Document/Exhibit Description Pages Size
1: 10-K U.S. Technologies, Inc. 62 373K
2: EX-2.5 Amendment to the Stock Exchange Agreement 9 34K
3: EX-4.5 Amended Certificate of Designations 2± 10K
4: EX-4.6 Waiver Agreement 2 15K
6: EX-10.11 Industry Work Program Agreement 12 38K
7: EX-10.13 Lease Agreement 13 49K
8: EX-10.18 Industry Work Program Agreement 14 47K
9: EX-10.20 Stock Purchase Agreement 39 178K
5: EX-10.8 1999 Stock Option Plan, as Amended 9 42K
10: EX-21.1 Subsidiaries of the Registrant 1 6K
11: EX-23.1 Consent of Bdo Seidman, LLP 1 7K
12: EX-27.1 Financial Data Schedule 1 10K
Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-15960
U.S. TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter.)
State of Delaware 73-1284747
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 Pennsylvania Avenue, Suite 675
Washington, DC 20006
(Address of principal executive offices.)
Registrant's telephone number, including area code: (202) 466-2100
-----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant at March 20, 2000 was approximately $ 72,582,000.
The number of shares outstanding of the Registrant's Common Stock, par value
$0.02 per share, at March 20, 2000 was 29,444,278 shares.
Table of Contents
[Enlarge/Download Table]
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management 51
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 55
Signatures 56
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PART I
ITEM 1. BUSINESS
OVERVIEW
U.S. Technologies Inc. (the "Company"), is engaged directly and indirectly
through its wholly owned subsidiary, Labor-to-Industry Inc. ("LTI"), in the
operation of industrial facilities located within both private and state
prisons, which are staffed principally with inmate labor. These prison-based
operations are conducted under the guidelines of the 1979 Prison Industry
Enhancement (PIE) program. On February 22, 2000, the Company announced that it
reached a definitive agreement to acquire E2Enet, Inc. ("E2E"), a privately held
Internet incubator company, and on April 5, 2000, this agreement was amended so
the acquisition could qualify as a tax-free transaction. E2E has made early
stage investments in several development stage business-to-business (B2B) and
business-to-consumer (B2C) e-commerce businesses. The Company's acquisition of
E2E is expected to close in April once all closing conditions have been
satisfied.
The Company believes that its acquisition of E2E will provide the Company with
a platform to establish a position in the growing e-commerce industry. The
Company believes that the completion of the E2E Acquisition will enhance the
Company's opportunities for both investment in and creative development of
promising early stage B2B and B2C e-commerce ventures. Further investments in
this industry are intended primarily to comprise controlled subsidiaries
engaged in the development or operation of B2B business. The Company also is in
the process of expanding its management team to include technology and
e-commerce expertise.
E2E ACQUISITION
The terms and conditions for the Company's acquisition of E2E (the "E2E
Acquisition") are contained in the Stock Exchange Agreement, dated as of
February 21, 2000, entered into by the Company, E2E and certain stockholders of
E2E, as amended (the "E2E Acquisition Agreement"). The Company initially agreed
to acquire E2E by purchasing all of E2E's outstanding stock in exchange for
shares of a Series B Mandatorily Convertible Preferred Stock, par value $0.02
per share ("Series B Preferred Stock"), to be newly created by the Company.
However, in late March 2000, it became clear that if the E2E Acquisition
remained structured as a share exchange, the transaction would not qualify for
treatment as a tax-free exchange because certain stockholders of E2E would
receive consideration other than voting stock of the Company. To preserve the
tax-free nature of the E2E Acquisition, the Company, E2E and certain
stockholders of E2E agreed on April 5, 2000 to change the structure of the E2E
Acquisition from a share exchange to a merger between E2E and a wholly-owned
subsidiary of the Company, U.S. Technologies Acquisition Sub, Inc. ("U.S.
Technologies Acquisition"). Accordingly, the Company proposes to acquire E2E by
causing U.S. Technologies Acquisition to merge with and into E2E. U.S.
Technologies Acquisition will be the surviving corporation of this merger, and
upon the consummation of this merger, U.S. Technologies Acquisition will change
its name to E2E Net, Inc. As a result, upon the completion of the E2E
Acquisition, E2E will become a wholly owned subsidiary of the Company.
When the E2E Acquisition closes, E2E's stockholders will be issued shares of
Series B Preferred Stock, which will have a stated liquidation preference
aggregating approximately $11,200,000, and certain minority stockholders of E2E
will also receive options to purchase shares of the Company's common stock, par
value $0.02 ("Common Stock"). Upon their mandatory conversion as described
below, these shares of Series B Preferred Stock will be converted into
approximately 56,000,000 shares of Common Stock.
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the
closing of the E2E Acquisition. To raise these funds, the Company recently
commenced the private placement sale of $1,250,000 of additional shares of its
Series A Convertible Preferred Stock, par value $0.02 (the "Series A Preferred
Stock"), to USV Partners, LLC ("USV"), a limited liability company controlled
by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer,
which is the Company's largest shareholder, and at least $5,000,000 and up to
$8,750,000 of its newly created Series C Mandatorily Convertible Preferred
Stock, par value $0.02 ("Series C Preferred Stock"), to accredited investors.
The Company has thus far received subscriptions or indications of interest for
the purchase of approximately $5,200,000
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of its Series C Preferred Stock, of which approximately $3,000,000 consists of
subscriptions by USV. In connection with the private placements of the Series A
Preferred Stock and the Series C Preferred Stock, the Company has received to
date subscriptions for a total of approximately $6,450,000. The Series C
Preferred Stock would be convertible into shares of Common Stock at a conversion
price per share ranging from $0.90 to $2.00, which will be determined based on
the closing sale price for a share of Common Stock on the closing date of the
E2E Acquisition, as quoted on the OTC Bulletin Board. The proceeds of these
offerings will be used primarily to finance additional investments in new and
existing Internet businesses that focus on B2B and B2C e-commerce, the payment
of costs incurred and liabilities assumed in connection with the E2E Acquisition
and related business transactions and ongoing working capital needs.
The Company intends, and is required by the E2E Acquisition Agreement to call a
meeting of its stockholders for the purpose of amending the Company's Restated
Certificate of Incorporation. The proposed amendment (the "Charter Amendment")
will increase the number of shares of Common Stock the Company is authorized to
issue to an amount sufficient to permit the conversion to Common Stock of all
of the Company's then-outstanding shares of all of its authorized and
designated series of convertible preferred stock, including the Company's
Series A Preferred Stock, the Series B Preferred Stock to be issued to E2E's
stockholders, and the Series C Preferred Stock. In addition to authorizing a
sufficient number of shares of Common Stock to permit conversion to Common
Stock of all of the Company's outstanding shares of convertible preferred
stock, the Charter Amendment's proposed increase to the number of shares the
Company is authorized to issue will also include an amount sufficient to permit
the conversion to Common Stock of any other then-outstanding securities or
options, which are convertible into or otherwise permit the holder thereof to
purchase or otherwise receive shares of Common Stock. Upon the acceptance of
the Charter Amendment by the Secretary of State of the State of Delaware, the
Series B Preferred Stock and the Series C Preferred Stock will automatically be
converted into shares of Common Stock. USV has also indicated its intention to
convert all of its shares of Series A Preferred Stock to Common Stock at that
time.
The Company also announced that it will expand its Board of Directors in
connection with the completion of the E2E Acquisition. The new directors will
also stand for election at the Company's next annual meeting, which also is
when the Company expects to present the Charter Amendment for Stockholder
approval. These new directors will be:
- General Alexander M. Haig, Jr., former Secretary of State and
White House Chief of Staff;
- The Honorable George J. Mitchell, former Senator from Maine
and Senate Majority Leader;
- The Honorable William H. Webster, former Director of both the
FBI and CIA;
- Rick Rickersten, partner at Thayer Capital, a leading
investment management firm headquartered in Washington, D.C.;
- Hal Wilson and Peter Schiff, Managing Directors of Northwood
Ventures LLC and Northwood Capital Partners LLC, venture
capital investment firms headquartered in New York; and
- Arthur Maxwell, President of Affordable Interior Systems,
Inc., one of the 25 largest commercial furniture
manufacturers in the United States.
