U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission file number: 0-25339
U. S. Laboratories Inc.
(Name of small business issuer in its charter)
Delaware
(State or other jurisdiction of 33-0586167
incorporation or organization) (I.R.S. Employer Identification No.)
7895 Convoy Court, Suite 18, San Diego, California 92111
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (858) 715-5800
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
(Title of class)
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 X No ___.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10KSB. [ ]
Issuer's revenues for its most recent fiscal year: $16,397,060
Aggregate market value of voting stock held by non-affiliates of the issuer as
of March 15, 2000: $4,000,000
Number of shares of common stock, no par value, outstanding on March 15, 2000:
3,200,000
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format: Yes ___ No X
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U. S. Laboratories Inc.
Index to Annual
Report on Form 10-KSB
For The Fiscal Year Ended December 31, 1999
Page
PART I.......................................................................3
Item 1. Business............................................................3
Item 2. Properties.........................................................14
Item 3. Proceedings........................................................15
Item 4. Submission of Matters to a Vote of Security Holders................15
PART II.....................................................................16
Item 5. Market for Common Equity and Related Stockholder Matters...........16
Item 6. Management's Discussion and Analysis of Financial
Statements and Results of Operations..............................17
Item 7. Financial Statements...............................................19
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure............................19
PART III....................................................................20
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a)
of the Exchange Act...............................................20
Item 10. Executive Compensation.............................................22
Item 11. Security Ownership of Certain Beneficial
Owners and Management.............................................25
Item 12. Certain Relationships And Related Transactions.....................26
Item 13. Exhibits and Reports on Form 8-K...................................27
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PART I
Item 1. Business
Overview
U.S. Laboratories Inc. is a Delaware corporation formed in May 1998,
that offers quality construction control services from conception to completion
of a building project in order to verify that the project conforms to
construction specifications. We analyze the soil that will be built upon to
determine whether it can hold the proposed structure. We also analyze the
structural strength of the concrete, masonry, and steel materials to be used
during construction. We use universally recognized test procedures and
laboratory equipment to perform the analyses, and all construction in the field
is verified by our licensed inspectors. Our projects involve every type of
construction: high-rises, low-rises, shopping centers, residential, schools,
hospitals, bridges, tunnels, highways, stadiums, airports, military facilities,
and many other types of public and private improvements. We work for government
agencies, real estate developers, general contractors, school districts, and
other types of landowners.
Description of Engineering Services
Our service to clients begins before an actual construction project
commences. We evaluate construction sites, building plans, and designs to assure
compliance with the approved construction documents for the proposed facility.
We assess the building site by testing the soil and the materials. We also
evaluate the impact on the environment. We do this to detect any potential
problems with the proposed site that could prevent or complicate the successful
completion of the project. In addition, we evaluate the onsite building
conditions and recommend optimum methods and materials for building foundations,
site preparation, and excavation. We provide these services on an integrated
start to finish basis designed to guide clients through each phase of a
construction project. We become an integral part of our client's project team,
offer comprehensive quality control programs, and create value by delivering
quality control and problem solving in a cost-effective manner to meet our
clients' time and budget requirements.
When construction commences, we begin onsite consulting by monitoring
construction quality. We visually inspect each phase of the construction
project, including excavation, foundations, structural framing, mechanical
heating and air conditioning systems, electrical systems, underground utilities,
and roofing. Where applicable, we may use additional methods to test materials
and work quality, testing the metals, concrete, and other materials used in
construction continues through each phase of the project. We are comprehensively
involved during the construction phase to assure compliance with the design
specifications and to monitor the overall quality of work.
During construction, we actively maintain contact with our clients'
project managers. Problems detected or anticipated are identified, and we assist
clients in determining appropriate, cost effective solutions. We periodically
provide construction progress inspections and assessment reports. When a project
is complete, we prepare an evaluation report of the project and certify the
inspections for our client. We will also perform final inspections to determine
the moisture resistance of windows, doors, foundations, and roofing. After
construction, we offer periodic building inspection services to assure that the
building is being maintained in accordance with applicable building codes to
assure maximum building life. We may also perform indoor air and water quality
tests during this period.
Construction Materials Testing and Engineering Services. We provide
testing and client representative services related to concrete and steel
materials used in the construction industry. From the preconstruction stage of
evaluating materials to the completion of the project, our range of services
supporting construction projects include quality assurance and quality control,
construction specifications, test evaluations, materials performance
documentation, and problem solving. We conduct these services in our
laboratories prior to and during construction, in the fabrication plant, and at
the construction site.
Our expertise in these areas provides valuable assistance to clients in
the construction of major buildings of all types and sizes including industrial,
commercial, office, retail, medical, school, military, and governmental, as well
as highways, railroads, dams, bridges, transmission towers, airports runways,
water supply facilities,
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wastewater treatment facilities, dock and waterway facilities, solid waste
landfills, power plants, and many other structures. Potential clients includes
architects, engineers, contractors, commercial developers, local, state, and
federal government agencies, corporations, and other user-owners.
We provide testing of concrete and structural and reinforcing steel
through proven systematic methods and procedures of quality control management.
We customize project work to meet our clients' specific needs. We deliver
materials testing services on-site for the duration of a construction project,
giving us a competitive advantage over other providers. Concrete is tested
during and after placement to measure its consistency and strength. Architects
or engineers develop specifications for the design of the structure or
foundation, and we verify them during construction.
We also test steel structures for compliance. While many steel tests
and inspections are performed at the project site, tests and inspections are
also done at the steel fabrication plant, where the process can be monitored and
imperfections can be corrected before shipment to the project. Concrete and
steel samples collected in the field are transported back to our local
laboratory for analysis. Field representatives are deployed to the job site from
the nearest area office providing these services. Typically, a 100-mile radius
is the most economically feasible distance for providing these services.
Therefore, we only provide these services in areas with construction activities
to support the necessary operational resources. Periodically field offices are
established to accommodate large projects.
All of our field personnel work directly under the supervision of
licensed civil/geotechnical engineers. These engineers actively participate in
American Society of Civil Engineers, American Council of Independent
Laboratories, American Public Works Association, and other similar professional
groups in order to remain current with changes in the industry. As members of
the International Conference of Building Officials, our personnel receive
notification of all code changes. All field personnel must maintain and renew
licenses in their respective areas of inspection. All laboratories are inspected
biannually by the Cement and Concrete Reference Laboratory ("CCRL") of the
National Institute of Standards and Measures. Additionally, our laboratories
participate in proficiency programs conducted by CCRL and the American
Association of State Highway & Transportation Officials.
Infrastructure Engineering Services. We provide inspection and testing
services similar to those provided to our construction materials testing and
engineering services and geotechnical engineering services clients. These
services are provided to support the planning and construction of the
transportation network including highways, bridges, piers, tunnels, airports,
and other similar structures; dams, drainage basins, and storm water facilities,
waste treatment facilities, and utility transfer systems. One advantage we have
is that our laboratories in California and New Jersey have been certified by the
American Association of State Highway & Transportation Officials. This AASHTO
certification is often required in order to bid on infrastructure projects,
especially the larger projects. We believe that demand for these services will
increase in the future as the country repairs its deteriorating infrastructure
and as funding becomes available as a result of Congress' recent TEA-21 funding
package authorizing approximately $165 billion for highway and infrastructure
improvements. As we have become active in providing infrastructure engineering
services, we believe we will receive additional work from the substantially
increased expenditures projected for transportation construction.
Geotechnical Engineering and Consulting Services. Our geotechnical
engineering and consulting services involve the analysis of soil data and design
of structures supported on or within the earth. Geotechnical services begin with
the project planning and design phase of a project, extend through construction,
and often continue through the service life of a structure. Geotechnical
engineers, geologists, and earth scientists conduct tests on the soil, rock, and
groundwater to determine whether sites are suitable for proposed new
construction. Our professionals have expertise in soil and rock mechanics,
geophysics, and earthquake engineering. The design of a subsurface program
requires familiarity with local geology and a thorough knowledge of economical
construction methods. Our offices are staffed by professionals with local
expertise in a wide variety of soil conditions.
