<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30,2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-25339
U.S. Laboratories Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 33-0586167
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
7895 Convoy Court, Suite 18
San Diego, California 92111
---------------------------
(address of principal executive offices)
858-715-5800
------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ____ No X
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF AUGUST 11, 2000
----- ---------------------------------
<S> <C>
Common Stock, $0.1 par value per share 3,201,065
</TABLE>
Transitional Small Business Disclosure Format: Yes ____ No X
<PAGE>
U.S. LABORATORIES INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 2000 (unaudited) and December 31,1999 3
Consolidated Statements of Income
For the Six Months ended June 30, 2000 and 1999 (unaudited) 5
And the Three Months ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2000(unaudited) 6
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibits 23
</TABLE>
2
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Current assets
Cash ............................................. $ 273,609 $ 1,217,527
Accounts receivable,net of allowance for
doubtful accounts of $649,283 and $209,956,
respectively ................................... 7,756,116 4,783,095
Work-in-progress ................................. 747,532 329,899
Prepaid expenses and other current assets ........ 334,102 85,147
Current portion of notes receivable-related
party .......................................... 47,054 46,905
----------- -----------
Total current assets .................... 9,158,413 6,462,573
Furniture and equipment, net of accumulated
depreciation of $1,344,412 and $1,077,836,
respectively ................................... 1,787,786 1,102,149
Goodwill, net of accumulated amortization
of $673,243 and $575,420, respectively ......... 2,604,565 1,629,826
Note receivable-related party,net of current
portion ........................................ 93,809 93,809
Other assets ..................................... 418,311 303,420
----------- -----------
Total assets ............................ $14,062,884 $ 9,591,777
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2000 AND DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Current liabilities
Bank overdraft .............................. $ 297,266 $ --
Lines of credit ............................. 1,677,231 63,641
Current portion of long-term debt ........... 236,974 132,750
Current portion of capitalized
lease obligations ......................... -- 4,966
Current portion of notes payable ............ 776,095 157,325
Accounts payable ............................ 665,164 736,540
Accrued payroll and payroll taxes ........... 1,457,863 308,757
Deferred income tax ......................... 472,288 306,203
Income tax payable .......................... 459,813 777,434
------------ ------------
Total current liabilities ........... 6,042,694 2,487,616
Long-Term debt,net of current portion ....... 299,901 283,173
Notes payable,net of current portion ........ 151,670 225,000
------------ ------------
Total liabilities ...................... 6,494,265 2,995,789
Commitments
Stockholders' equity
Preferred stock,$0.01 par value
5,000,000 shares authorized
none issued and outstanding ............... -- --
Common stock,$0.01 par value
50,000,000 shares authorized
3,201,065 and 3,200,000 shares
issued and outstanding, respectively ...... 32,010 32,000
Treasury stock,at cost ...................... (4,327) (114,088)
Additional paid-in capital .................. 5,244,354 5,188,442
Retained earnings ........................... 2,296,582 1,489,634
------------ ------------
Total stockholders' equity ............... 7,568,619 6,595,988
------------ ------------
Total liabilities and stockholders' equity .. $ 14,062,884 $ 9,591,777
============ ============
</TABLE>
See accompanying notes
4
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
AND THE SIX MONTHS ENDED JUNE 30,2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue .................. $ 9,011,820 $ 3,802,001 $ 15,941,958 $ 6,984,701
Cost of goods sold ....... 5,184,651 1,831,639 8,975,295 3,551,576
------------ ------------ ------------ ------------
Gross profit ............. 3,827,169 1,970,362 6,966,663 3,433,125
------------ ------------ ------------ ------------
Selling,general,and
administrative expenses 2,995,753 1,845,805 5,402,680 3,115,848
------------ ------------ ------------ ------------
Income from operations ... 831,416 124,557 1,563,983 317,277
------------ ------------ ------------ ------------
Other income (expense)
Interest expense ........ (60,621) (25,478) (127,014) (68,820)
Interest income ......... -- 27,699 10,221 40,642
Other income ............ -- 19,290 952 34,946
Other expense ........... (21,310) -- (23,047) --
