---




U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED March 31, 2002 ̈

TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM
 TO





Commission file number 0-25339





U.S. Laboratories Inc.


(Exact name of registrant as specified in its charter)





Delaware (State or other jurisdiction of incorporation or organization)

33-0586167 (I.R.S. Employer Identification No.)





7895 Convoy Court, Suite 18


San Diego, California 92111


(Address of principal executive offices)





858-715-5800


(Registrants telephone number, including area code)





Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 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  ̈





Class

Outstanding as of May 13, 2002Common Stock, $.01 par value per share

4,822,820





---



---




U.S. Laboratories Inc.





Index





PagePart IFinancial InformationItem 1.    Financial StatementsConsolidated Condensed Balance Sheets at March 31, 2002 (unaudited) and December 31, 2001

3Consolidated Condensed Statements of Income For the Three Months ended March 31, 2002 and 2001 (unaudited)

5Consolidated Condensed Statements of Stockholders Equity For the Three Months Ended March 31, 2002 (unaudited)

6Consolidated Condensed Statements of Cash Flows For the Three Months Ended March 31, 2002 and 2001 (unaudited)

7Notes to Consolidated Condensed Financial Statements

9Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations

17Part IIOther InformationItem 5.    Other Information

23Item 6.    Exhibits and Reports on Form 8-K

23Signatures

24




2




---

U.S. LABORATORIES INC. AND SUBSIDIARIES


CONSOLIDATED CONDENSED BALANCE SHEETS


March 31, 2002 (Unaudited) and December 31, 2001





ASSETS


March 31, 2002

December 31, 2001(unaudited)Current assetsCash and cash equivalents

$
1,510,275

$
1,329,622Accounts receivable, net of allowance for doubtful accounts of $549,560 and $546,049, respectively


13,996,640


14,400,067Unbilled receivables


2,663,644


2,012,646Prepaid expenses and other current assets


769,015


503,951Total current assets


18,939,574


18,246,286Furniture and equipment, net of accumulated depreciation of $2,664,681 and $2,578,462, respectively


3,159,103


3,194,595Goodwill and intangibles, net of accumulated amortization of $1,057,842 and $1,026,592, respectively


15,092,762


15,119,540Other assets


467,077


382,854Total assets

$
37,658,516

$
36,943,275





See accompanying notes




3




---

U.S. LABORATORIES INC. AND SUBSIDIARIES


CONSOLIDATED CONDENSED
BALANCE SHEETS (Continued)


March 31, 2002 (Unaudited) and December 31, 2001





LIABILITIES AND STOCKHOLDERS EQUITY


March 31, 2002


December 31, 2001(unaudited)Current liabilitiesNotes payable, current portion

$
4,728,218


$
4,664,568Accounts payable


1,368,307



1,699,742Accrued liabilities


2,798,581



4,896,055Income taxes payable


451,084



137,450Total current liabilities


9,346,190



11,397,815Deferred income taxes






204,212Notes payable, net of current portion


4,660,597



3,347,012Total liabilities


14,006,787



14,949,039Stockholders equityPreferred stock, $.01 par value 5,000,000 shares authorized none issued and outstanding






Common stock, $.01 par value 50,000,000 shares authorized 4,822,820 and 4,814,855 shares issued and outstanding, respectively


48,229



48,150Treasury stock, at cost, none and 96,735 shares, respectively






(644,454
)Additional paid-in-capital


17,031,696



16,802,298Note receivable from stockholder


(140,863
)


(140,863
)Retained earnings


6,712,667



5,929,105Total stockholders equity


23,651,729



21,994,236Total liabilities and stockholders equity

$
37,658,516


$
36,943,275





See accompanying notes




4




---

U.S. LABORATORIES INC. AND SUBSIDIARIES


CONSOLIDATED CONDENSED STATEMENTS OF INCOME


For the Three Months Ended March 31, 2002 and 2001 (unaudited)





For the Three Months Ended March 31,2002


2001(unaudited)