Soil tests are performed to determine soil compaction characteristics
both before foundation design and after excavation or soil placement have taken
place. These tests is determine the stability and load-bearing characteristics
of a soil before, during, and after construction. We use the expertise of our
geotechnical engineers, geologists, and experienced field drilling personnel to
design a field exploratory program. The field data
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and samples are brought to our soil laboratories for further testing and
evaluation. The information obtained during the field exploration and laboratory
testing is used to provide our clients with cost-effective designs for high-rise
building foundations, site improvements, tunnels, dams, manufacturing
facilities, landfills, bridges, and many other structures. We also provide
specific recommendations to avoid delays and cost overruns during construction,
particularly in the weather-dependent site preparation phase of a project. An
engineering report is prepared under the direction and review of a licensed
professional engineer familiar with the particular geologic conditions and
engineering requirements for the project.
Other Services and Products
In addition to the core services described above, we maintain
specialized services that can be integrated with the overall needs of our
clients. This is part of our overall business strategy to build and maintain
client relationships while adjusting to the market demand for professional
services. Most of these services have either developed within the last five
years or been obtained through recent acquisitions. The following is a
description of some of the non-core services we offer to complement our core
business.
Building Condition Surveys. As part of our integrated service strategy
for commercial and industrial clients, we also offer building condition surveys.
As a general rule, building condition surveys involve an evaluation of the
facility's heating, ventilation, and lighting systems, water services, roofing
system, and structural or architectural construction or both. This service is
frequently associated with the purchase of real estate where the purchaser
requires an evaluation of operation and maintenance exposures of property prior
to closing. These services are also integrated with our other commercial and
industrial project services such as Phase I and Phase II environmental
assessments, asbestos assessments, and indoor air quality consulting. We are in
the process of promoting and developing building condition surveys on a national
level.
Construction Administrative Services. Our services also include
construction administrative services. These services range from acting as our
client's field representative during construction to overall responsibility for
the project's quality issues. The client representative assures that the
construction is done according to the plans and specifications developed by
either the architect or engineer. These services are typically billed on either
daily rates or hourly rates plus expense reimbursement.
An example of these services is a recent long-term contract to act as
the Orange County, Florida's school district field representative for all of its
new construction and building maintenance. In the case of this school district,
which encompasses the entire city of Orlando, we act like a building department,
reviewing plans, conducting inspections, and certifying compliance with codes.
Environmental Assessment Services. The majority of our project
activities within this segment focus on identifying potential environmental
hazards and risk exposures. We provide environmental consulting services to
corporate and governmental clients. Many of these clients are large regional and
national corporations with multi-site consulting needs. Client relationships and
quality of service delivery primarily drive the market for these services.
Business Strategy and Current Year Developments
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.
Pursue Strategic Acquisitions. We believe that the industry for
engineering services is fragmented and that there are opportunities to acquire
local engineering services companies. We estimate that there are 3,500 companies
whose businesses are complementary to ours. We believe our expertise in
identifying, completing, and integrating acquisitions provides us with a
competitive advantage in entering new geographical markets. We plan to apply our
expertise in assimilating acquired companies' personnel and branch operations
into our existing infrastructure and
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expanding acquired companies' service and product offerings to existing clients.
We further believe that our existing infrastructure provides a platform for tuck
in acquisitions of regional and local companies. A tuck in acquisition is one in
which we integrate the acquisition with our existing regional management.
In analyzing new acquisitions, we normally pursue acquisitions that
either provide the critical mass to function as a profitable, stand-alone
operation, or are geographically situated so that they can be integrated into
our existing locations. If we acquire a stand-alone operation, it must possess
an experienced management team thoroughly committed to going forward with us. We
also must identify how the profitability of a new acquisition can be improved as
part of our operations through the integration of the new personnel into our
management systems and the expansion of the service and product offerings to
existing clients. We believe we can improve the operations of our acquisitions
by providing superior marketing and sales support, customer service, cash
management, financial controls, and human resources support.
Since 1993, we have implemented this strategy, the key elements of
which are designed to establish a national infrastructure of branch office
locations and diversify our service offerings. We currently operate facilities
serving San Diego, Riverside, San Bernardino, Orange, and Los Angeles counties
in Southern California; 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 two acquisitions. During the first quarter of 2000, we
have completed four acquisitions.
In May 1999, we entered into an asset purchase agreement to acquire
substantially all the assets of Buena Engineers, Inc., 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 which will generate in excess of $1 million in annual sales.
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 merged into the PEICO operation and its successful
operations since the acquisition authenticate the validity of the tuck in
concept. AGS was acquired for approximately $250,000 and will generate in excess
of $1 million in annual revenues. We also acquired an engineering firm from Gary
Elzweig, a stockholder, for $30,000 cash. This acquisition will allow our
company to bid on the privitization of public work in Florida.
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.
In January 2000, Buena Engineers, Inc., a wholly-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, 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.
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Target Premium National Accounts. As a result of our acquisition
strategy, we expanded our service offerings and client base. This has resulted
in our ability to attract premium national accounts such as Home Depot,
Marriott, Target, Wal-Mart, Disney, and Nordstrom. We expect these opportunities
to continue at an accelerated rate.
Increase Infrastructure Accounts. The successful implementation of
strategies designed to increase service offerings has resulted in our ability to
capitalize on certain high-growth market opportunities. We believe that we are
well positioned to take advantage of the approximately $165 billion authorized
under the TEA-21 for highway construction and related services. Our advantages
include a strong presence in California, which expects to receive $2.5 billion
in funds over the next six years, or $800 million more than under the previous
legislation. However, we have no guaranty that we will secure contracts funded
by the TEA-21.
Balance Public Sector and Private Industry Services. We continue to
successfully maintain a balance between business from the public sector and
private industry clients. The private industry sector clients allow us to take
advantage of increases in private construction during times of economic
expansion. The public sector clients provide us a continued revenue source
during times of economic slowing because public sector projects are not as
sensitive to downturns in the economy as private industry projects.
Expand Geographic Markets. We are targeting ten geographical areas for
expansion. We believe that one key executive can efficiently manage an operation
with $10 million in annual sales. Additionally, as each operating division
grows, it will continue to reduce overhead as a percentage of sales. Further,
because we provide ancillary administrative support necessary to run each
division, our division level executives are encouraged to manage these
operations in a more decentralized fashion. Consequently, our division level
managers can react to regional business practices and traditions. We are
committed to future expansion and have targeted the West Coast and the
Mid-Atlantic regions for expansion.
Contractual Arrangements
We often provide services for our major clients under arrangements
involving continuing service agreements. These arrangements are usually on a
time-and-materials, cost-plus-fixed-fee, or a fixed-price basis, and are usually
terminable on advance notice by either party. In 1999, approximately 60% of our
projects were on a time-and-materials basis, under which we billed our clients
at fixed hourly rates plus subcontracted services and materials used. In 1999,
an additional 25% of our work was performed under cost-plus-fixed-fee agreements
where we and our client agreed to a budgeted contract, but our client covered
overruns and was credited for any savings realized under budget.
Fixed-price arrangements, under which we perform a stated service for a
set price regardless of the time and materials cost involved, represented
approximately 15% of our business in 1999. This percentage may significantly
change from time to time in the future. Although this type of contract does
carry the risk that the cost to us for performing the agreed-upon services may
exceed the set price, a fixed-price also has the benefit of potentially higher
profit created by all savings under the contract amount. With military projects,
we have used fixed-price contracts very successfully where very detailed project
plans and specifications are available. When quoting a fixed-price contract, our
marketing personnel provide detailed breakdowns of all phases of the work
specified including man-hours, tests, and construction schedule assumptions. The
fixed-price contract is thus based upon a clearly defined scope of work and
contract duration. During the course of the project this scope of work and
contract duration is constantly monitored, and any expansion of the scope of
work or contract duration is billed as an extra to the contract.