------------ ------------ ------------ ------------
Total other income
(expense) ............. (81,931) 21,511 (138,888) 6,768
Income before provision
for income taxes ....... 749,485 146,068 1,425,095 324,045
Provision for
income taxes ........... 324,932 51,611 618,147 129,618
------------ ------------ ------------ ------------
Net income ............... 424,553 $ 94,457 $ 806,948 $ 194,427
============ ============ ============ ============
Basic and diluted
income per share ....... .13 $ .03 $ .25 $ .07
============ ============ ============ ============
Weighted average
shares outstanding ..... 3,201,065 3,200,000 3,201,065 2,905,555
============ ============ ============ ============
</TABLE>
See accompanying notes
5
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Stock Treasury Paid-In Retained
Shares Amount Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance,12/31/99.. 3,200,000 $32,000 $(114,088) $5,188,442 $1,489,634 $6,595,988
Adjustment to
balance to
reflect acquisition
of subsidiary..... 30,000 30,000
Issuance of 20,000
treasury shares
for purchase of
AGS,Inc........... 63,613 16,387 80,000
Issuance of 15,000
treasury shares
for purchase of
Sage Engineering,
Inc............... 50,475 9,525 60,000
Issuance of common
stock............. 1,065 10 10
Purchase of 1,065
shares of Treasury
stock, at cost.... (4,327) (4,327)
Net income........ 806,948 806,948
------- ------- -------- ---------- ---------- -----------
Balance,6/30/00... 3,201,065 $32,010 $ (4,327) $5,244,354 $2,296,582 $7,568,619
========= ======= ======== ========== ========= ===========
</TABLE>
See accompanying notes
6
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------
2000 1999
---- ----
(Unaudited) (Unaudited)
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income ..................................... $ 806,948 $ 194,427
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities
Amortization of Goodwill ....................... 97,823 52,614
Depreciation ................................... 264,655 135,094
Deferred Income Tax ............................ (5,267) --
(Increase) Decrease in
Accounts receivable ............................ (866,059) (62,345)
Work in progress ............................... (233,552) (118,724)
Prepaid expenses ............................... (189,526) (212,618)
Other assets ................................... (53,767) (71,957)
Increase (Decrease) in
Accounts payable ............................... (579,437) 45,161
Accrued payroll and payroll taxes .............. 1,053,428 73,895
Other accrued expenses ......................... -- 176,313
Income tax payable ............................. (317,621) 67,818
----------- -----------
Net cash (used in) provided by operating
activities ..................................... (22,375) 279,678
----------- -----------
Cash flows from investing activities
Purchase of furniture and equipment(net) ....... (507,697) (141,529)
Acquisitions of businesses,
net of cash acquired ........................... (2,906,839) (184,178)
Note Receivable-related party .................. (149) --
----------- -----------
Net cash (used in) investing activities ........ (3,414,685) (325,707)
----------- -----------
</TABLE>
See accompanying notes
7
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30,2000 AND 1999(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30
----------------------------
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities
Increase (decrease) in bank
Overdraft .................................... $ 297,266 $ (82,616)
Line of credit,(net) ......................... 1,613,590 (1,877,744)
Due to stockholders,(net) .................... -- 2,664
Payments on long-term debt, capitalized
lease obligations and notes payable ........ 530,691 (313,854)
Proceeds from the initial stock offering
net of the deferred offering costs ......... -- 4,785,685
Issuance of common & treasury stock .......... 51,595 --
----------- -----------
Net cash provided by
financing activities ....................... 2,493,142 2,514,135
----------- -----------
Net (decrease) increase in cash ................ (943,918) 2,468,106
Cash,beginning of period ....................... 1,217,527 121,782
----------- -----------
Cash,end of period ............................. $ 273,609 $ 2,589,888
=========== -----------
Supplemental disclosures of cash flow
information
Interest paid .................................. $ 127,014 $ 68,820
=========== ===========
Income taxes paid .............................. $ 364,700 $ 61,800
=========== ===========
</TABLE>
Supplemental Schedule of Financing Activities
In the first quarter 2000, the company issued treasury stock of $114,088 as
the initial payment for the purchase of Sage Engineering Inc. and as an
installment payment for AGS Inc., purchased in 1999, as per the respective
purchase agreements.