E2E has various interests in several development stage Internet e-commerce
companies. These portfolio companies principally include:
- Buyline.net, Inc. ("Buyline"). Buyline is a developer of B2B
e-commerce applications, and is developing a proprietary
Internet software program designed to be a universal platform
for entry-level B2B e-commerce, linking buyers and sellers.
Buyline's application for RFP/RFQ technology (Request for
Proposal/Request for Quotation) will be used in a full range
of on-line advertising, on Internet based directories, and in
commercial web sites.
- VIPRO Corporation ("Vipro"). Vipro is an Internet surety
company, which provides repair guarantees against viruses
that harm computers. The Company has e-commerce relationships
with
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a leading Internet utility company, a credit card
association, one of the largest warranty claims
administrators in the world and over 170 Internet service
providers.
- Urban Box Office Network, Inc. ("UBO"). UBO is a developer of
networked multi-media web sites that will provide e-commerce
services to participants interested in urban culture,
information, entertainment and products.
- OneMade, Inc. ("OneMade"). OneMade is a developer of an
e-commerce community that will serve participants in the
arts, crafts, and hobby industries. OneMade intends to
connect wholesalers, retailers, consumers and artists in
these fields.
- bluemercury, Inc. ("bluemercury"). bluemercury operates an
e-commerce site for upscale cosmetic products and
accessories. It intends to pursue a "clicks and bricks"
strategy by also acquiring high-end cosmetic specialty
retailers.
- MEI Software Systems, Inc. ("MEI"). MEI provides customized
software systems to manage the databases of trade
associations, professional associations, fund-raising
organizations and chambers of commerce.
The Company intends to restructure some of E2E's investments in its portfolio
companies and provide these entities with additional working capital to
stimulate their further growth and expansion. E2E's initial investment in
Buyline will be restructured and increased so that Buyline becomes a controlled
operating subsidiary. On February 28, 2000, Buyline and the Company entered into
an Agreement in Principle (the "Buyline Agreement"), which provides that E2E
will invest $3,000,000 in Buyline and will receive in exchange shares of
Buyline's common stock. This investment will consist of (1) the conversion of
E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment
of in kind services already rendered, and (3) an additional $1,000,000 cash
investment. In addition, the two principal stockholders and creditors of E2E
will each invest $250,000 in Buyline. Simultaneous with entering into the
Buyline Agreement, the Company hired a technology executive who will become
Buyline's President and Chief Executive Officer.
The Company presently expects to complete definitive documentation for, and to
complete, the Buyline restructuring shortly after closing the E2E Acquisition.
Upon the consummation of the transactions contemplated by the Buyline Agreement,
the Company, through E2E, will be the controlling shareholder of Buyline, and
will designate and supervise the Buyline management team.
Also, on March 13, 2000, the Company reached an agreement with Vipro to invest
directly or indirectly through E2E an additional $1,000,000 in Vipro, on or
before April 12, 2000, in exchange for additional equity in the form of shares
of Vipro's Series B Convertible Preferred Stock. On the same day, one of the
principal creditors and stockholders of E2E that will become a stockholder of
the Company upon the completion of the E2E Acquisition invested $1,000,000 in
Vipro on terms identical to the Company's pending investment.
E2E has not been actively involved in the development of its portfolio
companies' business strategies, operations and management teams. Many of these
portfolio companies are now largely supported by later stage investors and
managed by executive groups independent of E2E. With the exception of Buyline,
it is anticipated that E2E will retain its minority equity position in these
original portfolio companies. It is anticipated that in the future the Company
principally will follow the investment precedent established by its proposed
restructuring of Buyline by seeking ownership positions, voting interests and
management roles in new portfolio companies that provide the Company, through
E2E, operating control of such portfolio company.
Further information about E2E, its investments in the existing portfolio
companies and the restructuring of Buyline will be included in future reports
by the Company after these transactions are complete. The proxy materials for
the Company's meeting of stockholders at which the Charter Amendment will be
presented for approval by holders of the Company's Common Stock and Series A
Preferred Stock (the terms of the Series B and Series C Preferred Stock do not
permit them to vote on this proposal, but otherwise permit them to vote as if
already converted to Common Stock) will provide both explanatory and financial
information.
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OUTSOURCING OPERATIONS
The Company is an "outsourcing company" soliciting manufacturing, assembly,
repair, kitting and fulfillment services from Fortune 1000 and other select
businesses. The Company performs its services utilizing prison labor under the
Prison Industry Enhancement Program ("PIE"). Congress created the PIE program
in 1979 to encourage states and local units of government to establish
employment opportunities for prisoners that approximate private sector work
opportunities. The program is designed to place inmates in a realistic working
environment, pay them the local prevailing wage for similar work, and enable
them to acquire marketable skills to increase their potential for successful
rehabilitation and meaningful employment upon release. The PIE Program has two
primary objectives:
To generate products and services that enable prisoners to make a
contribution to society, help offset the cost of their incarceration,
compensate crime victims, and provide inmate family support.
To provide a means of reducing prison idleness, increasing inmate job
skills, and improving the prospects for successful inmate transition
to the community upon release.
The Company, directly or indirectly through its wholly-owned operating
subsidiary LTI, employs a portion of the inmates at each prison facility
through a competitive process and designs the work environment to motivate and
train each participant in the specific job skills of the contracted work and
the general skills required to obtain and hold long-term employment as well as
how to advance in employment in a competitive work environment. This training
is crucial for many prisoners, who may have never held a job before their
conviction. The PIE program allows for up to 80% of the prisoners' wages to be
withheld for the purpose of paying restitution to victims, fines, reimbursing
the cost of incarceration, alimony, child support, taxes and a restricted
savings account. In this way, the PIE program aids in reducing costs to
taxpayers and is a savings vehicle to assist the former inmate's transition
back into society. Further, the program has been very successful in reducing
the rate of recidivism, within the participating inmate population, according
to the Federal Bureau of Justice and Assistance.
In August 1997, the Company entered into an agreement with Wackenhut
Corrections Corporation ("WCC") whereby WCC agreed to allow the Company to
operate as its "industry partner" in any correctional facility managed by WCC.
WCC also agreed to determine the products it purchases from third parties, and
to the extent possible, purchase such products from the Company. WCC operates
47 corrections facilities in the United States, Australia, England and Canada
and is the second largest manager of privatized correctional facilities in the
United States. In February 1998, the Company reached an agreement with the
states of California and Florida to expand its operations into corrections
facilities managed by those states.
LTI operates an electronics manufacturing plant at WCC's Lockhart, Texas
corrections facility. The Company currently operates a furniture manufacturing
plant in a California Department of Corrections facility located in Blythe,
California. The Company's customer call center operation, which had been
located in a Utah Department of Corrections facility located in Draper, Utah,
ceased operations during the first quarter of 1999 and has not reopened. The
Company is currently awaiting the completion of the construction of a motorcycle
parts operation, which is located in a WCC facility in South Bay, Florida.
The Company was incorporated on September 9, 1986. The Company's principal
executive offices are located at 2001 Pennsylvania Avenue, NW, Suite 675 in
Washington, DC 20006, and its phone number is (202) 466-2100.
BUSINESS STRATEGY. The Company's strategy is to establish itself as a national
leader in the employment of prison labor in a variety of business sectors. To
that end, the Company utilizes the PIE program to perform its services by using
a low-cost, but highly-motivated labor pool, in modern, clean and efficient
facilities. The Company intends to operate the business in a simple and
straight-forward manner by maintaining corporate overhead at its present level
during the Company's expansion. The Company's strategy also includes the
following:
Utilize existing expertise in electronics manufacturing to seek new
business opportunities and to fully utilize all of LTI's electronic
assembly facility in Lockhart, Texas;
Provide ancillary services such as the assembly of kits (kitting) and
installation of parts associated with the primary electronics
manufacturing process;
Expand the Company's furniture manufacturing operations by increasing
its modular furniture production capabilities and introducing other
furniture products; and
Evaluate the Company's ability to provide fulfillment services.
Management believes that additional capacity can be added, beyond the existing
facilities, without significant additional corporate overhead.
