net of cash acquired -- (296,729)
Investment in Professional Services
Industries, Inc. -- (13,900)
Investment in Jupiter, Division of Fraser
Engineering & Testing, Inc. -- (35,000)
---------- ---------
Net cash used in investing activities (498,328) (545,982)
---------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-13-
<PAGE>
<TABLE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- ----------------------------------------------------------------------------------------
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from financing activities
Increase (decrease) in book overdraft $ (125,635) $ 116,245
Line of credit, net (634,103) 15,907
Due to stockholders, net (81,461) (502,820)
Payments on long-term debt (149,431) (115,507)
Payments on capitalized lease obligations (13,112) (9,021)
Deferred offering costs 552,738 (552,738)
Increase in notes payable 20,000 1,230,000
Payments on notes payable (1,937,924) --
Due from Wyman Testing Laboratories, Inc. -- (56,007)
Purchase of treasury stock (201,927) --
Proceeds from public offering of common stock 6,000,000 --
Offering costs (1,767,053) --
----------- -----------
Net cash provided by financing activities 1,662,092 126,059
----------- -----------
Net increase in cash and cash equivalents 1,095,745 27,650
Cash and cash equivalents, beginning of year 121,782 94,132
----------- -----------
Cash and cash equivalents, end of year $ 1,217,527 $ 121,782
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 90,632 $ 177,231
=========== ===========
Income taxes paid $ 598,482 $ 2,064
=========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities
During the years ended December 31, 1999 and 1998, the Company acquired an
automobile and trucks of $172,534 and $225,897, respectively, under note payable
agreements.
On January 1, 1998, the Company issued 490,142 shares of its 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.
-14-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
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, Nevada, New Jersey, and Florida and grants credit to customers
in those states.
Acquisitions
In January 1998, the Company purchased all of the shares held by minority
stockholders in its subsidiaries for $533,052. The Company issued an
aggregate of 439,664 shares of common stock in exchange for the purchase
price. The shares were valued using a method similar to previous Company
acquisitions. The Company recorded $194,924 in excess of cost over fair
value of net assets acquired which is being amortized on a straight-line
basis over fifteen years.
On March 25, 1998, Wyman Testing Laboratories, Inc. ("Wyman"), a
majority-owned subsidiary of U.S. Laboratories Inc., acquired certain
assets and liabilities of Wyman Enterprises, Inc. The purchase price for
the assets was $830,620. The purchase price was paid as follows: (i)
$300,000 cash paid upon the closing, (ii) $468,993 notes payable issued to
the stockholders of Wyman Enterprises, Inc., and (iii) 50,478 shares of
U.S. Laboratories Inc.'s common stock issued to a stockholder of Wyman
Enterprises, Inc. valued at $61,200, using a method similar to previous
company acquisitions. Wyman recorded $511,200 in excess of cost over fair
value of net assets acquired which is being amortized on a straight-line
basis over fifteen years. For financial statement purposes, the acquisition
occurred on March 31, 1998.
The assets acquired were as follows:
Cash $ 22,690
Accounts receivable 577,681
Prepaids 29,985
Furniture and equipment 96,952
Goodwill 511,200
Liabilities (407,888)
-------------
Total $ 830,620
=============
In April 1999, the Company agreed to give Wyman Enterprises, Inc. an
additional $31,007 relating to the purchase price and $71,904 of accounts
receivable. Upon this agreement, the Company recorded additional goodwill
of $102,911.
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 1 - ORGANIZATION AND BUSINESS (Continued)
Acquisitions (continued)
In May 1998, Wyman merged into San Diego Testing Engineers, Inc., a
majority-owned subsidiary of the Company, which is the surviving
corporation. Each share of Wyman was converted into one-half share of the
surviving corporation.
In May 1998, the Company acquired certain equipment of Professional
Services Industries, Inc. ("PSI") for a purchase price of $13,900, which
has been paid.
In May 1998, the Company acquired certain equipment of Jupiter, Division of
Fraser Engineering & Testing, Inc. ("Jupiter") for a purchase price of
$35,000, which has been paid.