(unaudited)Revenue

$
16,042,643


$
10,527,195Cost of goods sold


9,610,837



6,119,648Gross profit


6,431,806



4,407,547Selling, general and administrative expenses


4,982,107



3,559,394Income from operations


1,449,699



848,153Other income (expense)Interest expense


(136,451
)


(72,630
)Interest income


22



448Other, net


8,767



6,179Total other income (expense)


(127,662
)


(66,003
)Income before provision for income taxes


1,322,037



782,150Provision for income taxes


538,475



312,883Net income

$
783,562


$
469,267Earnings per share:Basic

$
.17


$
.14Diluted

$
.16


$
.14Weighted average shares outstanding:Basic


4,737,670



3,301,065Diluted


4,987,700



3,340,920





See accompanying notes




5




---

U.S. LABORATORIES INC. AND SUBSIDIARIES


CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY


For the Three Months Ended March 31, 2002 (unaudited)





Common Stock


Treasury Stock


Additional Paid-In Capital


Note Receivable From Stockholder


Retained Earnings

TotalShares


AmountBalance, December 31, 2001

4,814,855


$
48,150


$
(644,454
)

$
16,802,298


$
(140,863
)

$
5,929,105

$
21,994,236Exercise of common stock options (and related tax benefit of $223,680)

88,200



881







782,000










782,881Redemption of common stock warrants (net of costs)

16,500



165







90,885










91,050Retirement of 96,735 shares of treasury stock, at cost

(96,735
)


(967
)


644,454



(643,487
)









Net income





















783,562


783,562Balance, March 31, 2002

4,822,820


$
48,229






$
17,031,696


$
(140,863
)

$
6,712,667

$
23,651,729





See accompanying notes




6




---

U.S. LABORATORIES INC. AND SUBSIDIARIES


CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


For the Three Months Ended March 31, 2002 and 2001 (unaudited)





For the Three Months Ended March 31,2002


2001(unaudited)


(unaudited)Cash flows from operating activitiesNet income

$
783,562


$
469,267Adjustments to reconcile net income to net cash flows from operating activities:Amortization


31,250



52,050Depreciation


239,333



164,763Deferred Income Taxes


(204,212
)


Gain (Loss) on sale of furniture and equipment


650



(6,983
)Changes in assets and liabilities, excluding the effects of businesses acquired:Accounts receivable


403,427



(537,491
)Unbilled receivables


(650,998
)


(91,662
)Prepaid expenses


(265,064
)


(168,872
)Other assets


(88,695
)


13,759Accounts payable


(331,435
)


32,104Accrued liabilities


(2,097,474
)


6,466Income tax payable


537,314



270,538Net cash (used in) provided by operating activities


(1,642,342
)


203,939Cash flows from investing activitiesPurchase of furniture and equipment, net of disposals


(204,491
)


(214,128
)Acquisitions of businesses, net of cash acquired






(162,338
)Net cash used in investing activities


(204,491
)


(376,466
)





See accompanying notes




7




---

U .S. LABORATORIES INC. AND SUBSIDIARIES


CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS


For the Three Months Ended March 31, 2002 and 2001 (unaudited)





For the Three Months Ended March 31,2002

2001(unaudited)

(unaudited)Cash flows from financing activitiesIncrease in bank overdraft

$


$
274,387Borrowings (repayments) on notes payable, net


1,377,235


(379,279
)Issuances of common stock, net


650,251


Net cash provided by (used in) financing activities


2,027,486


(104,892
)Net increase (decrease) in cash and cash equivalents


180,653


(277,419
)Cash and cash equivalents, beginning of period


1,329,622


460,801Cash and cash equivalents, end of period

$
1,510,275

$
183,382Supplemental disclosures of cash flow informationInterest paid

$
136,451

$
72,630Income taxes paid

$
800,747

$
75,359





Supplemental disclosure of non-cash information





In the first quarter, 2002 employee stock options were exercised to purchase common stock of the Company, which allowed the Company to reduce its income
taxes payable, which is a current liability. The Company recorded $223,680 in the first quarter, 2002 for this stock option income tax benefit.