See accompanying notes
8
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 1 - ORGANIZATION AND BUSINESS
U.S. Laboratories Inc. and its subsidiaries (collectively the"Company")
offers engineering and design services,project management,construction
quality control, structural engineering and design, environmental
engineering and inspection and testing. The Company has facilities in
California, New Jersey, Florida, Nevada and Virginia and grants credit
to customers in those states. Readers of this report should refer to
additional information in the annual report filed on Form 10K-SB for
December 31, 1999.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
As contemplated by the Securities and Exchange Commission under Item
310(b) of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all
disclosures required by generally accepted accounting principles. The
interim financial data is unaudited. However, in the opinion of the
Company the interim data includes all adjustments, consisting only of
normal recurring adjustments,necessary for a fair statement of the
financial position and results for the interim periods. The
Company's interim results are not necessarily indicative of the
results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
U.S.Laboratories Inc. and its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows,the Company consider all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment,including equipment under capital leases,are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Automobile and trucks 3 to 5 years
Furniture and fixtures 5 to 7 years
Office hardware and software 5 years
Machinery and equipment 5 to 7 years
Leasehold improvements 5 years
</TABLE>
Maintenance, repairs, and minor renewals are expensed as
incurred.Expenditures for additions and major improvements are
capitalized. Gains and losses on disposals are included in the
statements of income.
9
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
INTANGIBLES
Intangibles consist of goodwill which is being amortized over
a period not exceeding twenty years. The Company continually
evaluates whether events or circumstances have occurred that indicate
the remaining estimated value of goodwill may not be recoverable. When
factors indicate that the value of goodwill may be impaired, the
Company estimates the remaining value and reduces the goodwill to that
amount.
REVENUE RECOGNITION
Revenue from services performed, including fixed-price and unit-price
contracts, is recorded as earned over the lives of the contract.
Revenue from services is recognized when service has been performed and
accepted. At the time loss on a contract becomes known, the entire
amount of the estimated ultimate loss is recognized in the financial
statements. The Company has not experienced any material losses on its
contracts.
ADVERTISING
The Company expenses advertising costs as incurred.
INCOME TAXES
The Company utilizes Statement of Financial Accounting
Standards("SFAS") No. 109," Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax law
and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
10
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments including
cash,accounts receivable, accounts payable, and other accrued expenses,
the carrying amounts approximate fair value due to their short
maturities. The amounts shown for long-term debt and capital lease
obligations also approximate fair value because current interest rates
and terms offered to the Company for similar long-term debt and capital
lease obligations are substantially the same.
CONCENTRATIONS OF RISK
The Company provides contract services to construction companies and
the military, primarily in California, New Jersey, Florida, Nevada and
Virginia. It also extends credit based on an evaluation of the
customer's financial condition,generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
NET INCOME PER SHARE
For the three months and six months ended June 30, 1999 and 2000, basic
earnings per share is computed by dividing net income to common
stockholders by the weighted-average number of common shares
outstanding during the accounting period. Diluted earnings per share is
computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As amended by SFAS No. 137, this
pronouncement, is effective for financial statements in fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133
and SFAS No. 137 establish accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company
does not expect adoption of SFAS No. 133 to have a material effect, if
any, on its interim or annual financial position or results of
operations.
NOTE 3 - CASH
The Company maintains cash deposits at banks located in California,
Nevada, Florida, Virginia and New Jersey. Deposits at each bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
As of June 30, 2000 and December 31, 1999, uninsured portions of
balances held at banks aggregated $0 and $1,079,135, respectively. The
Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash.
11
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Automobile and trucks..................... $ 1,287,536 $ 963,259
Furniture and fixtures.................... 381,432 319,136
Office hardware and software.............. 490,486 168,735
Machinery and equipment................... 794,058 596,337
Leasehold improvements.................... 178,686 132,518
---------- -----------
3,132,198 2,179,985
---------- -----------
Less:accumulated depreciation............. 1,344,412 1,077,836
---------- -----------
Total............................ $ 1,787,786 $1,102,149
=========== ==========
</TABLE>
Depreciation expense for the six months ended June 30,
2000 and 1999 was $264,655 and $135,094, respectively.
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following at June 30, 2000:
<TABLE>
<S> <C>
Note payable to stockholder of Wyman Enterprises,Inc.in
connection with the acquisition. The amount is to be
paid in two annual installments of $75,000 beginning
March 25,2001....................................... $ 150,000
Note payable to stockholder of Advanced Geo Materials Inc.
in connection with the acquisition. The amount is to be
paid in installments commencing October 15,2000..... 154,188
Note payable to stockholder of Stewart Enviromental Inc.
in connection with the acquisition.