In May 1999, the Company acquired substantially all of the assets and
contractual rights of Buena Engineers, Inc. ("Buena") for a purchase price
of $318,834, plus the assumption of certain liabilities, which has been
paid. The Company recorded $21,595 in excess of cost over fair value of net
assets acquired which is being amortized on a straight-line basis over 15
years. The assets acquired were as follows:
Accounts receivable $ 305,785
Furniture and equipment 16,823
Goodwill 21,595
Liabilities (25,369)
-------------
Total $ 318,834
=============
In October 1999, the Company acquired substantially all of the assets and
contractual rights of Advanced Geo-materials Services, Inc. ("AGS") for the
purchase price of $257,325 in cash and 20,000 shares of common stock issued
in March 2000, plus the assumption of the assumed liabilities. The purchase
price will be paid as follows: (i) $100,000 cash paid upon the closing,
(ii) $100,000 note payable, which shall not bear interest and the principal
of which shall be payable in equal installments of $50,000 on the first and
second anniversary dates of the closing date, and (iii) an additional
$7,325 by December 31, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 1 - ORGANIZATION AND BUSINESS (Continued)
Acquisitions (continued)
There are contingent payments as follows: (i) the buyer will hold back cash
in the amount of $25,000 until April 1, 2000, with payment contingent upon
the seller maintaining a minimum net asset value of $100,000, and if the
value falls below the minimum, the contingent payment will be reduced
accordingly. Should the net asset value exceed the minimum as reconciled
back to the date of closing, then the seller and buyer shall share the
overage based on the seller receiving a 25% share and the buyer receiving a
75% share, (ii) the buyer will hold back additional cash of $25,000 until
January 15, 2001, with payment contingent upon the buyer's net revenues,
exceeding $1,500,000, for the 12 months ending December 31, 2000. The
Company recorded $103,743 in excess of cost over fair value of net assets
acquired which is being amortized on a straight-line basis over 20 years.
The assets acquired were as follows:
Accounts receivable $ 175,912
Furniture and equipment 135,724
Prepaid expenses 5,110
Goodwill 103,743
Liabilities (163,164)
-------------
Total $ 257,325
=============
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. ("BDI") for a purchase
price of $30,000 in cash, which has been paid. An additional amount up to
$50,000 will be paid at a later date to be determined after December 31,
1999.
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
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.
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Furniture and Equipment
Furniture and equipment, including equipment under capital leases, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives as follows:
Automobile and trucks 3 to 5 years
Furniture and fixtures 5 to 7 years
Office hardware and software 5 years
Machinery and equipment 5 to 7 years
Leasehold improvements 5 years
Maintenance, repairs, and minor renewals are expensed as incurred.
Expenditures for additions and major improvements are capitalized. Gains
and losses on disposals are included in the statements of operations.
Intangibles
Intangibles consist of goodwill which is being amortized over either a 15-
or 20-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.
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, 1999 and 1998 were $65,214 and $42,882,
respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and
the change during the period in deferred tax assets and liabilities.
Stock Split
Effective May 30, 1998, the Company effected a 20,324-for-one stock split
and on November 9, 1998, effected a one-for-0.8413 reverse stock split. The
options and warrants to acquire common stock were unaffected by the reverse
stock split. All share and per share data have been retroactively restated
to reflect the stock split.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, 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, developers, and public and private industries, primarily in
California, Nevada, 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.
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income 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.
Comprehensive Income
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes
in equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is
not presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period presented.
Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 136, "Transfer of Assets to a Not-for-Profit Organization or Charitable
Trust that Raises or Holds Contributions for Others." This statement is not
applicable to the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect adoption
of SFAS No. 137 to have a material impact, if any, on its financial
position or results of operations.
NOTE 3 - CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California, Nevada,
Florida, and New Jersey. Deposits at each bank are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of December 31, 1999,
uninsured portions of balances held at banks aggregated to $1,079,135. 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.
-20-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1999 consisted of the following:
Automobile and trucks $ 963,259
Furniture and fixtures 319,136
Office hardware and software 168,735
Machinery and equipment 596,337
Leasehold improvements 132,518
-------------
2,179,985
Less accumulated depreciation
and amortization 1,077,836
Total $ 1,102,149
=============
Depreciation and amortization expense for the years ended December 31, 1999
and 1998 was $325,441 and $215,660, respectively.
NOTE 5 - LINES OF CREDIT
In September 1999, the Company entered into a $200,000 non-revolving line
of credit with a bank, which expires on July 31, 2000. Interest is payable
on a monthly basis at the bank's reference rate (8.5% at December 31,
1999). The line is used only for financing capital additions. On August 31,
2000, the line of credit will convert to a five-year term loan, and the
remaining principal balance will be paid in 60 equal monthly installments,
commencing August 31, 2000. The line is collateralized by a majority of the
Company's assets. The outstanding balance at December 31, 1999 was $63,641.
In September 1999, the Company entered into a $4,000,000 line of credit
with a bank, which expires on July 31, 2001. The line is to be used only
for financing working capital. The borrowing base is the lesser of (i)
$4,000,000 or (ii) 80% of the balance on acceptable accounts receivable and
up to $400,000 in work-in-process. The line is secured by the assets of the
Company and bears interest at the bank's reference rate, which is payable
on a monthly basis. At December 31, 1999, the line was unused.