See accompanying notes




8




---




U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS





March 31, 2002 (unaudited)





NOTE 1ORGANIZATION AND BUSINESS





U.S.
Laboratories Inc. and its subsidiaries (collectively the Company) offer engineering and design services, project management, construction quality control, structural engineering and design, environmental engineering and inspection and
testing to construction companies and various government agencies. The Company operates throughout the United States with facilities in California, Florida, Illinois, Nevada, New Jersey, Pennsylvania, Texas, Virginia and Washington. Readers of this
report should refer to additional information included in the annual report filed on Form 10K-SB for the year ended December 31, 2001.





NOTE
2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





GeneralInterim Unaudited Financial Information





As contemplated by the rules and regulations of the Securities and Exchange Commission the accompanying financial statements and footnotes
have been condensed and therefore do not contain all disclosures required by generally accepted accounting principals. 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.





Unbilled Receivables





Unbilled receivables represent amounts earned under contracts in progress but not billable at the respective balance sheet dates. The Company anticipates that substantially all of such
unbilled amounts will be billed and collected over the next twelve months.





Revenue Recognition





Revenue from services performed, including fixed-price and unit-price contracts, is recorded as earned over the duration of the contract, which
approximates the percentage of completion method. At the time losses on a contract become known, the entire amount of the estimated loss is recognized in the financial statements.




9




---



U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Net Income Per Share





For the three months ended March 31, 2001 and 2002, 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 additional common shares
had been issued and were dilutive.





Recently Issued Accounting Pronouncements





In June 1998, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No.133,
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138; this pronouncement is effective for financial statements with fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The adoption of SFAS No. 133, as amended did not effect the Companys
interim financial position or results of operations.





In June 2001, the FASB issued SFAS No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives.





The Company has applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the goodwill nonamortization provisions of the statement resulted in
an increase in net income of approximately $63,944 ($.02 per share) after taxes for the first quarter, 2002 based on current diluted weighted average outstanding shares. The Company has performed the first of the required impairment tests of
goodwill as of January 1, 2002 and determined that there was no effect on the earnings and financial position of the Company at that date.







10




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U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





In June 2001, the FASB issued SFAS No. 143 Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will implement SFAS No. 143 in the first quarter of 2003 and has not yet made a final determination of its impact on
the financial statements.





In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment of Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for impairment or disposal of long-lived assets. It supersedes FASB SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and supersedes certain provisions of APB Opinion No. 30 Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions and amends Accounting Research Bulletin No. 51 Consolidated Financial Statements. The Company has implemented SFAS No. 144 for the first quarter of 2002 and has determined that there is no impact on the financial statements.





Reclassifications





The Company has reclassified certain prior year financial statement accounts to conform to the current year presentation.





NOTE 3FURNITURE AND EQUIPMENT





Furniture and equipment consisted of the following:





March 31, 2002

December 31, 2001Automobiles and trucks

$
1,618,498

$
1,580,886Furniture and fixtures


568,844


577,110Office hardware and software


1,214,120


1,239,981Machinery and equipment


2,018,197


1,977,081Leasehold improvements


404,125


397,9995,823,784


5,773,057Less: accumulated depreciation


2,664,681


2,578,462Total

$
3,159,103

$
3,194,595







11




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U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 4NOTES PAYABLE





Notes payable, which includes principal and accrued interest, consists of the following:





March 31, 2002

December 31, 2001Secured credit facilities, with monthly payments including interest at variable prime, and fixed rates ranging from 7%
to 14%

$
5,006,082

$
3,613,448Notes payable due in installments, with interest ranging from 7% to 10%


4,382,733


4,398,1329,388,815


8,011,580Less current portion


4,728,218


4,664,568Notes payable, net of current portion

$
4,660,547

$
3,347,012





The Company has a line of credit facility, totaling $6,000,000 at March 31, 2002
and December 31, 2001, which expires on May 31, 2003. The available unused balance of this facility at March 31, 2002 was $2,545,000 and $3,535,000 at December 31, 2001. This credit facility is used for working capital purposes and is secured by
assets of the Company.