GROWTH STRATEGY. The Company has established a sound working relationship with
WCC and seeks to expand that relationship by going into additional WCC
facilities with available industry workspace to establish successful
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PIE programs. The Company is also working with state-run (non-privatized)
correctional facilities where industry work space is available to establish PIE
work programs. In addition to LTI's successful electronics manufacturing
facility in Lockhart, Texas, the Company will open a motorcycle parts
manufacturing and assembly facility in a WCC facility located in South Bay,
Florida during the second quarter of 2000 and continue to seek additional
customers for its furniture manufacturing facility located in Blythe,
California. The Company is evaluating several options regarding its
opportunities for entry into the fulfillment industry. The Company is also
evaluating the strategic acquisition of successfully run companies whose
services and products would be suitable for expansion into a prison industry
work program.
SALE OF GWP, INC. On October 5, 1998, the Company's wholly-owned subsidiary,
GWP, Inc. ("GWP"), purchased 51% of the outstanding voting capital stock of
Technology Manufacturing and Design, Inc. ("TMD"), an EMP located in Austin,
Texas. GWP paid cash of $730,000 for this equity interest in TMD, an amount that
was loaned by the Company to GWP for the express purpose consummating this
acquisition. Between the date of the purchase of TMD's shares and February 11,
1999, the Company contributed, through GWP, an approximately additional
$1,206,000 to TMD for working capital purposes. On February 15 1999, as part of
a severance agreement, the Company sold GWP to Kenneth H. Smith, the former
President and Chief Executive Officer of the Company, for approximately the
total amount invested by the Company in GWP and TMD. See "Certain Relationships
and Related Transactions."
PRODUCTS AND SERVICES
Through LTI, the Company's operations have been primarily focused in two
industries, electronics manufacturing (EM) and furniture manufacturing. The EM
industry has been characterized by rapid growth and aggressive competition
based on improving technology and decreasing cost. In 1998, the Company entered
the furniture manufacturing and the customer call center industries. The
Company ceased its call center operations during the first quarter of 1999.
During 2000, the Company is scheduled to open a facility, which will provide
parts manufacture and assembly services to a motorcycle manufacturer.
Electronics Manufacturing. As a member of the electronics manufacturing
provider ("EMP") industry the Company, through LTI, provides several services
including contract manufacturing, cable and wire harness assembly and printed
circuit board assembly. Given the emergence of new technologies and the
proliferation of electronics into virtually all segments of the world economy,
management believes the Company is poised for significant sustainable growth in
the years ahead.
Original equipment manufacturers ("OEM") such as Cisco, Hewlett-Packard, IBM,
Lucent, Texas Instruments and many others are increasingly relying on EMPs for
assembly and other value-added services. Many OEMs have begun to view
outsourcing as a strategic tool which allows them to focus their efforts on
resources and core competencies resulting in improved flexibility and
responsiveness in all segments of their business. The benefits of outsourcing
by the OEM include: improved time to market since new products can be turned on
quickly by an EMP without the cost and time required for the OEM to re-tool;
access to state of the art manufacturing facilities and technologies without
the need for the OEM to invest in facilities capital equipment; and lower
production and procurement costs since EMP's can efficiently purchase many
generic components. Finally, EMP's typically do not bear the same overhead and
benefit burdens typically incurred by OEMs.
Furniture Manufacturing. Through its furniture manufacturing facility, the
Company manufactures panels and associated parts for use in the office
workstation industry. The Company's automated facility is capable of producing
a high quality panel comparable to those produced and sold by Herman Miller and
Steelcase. The Company's product is designed to be interchangeable with several
manufacturers of office furniture.
Motorcycle Manufacturing. The Company's motorcycle parts manufacturing and
assembly facility, which will be located in a WCC facility in South Bay,
Florida, is scheduled to begin operations in the second quarter of 2000.
Initially, the facility will be manufacturing, painting and polishing various
motorcycle body parts with the intention of eventually accomplishing complete
parts manufacture and assembly of motorcycles.
CUSTOMERS AND MARKETS
Within the EMP industry the Company promotes its services primarily in the
Southwest region of the United States. The market for its EM services is the
multi-billion dollar electronics industry. LTI specializes in production of
circuit boards which are ordered in shorter production runs and therefore do
not have to compete with the larger companies in the industry who have invested
millions of dollars in high speed production equipment capable of continuous
production runs creating hundreds of thousands of boards. LTI's customer base
consists of over 200 customers, none of whom accounted for more than 15% of the
Company's 1999 sales volume.
The major market served by the Company's furniture manufacturing facility is
the replacement workstation market. This market is dominated by a few large
companies who offer alternatives to purchasing the higher priced products of
Herman Miller and Steelcase. These companies offer finished products which are
interchangeable with the more
5
expensive products, but at a considerably lower price. In November 1999, the
Company's contract with Affordable Interior Systems, the only customer of
Blythe, was cancelled. The Company has since contracted with another
manufacturer and started producing their panels in January 2000. This
manufacturer requires approximately one-shift of the operating capabilities of
the Blythe facility. The Company is actively seeking other customers to
increase the plant's output.
The Company's motorcycle assembly plant will, initially, have only one
customer, American Quantum Motorcycles ("American Quantum"). However, the
Company will explore other customer opportunities in conjunction with American
Quantum. The contract with American Quantum involves marking up the Company's
labor component of the facility while passing through and being reimbursed in
full for all other costs incurred to operate the facility.
The Company is dependent upon certain customers for a major portion of its
sales. High End (a customer of the LTI segment) accounted for 15% of sales for
the years ended December 31, 1999. The sales of services to IBM represented
approximately 43% and 66% for the years ended December 31, 1998 and 1997,
respectively. Texas Instruments accounted for approximately 7% and 19% of total
sales for the years ended December 31, 1998 and 1997, respectively. Amounts due
from three customers, Dell, Vektronix (customers of the LTI segment) and AIS (a
customer of the LTI - Blythe segment), constituted 87% of the Company's
accounts receivable at December 31, 1999. IBM and Texas Instruments, along with
other customers, High End Systems and Wyle EMG, comprised approximately 16% of
net accounts receivable at December 31, 1998. The Company generally does not
require collateral on its trade accounts receivable.
SUPPLIERS AND RAW MATERIALS
The raw materials used in each of the Company's industry segments are widely
available from numerous suppliers. The Company does not anticipate any
difficulty in obtaining sufficient quantity and quality of raw materials to
satisfy the requirements of its customers.
COMPETITION
The competition in the Company's EM and furniture manufacturing segments
consists of numerous small, regional companies and a significantly smaller
group of large national companies. The Company competes directly with the
smaller regional companies and avoids the markets dominated by the national
companies. When competing with smaller regional companies, the Company has a
distinct cost advantage created through the use of provided manufacturing
facilities and not having to provide the same benefits, (medical, dental, etc.)
to prison inmates as companies that rely exclusively on free-world employees.
In the case of the motorcycle parts facility, the Company has no direct
competition, as the Company has a contract to produce the manufacturing
requirements of American Quantum. However, the Company's revenues will be
directly effected by the competitive market conditions in the road bike
industry where American Quantum competes in an industry dominated by Harley
Davidson, Honda and to a lesser extent, BMW.
REGULATION OF THE PIE PROGRAM
Congress created the PIE Program in 1979 to encourage state and local
governments to establish employment opportunities for prisoners that
approximate private sector work opportunities and conditions. The program is
designed to place inmates in a realistic working environment, pay them the
state or Federal minimum or prevailing wage for similar work (whichever is
greater), and enable them to acquire marketable skills and work habits to
increase their potential for successful rehabilitation and meaningful
employment upon release. The U. S. Department of Justice's Bureau of Justice
Assistance administers the PIE Program through its Corrections Branch. Each
certified PIE Program must be determined to meet certain statutory and
guideline requirements so as to safeguard free world labor and industry and to
protect free enterprise. Mandatory criteria for participation in the PIE
Program are as follows: (a) inmates must be paid the prevailing local wage or
state or Federal minimum wage, whichever is greater, to protect private
business from unfair competition that would otherwise stem from the flow of
low-cost, prison made goods into the marketplace; (b) workers compensation and
unemployment compensation benefits must be provided; (c) inmate participation
in the program must be voluntary and in writing; (d) organized labor and local
private industry must be consulted prior to the initiation of a new PIE
industry; (e) participating companies must have written assurances from the
appropriate state agency that the new PIE industry will not result in the
displacement of workers employed prior to the program's implementation, does
not occur in occupations in which there is a surplus of labor in the locality,
and does not impair existing contracts for services; (f) deductions (not to
exceed 80%) must be made from the inmates pay for taxes, reasonable charges for
room and board, family support, victims compensation fund, and a mandatory
savings account for the inmate, the proceeds of which are available upon
release. In addition, each prison is also subject to laws and regulations
concerning the operation, management and supervision of prisoner employees,
which affects the operation of each of the Company's facilities. The Company's
PIE operations are also subject to all governmental workplace regulations
commonly associated with a service or manufacturing enterprise.