In September 1999, the Company entered into a $350,000 term loan with a
bank. The term loan is to be used only for refinancing existing equipment.
The loan is available in one disbursement from the bank on the date of the
agreement. The principal balance is due in 36 equal monthly installments of
$9,722, commencing August 31, 1999. The term loan is secured by the assets
of the Company and bears interest at the bank's reference rate. At December
31, 1999, the term loan was unused.
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 5 - LINES OF CREDIT (Continued)
The credit agreements provide for the Company to maintain certain
covenants. At December 31, 1999, the Company was in compliance with all of
the reporting covenants.
NOTE 6 - LONG-TERM DEBT
Long-term debt at December 31, 1999 consisted of the following:
Notes payable to various motor credit
corporations, collateralized by
applicable equipment. The notes
are currently due in aggregate
monthly payments of $17,100,
including interest from 7.75% to
13.5% per annum. $ 415,923
Less current portion 132,750
-------------
Long-term portion $ 283,173
=============
The following is a schedule by years of future maturities of long-term
debt:
Year Ending
December 31,
2000 $ 132,750
2001 132,565
2002 104,325
2003 37,426
2004 8,857
-------------
Total $ 415,923
=============
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1999.
Note payable to stockholder of Wyman
Enterprises, Inc. in connection
with the acquisition. The remaining
amount is to be paid in three annual
installments of $37,500 on March 25,
2000, 2001, and 2002. $ 112,500
The accompanying notes are an integral part of these consolidated financial
statements.
-22-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 7 - NOTES PAYABLE (Continued)
Note payable to stockholder of Wyman
Enterprises, Inc. in connection with
the acquisition. The remaining
amount is to be paid in three annual
installments of $37,500 on March 25,
2000, 2001, and 2002. $ 112,500
Note payable to stockholders of AGS
in connection with the acquisition.
The amount is to be paid in two
annual installments of $50,000,
commencing October 15, 2000. An
additional $25,000 will be held
until April 1, 2000 with payment
contingent upon the seller
maintaining a minimum net book
asset of $100,000. An additional
$25,000 will be held back until
January 15, 2001 with payment
contingent upon the buyer's net
revenues exceeding $1,500,000 for
the 12 months ending December 31,
2000. An additional $7,325 is due
by December 31, 2000. 157,325
-------------
382,325
Less current portion 157,325
Long-term portion $ 225,000
=============
The following is a schedule by years of future maturities of notes payable:
Year Ending
December 31,
2000 $ 157,325
2001 150,000
2002 75,000
-------------
Total $ 382,325
=============
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes Payable - Related Party
At December 31, 1999, the Company had amounts due from the majority
stockholder of $140,714. The amounts are non-interest bearing and are
payable in three equal annual installments.
The accompanying notes are an integral part of these consolidated financial
statements.
-23-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
Stockholder Management Fees
During the year ended December 31, 1998, the Company expensed $92,052 in
management fees to a stockholder. The management fees are based upon 5% of
net sales of a subsidiary and have been discontinued effective January 1,
1999.
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, Nevada, 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, 1999 are as follows:
Year Ending
December 31,
2000 $ 331,000
2001 230,000
2002 166,000
2003 39,000
-------------
Total $ 766,000
=============
Rent expense was $375,614 and $301,598 for the years ended December 31,
1999 and 1998, respectively.
Employment Agreements
During the years ended December 31, 1999 and 1998, the Company entered into
three-year employment agreements with certain key employees of the Company.
The agreements require aggregate monthly payments of $84,167.
Bonuses
During the year ended December 31, 1999, the Company awarded bonuses to
various employees in the form of cash and common stock valued at $17,900
and $83,082, respectively. The Company further awarded a key employee a
bonus based upon the Company's performance. As of December 31, 1999,
accrued bonuses amounted to $25,000.
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Severance
In March 1999, an officer of the Company resigned his position and was
given a severance package equal to 50% of his base salary. Included in
accounts payable at December 31, 1999 is $24,000 related to this
obligation.