The credit agreement requires that the Company maintain various financial and other covenants. At March
31, 2002 the Company was in compliance with its required covenants.





Additionally, the Company has obtained a $750,000 line of
credit in the first quarter, 2002 for vehicle financing and capital purchases and the available unused balance at March 31, 2002 was $750,000.





The notes payable due in installments, arose from the acquisitions of businesses.




12




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U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 4NOTES PAYABLE (Continued)





At March 31, 2002, future maturities of notes payable are as follows:





Quarter Ending March 31,2003

$
4,728,2182004


3,964,6592005


383,0872006 & thereafter


312,851Total

$
9,388,815





NOTE 5RELATED PARTY TRANSACTIONS





Due from Stockholder





At March 31, 2002 and December 31,
2001 the Company had amounts due from the largest stockholder of $140,863. The total amount is due on September 20, 2005 in one payment and is non-interest bearing. The amount is shown in stockholders equity.





NOTE 6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 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 5 years. At March 31, 2002, the Company had 472,100 stock options outstanding at an exercise
price ranging from $6.00 to $15.00 per share, of which 379,462 stock options were exercisable.







13




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U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 7WARRANTS





In 1998, the Board of Directors approved the grant of 135,000 stock warrants to certain employees of the Company. The warrants entitled the holder to purchase, Company common stock at a
price of $6.00 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 Nasdaq 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 expired to the extent not previously exercised on November 1, 2001. In the second and fourth quarters of 2001, 125,000 of the outstanding
warrants were exercised. The remaining 10,000 warrants expired on November 1, 2001.





The Company has granted warrants to
purchase shares of common stock to consultants. As of March 31, 2002 consultants held warrants to purchase a total of 59,535 shares of common stock. Deferred compensation of $249,950 related to these consultant warrants was amortized to expense
in accordance with FASB Interpretation No. 28 through March 31, 2001.





NOTE 8SEGMENT DISCLOSURE





The Company has adopted SFAS No. 131  Disclosure about Segments of an Enterprise and Related Information. The Companys business is to
provide professional and technical services. The Company provides its services from offices located primarily throughout the United States. In accordance with the provisions of SFAS 131, the Company has concluded that its operations may be
aggregated into one reportable segment for purposes of this disclosure.





NOTE 9CONTINGENT MATTERS





The Company is involved in various legal and claim proceedings which are incidental to its business, and in the Companys opinion will not have a
material adverse effect upon the Companys financial position.







14




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U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 10STOCKHOLDERS EQUITY





On September 13, 2001, the Companys Board of Directors authorized a stock repurchase program. The program allows the Company to repurchase up to $1,500,000 of common stock from
time to time for general corporate purposes. As of March 31, 2002, 57,800 shares have been repurchased at a total cost of $487,031 pursuant to this buyback program.





Effective January 1, 2002, the Companys Board of Directors authorized the Company to retire all 96,735 shares of its common stock previously held in treasury.





NOTE 11EARNINGS PER SHARE DATA





The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.





Three Months Ended March 31,2002

2001Basic:Net Income

$
783,562

$
469,267Weighted Average shares outstanding


4,737,670


3,301,065Basic EPS


.17


.14Diluted:Net Income

$
783,562

$
469,267Weighted Average shares outstanding


4,737,670


3,301,065Net effect of dilutive stock options & warrantsbased onthe treasury stock method


250,030


39,855Totals


4,987,700


3,340,920Diluted EPS


.16


.14





During the first quarter of 2002, 16,500 warrants to consultants and underwriters
were exercised at prices of $3.875 to $4.50.