EMPLOYEES. The Company employs approximately 100 persons, 88 of whom are
inmates, nine (9) of whom are production, clerical and bookkeeping staff who
support manufacturing operations and three (3) of whom are members of executive
management. None of the Company's employees are represented by a union. The
Company believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
LEASES AND FACILITIES
The Company's wholly-owned subsidiary, LTI operates in a minimum security
prison under an agreement with WCC, the Texas Department of Criminal Justice
("TDCJ"), the Division of Pardons and Parole (the "Division") and the City of
Lockhart, Texas. The lease on the Lockhart facility provides approximately
27,800 square feet of manufacturing and office space through January 21, 2001,
and provides an automatic three year extension unless
6
notification is given by either party at least 6 months prior to the expiration
date of the current term not to renew. The amount of square footage may be
increased or decreased depending upon the number of prisoners employed. The
lease also provides for annual rental rates of $1 per year for the primary term
and the first renewal term thereafter. Occupancy fees for successive renewal
terms shall be negotiated by written agreement of the parties. It is expected
that similar operating leases will be executed at other WCC facilities.
LTI also operates in a minimum-security prison at Chuckawalla Valley State
Prison located in Blythe, California. The lease on the Blythe facility provides
approximately 36,300 square feet of manufacturing and office space through
August 31, 2003. The lease also provides for monthly payments of $726.
The facility, which the Company's motorcycle parts operation will occupy, is
located in a WCC minimum security prison located in South Bay, Florida. The
lease on the South Bay facility provides approximately 20,500 square feet of
manufacturing and office space through October of 2006. The lease provides for
annual rental payments of $1.00.
The Company's executive office is currently co-located in the offices of USV in
Washington, DC. The Company does not have a lease on the space it occupies and
does not pay rent to USV. The Company is in the process of locating
approximately 5-7,000 square feet of office space in Washington, DC, to serve
as its executive offices. As of the date of this report, suitable space has not
been located and leased.
The Company's operations and accounting center is currently co-located in the
offices of The Spear Group in Norcross, Georgia. James V. Warren, the
Co-Chairman of the Company's Board of Directors and the Co-Chief Executive
Officer, is the co-founder and President of The Spear Group. The Company is
negotiating a management services agreement with The Spear Group to provide
operating, accounting and administrative services to the Company's prison
facilities. The Company does not currently have a lease on the space it
occupies at The Spear Group and does not pay rent to The Spear Group. The
management agreement with The Spear Group, when executed, will include
occupancy costs. See "Certain Relationships and Related Transactions".
ITEM 3. LEGAL PROCEEDINGS.
On July 16, 1995 the Company was served with a citation in Texas Industrial
Services vs. U.S. Technologies Inc., County Court at Law No. 2 of Travis
County, Texas. The suit alleges that the Company is liable for certain debts of
a former subsidiary, American Microelectronics, Inc., ("AMI") on the theory
that the Company was doing business as AMI. The petition seeks damages totaling
approximately $54,000. The Company has asserted a defense and no activity has
taken place on the suit since September 1995.
On October 31, 1996 a consent order was signed by Mr. William Meehan, the
Company's former president, in the case of Environmental Protection Agency v.
Senson Corp, LTD., Docket No. TSCA-09-96-0002, agreeing among other things to
pay a civil penalty. The penalty was never paid and is estimated to be
approximately $7,000.
On May 6, 1997 Mr. Meehan filed a lawsuit in the 98th Judicial District Court
for Travis County, Texas seeking payment of certain wages and other benefits
totaling approximately $330,000. The Company believes the claim is without merit
and intends to defend its position vigorously.
On July 14, 1997, Ryan Corley sued the Company, in the case styled Ryan Corley
vs. U.S. Technologies, case No. 97-08065, in the 250th Judicial District of
Travis County, Texas, alleging that he is entitled to four months severance pay
in the approximate amount of $30,000. This case is being vigorously defended by
the Company.
On January 13, 1999, in the case styled St. John vs. Labor-To-Industry, Inc.,
et al, (U.S. District Court, Western District of Texas, Austin Division), Dale
St. John sued LTI, WCC and others. Mr. St. John alleges that he was denied
continued employment because he missed work as a result of being subpoenaed to
court. He sued for back wages in an unspecified amount. On May 17, 1999, the
Court dismissed this lawsuit in its entirety without prejudice.
On February 16, 1999, in the case styled Fidelity Funding vs. Ken Smith, et al,
in the 14th Judicial District of Dallas County, Texas, Fidelity Funding, Inc.
(Fidelity) sued Mr. Smith and the Company in the amount of $839,449, the amount
allegedly owed by Technology Manufacturing and Design, Inc., ("TMD") to
Fidelity under a secured credit facility extended by Fidelity to TMD in
November of 1998. The suit resulted after the Company sold its wholly owned
subsidiary, GWP, which owned a 51% interest in TMD to Mr. Smith and after TMD
filed bankruptcy. The suit sought to enforce a payment guaranty of the Company
with respect to the balance of principal and accrued interest owed by TMD to
Fidelity under this secured credit facility. The bankruptcy court for the
Western District of Texas permitted Fidelity to collect the remaining principal
and interest due under this credit facility from the accounts receivable
securing this credit facility. As a result, Fidelity decided not to pursue its
action against the Company and on June 17, 1999, filed a nonsuit, dismissing
this lawsuit.
On December 15, 1999, in the case styled Affordable Interior Systems, Inc.
("AIS") vs. U. S. Technologies, Inc., et al, (U.S. District Court, District of
Massachusetts), AIS sued the Company alleging breach of contract, breach of
covenant of good faith and fair dealing and a violation of the Massachusetts
unfair trade practices statute. AIS claimed that the Company violated its
exclusive supplier agreement with AIS by raising the price of panel blanks the
Company had agreed to manufacture for and sell to AIS in connection with AIS's
office furniture systems business. As a result, AIS alleged that it had to pay
the increased amounts while it established an alternative source, and that it
was entitled to a refund of those additional payments and the cost of
establishing its own source. AIS also claimed that it was entitled to be
reimbursed for certain expenses and fees incurred during the time period that
the Company was considering purchasing AIS from its corporate owner, U.S. Office
Products, which purchase did not occur. AIS sought in excess of approximately
$1,400,000 in compensatory damages. AIS also sought treble damages under the
Massachusetts unfair trade practices statute. The Company generally denied the
claims asserted by AIS and raised certain affirmative defenses. The Company also
asserted a counterclaim against AIS in the amount of approximately $200,467 plus
interest for AIS' failure to pay for panel blanks the Company manufactured for
AIS and delivered to it. On or about March 6, 2000, the Company and AIS reached
an oral agreement under which both the claims and counterclaims asserted in this
case would be dismissed and that mutual releases would be executed. On March 30,
2000, AIS and the Company executed and filed a Joint Stipulation of Dismissal
Without Prejudice. During the second quarter 2000, the Company anticipates that
it and AIS will execute mutual written releases relinquishing their respective
claims against each other.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31, 1999 to a
vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the OTC Bulletin Board under the symbol
"USXX".
The following table sets forth the high and low bid prices of the Company's
Common Stock in the over-the-counter market for the years ended December 31,
1999 and 1998. Prices are as quoted on the OTC Bulletin Board System.
Quotations reflect inter-dealer prices without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.