The amount is to be paid on March 31, 2001........... 27,985
Note payable to stockholders of BTC Associates, Inc.
in connection with the acquisition.
The amount is to be paid on July 7, 2000............ 550,000
Note payable to stockholders of Sage Engineering Inc.
in connection with the acquisition.The amount is to be
paid in installments commencing February 1, 2001.... 45,662
----------
Less:current portion..................................... 776,095
----------
Long term portion........................................ $ 151,670
</TABLE>
The notes payable bear interest at the prime rate at the date of acquisition.
12
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS
DUE FROM STOCKHOLDER
At June 30, 2000, the Company had amounts due from the majority
stockholder of $140,863. The amounts are due in three annual equal
installments, are non-interest bearing and are due starting
September 30, 2000. 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
was paid in 1999 and an additional payment of $63,000 paid in the
first quarter,2000.
NOTE 7 - STOCK OPTION PLAN
In July 1998, the Board of Directors adopted and approved the 1998
Stock Option Plan (the"Option Plan") under which a total of 500,000
shares of common stock have been reserved for issuance. In June 1999,
the Board of Directors and the stockholders approved an increase in the
number of shares reserved under the Option Plan to bring the total
number of shares reserved to 810,000. Options under this plan may be
granted to employees, officers, and directors and consultants of the
Company. The exercise price of the options is determined by the Board
of Directors, but the exercise price may not be less than 100% of the
fair market value on the date of grant. Options vest over periods not
to exceed 5 years. In June 2000, the Company had 395,000 stock options
outstanding at an exercise price ranging from $6.00 to $6.60 per share,
of which 238,632 stock options were exercisable. The Board of Directors
also approved the grant of an additional 62,500 options to various
employees under the plan.
NOTE 8 - WARRANTS
In July 1998, the Board of Directors approved the grant of 150,000
stock warrants to certain employees of the Company. The warrants
entitle the holder to purchase Company common stock at a price of $5.00
per share. The warrants are exercisable at the earlier of (i) the date
on which the closing price of a share of the Company's common stock as
reported on the Nasdaq Small-Cap Market is greater than $12.00 or (ii)
the date on which the audited consolidated earnings for any fiscal year
are at least twice the base period earnings of $841,041. The warrants
expire upon termination or November 9, 2003.
NOTE 9 - INITIAL PUBLIC OFFERING
On February 23, 1999, the Company completed an initial public offering
that generated net cash of $4,825,000 in the first quarter, 1999.
1,000,000 shares of common stock, which represented 31.125% of the post
offering common stock were sold in the offering. A part of the proceeds
of the offering was used to retire debt in the approximate amount of
$2,150.000.
13
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 10 - LINES OF CREDIT
In the third quarter 1999, the Company entered into a $4,000,000
revolving working capital line of credit facility as part of its
ongoing efforts to ensure appropriate levels of liquidity. At June 30,
2000, this working capital line of credit balance was $1,677,231.
In the third quarter 1999, the Company entered into a $200,000 capital
purchases line of credit facility. This line of credit is used for
equipment purchases of the Company and at the end of one year this
facility will convert to a five year term loan. At June 30, 2000, this
capital purchases line of credit balance was $199,762, included in long
term debt.
In the third quarter 1999, the Company entered into a $350,000 term
loan facility to refinance existing equipment debt. At June 30, 2000,
this term loan facility was unused and available for future use.
In the second quarter 2000, the Company entered into a $500,000
commercial lease line of credit. This line of credit is used for
vehicle financing and at June 30, 2000, this vehicle line of credit was
unused and available for future use.
All of these credit facilities are secured by the assets of the
Company and its subsidiaries and bear interest at the variable prime
rate.
The Company also has a line of credit with Bank of America in the
amount of $500,000. Dickerson Wright and his spouse have personally
guaranteed this line of credit. It is an unsecured note that was due in
July 2000. The note bears interest at the prime rate. This line of
credit is still in place and had a zero outstanding balance since the
end of 1998. The Company does not intend to use this credit facility in
the future.
NOTE 11 - ACQUISTIONS
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 on January 3, 2000. Additionally, the Company will
pay to the sellers cash equal to the collections of accounts receivable
and work in progress during the six months immediately following the
closing date up to a maximum amount of $700,000 of which $150,000 of
this amount was paid on April 3, 2000.