During the first quarter of 2002, employees exercised stock options to acquire
88,200 shares at an average exercise price of $6.00 to $6.60 per share.







15




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U.S. LABORATORIES INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)





March 31, 2002 (unaudited)







NOTE 12Subsequent Event





As of May 1, 2002, the Company purchased 100% of the common stock of Terra-Mar, Inc. for a purchase price of $7,500,000 and an $875,000 note relating to short term receivable
collections. The acquisition price is payable in cash, promissory notes and common stock of U.S. Laboratories Inc. This acquisition will be recorded by the Company under the purchase method of accounting in the second quarter, 2002.







16




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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





Financial Condition and Results of Operations





Critical Accounting Policies.    The
Companys discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States. The Companys significant accounting policies are described in footnotes accompanying the consolidated financial statements. The preparation of the consolidated financial statements requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management continually evaluates its estimates that are deemed critical to the determination of its
operating results. These include estimates relating to unbilled receivables, bad debt expense, the valuation of certain assets, and accrued liabilities. Estimates are based on information available as of the date of the financial statements and,
accordingly, actual results could differ from these estimates.





In accordance with recent Securities and Exchange Commission
guidance, those material accounting policies that we believe are the most critical to an investors understanding of our financial results and condition and require complex management judgment have been expanded and are discussed below.
Information regarding our other accounting policies is included in our Annual Report on Form 10-KSB for the year ended December 31, 2001.





Three months ended March 31, 2002 and 2001.





Revenue.    We
often provide services for our major clients under arrangements involving continuing service agreements. These arrangements are usually on a time-andmaterials, costs-plus-fixed-fee, or a fixed-price basis, and are usually terminable on advance
notice by either party. Approximately 65% of our projects are on a time-and-materials basis, under which we bill our clients at fixed hourly rates plus expenses for subcontracted services and materials used. An additional 30% of our work is
performed under cost-plus-fixed-fee agreements, under which we and the client agreed to a budgeted contract, with the client covering overruns and receiving credit 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 5% of our business.







17




---




Financial Condition and Results of Operations (continued)





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 on client dissatisfaction and 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.





Contract revenues are
recognized as services are performed over the duration of the contract, which approximates the percentage of completion method on a cost-to-cost basis. This method of revenue recognition requires the Company to prepare estimates of costs at the
beginning of projects, which are then revised as changes to project scope, timing etc. occur. In making such estimates, judgments are requires to elevate contingencies such as potential variances in schedule, the cost of labor and material,
liability claims, contract disputes or achievement of contractual performance standards. Changes in such estimates, if any, are recognized in the period they are determined.





Goodwill.    Since 1993, we have implemented a strategy of establishing a national infrastructure of branch office locations and diversifying our service
offerings. Acquisitions have been and will continue to be a key element of our growth strategy. We plan to apply our expertise in assimilating acquired companies personnel and branch operations onto our existing infrastructure and expanding
acquired companies service and product offerings to existing clients.





In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 supercedes Accounting Principles Board Opinion No. 17 and addresses the financial
accounting and reporting standards for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 requires the goodwill be separately disclosed from other intangible assets in the balance sheet, and no longer be amortized. It
also requires that goodwill and other intangible assets be evaluated for impairment at least annually. We adopted SFAS 142 on June 30, 2001 and ceased to amortize goodwill for acquisitions made on June 30, 2001 or thereafter.





As part of our adoption of SFAS 142, we completed the initial impairment tests during the first quarter of fiscal year 2002, and these tests
resulted in no impairment.





Revenue.    Revenues for the three months ended March 31, 2002 were
$16,042,643 versus $10,527,195 for the same three month period ending March 31, 2001 for an increase of 52% and the highest for any quarter in the Companys history. The Company increased its revenues through internal growth, the result of
prior year acquisitions and an influx of major contracts primarily in the California, Illinois and Texas operations of the Company.