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, 1999 and 1998 were
$50,072 and $19,525, 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:
1999 1998
---- ----
Income tax computed at federal
statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 5.2 5.6
Non-deductible goodwill amortization
and other 4.2 4.2
------- -------
Total 43.4% 43.8%
======= =======
Significant components of the Company's deferred tax assets and liabilities
for income taxes for the year ended December 31, 1999 consisted of the
following:
Deferred tax assets
State taxes $ 67,561
-------------
Deferred tax liabilities
Change in accounting
method - cash to accrual 363,857
Depreciation 9,907
-------------
373,764
Net deferred tax liability $ 306,203
=============
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 11 - INCOME TAXES (Continued)
The components of the income tax provision (benefit) for the years ended
December 31 are as follows:
1999 1998
---------- ---------
Current
Federal $ 589,000 $ -
State 124,998 800
---------- ---------
713,998 800
---------- ---------
Deferred
Federal (182,048) 357,000
State (32,950) 87,057
---------- ---------
(214,998) 444,057
Total $ 499,000 $ 444,857
========== =========
NOTE 12 - STOCKHOLDERS' EQUITY
Initial Public Offering ("IPO")
On February 23, 1999, the Company completed an IPO to offer up to
$6,000,000 worth of shares of common stock consisting of 1,000,000 units at
$6 per share. Each unit consisted of one share of common stock and one
redeemable warrant to purchase one share of common stock at an exercise
price of $7.80. The Company generated $4,232,947, net of offering costs.
Treasury Stock
On November 2, 1999, the Company's Board of Directors authorized a stock
repurchase program. The program allows the Company to repurchase up to
100,000 shares of common stock from time to time in connection with
employee benefit programs and other corporate purposes.
As of December 31, 1999, 60,000 shares of the 100,000 authorized shares
have been repurchased at a total cost of $201,927. As of December 31, 1999,
26,065 of these shares have been issued to various employees in lieu of
bonuses valued at $83,082.
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
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 Company's
Board of Directors approved an amendment to the Option Plan to increase the
authorized number of shares of common stock to 810,000. Options under this
plan may be granted to employees, officers, directors, and consultants of
the Company. The exercise price of the options is determined by the Board
of Directors, but the exercise price may not be less than 100% of the fair
market value on the date of grant. Options vest over periods not to exceed
five years. In July 1998, the Company had 395,000 stock options outstanding
at exercise prices which range from $5 to $5.50 per share, of which 238,632
stock options were exercisable.
In November 1998, the Company cancelled all of its outstanding options, and
the Board of Directors approved a grant of 395,000 stock options at
exercise prices which range from $6 to $6.60 per share, of which 238,632
stock options were exercisable.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock and
options/warrants issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the
grant date for awards under its plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and earnings per share
would be reduced to the pro forma amounts indicated below for the years
ended December 31, 1999 and 1998:
1999 1998
--------- ---------
Net income
As reported $ 650,201 $ 570,021
Pro forma $ 389,887 $ 25,455
Basic earnings per common share
As reported $ 0.21 $ 0.26
Pro forma $ 0.13 $ 0.01
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1995. The fair value of these options was estimated
at the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for the years ended December 31,
1999 and 1998: dividend yields of 0% and 0%, respectively; expected
volatility of 55% and 0%, respectively; risk-free interest rates of 6.3%
and 4.3%, respectively; and expected lives of four and three years,
respectively. The weighted-average fair value of options granted during the
years ended December 31, 1999 and 1998 for which the exercise price equals
the market price on the grant date was $1.13 and $4.16, respectively, and
the weighted-average exercise price was $6 and $6, respectively. The
weighted-average fair value of options granted during the years ended
December 31, 1999 and 1998 for which the exercise price was greater than
the market price on the grant date was $1.13 and $4.07, respectively, and
the weighted-average exercise price was $6 and $6.60, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following summarizes the stock option transactions under the stock
option plan:
Weighted-
Stock Average
Options Exercise
Outstanding Price
----------- ---------
Balance, December 31, 1997 - $ -
Granted 395,000 $ 6.22
----------
Balance, December 31, 1998 395,000 $ 6.22
Granted 152,500 $ 6.00
Cancelled (7,000) $ 6.00
----------
Balance, December 31, 1999 540,500 $ 6.16
==========
Exercisable, December 31, 1999 349,402 $ 6.13
==========
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
The weighted-average remaining contractual life of the options is 3.92
years at December 31, 1999.
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 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 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.
In November 1998, the Company cancelled all of its outstanding warrants,
and the Board of Directors approved the grant of 150,000 stock warrants to
certain employees of the Company. The warrants entitle the holder to
purchase Company common stock at a price of $6 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; 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.
On February 23, 1999, the Company entered into an underwriter warrant
agreement in correlation with the Company's IPO to issue warrants to
purchase 100,000 units at an initial exercise price of $9.60 per unit. The
warrants may be exercised at any time from February 23, 2000 until February
23, 2004, the expiration date. The units consist of one fully-paid and
non-assessable share of common stock and one warrant to purchase one share
of common stock.