[Download Table]
Bid
High Low
-----------------------
1999
4th Quarter $.2500 $.1000
3rd Quarter $.4000 $.2100
2nd Quarter $.4700 $.2800
1st Quarter $.5900 $.3400
1998
4th Quarter $.6300 $.3800
3rd Quarter $.7100 $.4200
2nd Quarter $.9000 $.6400
1st Quarter $.9200 $.4400
On March 20, 2000, the closing bid price of the Company's Common Stock, as
quoted on the OTC Bulletin Board system, was $4.2500.
HOLDERS OF COMMON STOCK
As of March 20, 2000, there were 447 holders of record of the Company's Common
Stock. This number is exclusive of beneficial owners whose securities are held
in street name.
DIVIDENDS
The Company has not declared or paid any cash dividend on its Common Stock. The
policy of the Board of Directors of the Company is to retain earnings for the
expansion and development of the Company's business. Future dividend policy and
the payment of dividends, if any, will be determined by the Board of Directors
in light of circumstances then existing, including the Company's earnings,
financial condition and other factors deemed relevant by the Board of
Directors.
RECENT SALES OF UNREGISTERED SECURITIES
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing
of the E2E Acquisition. To raise these funds, the Company recently commenced the
private placement sale of $1,250,000 of additional shares of its Series A
Preferred Stock to USV, a limited liability company controlled by Gregory Earls,
the Company's Co-Chairman and Co-Chief Executive Officer, which is the Company's
largest shareholder, and at least $5,000,000 and up to $8,750,000 of its newly
created Series C Preferred Stock, to accredited investors. The Company has thus
far received subscriptions or indications of interest for the purchase of
approximately $5,200,000 of its Series C Preferred Stock, of which approximately
$3,000,000 consists of subscriptions by USV. The Series C Preferred Stock would
be convertible into shares of Common Stock at a conversion price per share
ranging from $0.90 to $2.00, which will be determined based on the closing sale
price for a share of Common Stock on the closing date of the E2E Acquisition as
quoted on the OTC Bulletin Board. In connection with the private placement of
the Series A Preferred Stock and the Series C Preferred Stock, the Company has
received to date subscriptions for a total of approximately $6,450,000. The
proceeds of these offerings will be used primarily to finance additional
investments in new and existing Internet businesses that focus on B2B and B2C
e-commerce, the payment of costs incurred and
8
liabilities assumed in connection with the E2E Acquisition and related business
transactions and ongoing working capital needs. Upon the acceptance of the
Charter Amendment by the Secretary of State of the State of Delaware, the
Series B Preferred Stock and the Series C Preferred Stock will be automatically
converted into shares of Common Stock. USV has also indicated its intention to
convert all of its shares of Series A Preferred Stock to Common Stock at that
time. See "Business - E2E Acquisition."
When the E2E Acquisition closes, E2E's stockholders will be issued shares
of Series B Preferred Stock, which will have a total liquidation preference
aggregating approximately $11,200,000. Upon their mandatory conversion, these
shares of Series B Preferred Stock will be converted into approximately
56,000,000 shares of Common Stock. See "Business -- E2E Acquisition."
Commencing on July 9, 1998 and continuing through May 11, 1999, the Company
received $5,000,000 of a total commitment of $5,000,000 under an agreement
with USV which provided that the Company would issue to USV warrants to
purchase 500,000 shares of Common Stock (the "Warrants") and shares of its
Series A Preferred Stock pursuant to Regulation "D" promulgated under the
Securities Act of 1933. Of the $5,000,000, amounts received during 1999 and
1998 were $1,300,000 and $3,700,000, respectively. The shares of Series A
Preferred Stock and the Warrants were issued to USV on May 11, 1999. The net
proceeds to the Company of approximately $4,850,000, after legal and other
costs, were used to provide working capital to support the Company's 1999 and
1998 operations and fund the 1998 purchase of a controlling interest in TMD by
the Company's wholly owned subsidiary, GWP. The Earls Family Limited
Partnership made a contribution of approximately $400,000 to USV, which
allowed USV to complete the payment of the $5,000,000 purchase price for the
Warrants and the Series A Preferred Stock to the Company. The Earls Family
Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of the
Company's Board of Directors and the Co-Chief Executive Officer of the
Company, controls both USV and the Earls Family Limited Partnership. Promptly
after USV was issued the Warrants, USV transferred the Warrants to the Earls
Family Limited Partnership. On November 29, 1999, the terms of the Series A
Preferred Stock were amended to cancel the right of the holders of the Series
A Preferred Stock to receive an annual dividend and to change the conversion
price for the Series A Preferred Stock to $0.122. The amended Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock setting
forth these changes was filed with the Delaware Secretary of State on December
31, 1999.
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership has the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of the Series A Preferred Stock were converted and the
Warrants were exercised in full, the holders of such securities would be
entitled to receive 48,149,758 shares of Common Stock. Each Warrant is
exercisable for one share of Common Stock at a price of $1.00 per share. If all
of USV's shares of Series A Preferred Stock were converted, USV would be
entitled to receive 47,649,758 shares of Common Stock. Because that amount
exceeds the number of shares of Common Stock available for issuance under the
Company's Restated Certificate of Incorporation, USV and the Company entered
into an agreement, dated March 1, 2000, whereby USV waived its right to convert
its shares of Series A Preferred Stock until an appropriate amendment to the
Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State. See "Business - E2E Acquisition."
On January 12, 1998, the Company issued 4% convertible subordinated debentures
and common stock purchase warrants to purchase 275,000 shares of Common Stock
exercisable at $1.00 per share, through a private placement to certain foreign
investors pursuant to a claim of exemption under Regulation "S" promulgated by
the Securities and Exchange Commission under the Securities Act of 1933. The
net proceeds to the Company, after legal and other costs, were $247,500, which
was used to liquidate certain 1996 liabilities and provide working capital to
support the Company's operations. On March 16, 2000, a holder of the common
stock purchase warrants exercised its right to purchase 137,500 shares of
Common Stock. As of March 20, 2000, the holders of these common stock purchase
warrants have the right to purchase a total of 138,000 shares of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth for the years ended December 31, 1999,
1998, 1997, 1996 and 1995 is derived from the Company's audited financial
statements. This information should be read in conjunction with the financial
statements for 1999, 1998 and 1997 and notes thereto included elsewhere herein
and "Management's Discussion and Analyses of Financial Condition and Results of
Operations" included in ITEM 7., which are incorporated herein by reference.
9
[Enlarge/Download Table]
DECEMBER 31
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $ 3,764,785 $ 6,107,244 $ 4,166,626 $ 1,410,498 $ 1,951,487
Operating costs and expenses:
Cost of sales 4,458,881 5,349,459 3,424,313 2,513,672 1,764,121
Selling expenses 43,658 313,283 70,869 245,232 270,906
General and administrative expenses 1,988,113 2,788,104 1,118,310 961,195 1,777,934
Impairment of long-lived assets -- -- 1,408,839 -- --
Restructuring charge -- 90,000 196,903 -- --
Other - litigation -- -- 252,256 -- --
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses 6,490,652 8,540,846 6,471,490 3,720,099 3,812,961
------------ ------------ ------------ ------------ ------------
Loss from operations (2,725,867) (2,433,602) (2,304,864) (2,309,601) (1,861,474)
Other expense (income)
Gain on sale of asset (642,764) -- -- -- --
Interest (28,893) 112,325 25,191 20,277 112,387
Other 202,271 18,782 (87,310) 253,134 (112,773)
------------ ------------ ------------ ------------ ------------
Total other (469,386) 131,107 (62,119) 273,411 (386)
------------ ------------ ------------ ------------ ------------
Net loss $ (2,256,481) $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088)
Preferred stock dividend 525,114 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss available to common
shareholders $ (2,781,595) $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088)
------------ ------------ ------------ ------------ ------------
Basic and diluted loss per common
share $ (0.10) $ (0.09) $ (0.08) $ (0.14) $ (0.12)
Weighted average shares outstanding 28,795,278 28,996,607 26,793,999 18,555,439 14,997,532
BALANCE SHEET DATA:
Working capital $ (794,439) $ (312,828) $ (849,592) $ (707,467) $ 574,146
Total assets 1,092,096 2,367,533 869,742 2,652,682 3,326,537
Total debt(1) 41,064 47,912 54,821 144,000 840,435
Stockholders' equity (capital deficit) (220,792) 724,042 (419,911) 1,088,520 1,859,785
(1) Includes long-term debt, current maturity of long-term debt, capital
lease obligations and notes payable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) included
under ITEM 8.