We have undertaken, and may undertake in the future, projects in which
we guarantee performance based upon defined operating specifications or
guaranteed delivery dates or both. Unsatisfactory performance or unanticipated
difficulties in completing these projects may result in client dissatisfaction
and a reduction in payment to us or payment of damages by us to our clients or
other persons. Either of these results could have a material adverse effect on
our financial condition or our results of operations. Certain contracts
involving government agencies are priced at cost or agreed upon labor rates plus
overhead. Our overhead rates are subject to audit and could result in price
reductions associated with disallowed overhead costs or methods used to derive
overhead rates.
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Marketing and Sales
We provide our professional consulting, engineering, and testing
services in the construction industry to Fortune 500 companies, Engineering
News-Record top 400 contractors and construction engineering firms, small
companies, real estate property owners and managers, and federal, state, and
local governments. Our contracts are obtained by our sales staff through
relationship building followed by proposals and bidding. The current sales staff
consists of one to two sales representatives in each of our locations, and
estimators as well as clerical staff back up these sales personnel. Referrals
from existing and former clients, architects, and engineers are a significant
source of contract leads. Clients are often interested in more than one of our
services. We have been able to sell construction materials testing and
engineering services, geotechnical services, and environmental services, to the
same clients.
We presently market our services through our subsidiaries. Direct
marketing is accomplished by technical sales representatives, technical
personnel, and management personnel who routinely call on prospective clients.
We also utilize government and industry publications to identify potential
services and requests for project proposals for submission of competitive bids.
Recent trends in the engineering and consulting market require that a
service provider commit considerable resources toward maintaining and developing
client relationships. This shift from project-specific to long-term client
relationship partnering requires a service provider to dedicate both technical
and marketing resources toward tailoring services for a client. It also requires
the provider to maintain a broad range of responsive, quality services. The
rewards of this client relationship partnering and quality, service-focused
programs are continued revenues from repeat customers and, in many instances,
sole source solicitation and award of work to the firm.
Key Clients and Projects
Our services and products are applicable to a full range of business,
manufacturing, institutional, and government sectors. However, based on demand
for our services, existing relationships, and revenue generation potential, we
target real estate management and development firms, large general contracting
firms, large construction management firms, national corporate owners/users,
state transportation agencies, municipalities, public school systems, public
housing authorities, and the U.S. Department of Defense as key client sectors
for development.
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Our client list is comprised of hundreds of different customers. We
serve the private commercial market, the public sector, and a variety of public
interest or non-profit organizations. In 1999, no single customer accounted for
more than 10% of our revenues. The following is a representative list of our
clients.
Private Commercial Clients
Wal-Mart Nordstrom
Neiman Marcus Home Depot
Saks Fifth Avenue Circuit City
Lord & Taylor Marriott
Hilton Hotels Walt Disney
Claridge Casino Atlantic City Bally's Park Place
Sea World San Diego Universal Studios Orlando
Lockheed Martin Sports Authority
Rite-Aid Target Stores
Public Interest Clients
Giants Meadowlands California State Universities
San Diego Qualcomm Stadium Princeton University
Florida Panthers Ice Hockey University of California
Public Sector Clients
New Jersey Turnpike Authority Port Authority New York
New Jersey Transit Authority Port Authority New Jersey
New Jersey Sports & Expositions CalTrans
City of Los Angeles City of San Diego
San Diego County Los Angeles County
United States Navy Port Authority San Diego
One marketing and operational goal we have worked toward is an equal
balance between private industry and public sector work. We have maintained this
goal although the percentage breakdown in the three regional areas we serve has
varied. In Southern California, Nevada and Florida, the split between private
industry and public sector work has been even. In the New Jersey area,
approximately 25% of the work has been private industry and 75% public sector.
Backlog
Backlog includes anticipated revenue from services on major long-term
contracts or continuing service agreements that provide for authorization of
funding on a task or fiscal period basis. Excluded from backlog are anticipated
revenues from smaller projects done without long-term contracts or service
agreements. At December 31, 1999, we had approximately $11.0 million of gross
revenue backlog compared to $8.1 million at December 31, 1998.
We bill for our services monthly for work completed during the previous
month. All billing is done on the regional level, and all accounts receivable
responsibilities are also handled on the regional level with overall supervision
from our headquarters. Collection periods for our receivables range between 85
and 100 days. An allowance for doubtful accounts is typically established
equivalent to five percent of accounts receivables.
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Competition
The services that we provide are subject to intense competition. In
addition to the thousands of small consulting and testing firms operating in the
United States, we compete with several national engineering and consulting firms
including Law Companies Group, Inc., Harding Lawson Associates Group, Inc.,
Dames & Moore, Inc., and Professional Service Industries, Inc.
Some of our present and future competitors may have greater financial,
technical, and personnel resources than us. We cannot predict the extent of
competition that we will encounter in the near future as construction materials
testing and engineering, infrastructure, geotechnical and environmental services
industries continue to mature and consolidate. Historically, competition has
been based primarily on the quality, timeliness, and costs of services. Our
ability to compete successfully will depend upon our marketing efforts, our
ability to accurately estimate costs, the quality of the work we perform, our
ability to hire and train qualified personnel, and the availability of
insurance.
Insurance
We have a claims made professional liability insurance policy, which
includes contractor's pollution liability coverage. The professional liability
insurance policy has a three-year term, ending in November 2002. The policy has
limits of $2 million on both the annual aggregate and per-claim, with a
deductible of $25,000 per claim. Increased limits have been obtained on a
specific endorsement basis to meet the needs of particular clients or contracts.
A claims made policy only insures against claims filed during the period in
which the policy is in effect. This policy covers both errors and omissions.
We currently have no professional liability claims pending and we are
unaware of any other claims that will have a material adverse effect of our
operations or financial condition. Although various claims have been made in the
past against our professional liability policy, to date no such claim has ever
resulted in an uninsured loss.
We also carry an occurrence basis general liability insurance policy in
the amount of $2 million, with a $5 million umbrella. This coverage includes
products/completed operations. The general liability insurance policy has a
one-year term. Our policies have been renewed in each of the years that they
have been in effect.
In addition, we have secured a claims made directors and officers'
liability insurance policy with an aggregate limit of $5 million. This policy
has a one-year term that has been renewed in February 2000. We can make no
assurance that insurance coverage will continue to be renewed or available in
the future or offered at rates similar to those under the current policies.
The Company maintains key person life insurance policies on the lives
of Dickerson Wright, Martin Lowenthal, Mark Baron, Christopher O'Malley, and
Gary Elzweig. According to the provisions of those policies, our company
receives the amount of $2,650,000, $650,000, $300,000, $300,000, and $1,000,000,
on the lives of Messrs.
Wright, Lowenthal, Baron, O'Malley, and Elzweig, respectively.
Government Regulation
Except for state licensure requirements for the engineering component,
there is limited regulation of the construction materials testing and
engineering or geotechnical consulting service industries. Industry standards
are set by agencies, including the American Society of Testing Material, the
American Association of State Highway & Transportation Officials, the American
Concrete Institute, and the American Welding Society. State and local building
codes, the stringency of which varies by location, however, govern construction
projects themselves.
Personnel
We employ approximately 260 regular, full-time employees, including 212
engineers, inspectors, and field lab technicians and 48 administrative
personnel. None of our employees is presently represented by a labor union.
We believe that relations with our employees are good.
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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.
-11-
<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.