18




---




Financial Condition and Results of Operations (continued)





Gross Profit.Gross profit for the three months ended March 31, 2002 was $6,431,806 versus $4,407,547, an increase of 46% over the same period in 2001.
This increase in gross profit was due primarily to the increase in revenues described above. The gross profit as a percentage of revenues was 40% for the first quarter 2002 as compared to 42% for the first quarter 2001.





The decrease in our overall gross profit percentage between periods is partly attributable to Unitek Energy Services Group, Inc., which was started in
August 2001, and which negatively impacted the first quarter results as this is a start up operation in the energy inspection business and had a gross profit of approximately 24% in the first quarter, 2002.





Selling General and Administrative (SG&A).    For the three months ended March 31, 2002, SG&A expenses for the
Company were $4,982,107 versus $3,559,394, over the comparable period ending March 31, 2001. This increase is primarily due to increased costs for the mergers and acquisition department and additional management personnel and related expenses
required to manage the additional acquisitions made in previous years and for the overhead expenses attributable to the start-up of the new business, Unitek Energy Services Group, Inc. As a percentage of revenues, the SG&A expenses declined to
31% for the first quarter 2002 as compared to 34 % for the same period last year.





For the three months ended March 31, 2002,
the Company recorded amortization of intangible assets of $31,250 and during the three months ended March 31, 2001, the Company recorded goodwill amortization of $61,924, which are included in SG&A expense. Intangible assets are being amortized
over a period not exceeding four years whereas goodwill was amortized over a period up to twenty years in 2001.





Interest
Expense.    Interest expense for the three months ended March 31, 2002, increased to $136,451 versus $72,630 over the same period in 2001. Interest expense increased primarily to accruing interest expense of $65,000 on the
acquisition notes related to the purchase of Robert W. Hunt Company in the third quarter of 2001.





Income Before Provision
for Income Taxes.    Income before provision for income taxes for the three months ended March 31, 2002 was $1,322,044, versus $782,150 or an increase of 69% over the same period in 2001. The profit increased primarily due to
acquisitions in prior years, while selling, general and administrative (SG&A) expenses decreased as a percentage of revenues.




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Financial Condition and Results of Operations (continued)





Provision for Income Taxes.    The combined effective tax rate for the three months ending March 31, 2002 was 41% versus 40% for the three months ending
March 31, 2001. The Company will obtain a tax benefit due to the exercise of employee stock options in the first quarter, 2002 and this is reflected in the tax rate.





Net Income.    Net income for the three months ended March 31, 2002 was $783,562 and $469,267, in the comparable period last year for an increase of 67%. The
increase in net income was primarily due to the inclusion of the results of accretive acquisitions made in prior years, internal growth and the decrease as a percentage of revenue in SG&A expenses. This decrease is due primarily to the
decentralized management approach of the Companys operations, which was also a contributing factor to the increase in net income.





Liquidity and
Capital Resources





During the three months ended March 31, 2002, the Companys net cash used in operating activities
was $1,642,342, a decrease of $1,846,281 over the same period in 2001, primarily due to the decrease in accrued liabilities and an increase in accounts receivable collections at the end of the first quarter 2002. Accrued liabilities decreased due to
the timing and payment of these liabilities. Accounts receivable days sales outstanding (DSO) at March 31, 2002 decreased to 79 days from 100 days at December 31, 2001 for an improvement of 21 days.





The Company has a $6,000,000 revolving working capital line of credit facility as part of the Companys ongoing efforts to ensure appropriate
levels of liquidity. At March 31, 2002, this working capital line of credit balance was $3,455,000. In the second quarter of 2002 the due date of this line of credit was extended to May 31, 2004, and the available credit was increased to
$12,000,000.





In the first quarter 2002, the Company entered into a $750,000 capital purchases line of credit. This line of
credit is used for vehicle, computer and test equipment purchases of the Company and was available at March 31, 2002.





These
credit facilities are secured by the assets of the Company and its subsidiaries and bear interest based at the variable prime rate minus .25% except for the $750,000 capital purchase line of credit, which bears interest at fixed rates of 6.9% to
7.6%.