RESIGNATION OF KENNETH H. SMITH; SALE OF GWP
On February 11, 1999, Kenneth H. Smith resigned as President and Chief
Executive Officer of and as a director of the Company. Subsequent to Mr.
Smith's resignation, the Board of Directors of the Company appointed Gregory
Earls, a director of the Company since April 1998, as the Chief Executive
Officer of the Company. Since November 29, 1999, Mr. Earls has served as the
Co-Chairman of the Board of Directors and Co-Chief Executive Officer of the
Company with James V. Warren. See "Appointment of New Management Team".
Pursuant to the severance agreement entered into between the Company and Mr.
Smith, the Company sold its wholly owned subsidiary, GWP, to Mr. Smith. The sole
asset of GWP was an ownership interest in an amount of capital stock of TMD,
which represented a controlling interest in TMD. This majority interest in TMD
was acquired by GWP in early October 1998 for $730,000, which was contributed
by the Company to GWP for the express purpose of purchasing TMD stock. In
addition to contributing to GWP the funds necessary to complete the purchase of
a controlling interest in TMD, from early October 1998 through February 11,
1999, the Company, through GWP, also contributed approximately $1,337,000 in
working capital funds to TMD. The Company also guaranteed certain existing
obligations of TMD, including the repayment of TMD's Fidelity Funding Inc.
loan,
10
pursuant to the Loan and Security Agreement between TMD and Fidelity
Funding, Inc., dated as of November 30, 1998.
The sale of GWP was concluded on February 15, 1999. The total purchase price
for GWP was approximately $2,451,000. This amount represented the Company's
estimate of its investment in TMD through February 11, 1999 and certain legal
and other transactional costs Mr. Smith agreed to assume.
A portion of the purchase price for GWP was paid in the form of a promissory
note executed by Mr. Smith in the principal amount of $1,234,832 bearing
interest annually at the Wall Street Journal's prime rate of interest plus two
percent (2%). The principal amount of Mr. Smith's promissory note and any
accrued unpaid interest were due and payable in three (3) equal annual payments
commencing February 15, 2000 and ending on February 15, 2002. Mr. Smith and TMD
also agreed to guarantee any of TMD's obligations for which the Company was a
guarantor. Repayment of the promissory note and the performance of Mr. Smith's
guaranty obligations to the Company were secured by Mr. Smith's pledge to the
Company of his 3,000,000 shares of the Company's Common Stock. The performance
of GWP's guaranty obligations to the Company was secured by GWP's pledge to the
Company of all of its stock holdings in TMD.
The remaining balance of the purchase price for GWP was paid through Mr.
Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability
company controlled by Gregory Earls, the Co-Chairman of the Company's Board of
Directors and Co-Chief Executive Officer of the Company. The aggregate purchase
price of these shares was approximately $1,076,000. USV paid this purchase
price directly to the Company, which applied such funds toward the amount
payable by Mr. Smith to the Company in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date
for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing
sale price on April 1, 1999 was $0.35 per share, for a total sale price of
$1,050,000. The aggregate sale price of $1,050,000, less the expenses associated
with the sale, was applied in reduction of Mr. Smith's indebtedness to the
Company. The 3,000,000 shares of Common Stock were sold to USV. In payment of
the $1,050,000 sale price, USV executed a promissory note in favor of the
Company. This promissory note was secured by USV's pledge of the 3,000,000
shares of Common Stock it purchased on April 1, 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse
judgment is rendered against the Company by any court of competent jurisdiction
in connection with its guaranty obligations of TMD, or (iii) any new default
under Mr. Smith's promissory note. See "Certain Relationships and Related
Transactions."
APPOINTMENT OF NEW MANAGEMENT TEAM
On November 29, 1999, the Company, James V. Warren and J.L. (Skip) Moore
entered into a Management Agreement (the "Management Agreement"). Under the
terms of the Management Agreement, Mr. Warren was elected a Director,
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer
of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer
of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman
and Chief Executive Officer of the Company were modified to include Mr. Warren.
Also, under the terms of the Management Agreement, Mr. Moore was elected to
serve as the Company's Executive Vice-President and Chief Operating Officer.
The accounting functions of the Company have also been moved from the Company's
manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance
with the terms of the Management Agreement. See "Certain Relationships and
Related Transactions."
RESIGNATION AND TERMINATION OF EXECUTIVE OFFICERS
On February 15, 1999, James C. Melton resigned as Executive Vice President of
and as a director of the Company. Effective January 31, 2000, the Company
terminated the employment of John P. Brocard. Mr. Brocard was the Senior Vice
President and General Counsel of the Company.
11
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations expressed as
a percentage of total revenues for the periods indicated:
[Download Table]
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales 100% 100% 100% 100%
Operating costs and expenses:
Cost of sales 118% 88% 82% 178%
Selling expenses 1% 5% 2% 17%
General and administrative expenses 53% 46% 27% 68%
Impairment of long-lived assets -- -- 34% --
Restructuring charge -- 1% 5% --
Other - litigation -- -- 6% --
------ ------ ------ ------
Total operating costs and expenses 172% 140% 155% 264%
------ ------ ------ ------
Loss from operations (72)% (40)% (55)% (164)%
Gain on sale of asset (17)% -- -- --
Interest (1)% 2% 1% 1%
Other 5% 0% (2)% 18%
------ ------ ------ ------
Total other (13)% 2% (1)% 19%
------ ------ ------ ------
Net loss (59)% (42)% (54)% (183)%
====== ====== ====== ======
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
During the year ended December 31, 1999 the Company had net loss of $2,781,595
or $0.10 per weighted-average share, on net sales of $3,764,785 as compared to
a net loss of $2,564,709 or $0.09 per weighted-average share on net sales of
$6,107,244 for the year ended December 31, 1998. The net sales decrease of 38%
was primarily the result of an approximate $2,000,000 sales decline at the
Company's Lockhart facility due to management changes and a reorganization of
the facility. Additionally, 1999 included approximately six weeks of sales for
TMD ($948,000) while 1998 included thirteen weeks sales for TMD ($2,119,000).
The Company's ownership interest in TMD was purchased in October 1998 and sold
in mid-February 1999.
Cost of sales, in the amount of $4,458,881, increased as a percentage of net
sales to 118% for the year ended December 31, 1999 from $5,349,459, which
represented 88% of net sales, for the year ended December 31, 1998. The increase
in the cost of sales percentage is primarily due to; Lockhart's cost of sales
exceeding its sales as a result of uneconomical material purchases and
inefficient use of labor, start up costs at other locations, during the period
of management change and reorganization.
Selling expenses in the amount of $43,658 represented 1% of net sales during
the year ended December 31, 1999 compared to $313,283 representing 5% of net
sales for the year ended December 31, 1998. The decrease in the selling
expenses percentage is primarily due the sale of TMD which accounted for
approximately $186,000 in selling expense in 1998, but only $8,000 in 1999. The
balance of the change was attributable to sales at Lockhart being produced from
in-house operations personnel rather than outside commission sales people.
General and administrative expenses totaled $1,988,113 for the year ended
December 31, 1999 which represented 53% of net sales, compared to $2,788,104
which represented 46% of net sales for the year ended December 31, 1998.
Included in general and administrative expense for the year ended December 31,
1999 were; severance expenses of approximately $228,000, related to the former
President and former Senior Vice President of the Company, approximately
$196,000 of compensation expense recorded as the result of the grant of stock
options, approximately $178,000 of operating expenses related to a temporary
manufacturing facility used by the Company until the Company's Blythe,
California, facility was fully operational, bad debt expense of $140,000 and
$116,000 in legal and accounting costs related to the attempted acquisition of
AIS. These expenses equaled 23% of net sales.
12
During the year ended December 31, 1998 the Company recorded restructuring
charges of $90,000 to account for primarily payroll cost associated with
reorganizations of the Company's management staff.