There may be an Adverse Affect from the of Issuance of Preferred Stock that has
Greater Rights than our Common Stock by our Board of Directors and a Potential
Adverse Affect if our Board Issues Preferred Stock to Delay or Prevent a
Change in Control that may Benefit the Holders of our Common Stock or Warrants
Our corporate documents authorize our board of directors to issue
shares of preferred stock without the approval of our common stockholders. This
means that our board may approve the issuance of preferred stock that would
grant dividend preferences, liquidation preferences, voting or other rights to
preferred stockholders that are greater than the rights you have as a common
stockholder. This also means that our board may issue preferred stock to delay
or prevent a change in control of U.S. Labs, even if a change in control would
result in you receiving payment for your shares above their then current market
value.
You may not be able to Sell our Securities due to a Potential Lack of Liquidity
in our Common Stock if Broker-Dealers must Comply with Penny Stock Regulations
that Make it More Difficult to Sell these Securities to their Customers
If our common stock trades below $5.00 per share, and it is no longer
quoted on The Nasdaq SmallCap Market (SM), it may become subject to the penny
stock regulations. If our shares are subject to the penny stock rules, the
market liquidity for them could be adversely affected because the rules require
broker-dealers to make a special suitability determination for the purchaser and
to have received the purchaser's written consent to the transaction prior to
sale. This makes it more difficult administratively for broker-dealers to buy
and sell stock subject to the penny stock regulations on behalf of their
customers. Consequently, the rule may affect the ability of broker-dealers to
sell our shares or warrants and may affect the ability of holders to sell them
in the secondary market.
You may Suffer a Loss from your Inability to Exercise the Warrants for our
Common Stock due to the Lack of a Current Prospectus, which is Required to
Exercise your Warrants
We have undertaken to maintain a current registration statement that
will permit the public sale of the common stock underlying the warrants upon
exercise of the warrants. The maintenance of a current registration statement
could result in substantial expense to us. We cannot assure you that we will
maintain a current prospectus covering the shares of common stock underlying the
warrants. You will have the right to exercise the warrants for the purchase of
shares of common stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the state applicable to you.
-12-
<PAGE>
Potential Loss from Inability to Exercise the Warrants for our Common Stock due
to the Offering being Registered in a Limited Number of States
Although we intend to qualify the shares of common stock underlying the
warrants for sale in those states where the securities are offered, except when
to do so would require us to qualify as a foreign corporation, there is no
assurance that we will obtain these qualifications. Moreover, even if such
qualifications are obtained, if you subsequently move to a state in which shares
of common stock underlying the warrants are not qualified, you may not have the
right to exercise the warrants. Consequently, you may be deprived of any value
if a current prospectus covering the shares underlying the warrants is not kept
effective or if such underlying shares are not or cannot be registered in the
applicable state.
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.
-13-
<PAGE>
Item 2.
Properties
We own no real estate, and all of our locations are leased from
independent third parties as follows, except for the Lincroft, New Jersey
location which is leased from a related party:
Location Footage Lease Expiration
- -------- ------- ----------------
South Coast Florida Office:
4350 West Sunrise Boulevard
Plantation, Florida 6,000 July 2000
Central Coast Florida Office:
1001 Jupiter Park Drive
Jupiter, Florida 2,000 June 2000
Central Florida Office:
Florida Mall Business Centre
1650 Sand Lake Road
Orlando, Florida 1,671 February 2001
Southwest Florida Office:
10251 Metro Parkway
Ft. Myers, Florida 2,970 January 2002
North New Jersey Office:
903 E. Hazelwood Avenue
Rahway, New Jersey 7,000 December 2002
New Jersey Coast Office:
2511 Fire Road
Egg Harbor, New Jersey 2,000 March 2000
South New Jersey Office:
443 Commerce Lane
West Berlin, New Jersey 3,700 June 2001
New Jersey Accounting Office:
631 Newman Springs Road
Lincroft, New Jersey 1,400 January 2002
Nevada Office:
3021 South Valley View Blvd.
Las Vegas, Nevada 3,344 September 2000
-14-
<PAGE>
Location Footage Lease Expiration
- -------- ------- ----------------
Southern California Offices:
7895 Convoy Court
San Diego, California 13,000 May 2003
17905 Skypark Circle
Irvine, California 3,200 August 2001
Item 3. Proceedings
We are not a party to any material legal proceedings. Notwithstanding
this, from time to time we may be involved in material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
-15-
<PAGE>
PART II
Item 5. 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
-16-
<PAGE>
Item 6. 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 an
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. The profit increased due to a reduction
in interest expense and an increase in interest income.
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, a 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
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. 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.
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
-17-
<PAGE>
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
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-KSB 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; 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.
-18-
<PAGE>
Item 7. Financial Statements
Page
Independent Auditor's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with our independent
auditors regarding accounting and financial disclosure required to be reported
under this item.
-19-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Our directors and executive officers and their ages and positions held
with us are as follows:
Name Age Positions
Dickerson Wright 53 Chief Executive Officer, President, and
Chairman of the Board of Directors
Gary H. Elzweig 44 Executive Vice President and Director
Donald C. Alford 55 Executive Vice President, Secretary and
Director
Mark Baron 44 Executive Vice President and Director
Martin B. Lowenthal 43 Executive Vice President and Director
Joseph M. Wasilewski 50 Chief Financial Officer and Director
Thomas H. Chapman 69 Director
James L. McCumber 52 Director and Member of Audit and
Compensation Committees
Robert E. Petersen 53 Director and Member of Audit and
Compensation Committees
Each of our directors is elected at the annual meeting of stockholders
and serves until the next annual meeting and until his successor is elected and
qualified, or until his earlier death, resignation, or removal. The underwriters
have the right to observe board meetings for a period of five years following
the offering. We intend to maintain at least two independent directors on our
board.
Dickerson Wright, P.E., is our founder and has served as our chairman
of the board of directors and president since our incorporation in October 1993.
Mr. Wright is a registered professional engineer with a history of building and
managing engineering service companies and over 25 years experience in the
independent testing and inspection industry. Prior to founding our company, he
was the co-owner and executive vice president of American Engineering
Laboratories and a senior executive with Professional Service Industries. Mr.
Wright also served as president and chief executive officer of Western State
Testing, as national group vice president of United States Testing Company, and
as executive vice president of Professional Service Industries during this
period of time.
Gary H. Elzweig, P.E., is a co-founder of Professional Engineering and
has served as president of Professional Engineering since its incorporation in
March 1987. Mr. Elzweig has served as our executive vice president and director
since May 1998. He is a registered professional engineer with over 20 years of
experience in engineering, design, and testing. Mr. Elzweig earned his
Bachelor's Degree from Columbia University, School of Engineers in 1977. Mr.
Elzweig also serves as Chairman of Broward County's Board of Rules and Appeals
Foundations Subcommittee, and Building Envelope Subcommittee.
Donald C. Alford, M.B.A., has served as our executive vice president
and director since May 1998 and secretary since June 1999. Mr. Alford was an
owner of Wyman Enterprises, Inc. and served as its vice president and chief
financial officer from April 1996 until its acquisition by U.S. Labs. Mr. Alford
continued to work for U.S. Labs as an officer of Wyman Testing after the
acquisition of Wyman Enterprises, Inc. Mr. Alford was co-founder of Cornerstone
Development, a real estate company that developed approximately 20 major
projects in the San Diego area from 1983 to 1991. From October 1991 to June
1994, Mr. Alford served as president of Procom Supply
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<PAGE>
Corporation, a wholesale distributor of telephone equipment. Mr. Alford also
served as managing partner of S.A. Assets, LLC, a real estate development
company, from July 1994 to September 1996.
Mark Baron has been president and director of San Diego Testing
Engineers since May 1998 and has served as our executive vice president and
director since May 1998. Mr. Baron also was employed in the position of manager
of business development with Professional Service Industries from November 1989
to October 1996. He has over 20 years experience in the construction industry.
Mr. Baron is a certified OSHPD Class A Construction Inspector.