In March 1999, the Company granted warrants to purchase 120,000 shares of
common stock at an exercise price of $3.88 per share to an investment
relations firm. 70,000 warrants vest immediately, and 50,000 warrants vest
on the earlier of (i) the date on which the closing price of a share of
stock as reported on the NASDAQ Small-Cap Market is at least $7 for three
consecutive trading days or (ii) the date on which the Company determines
that the value of the services provided to the Company during the term of
the agreement is sufficient to justify vesting. This warrant will expire
and will not be exercisable on the date five years from the date of grant.
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1999
NOTE 14 - YEAR 2000 ISSUE
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.
Based on the review of the computer systems, management believes all action
necessary to prevent significant additional problems has been taken. While
the Company has taken steps to communicate with outside suppliers, it
cannot guarantee that they have all taken the necessary steps to prevent
any service interruption that may affect the Company.
NOTE 15 - SUBSEQUENT EVENTS
In January 2000, the Company entered into a stock purchase agreement to
purchase all the outstanding shares of BTC Laboratories, Inc. ("BTC") for a
total purchase price of $1,200,000 payable for $500,000 in cash, which has
been paid. The buyer will pay to stockholders cash equal to the collections
of accounts receivable and work-in-process during the six months
immediately following the closing date up to a maximum amount of $700,000.
In January 2000, Buena Engineers, Inc., a majority-owned subsidiary of U.S.
Laboratories, Inc., entered into an asset purchase agreement with Stewart
Environmental, Inc. ("Stewart") to purchase substantially all of the assets
for a purchase price of $60,000.
In January 2000, San Diego Testing Engineers, Inc. entered into a asset
purchase agreement to purchase substantially all the assets of SAGE
Engineering, Inc. ("SAGE") for a total purchase price of $50,000 in cash
and 15,000 shares of common stock.
In February 2000, the Company entered into an asset purchase agreement with
Intertek Technical Services, which will operate under the name Unitek
Technical Services, Inc., for a total purchase price of $1,650,000 in cash
which has been paid.
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
<PAGE>
DIRECTORS AND OFFICERS OF U.S. LABORATORIES INC.
BOARD OF DIRECTORS: OFFICERS:
Dickerson Wright, P.E. Dickerson Wright, P.E.
Chairman of the Board Chief Executive Officer and
President
Gary H. Elzweig, P.E. Donald C. Alford
President Executive Vice President and
Professional Engineering Secretary
& Inspection Company, Inc.
Martin B. Lowenthal Mark Baron
President Executive Vice President
U.S. Engineering Laboratories Inc.
Donald C. Alford Gary H. Elzweig, P.E.
Executive Vice President and Secretary Executive Vice President
U.S. Laboratories Inc.
Joseph M. Wasilewski, CPA Martin B. Lowenthal
Chief Financial Officer Executive Vice President
U.S. Laboratories Inc.
Mark Baron Joseph M. Wasilewski, CPA
President Chief Financial Officer
San Diego Testing Engineers, Inc.
Thomas H. Chapman
Former President
San Diego Testing Engineers, Inc.
James L. McCumber
Chairman, Chief Executive Officer
and Founder
McCumber Golf
Robert E. Petersen, CPA
President , Asset Management Group
Vice President, La Jolla Development Co.
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<PAGE>
General Shareholder Information
Administrative Office: Investor Relations:
U.S. Laboratories Inc. The Miller Group
7895 Convoy Court, Suite 18 4909 East McDowell Road
San Diego, California 92111 Phoenix, Arizona 85008
619-715-5800 602-225-0504
619-715-5811 Facsimile 602-225-9024 Facsimile
www.uslaboratories.com www.themillergroup.net
Legal Counsel: Independent Auditors:
Foley & Lardner Singer Lewak Greenbaum & Goldstein LLP
Attorneys at Law 10960 Wilshire Blvd., Suite 1100
402 W. Broadway, 23rd Floor Los Angeles, California 90024
San Diego, Californis 92101
Registrar and Transfer Agent: Stock Exchange Listing:
U.S. Laboratories Inc.'s common
North American Transfer Co. stock is traded on the Nasdaq
147 W. Merrick Road under the symbol USLB.
Freeport, New York 11520
Annual Meeting: Investor Inquiries:
June 3, 2000, 10:30 a.m. Copies of the Company's 1999 Annual
Oyster Point Hotel, Marina Report, Form 10-KSB and Exhibits are
& Conference Center available free of charge upon request.
Bodman Place
Red Bank, New Jersey 07701
732-530-8200
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<PAGE>
www.uslaboratories.com
[GRAPHIC OMITTED]
[U.S. LABORATORIES INCORPORATED]
www.uslaboratories.com