During the year ended December 31, 1999, the Company recorded a gain on the
sale GWP and its 51% interest in TMD in the amount of $642,764. This gain was
net of the write off of approximately $526,000, which represented the full
value of the note receivable resulting from the sale of GWP. There were no
comparable gain recorded during the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recorded other expense of
$202,271. A significant part of this was $154,641, which represented legal and
accounting expenses incurred to secure the $5,000,000 subscription for the
Company's convertible preferred stock. There was no comparable expense during
the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recorded a charge of
$525,114, for dividends paid on the Company's convertible preferred stock. Under
an agreement reached with the preferred stock holder in November 1999, no
further dividends will be paid on the preferred stock in exchange for the
Company's reducing the conversion price for each share of the Company's common
stock from $0.410 per share to $0.122 per share. There was no comparable expense
during the year ended December 31, 1998.
Due to the continuing losses by the Company, the 100% reserve against the
Company's $5,452,000 net deferred tax asset continues to be recognized at
December 31, 1999. Additionally, as a result of the series of transactions
through which the Company's new management gained control, in 1999, the Company
is limited in the utilization of prior accumulated net operating losses and
anticipates that approximately $574,000 per year of net operating losses are
available to offset future annual taxable income.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
During the year ended December 31, 1998 the Company had net loss of $2,564,709
or $0.09 per weighted-average share, on net sales of $6,107,244 as compared to
a net loss of $2,242,745 or $0.08 per weighted-average share on net sales of
$4,166,626 for the year ended December 31, 1997. The net sales increase of 47%
was primarily the result of additional sales associated with TMD.
Cost of sales, in the amount of $5,349,459, increased as a percentage of net
sales to 88% for the year ended December 31, 1998 from $3,424,313, which
represented 82% of net sales, for the year ended December 31, 1997. These
amounts include charges to write-off obsolete inventory in the amount of $0 in
1998, and $306,888 in 1997. Excluding the write-off of obsolete inventory, cost
of sales would have represented approximately 88% and 75% of net sales for the
years ended December 31, 1998 and 1997 respectively. The increase in the cost of
sales percentage is primarily due to TMD's cost of sales exceeding its sales as
a result of uneconomical material purchases and inefficient use of labor.
Excluding the operating results of TMD, cost of sales is approximately 78% of
net sales for the year ended December 31, 1998.
Selling expenses in the amount of $313,283 represented 5% of net sales during
the year ended December 31, 1998 compared to $70,869 representing 2% of net
sales for the year ended December 31, 1997. The increase in the selling
expenses percentage is primarily due to the cost of TMD's sales staff.
Excluding the operating results of TMD, selling expenses are approximately 3%
of net sales.
General and administrative expenses totaled $2,788,104 for the year ended
December 31, 1998 which represented 46% of net sales, compared to $1,118,310
which represented 27% of net sales for the year ended December 31, 1997. The
increase in general and administrative expenses is attributable to the
increased costs of management staffing, start-up expenses, travel and legal
costs associated with opening new locations and acquiring TMD.
During the year ended December 31, 1998 and 1997, the company recorded
restructuring charges of $90,000 and $196,903, respectively, to account for
primarily payroll cost associated with reorganizations of the Company's
management staff.
Due to the continuing losses by the Company, the 100% reserve against the
Company's $4,408,000 net deferred tax asset continues to be recognized at
December 31, 1998. Additionally, as a result of the series of transactions
through which the Company's new management gained control, in 1997, the Company
is limited in the utilization of prior accumulated net operating losses and
anticipates that approximately $574,000 per year of net operating losses are
available to offset future annual taxable income. The Company expects to pay
taxes for 1999 in accordance with the provisions of the alternative minimum tax
and various state income taxes.
Liquidity and Capital Resources.
During the three years ended December 31, 1999, 1998, and 1997 the Company
experienced negative operating cash flows of $2,660,402, $2,870,611 and
$560,302, respectively. Negative cash flows from operations resulted
principally from operating losses incurred during these years. The primary
operating uses of cash during 1999 were
13
to fund net losses of $2,256,481, net of a gain on the sale of TMD of $642,764.
Net cash used in 1999 operating activities was favorably impacted by
depreciation of $178,230 and decreases in inventories and accounts receivable
of $325,280 and $311,612, respectively, reduced by declines in accrued expenses
of $203,965. The primary operating uses of cash during 1998 were to fund
operating losses of $2,564,709, which included a $972,892 loss from the
operations of TMD. The 1998 net cash used in operating activities was adversely
effected by increases in accounts receivable and inventories of $510,922 and
$353,648, respectively and a decrease in accrued expenses of $501,951, while
being favorably impacted by a $747,196 increase in accounts payable. The
$2,242,745 operating losses in 1997 were largely offset by non-cash reductions
of (1) $1,408,839 for impairment of long-lived assets (2) $306,888 for an
increase in inventory valuation allowance and (3) $179,194 for depreciation and
amortization. The primary uses of operating cash during 1997 were to fund the
reduction of accounts payable of $238,363 and the increase in accounts
receivable of $120,680 due to increased sales volume.
During the year ended December 31, 1999, investing activities provided a net
amount of $400,653. This amount was negatively impacted by equipment purchases
of $475,347. The sale of TMD in 1999 resulted in the collection of $1,076,000
proceeds from the sale. During the year ended December 31, 1998, investing
activities used $658,104. The 1998 activity was unfavorably impacted by the
purchase of GWP and its interest in TMD for $730,000, and equipment purchases of
$431,298. The 1998 activity was favorably impacted by collections on notes
receivable of $385,194 and proceeds from the sale of assets of $118,000. Net
cash used for investing activities of $58,942 during the year ended December 31,
1997 was for the purchase of equipment.
Cash provided by financing activities of $2,159,060, $3,638,366 and $618,185
during 1999, 1998 and 1997, respectively, were primarily the net proceeds of
preferred stock, common stock and debt issuances.
Commencing on July 9, 1998 and continuing through May 11, 1999, the Company
received $5,000,000 of a total commitment of $5,000,000 under an agreement with
USV which provided that the Company would issue to USV Warrants to purchase
500,000 shares of Common Stock and shares of its Series A Preferred Stock
pursuant to Regulation "D" promulgated under the Securities Act of 1933. Of the
$5,000,000, amounts received during 1999 and 1998 were $1,300,000 and
$3,700,000, respectively. The shares of Series A Preferred Stock and the
Warrants were issued to USV on May 11, 1999. The net proceeds to the Company of
approximately $4,850,000, after legal and other costs, were used to provide
working capital to support the Company's 1999 and 1998 operations and fund the
1998 purchase of a controlling interest in TMD by the Company's wholly owned
subsidiary, GWP. The Earls Family Limited Partnership made a contribution of
approximately $400,000 to USV, which allowed USV to complete the payment of the
$5,000,000 purchase price for the Warrants and the Series A Preferred Stock to
the Company. The Earls Family Limited Partnership is a member of USV. Gregory
Earls, the Co-Chairman of the Company's Board of Directors and the Co-Chief
Executive Officer of the Company, controls both USV and the Earls Family Limited
Partnership. Promptly after USV was issued the Warrants, USV transferred the
Warrants to the Earls Family Limited Partnership. On November 29, 1999, the
terms of the Series A Preferred Stock were amended to cancel the right of the
holders of the Series A Preferred Stock to receive an annual dividend and to
change the conversion price for the Series A Preferred Stock to $0.122. The
amended Certificate of Designations, Preferences and Rights of the Series A
Preferred Stock setting forth these changes was filed with the Delaware
Secretary of State on December 31, 1999.
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership has the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of Series A Preferred Stock were converted and the Warrants
were exercised in full, the holders of such securities would be entitled to
receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one
share of Common Stock at a price of $1.00 per share. If all of USV's shares of
Series A Preferred Stock were converted, USV would be entitled to receive
47,649,758 shares of Common Stock. Because that amount exceeds the number of
shares of Common Stock available for issuance under the Company's Restated
Certificate of Incorporation, USV and the Company entered into an agreement,
dated March 1, 2000, whereby USV waived its right to convert its shares of
Series A Preferred Stock until an appropriate amendment to the Company's
Restated Certificate of Incorporation is filed with the Delaware Secretary of
State. See "Business - E2E Acquisition."