Martin B. Lowenthal is president and a director of U.S. Engineering and
has served as our executive vice president and director since May 30, 1998. Mr.
Lowenthal has served as president and director of U.S. Engineering since
November 1994 and as secretary of U.S. Engineering since its incorporation in
October 1993. Mr. Lowenthal has 16 years of management experience in the
engineering and testing industry. He has overseen inspection and testing
operations in six states, including New Jersey, New York, Delaware,
Pennsylvania, Maryland, and Virginia.
Joseph M. Wasilewski, C.P.A./M.B.A., has served as our chief financial
officer, treasurer and director since July 1999. Mr. Wasilewski has been
instrumental in establishing accounting systems and internal controls for the
company and its subsidiaries since its incorporation in 1993 on a consulting
basis prior to becoming CFO. He has over 30 years experience on the financial
side of the inspection/consulting/engineering business. Mr. Wasilewski's
previous experience includes serving as CFO for LK Comstock & Co., Inc., a part
of a multinational French-based conglomerate performing construction services.
Before Comstock, he was the CFO for the 25-branch operation of SGS/United States
Testing Co., Inc., a multinational Swiss-based engineering conglomerate.
Thomas H. Chapman, R.C.E., has served as a director of San Diego
Testing Engineers since March 1997 and has served as one of our directors since
May 1998. Mr. Chapman previously served as president of San Diego Testing
Engineers from March 1997 to May 1998 and has been employed by San Diego Testing
Engineers since May 1997. Mr. Chapman originally joined the predecessor to San
Diego Testing Engineers in 1968 and eventually left San Diego Testing Engineers
in 1989 when he went to work for Law Engineering. He served as the office
manager for Law Engineering until he rejoined San Diego Testing Engineers in
1997. He is currently a vice president of San Diego Testing Engineers. Mr.
Chapman has been involved in several notable projects in San Diego, including
the San Diego Convention Center, the Hyatt Regency Hotel, the City Front
Terrace, and One Harbor Drive. Mr. Chapman earned his degree in Civil
Engineering from San Diego State University and is a California Registered Civil
Engineer.
James L. McCumber is the chairman, chief executive officer, and founder
of McCumber Golf, an internationally recognized firm noted for the design and
construction of landmark golf courses. McCumber Golf was founded in 1971. Mr.
McCumber has been one of our directors since May 1998. Additionally, he serves
as a committee man for the United States Golf Association.
Robert E. Petersen has served as one of our directors since May 1998.
Mr. Petersen has served as president of Asset Management Group, a retail and
industrial property management firm, since October 1983. Mr. Petersen has also
served as senior vice president and chief financial officer of Collins
Development Co. and vice president of La Jolla Development Co., both of which of
are real estate development companies, since October 1983.
Committees of the Board of Directors
We have a standing compensation committee currently composed of Messrs.
Petersen and McCumber. The compensation committee reviews and acts on matters
relating to compensation levels and benefit plans for our executive officers and
key employees, including salary and stock options. The committee is also
responsible for granting stock awards, stock options, stock appreciation rights,
and other awards to be made under our existing incentive compensation plans. We
also have a standing audit committee composed of Messrs. McCumber and Petersen.
The audit committee assists in selecting our independent auditors and in
designating services to be performed by, and maintaining effective communication
with, those auditors.
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<PAGE>
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation provides that our
directors will not be personally liable to us or you for monetary damages for
breach of fiduciary duty as a director except for liability:
o for any breach of the director's duty of loyalty to us or you;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law, which
relates to unlawful payment of dividends or unlawful stock purchase
or redemption; or
o for any transaction from which the director derived any improper
personal benefit.
Our amended and restated certificate of incorporation also provides
that we will indemnify our directors, officers, employees, and agents to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, and controlling persons of U.S. Labs
pursuant to the foregoing provisions, or otherwise, U.S. Labs has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In addition, we have secured a claims made directors and officers'
liability insurance policy with an aggregate limit of $5 million. This policy
has a one-year term that renews in February 2000. We can make no assurance that
insurance coverage will continue to be renewed or available in the future or
offered at rates similar to those under the current policies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our company's officers and
directors, and persons who own more than 10% of a registered class of our
company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the Nasdaq SmallCap Market. Our officers, directors
and greater than 10% beneficial owners are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file with the SEC.
Based solely on review of the copies of forms furnished to us or
written representations from certain reporting persons that no Forms 5 were
required, we believe that, during the 1999 fiscal year, except for one late
filing by Joseph Wasilewski, our officers, directors and greater than 10%
beneficial owners complied with all applicable Section 16(a) filing
requirements.
Item 10. Executive Compensation
Employment Agreements
We have entered into employment agreements with Messrs. Wright,
Elzweig, Alford, Baron, Lowenthal, and Wasilewski. Each of these agreements has
a term of three years, and provides that we may terminate any of the agreements
with or without cause. These employment agreements also provide for 12 months of
severance pay at the rate of 50% of the applicable executive's compensation in
the event the executive is terminated other than for cause prior to the end of
the three-year term, except for Mr. Wasilewski whose agreement provides for 24
months of severance pay at a rate of 50%.
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<PAGE>
The following table sets forth certain information concerning
compensation paid or accrued for the fiscal year ended December 31, 1999 by us
to or for the benefit of our chief executive officer and our other executive
officers whose total annual compensation for 1999 exceeded $100,000.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------------------------
Awards
----------------------------
Securities
Underlying
Restricted Options and All Other
Name and Principal Position Salary Bonus Stock Awards Warrants Compensation
<S> <C> <C> <C> <C> <C> <C>
Dickerson Wright 1999 $192,664 $81,550 + 7,844 15,000 $32,015
Chief Executive Officer 1998 $175,000 -0- -- 170,000 *
Gary H. Elzweig 1999 $140,000 $31,567 + -- 10,000 *
Executive Vice President 1998 $171,567 -0- -- 65,000 *
Martin B. Lowenthal $23,000 +
Executive Vice President; 1999 $81,200 $5,000++ 3,400 -0- *
Director 1998 $74,190** -0- -- 35,000 *
Donald C. Alford
Executive Vice President; 1999 $91,708 $15,000 + -- 15,000 *
Secretary; Director 1998 $59,446** -0- -- 30,000 *
Joseph M. Wasilewski
Chief Financial Officer; 1999 $91,000 $6,000 1,715 65,000 *
Director 1998 $15,000** -0- -- 5,000 *
* The aggregate amount of perquisites and other personal benefits,
securities or property was less than the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
** These officers and directors were employed by the Company for only a
portion of 1998.
+ The 1998 bonus was paid in 1999.
++ The 1999 bonus was paid in 1999.
</TABLE>
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<PAGE>
The following table provides the specified information concerning
grants of options and warrants to purchase our common stock made during the year
ended December 31, 1999 to persons named in the Summary Compensation Table.
<TABLE>
Options/SAR Grants in Last Fiscal Year
<CAPTION>
Number of
Securities Percent Total
Underlying Options/SARs Granted
Options/SARs to Employees in Exercise or Base Expiration
Name Granted Fiscal Year Price ($/Sh) Date
- --------------------------- ------------------ ----------------------- ------------------ -------------
<S> <C> <C> <C> <C>
Dickerson Wright 15,000 9.8% $6.60 10/15/04
Gary H. Elzweig 10,000 6.6% $6.60 10/15/04
Donald C. Alford 15,000 9.8% $6.00 10/15/04
Joseph M. Wasilewski 50,000 32.8% $6.00 04/01/02
Martin B. Lowenthal 15,000 9.8% $6.00 10/15/04
</TABLE>
The following table provides information concerning exercises of
options and warrants to purchase our common stock in the fiscal year ended
December 31, 1999, and unexercised options and warrants held at fiscal year end
by the persons named in the Summary Compensation Table. The value of the
unexercised options and warrants that are in the money was calculated by
determining the difference between the fair market value per share of our
company's common stock on December 31, 1999 and the exercise price of the
options and warrants.