In January 2000, Buena Engineers, Inc., subsidiary of the Company,
entered into an asset purchase agreement with Stewart Environmental,
Inc. to purchase substantially all of its assets for a purchase price
of $60,000, of which $30,000 has been paid thru March 31, 2000.
In January 2000, San Diego Testing Engineers, Inc., a subsidiary of the
Company, purchased substantially all the assets of SAGE Engineering,
Inc. for a total purchase price of approximately $110,000, including
15,000 shares of the Company's common stock.
In February 2000, the Company purchased substantially all of the assets
of Intertek Technical Services, which will operate under the name
Unitek Technical Services, Inc., for a total purchase price of
$1,650,000 in cash which has been paid as of February 22, 2000.
14
<PAGE>
U.S. LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 AND FOR
THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999(UNAUDITED)
NOTE 11 - ACQUISTIONS (CONTINUED)
In June 2000, the Company acquired the fixed assets of Moore
Consulting for a purchase price of $20,000, which was paid on
June 23, 2000.
The above acquisitions were recorded by the Company under the purchase
method of accounting. Goodwill was recorded based on the excess of the
purchase price over the fair value of the assets acquired and is
being amortized over a period not exceeding twenty years.
NOTE 12 - SUBSEQUENT EVENT
On July 7, 2000, the Company paid $499,662 to the previous shareholders
of BTC as payment toward the principal and interest due, for the
acquistion of the stock of BTC. A holdback of $3,433 has been made
until certain provisions of the acquisition agreement are fulfilled.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 and 1999
REVENUE. Revenue for the six months ended June 30, 2000 was
$15,941,958, an increase of 128% over the same period in 1999. The increase was
due equally to growth from internal operations and to acquisitions. The Company
experienced an internal growth rate of approximately 65%, with the remaining 63%
attributed to the expansion of operations through the acquisition of several
engineering consulting services companies in the first and second quarters of
2000.
GROSS PROFIT. Gross profit for the six months ended June 30, 2000 was
$6,966,663, an increase of 103% over the same period in 1999. 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 six months ended June 30, 2000 was $1,425,095, an increase
of 340% over the same period in 1999. The profit increased due to the completion
of five acquisitions in the first and second quarters of 2000, while selling,
general and administrative ("SG&A")expense decreased as a percentage of
revenues. Included in the second quarter SG&A expenses was a $95,000 provision
for 1998 penalties imposed by the IRS. The Company expects a favorable
settlement of this amount before the end of this year.
INTEREST EXPENSE. Interest expense was $127,014 in the six months ended
June 30,2000,an increase of 184% over the same period in 1999. This increase was
due primarily to funding the cost of acquiring five companies in the first and
second quarters of 2000 whereas previously the Company had used approximately
$1,500,000 of the net proceeds from its initial public offering to fund
acqusitions.
NET INCOME. Net income for the six months ended June 30,2000 was
$806,948, an increase of 315% over the same period in 1999. The increase in
net income was primarily due to the inclusion of the results of operations
for five acquisitions made in the first and second quarters of 2000 and a
decrease as a percentage of revenue in SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, the Company's net cash used
in operating activities was $22,375, a decrease of 135% over the same period in
1999, primarily due to the working capital requirements of the Company during
the summer months and several large projects which started in the second
quarter of fiscal 2000.
In the third quarter 1999, the Company entered into a $4,000,000
revolving working capital line of credit facility as part of the Company's
ongoing efforts to ensure appropriate levels of liquidity. At June 30, 2000,
this working capital line of credit balance was $1,677,231, and is included as a
current liability.
In the third quarter 1999, the Company entered into a $200,000 capital
purchases line of credit facility. This line of credit is used for equipment
purchases of the company and at the end of one year this facility will convert
to a five year term loan. At June 30, 2000, this capital purchases line of
credit balance was $199,762, included in long term debt.
In the third quarter 1999, the Company entered into a $350,000 term
loan facility to refinance existing equipment debt. At June 30, 2000, this term
loan facility was unused and available for future use.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In the second quarter 2000, the Company entered into a $500,000
commercial lease line of credit. This line of credit is used for vehicle
financing and at June 30, 2000, this vehicle line of credit was unused and
available for future use.
All of these credit facilities are secured by the assets of the
Company and its subsidiaries and bear interest at the variable prime rate.