Management believes that its available cash and cash equivalents as well as cash generated from operations will be
sufficient to meet its cash requirements for at least the next twelve months. The Company, nevertheless, is currently negotiating with a number of lenders to secure credit facilities that can be used to finance additional acquisitions and equipment
purchases.




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Financial Condition and Results of Operations (continued)





During the remainder of 2002, the Company intends to actively continue its search for accretive acquisitions in order to expand its geographical representation and enhance its
technical capabilities when it is economic to do so. Additionally, the Company is continuing to pursue start up opportunities in the energy inspection business, which may require additional capital expenditure funding and start up capital.





As of March 31, 2002 total assets of the Company were $37,658,516 as compared to $36,943,275 as of December 31, 2001. Total
stockholders equity is $23,651,729 as of March 31, 2002 as compared to $21,994,236 as of December 31, 2001 for an increase of $1,657,493. This increase was due to the continuing profitability of the Company, the exercise of stock options for company
stock and the retirement of treasury shares in the first quarter, 2002.





Working capital increased to $9,593,384 at March 31,
2002 from $6,848,471 at December 31, 2001 for an improvement of $2,744,913.





On September 17, 2001, the Companys Board of
Directors authorized a stock repurchase program. The program allows the Company to repurchase up to $1,500,000 of common stock from time to time for general corporate purposes. As of March 31, 2002, 57,800 shares have been repurchased at a total
cost of $487,031 for this buyback program. Effective January 1, 2002 the Companys Board of Directors authorized the Company to retire all 96,735 shares previously held in treasury.





Management Indebtedness





At March 31, 2002 the Company had amounts due from
the largest stockholder of $140,863. The total amount is due on September 20, 2005 in one payment, is non interest bearing and is included in stockholders equity.





Inflation





Currently, inflation does not significantly affect our operations, and we do
not expect inflation to affect our operations materially in the foreseeable future.





Backlog





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. The backlog increased to $52.1 million as of March 31, 2002 from $29.9 million at the end of the first quarter, 2001,
an increase of $22.2 million or 74% from the period ending March 31, 2001 due to internal growth and prior acquisitions.




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Financial Condition and Results of Operations (continued)





Forward Looking and Cautionary Statements





This Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Form 10-Q are forward looking. Statements containing words such as
anticipates, believes, expects, intends and similar expressions are generally forward-looking statements. These statements reflect managements current expectations and involve a number of risks
and uncertainties. Our actual results may differ materially from managements expectations for a variety of reasons, including, among others, any failure by us to identify suitable targets for acquisition or to integrate acquired companies
effectively into our business; professional liability for structural failure, property damage, personal injury or economic loss; failure by us to properly establish prices on fixed-price contracts; competitive pressures; our ability to attract and
retain key personnel; and other risks detailed from time to time in reports filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the year ended December 31, 2001.




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Part II





Item 5.    Other Information





The Board of Directors authorized a stock buyback
program for the repurchase of up to $1,500,000 of the Companys common stock on September 17, 2001. 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 March 31, 2002, the Company had repurchased a total of 57,800 shares for a total cost of $487,031 pursuant to this buyback program.





Effective January 1, 2002 the Companys Board of Directors authorized the Company to retire all 96,735 shares previously held in treasury.





Item 6.    Exhibits and Reports Form 8-K





a.    Exhibits





10.1 Amendment No. 2 dated April 29, 2002, between Bank of America, N.A. and U.S. Laboratories Inc.





b.    Report on Form 8-K





None







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SIGNATURES





In accordance with the requirements of the Securities Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.





U.S. LABORATORIES INC.By:

/s/    DICKERSON WRIGHTDickerson Wright , President


Dated: May 14, 2002








By:

/s/    JOSEPH M. WASILEWSKIJoseph M. WasilewskiName, Vice President and Chief Financial
Officer


Dated: May 14, 2002




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