-24-
<PAGE>
<TABLE>
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year End Option Values
<CAPTION>
Number of
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options and In-the-Money Options and
Name Exercise Realized Warrants at December 31, 1999 Warrants at December 31, 1999
- -------------------------- ------------- ----------- --------------------------------- ----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Dickerson Wright 0 $0 90,302 94,698 $0 $0
Gary H. Elzweig 0 $0 60,302 14,698 $0 $0
Donald C. Alford 0 $0 33,332 1,668 $0 $0
Joseph M. Wasilewski 0 $0 21,666 48,334 $0 $0
Martin B. Lowenthal 0 $0 35,000 -0- $0 $0
</TABLE>
Director Compensation
We reimburse our directors for all reasonable and necessary travel and
other incidental expenses incurred in connection with their attendance at
meetings of the board. Beginning in December 1998, we began compensating
non-employee directors $500 for each board meeting attended. In 1998, under the
1998 Stock Option Plan, each non-employee director received an option to
purchase 5,000 shares of common stock at an exercise price of $6.00 per share.
Directors who are members of our subsidiaries' boards received an additional
grant of an identical option to purchase 5,000 shares for each board membership.
In the future, a director, who is first elected to the board may receive an
option to purchase shares of common stock for the first year of the director's
board term. The board has not yet determined the number of option shares that
each director will receive for each additional year the director remains on the
board. These options will have an exercise price equal to 100% of the fair
market value of the common stock on the grant date.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of the units offered by us, by:
o each person who is known to own beneficially more than 5% of the
outstanding shares of our common stock;
o each of our directors; and
o all our directors and executive officers as a group.
The persons listed below have sole voting and investment power with
respect to all shares of common stock shown as being beneficially owned by them,
subject to community property laws, where applicable. The number of shares
column in the table includes shares issuable upon exercise of options and
warrants exercisable within 60 days of December 31, 1999. The number of options
and warrants exercisable within 60 days of December 31, 1999 are listed in the
shares issuable upon exercise of options or warrants column. The address of all
stockholders is care of U.S. Laboratories Inc., 7895 Convoy Court, Suite 18, San
Diego, California 92111.
-25-
<PAGE>
<TABLE>
<CAPTION>
Shares Issuable Upon
Name and Address of Number of Percentage Exercise of Options
Beneficial Owner Shares Ownership or Warrants
- ---------------- ------ --------- -----------
<S> <C> <C> <C>
Dickerson Wright........................ 1,818,638 59.65% 90,302
Gary H. Elzweig......................... 380,789 13.78% 60,302
Martin B. Lowenthal..................... 91,526 3.95% 35,000
Donald C. Alford........................ 101,810 4.54% 43,332
Mark Baron.............................. 74,852 3.59% 40,000
Thomas H. Chapman....................... 51,061 2.38% 25,000
Joseph M. Wasilewski.................... 28,373 1.56% 21,666
James L. McCumber....................... 5,000 * 5,000
Robert E. Petersen...................... 7,000 * 5,000
Horwitz & Associates, Inc.**............ 222,750 6.98% 0
All current directors and officers as a
group (9 persons)....................... 81.82%
- ---------------------
* Represents less than 1%
** Based solely on information contained in a Schedule 13G filed by Horwitz &
Associates, Inc. with the SEC on February 14, 2000.
</TABLE>
Item 12. Certain Relationships And Related Transactions
All ongoing present and future transactions with our affiliates have
been, and will continue to be, on terms no less favorable to us than could have
been obtained from unaffiliated parties, and will be approved by a majority of
no less than two of our independent directors. These independent directors will
not have an interest in those transactions and will have access, at our expense,
to our counsel or independent legal counsel.
During 1999, we signed a three year office building lease with a
related party to lease office space in New Jersey for the company's financial
and mergers and acquisition staff. The rental payments are $1,600 per month plus
utilities.
In December 1999, we entered into a stock purchase agreement with Gary
Elzweig for all of the outstanding stock of the Building Department, Inc. (BDI),
for a total price of $93,000. $30,000 cash was paid in 1999 and the balance of
$63,000 was paid in February 2000.
At December 31, 1998, we owed Dickerson Wright, the Chief Executive
Officer and majority stockholder, $81,461. The amounts are non-interest bearing
and are payable upon demand. Mr. Wright loaned these amounts to us through the
use of his personal line of credit that was personally guaranteed by Mr. Wright
and his spouse. In May 1998, we repaid a portion of that line of credit by
borrowing under a new $1,700,000 line of credit that is also personally
guaranteed by Mr. Wright and his spouse. At December 31, 1999, Dickerson Wright
owed our company $140,714. The amount is non-interest bearing and is payable on
demand.
-26-
<PAGE>
In October 1998, the $1,700,00 line of credit was refinanced into a
$1,200,000 note payable and a $500,000 line of credit, both of which are
guaranteed by Mr. Wright and his spouse. In July 1998, we also entered into a
$500,000 line of credit that is personally guaranteed by Mr. Wright and his
spouse. We used this $500,000 line of credit to repay in full to the bank the
$480,000 loan made to us through the use of Mr. Wright's personal line of
credit.
As part of the consideration for the acquisition of Wyman Enterprises,
Inc.'s assets, we issued a non-interest-bearing note payable to Donald C. Alford
in the principal amount of $150,000. The note payments are due in four equal
annual installments of $37,500 beginning in March 1999.
During the year ended December 31, 1997 and 1996 and the nine months
ended September 30, 1998 and 1997, we paid $181,067, $169,594, $92,052, and
$137,063, respectively, in management fees to Gary Elzweig. The management fees
were based on 5% of net sales of a subsidiary, and have been discontinued
effective January 1, 1999.
On January 1, 1998, we issued (a) 315,488 shares of our common stock to
Gary H. Elzweig in exchange for 100 shares of the common stock of Professional
Engineering; (b) 55,526 shares of our common stock to Martin B. Lowenthal in
exchange for 18.5 shares of the common stock of U. S. Engineering; (c) 33,652
shares of our common stock to Mark Baron in exchange for 1.67 shares of the
common stock of San Diego Testing Engineers; and (d) 24,061 shares of our common
stock to Thomas H. Chapman in exchange for 5.67 shares of the common stock of
San Diego Testing Engineers.
On January 1, 1998, we issued 10,937 shares of our common stock to
Christopher O'Malley, Vice President of U. S. Engineering under the terms of a
restricted stock agreement containing restrictions on the disposition of the
common stock. The common stock was issued in exchange for a capital contribution
made by Mr. O'Malley to U. S. Engineering.
On April 1, 1998, we issued 50,478 shares of our common stock to Donald
C. Alford in exchange for 25 shares of the common stock of Wyman Enterprises,
Inc.
Item 13. Exhibits and Reports on Form 8-K
(a) The exhibit list is located at the end of this report.
(b) We filed no Form 8-Ks during the fourth quarter.
-27-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 24, 2000.
U. S. Laboratories, Inc.
By: /s/ Dickerson Wright
Dickerson Wright
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities indicated on March 24, 2000:
Signature Title Date
/s/ Dickerson Wright
- --------------------------- Chief Executive Officer,
Dickerson Wright President, and Chairman
of the Board March 24, 2000
/s/ Gary Elzweig
- --------------------------- Executive Vice President
Gary Elzweig and Director March 24, 2000
/s/ Donald C. Alford
- --------------------------- Executive Vice President,
Donald C. Alford Secretary and Director March 24, 2000
/s/ Mark Baron
- --------------------------- Executive Vice President
Mark Baron and Director March 24, 2000
/s/ Martin B. Lowenthal
- --------------------------- Executive Vice President
Martin B. Lowenthal and Director March 24, 2000
/s/ Joseph Wasilewski
- --------------------------- Chief Financial Officer,
Joseph Wasilewski Assistant Secretary, and
Director March 24, 2000
/s/ Thomas H. Chapman
- ---------------------------
Thomas H. Chapman Director March 24, 2000
/s/ James L. McCumber
- ---------------------------
James L. McCumber Director March 24, 2000
-28-
<PAGE>
Exhibit
Number Exhibit Description
***2.1 Asset Purchase Agreement between the Company and Wyman Enterprises,
Inc.