The Company also has a line of credit with Bank of America in the
amount of $500,000. Dickerson Wright and his spouse have personally guaranteed
this line of credit. It is an unsecured note that was due in July 2000. The note
bears interest at the prime rate. This line of credit is still in place and has
had a zero outstanding balance since the end of 1998. The Company does not
intend to use this credit facility in the future.
Management believes that its available cash and cash equivalents as
well as cash generated from operations will be sufficient to meet its cash
requirements for at least the next twelve months. The Company's, nevertheless,
is currently negotiating with a number of lenders to secure credit facilities
that can be used to finance additional acquisitions. During the remainder of
2000, the Company intends to actively continue its search for acquisitions in
order to expand our geographical representation and enhance its technical
capabilities.
ACQUISITIONS
In January 2000, the Company entered into a stock purchase agreement to
purchase all the outstanding shares of BTC Laboratories, Inc. for a total
purchase price of $1,200,000 payable for $500,000 in cash, which has been paid
on January 3,2000. Additionally, the Company will pay to the seller cash equal
to the collections of accounts receivable and work in progress during the six
months immediately following the closing date, up to maximum amount of $700,000
of which $150,000 of this amount was paid on April 3, 2000.
In January 2000, Buena Engineers, Inc., a subsidiary of the Company,
entered into an asset purchase agreement with Stewart Environmental, Inc. to
purchase substantially all of the assets of Stewart for a purchase price of
$60,000 of which $30,000 had been paid thru March 31, 2000.
In January 2000, San Diego Testing Engineers, Inc., a subsidiary of the
Company, purchased substantially all the assets of SAGE Engineering, Inc. for a
total purchase price of $3,000 in cash and 15,000 shares of common stock.
In February 2000, the Company purchased assets of Intertek Technical
Services, which operates under the Unitek Technical Services, Inc., for a total
purchase price of $1,650,000 in cash which has been paid as of February 22,2000.
In June 2000, the Company acquired the fixed assets of Moore
Consulting for a purchase price of $20,000 which has been paid on June 23,
2000.
The above acquisitions were recorded by the Company under the
purchase method of accounting. Goodwill was recorded based on the excess of
the purchase price over the fair value of the assets acquired and is being
amortized over a period not exceeding twenty years.
MANAGEMENT INDEBTEDNESS
At June 30, 2000, the Company had amounts due from the majority
stockholder in the amount of $140,863. This amount was evidenced by a
non-interest bearing promissory note due in three equal annual installments
beginning September 30, 2000.
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INFLATION
Inflation does not currently affect our operations, and we do not
expect inflation to affect our operations in the foreseeable future.
BACKLOG
As of June 30, 2000, the Company's backlog has reached approximately $19.4
million. This amount has increased approximately 76% or $8.4 million from $11.0
million at December 31, 1999.
The increase in backlog for the second quarter 2000 can be attributed to the
increase in long term contract awards in the public sector along with an
increase in commercial sector business. Also contributing to this increase is
the ongoing and contracted work associated with the first and second quarter
of fiscal 2000 acquisitions of BTC Laboratories, Intertek Technical Services,
Stewart Environmental, Sage Engineering and Moore Consulting with increased
contract awards noted in the aerospace and communciation business sectors.
YEAR 2000 ISSUE - UPDATE
The Company has completed a comprehensive review of its computer systems to
identify the systems that could be affected by ongoing Year 2000 problems.
Upgrades to systems judged critical to business operations have been
successfully installed. To date, no significant costs have been incurred in
the Company's systems related to the Year 2000.
The Company continues to monitor the impact of Year 2000 on its operations,
and a contingency plan for critical business applications and continuing
project operations is in place in the event unidentified issues cause
business disruptions. The Company also continues to monitor the Year 2000
readiness of its clients, suppliers, subcontractors and vendors.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained
herein, statements contained in this Form 10-QSB may constitute 'forward
looking statements' within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements involve a number of risks, uncertainties
and other factors that could cause actual results to differ materially,
including the Company's failure to continue to develop and market new and
innovative products and services and to keep pace with technological change;
competitive pressures; failure to obtain or protect intellectual property
rights; financial condition or results of operations; quarterly fluctuations
in revenues and volatility of stock prices; the Company's ability to attract
and retain key personnel; currency and customer financing risks; dependence
on certain suppliers; changes in the financial or business condition of the
Company's distributors or resellers; the Company's ability to successfully
manage acquisitions and alliances; legal, political and economic changes and
other risks, uncertainties and factors discussed in the Company's other
filings with the Securities and Exchange Commission, and in materials
incorporated therein by reference.