******2.2 Stock Purchase Agreement between the Company and BTC Laboratories,
Inc.
*******2.3 Asset Purchase Agreement between the Company and Intertek, Inc.
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated by-laws of the Company
***4.1 Warrant Agreement, including Form of Warrant
*4.2 Form of Underwriters' Warrant
*4.3 Form of Warrant Agency Agreement
***4.4 Specimen Certificate Representing Shares of Common Stock of the
Company
***4..5 Revised Form of Underwriters' Warrant
***4.6 Form of Promotional Shares Escrow Agreement
***5.1 Opinion of Foley & Lardner regarding legality
***10.1 Bank Loan Agreement between North County Bank and the Company
in Principal Amount of $500,000
***10.2 Bank Loan Agreement between Bank of America and the Company
***10.3 Lease for San Diego, California facility
**10.4 Bonus Employment Agreement of Dickerson Wright
**10..5 Bonus Employment Agreement of Gary Elzweig
**10.6 1998 Stock Option Plan
***10.7 Form of Incentive Stock Option Agreement
***10.8 Form of Non-Qualified Stock Option Agreement
**10.9 Share Exchange Agreement between the Company and Gary H. Elzweig
**10.10 Share Exchange Agreement between the Company and Martin B.
Lowenthal
**10.11 Share Exchange Agreement between the Company and Mark Baron
**10.12 Share Exchange Agreement between the Company and Thomas H. Chapman
**10.13 Share Exchange Agreement between the Company and Donald C. Alford
***10.14 Employment Agreement of James D. Wait
****10.15 Employment Agreement of Mark Baron
****10.16 Employment Agreement of Martin B. Lowenthal
****10.17 Employment Agreement of Dickerson Wright
****10.18 Employment Agreement of Gary Elzweig
****10.19 Employment Agreement of Donald C. Alford
****10.20 Form of Employee Warrant Agreement
****10.21 Bank Loan Agreement between North County Bank and the Company
****10.22 Bonus Employment Agreement of Martin B. Lowenthal
****10.23 Bonus Employment Agreement of Mark Baron
****10.24 Bank Loan Agreement between North County Bank and the Company
****10.25 Acknowledgement of Termination and Replacement of Option(s) and
Warrant
***10.26 Loan Agreement between Merrill Lynch Business Financial Services
and the Company
*****10.27 1999 Stock Bonus Plan
10.28 Commercial Lease between Joseph Wasilewski and the Company
21 List of Subsidiaries
23 Consent of Singer Lewak Greenbaum & Goldstein, LLP.
27 Financial Data Schedule
-29-
<PAGE>
* Filed with the registration statement on Form SB-2 filed with the
Securities and Exchange Commission on October 29, 1998.
** Filed with Amendment No. 1 to the registration statement on Form SB-2,
filed with the Securities and Exchange Commission on January 8, 1999.
*** Filed with Amendment No. 2 to the registration statement on Form SB-2,
filed with the Securities and Exchange Commission on January 27, 1999.
**** Filed with Amendment No. 3 to the registration statement on Form SB-2,
filed with the Securities and Exchange Commission on February 5, 1999.
***** Filed with Amendment No. 3 to the registration statement on Form SB-2,
filed with the Securities and Exchange Commission on February 5, 1999.
***** Filed with the registration statement on Form S-8, filed with the
Securities and Exchange Commission on March 1, 2000.
****** Filed with the report on Form 8-K, filed with the Securities and
Exchange Commission on January 21, 2000.
******* Filed with the report on Form 8-K, filed with the Securities and
Exchange Commission on March 9, 2000.
-30-
<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
The accompanying notes are an integral part of these
consolidated financial statements.
F-1
<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.
F-2
<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.
F-3
<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.
F-4
<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
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
F-5
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1999 1998
----------- ------------
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)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
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
=========== ===========
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 our company's common
stock to minority interest holders in exchange for all of their shares in the
subsidiaries. In connection with the purchase, the Company recorded additional
goodwill of $194,924.
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-8
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-9
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
NOTE 1 - ORGANIZATION AND BUSINESS (Continued)
Acquisitions
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.
F-10
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-11
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-12
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-13
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-14
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
F-15
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
Notepayable 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.
F-16
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-17
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
========
F-18
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-19
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
F-20
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
==========
F-21
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-22
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
F-23
EXHIBIT 10.28
COMMERCIAL LEASE
THIS LEASE is made on the 1st day of February, 1999.
The Landlord hereby agrees to lease to the Tenant, and the Tenant hereby agrees
to hire and take from the Landlord, the Leased Premises described below pursuant
to the terms and conditions specified herein:
LANDLORD: Joseph M. Wasilewski, 631 Newman Springs Road, Lincroft, NJ 07738
TENANT(S): U.S. Laboratories, Inc., 7895 Convoy Court, Suite 18, San Diego,
California 92111.
1. Leased Premises. The Leased Premises are those premises described as:
entire first floor as described in attached sketch.
2. Term. The term of the Lease shall be for a period of 3 year(s) commencing on
the 1st day of February, 1999 ending on the 31st day of January, 2002, unless
sooner terminated as hereinafter provided. If Tenant remains in possession of
the Leased Premises with the written consent of the Landlord after the lease
expiration date stated above, this Lease will be converted to a month-to-month
Lease and each party shall have the right to terminate the Lease by giving at
least one month's prior written notice to the other party.
3. Rent. The Tenant agrees to pay the ANNUAL RENT of Nineteen thousand two
hundred dollars ($19,200) payable in equal installments $1,600 in advance on the
first day of each and every calendar month during the first year of this Lease.
Second year rent is $1,648 per month, third year rent is $1,700 per month plus
real estate taxes of $370 per month plus rental of furniture.
4. Rent Adjustment. If in any tax year commencing with the fiscal year 1999, the
real estate taxes on the land and buildings, of which the Leases Premises are a
part, are in excess of the amount of the real estate taxes thereon for the
fiscal year (hereinafter called the "Base Year"), Tenant will pay to Landlord as
additional rent hereunder, when and as designated by notice in writing by
Landlord.
80 percent of such excess that may occur in each year of the term of this Lease
or any extension or renewal thereof and proportionately for any part of a fiscal
year.
5. DELETED.
6. Delivery of Possession. If for any reason the Landlord cannot deliver
possession of the leased property to the Tenant when the lease term commences,
this Lease shall not be void or voidable, nor shall the Landlord be liable to
the Tenant for any loss or damage resulting therefrom. However, there shall be
an abatement of rent for the period between the commencement of the lease term
and the time when the Landlord delivers possession.
7. Use of Leases Premises. The Leased Premises may be used only for the
following purpose(s): business professional office.
8. Utilities. Except as specified below, the Tenant shall be responsible for all
utilities and services that are furnished to the Leased Premises. The
application for an connecting of utilities, as well as all services, shall be
made by and only in the name of the Tenant: (List exceptions, if any)
.
9. Condition of Leased Premise; Maintenance and Repair. The Tenant acknowledges
that the Leased Premises are in good order and repair. The Tenant agrees to take
good care of and maintain the Leases Premises in good condition throughout the
term of the Lease.