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PART II
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable
(b) Not applicable
(c) In January 2000, San Diego Testing Engineers, Inc., a subsidiary of
the Company, entered into an asset purchase agreement to purchase substantially
all the assets of SAGE Engineering, Inc. As part of the consideration for this
acquisition, the Company issued 15,000 shares of the Company's common stock to
stockholders in SAGE Engineering, Inc. The Company issued these securities under
the exemption form registration provided by Section 4 (2) of the Securities Act
of 1933.
(d) The Company's registration statement of Form SB-2 was made
effective by the Securities and Exchange Commission of February 23, 1999. We
sold 1,000,000 units, each consisting of one share of common stock, $0.01 par
value per share, and one redeemable warrant to purchase one share of common
stock at an exercise price of $7.80. Our managing underwriters were Cardinal
Capital Management, Inc. and Janda & Garrington LLC. After deducting the
underwriting discounts, commissions and all the offering's expenses, the Company
received approximately $4,275,000 from the offering.
As of August 11, 2000, we have used the net proceeds as described in the table
below.
<TABLE>
<CAPTION>
===============================================================================
Use Amount
-------------------------------------------------------------------------------
<S> <C>
Acquisitions $1,495,000
-------------------------------------------------------------------------------
Repayment of Debt $2,150,000
-------------------------------------------------------------------------------
Working Capital for Operations $ 630,000
===============================================================================
</TABLE>
Item 4. Submission of Matters to a Vote of Security Holders.
On June 3, 2000, the Company's Annual Meeting of Stockholders was held in Red
Bank, New Jersey,for the following purposes:
(a) The following directors were elected to serve one-year terms to
expire at the year 2001 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
===============================================================================
ELECTION OF DIRECTORS FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Dickerson Wright 3,188,469 0 500
-------------------------------------------------------------------------------
Gary Elzweig 3,188,469 0 500
-------------------------------------------------------------------------------
Donald C. Alford 3,188,469 0 500
-------------------------------------------------------------------------------
Mark Baron 3,188,469 0 500
-------------------------------------------------------------------------------
Martin B. Lowenthal 3,188,269 0 700
-------------------------------------------------------------------------------
Joseph Wasilewski 3,188,469 0 500
-------------------------------------------------------------------------------
Thomas H. Chapman 3,188,469 0 500
-------------------------------------------------------------------------------
James L. McCumber 3,188,319 0 650
-------------------------------------------------------------------------------
Robert E. Petersen 3,188,319 0 650
===============================================================================
</TABLE>
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.(Continued)
(b) The Stockholders approved the Company's 1999 Stock Incentive Plan,
as amended, which authorizes the grant of common stock up to 100,000 shares for
award by the Compensation Committee of the Board of Directors.
The total number of votes cast for, against and abstained was 3,178,094; 5,775;
and 5,100 respectively.
Item 5. Other Information
The Board of Directors authorized a stock buyback program for the
repurchase of up to 100,000 shares of the Company's common stock on November 2,
1999. The open market transactions are made from time to time in compliance with
applicable rules and regulations utilizing corporate earnings, and may be
discontinued at any time. Through June 30, 2000, the Company had repurchased
61,065 shares pursuant to this buyback program.
20
<PAGE>
Item 6. Exhibits and Reports Form 8-K
a. Exhibits
27 Financial Data Schedule
(EDGAR version only)
b. Reports on Form 8-K
(1) On April 28, 2000, the Company filed a Form 8-K which
disclosed, under Item 4, that it had engaged Ernst &
Young LLP as its independent auditors for the fiscal
year ending December 31, 2000. The Board of Directors
of the Company decided to change its auditors to
Ernst & Young LLP. There were no outstanding issues
or disagreements with the previous auditors.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
U.S. LABORATORIES INC.
Dated: August 11, 2000 /s/ Dickerson Wright
------------------------
Dickerson Wright, President
Dated: August 11, 2000 /s/ Joseph M. Wasilewski
--------------------------
Joseph M. Wasilewski,
Vice President and Chief Financial Officer
22
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EXHIBIT INDEX
Exhibit Number
--------------
27 Financial Data Schedule
(EDGAR version only)