<PAGE>
The Tenant, at his expense, shall make all necessary repairs and replacements to
the Leased Premises, including the repair and replacement of pipes, electrical
wiring, heating and plumbing systems, fixtures and all other systems and
appliances and their appurtenances. The quality and class of all repairs and
replacements shall be equal to or greater than the original worth. If Tenant
defaults in making such repairs or replacements, Landlord may make them for
Tenant's account, and such expenses will be considered additional rent.
10. Compliance with Laws and Regulations. Tenant, at its expense, shall promptly
comply with all federal, state, and municipal laws, orders, and regulations, and
with all lawful directives of public officers, which impose any duty upon it or
Landlord with respect to the Leases Premises. The Tenant at its expense, shall
obtain all required licenses or permits for the conduct of its business within
the terms of this lease, or for the making of repairs, alterations,
improvements, or additions. Landlord, when necessary, will join with the Tenant
in applying for all such permits or licenses.
11. Alterations and Improvements. Tenant shall not make any alterations,
additions, or improvements to, or install any fixtures on, the Leased Premises
without Landlord's prior written consent. If such consent is given, all
alterations, additions, and improvements made, and fixtures installed by Tenant
shall become Landlord's property at the end of the Lease/term. Landlord may,
however, require Tenant to remove such fixtures, at Tenant's expense, at the end
of the Lease term.
12. Assignment/Subletting Restrictions. Tenant may not assign this agreement or
sublet the Leased Premises without the prior written consent of the Landlord.
Any assignment, sublease or other purported license to use the Leased Premises
by Tenant without the Landlord's consent shall be void and shall (at Landlord's
option) terminate this Lease.
13. Insurance.
(i) By Landlord. Landlord shall at all times during the term of this Lease,
at its expense, insure and keep in effect on the building in which the Leased
Premises are located fire insurance with extended coverage. The Tenant shall not
permit any use of the Leased Premises which will make voidable any insurance on
the property of which the Leased Premises are a part, or on the contents of said
property or which shall be contrary to any law or regulation from time to time
established by the applicable fire insurance rating association. Tenant shall on
demand reimburse the Landlord, and all other tenants, the fill amount of any
increase in insurance premiums caused by the Tenant's use of the premises.
(ii)By Tenant. Tenant shall, at its own expense, during the term hereof,
maintain and deliver to Landlord public liability and property damage and plate
glass insurance policies with respect to the Leased Premises. Such policies
shall name the Landlord and Tenant as insureds, and have limits of at least
$500,000 for injury or death to any one person and $500,000 for any one
accident, and $500,000 with respect to damage to property and with full coverage
for plate glass. Such policies shall be in whatever form and with such insurance
companies as are reasonably satisfactory to Landlord, shall name the Landlord as
additional insured, and shall provide for at least ten days' prior notice to
Landlord of cancellation.
14. Indemnification of Landlord. Tenant shall defend, indemnify, and hold
Landlord harmless from and against any claim, loss, expense or damage to any
person or property in or upon the Leased Premises, arising out of Tenant's use
or occupancy of the Leased Premises, or arising out of any act or neglect of
Tenant or its servants, employees, agents, or invitees.
15. Condemnation. If all or any part of the Leased Premises is taken by eminent
domain, this lease shall expire on the date of such taking, and the rent shall
be apportioned as of that date. No part of any such award shall belong to
Tenant.
16. Destruction of Premises. If the building is which the Leased Premises is
located is damaged by fire or other casualty, without Tenant's fault, and the
damage is so extensive as to effectively constitute a total destruction of the
property or building, this Lease shall terminate and the rent shall be
apportioned to the time of the damage. In all other cases of damage without
Tenant's fault, Landlord shall repair the damage with reasonable dispatch, and
if the damage has rendered the Leased Premises wholly or partially untenantable,
the rent shall be apportioned until the
<PAGE>
damage is repaired. In determining what constitutes reasonable dispatch,
consideration shall be given to delays caused by strikes, adjustment of
insurance, and other causes beyond the Landlord's control.
17. Landlord's Rights upon Default. In the event of any breach of this lease by
the Tenant, which shall not have been cured within TEN (10) DAYS, then the
Landlord, besides other rights or remedies it may have, shall have the immediate
right of reentry and may remove all persons and property from the Leased
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of, and for the account of, the Tenant. If the Landlord
elects to reenter as herein provided, or should it take possession pursuant to
any notice provided for by law, it may either terminate this Lease or may, from
time to time, without terminating this lease, relet the Leased Premises or any
part thereof, for such term or terms and at such rental or rentals and upon such
other terms and conditions as the Landlord in Landlord's own discretion may deem
advisable. Should rentals received from such reletting during any month be less
than that agreed to be paid during the month by the Tenant hereunder, the Tenant
shall pay such deficiency to the Landlord monthly. The Tenant shall also pay to
the Landlord, as soon as ascertained, the cost and expenses incurred by the
Landlord, including reasonable attorneys fees, relating to such reletting.
18. Quiet Enjoyment. The Landlord agrees that if the Tenant shall pay the rent
as aforesaid and perform the covenants and agreements herein contained on its
part to be performed, the Tenant shall peaceably hold and enjoy the said rented
premises without hindrance or interruption by the Landlord or by any other
person or persons acting under or through the Landlord.
19. Landlord's Right to Enter. Landlord may, at reasonable times, enter the
Leased Premises to inspect it, to make repairs or alterations, and to show it to
potential buyers, lenders or tenants.
20. Surrender upon Termination. At the end of the lease term the Tenant shall
surrender the leased property in as good condition as it was in at the beginning
of the term, reasonable use and wear excepted.
21. Subordination. This lease, and the Tenant's leasehold interest, is and shall
be subordinate, subject and inferior to any and all liens and encumbrances now
and thereafter placed on the leased Premises by Landlord, any and all extensions
of such liens and encumbrances and all advances paid under such liens and
encumbrances.
22. Additional Provisions:
Tenant responsible for all utilities, office cleaning and real estate taxes.
Parking spaces are available. Storage of boxes included in rent.
23. Miscellaneous Terms.
(i) Notices. Any notice, statement, demand or other communication by one
party to the other, shall be given by personal delivery or by mailing the same,
postage prepaid, addressed to the Tenant at the premises, or to the Landlord at
the address set forth above.
(ii)Severability. If any clause or provision herein shall be adjudged
invalid or unenforceable by a court of competent jurisdiction or by operation of
any applicable law, it shall not affect the validity of any other clause or
provision, which shall remain in full force and effect.
(iii) Waiver. The failure of either party to enforce any of the provisions
of this lease shall not be considered a waiver of that provision or the right of
the party to thereafter enforce the provision.
(iv)Complete Agreement. This Lease constitutes the entire understanding of
the parties with respect to the subject matter hereof and may not be modified
except by an instrument in writing and signed by the parties.
(v) Successors. This Lease is binding on all parties who lawfully succeed
to the rights or take the place of the Landlord or Tenant.
<PAGE>
IN WITNESS WHEREOF, the parties have set their hands and seals on this 1st day
of February, 1999.
LANDLORD OR LANDLORD'S AUTHORIZED AGENT TENANT
/s/ Joseph Wasilewski /s/ Dickerson Wright
CEO, U.S. Laboratories Inc.
-----------------------------
Tenant
EXHIBIT 21
(List of Subsidiaries)
Name of Subsidiary State of Incorporation
San Diego Testing Engineers, Inc. Delaware
Los Angeles Testing Engineers, Inc. Delaware
Wyman Testing Laboratories, Inc. Delaware
Unitek Technical Services, Inc. Delaware
AGS/PEICO, Inc. Delaware
U.S. Engineering Laboratories, Inc. Delaware
Professional Engineering & Inspection Company Florida
BTC Laboratories, Inc. California
Buena Engineers, Inc. Delaware
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation of our report, dated February
23, 2000, included in this Form 10-KSB in the previously filed Registration
Statements of U.S. Laboratories Inc. on Form S-8 (No. 333-78707, 333-83029, and
333-31422)
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 27, 2000
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<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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