In 1997, as a result of the acquisition of the Company by the investor group
led by Mr. Smith and Mr. Warren, and the resulting issuance of 6,000,000 shares
of the Company's common stock, $536,613 was contributed to working
14
capital. This contribution significantly improved the Company's financial
condition thus improving the Company's relationships with vendors and allowing
the Company to finance significant increases in sales volume.
Working capital decreased by $481,611 from a negative $312,828 as of December
31, 1998, to a negative $794,439 as of December 31, 1999. Gross accounts
receivable decreased by $311,612 to $401,353, representing approximately 51 days
sales, at December 31, 1999, from $712,975, representing approximately 52 days
sales as of December 31, 1998. Inventory decreased by $325,280 to $260,575 at
December 31, 1999 from $585,855 at December 31, 1998 primarily as a result of
decreased sales at the LTI facility in Lockhart, Texas. During the year ended
December 31, 1999, accounts payable increased by $160,064 to $1,004,237,
including $318,490 resulting from manufacturing activities which represented 47
days cost of sales, from $844,173, including $577,359 resulting from
manufacturing activities which represented 89 days cost of sales in the year
ended December 31, 1998.
Working capital increased by $536,764 from a negative $849,592 as of December
31, 1997, to a negative $312,828 as of December 31, 1998. Accounts receivable
increased by $353,648 to $712,975, representing approximately 52 days sales, at
December 31, 1998, from $341,327, representing approximately 30 days sales as
of December 31, 1997. Inventory increased by $510,922 to $585,855 at December
31, 1998 from $74,933 at December 31, 1997 primarily as a result of a change in
the customer mix at the LTI facility in Lockhart, Texas which resulted in the
use of more purchased inventory instead of customer supplied inventory. For the
year ended December 31, 1998, accounts payable increased by $467,342 to
$844,173, representing approximately 89 days cost of sales, from $376,831,
representing approximately 66 days cost of sales for the year ended December
31, 1997. This increase was the result of increased working capital needs to
fund inventory, accounts receivable and operating losses.
The company took several steps, during 1999, to improve the performance of its
operating facilities:
- The Spear Group, a company experienced in the management of
manufacturing facilities and labor intensive businesses, was
employed to provide operational, accounting and
administrative support to the Company's operating facilities.
- The Company engaged additional contract sales personnel to
increase sales at the Company's Lockhart, Texas, electronics
manufacturing facility.
- An experienced plant manager was hired to operate the
Company's Lockhart, Texas, electronics manufacturing
facility.
- The Company purchased approximately $400,000 of equipment to
improve operating efficiencies at its manufacturing
facilities.
The Company's growth plans for 2000 include maximization of revenue potential
at the two existing facilities, Lockhart and Blythe, the opening of a
motorcycle parts manufacturing facility at a WCC facility located in South Bay,
Florida and possible acquisitions. Capital required to improve the South Bay
facility is being provided by WCC.
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing
of the E2E Acquisition. To raise these funds, the Company recently commenced the
private placement sale of $1,250,000 of additional shares of its Series A
Preferred Stock, to USV, a limited liability company controlled by Gregory
Earls, the Company's Co-Chairman and Co-Chief Executive Officer, which is the
Company's largest shareholder, and at least $5,000,000 and up to $8,750,000 of
its newly created Series C Preferred Stock, to accredited investors. The Company
has thus far received subscriptions or indications of interest for the purchase
of approximately $5,200,000 of its Series C Preferred Stock, of which
approximately $3,000,000 consists of subscriptions by USV. The Series C
Preferred Stock would be convertible into shares of the Company's Common Stock
at a conversion price per share ranging from $0.90 to $2.00, which will be
determined based on the closing sale price for a share of Common Stock on the
closing date of the E2E Acquisition, as quoted on the OTC Bulletin Board. In
connection with the private placements of the Series A Preferred Stock and the
Series C Preferred Stock, the Company has received to date subscriptions for a
total of approximately $6,450,000. The proceeds of these offerings will be used
primarily to finance additional investments in new and existing Internet
businesses that focus on B2B and B2C e-commerce, the payment of costs incurred
and liabilities assumed in connection with the E2E Acquisition and related
business transactions and ongoing working capital needs. See "Business - E2E
Acquisition."
15
Effect of Inflation.
Inflation has not had a material impact on the Company's operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," "believe," "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology,
and are made on the basis of management's plans and current analyses of the
Company, its business and the industry as a whole. These forward-looking
statements are subject to risks and uncertainties, including, but not limited
to, economic conditions, competition, interest rate sensitivity and exposure to
regulatory and legislative changes. The above factors, in some cases, have
affected, and in the future could affect, the Company's financial performance
and could cause actual results for 1999 and beyond to differ materially from
those expressed or implied in such forward-looking statements, even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
This Form 10-K also contains forward-looking statements concerning prospective
future acquisitions and investments, and prospects for such acquisitions and
investments. The Company cautions that the actual developments and results of
the Company's prospective future acquisitions and investments may differ from
its expectations for such prospective future events. There can be no assurance
that the conditions necessary to completing any prospective acquisition,
investment or related financing transaction will be satisfied, or that any such
prospective event will occur. Additional investments by the Company or an
unrelated person in any entity that is a part of E2E's investment portfolio or
E2E provide no assurance that such portfolio company of E2E or E2E will succeed
or that the Company's or E2E's investments will be recovered or profitable. The
Company's assets and operations, including results of operations, would be
affected materially by the extent to which the Company, E2E and E2E's portfolio
companies continue to have access to financing sources on reasonable terms in
order to pursue its and their business plans, by the success or failure of the
business plans of the Company, E2E and E2E's portfolio companies, by economic
conditions generally and particularly in the developing e-commerce market, by
competition and technological changes in the Company's, E2E's and E2E's
portfolio companies industries and businesses, and by the results of the
Company's, E2E's and E2E's portfolio companies' operations if and when
operating. In addition, the occurrence of any of the foregoing events or the
failure of any of the foregoing events to occur would materially affect the
Company's assets, operations and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
16
U.S. TECHNOLOGIES INC.
CONTENTS
[Download Table]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 20
Statements of operations 21
Statements of changes in stockholders' equity (capital deficit) 22
Statements of cash flows 23
Notes to financial statements 24-45
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
U.S. Technologies Inc.
Marietta, Georgia
We have audited the accompanying consolidated balance sheets of U.S.
Technologies Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity (capital
deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
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. Technologies
Inc. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
March 17, 2000, except for Note 18,
which is as of April 5, 2000
19
U.S. Technologies Inc.
Consolidated Balance Sheets
[Enlarge/Download Table]
December 31, 1999 1998
---------------------------------------------------------------- ------------ ------------
ASSETS
CURRENT
Cash $ 9,451 $ 110,140
Trade accounts receivable, net of reserves
of $206,000 and $140,000 195,289 572,975
Inventory, net 260,575 585,855
Prepaid expenses 39,340 29,831
------------ ------------
Total current assets 504,655 1,298,801
------------ ------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation 571,383 499,749
------------ ------------
OTHER ASSETS
Net investment in and advances to subsidiary held for sale -- 524,558
Other assets 16,058 44,425
------------ ------------
Total other assets 16,058 568,983
------------ ------------
Total assets $ 1,092,096 $ 2,367,533
============ ============
Current liabilities
Accounts payable $ 1,004,237 $ 1,124,027
Accrued expenses 267,587 471,552
Current portion of long-term debt and capital lease obligation 27,270 16,050
------------ ------------
Total current liabilities 1,299,094 1,611,629
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION,
less current portion 13,794 31,862
------------ ------------
Total liabilities 1,312,888 1,643,491
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series A convertible preferred stock;
$0.02 par value; 10,000,000 shares
authorized; 500,000 issued and
outstanding at December 31, 1999 5,000,000 --
Series A convertible preferred stock
subscribed but unissued 289,703 3,648,682
Common stock; $0.02 par value; 40,000,000 shares
authorized; 29,195,278 shares issued and outstanding 583,906 583,906
Additional paid-in capital 12,275,655 12,605,029
Accumulated deficit (17,992,167) (15,735,686)
Stock receivable (150,205) (150,205)
Treasury stock, at cost (227,684) (227,684)
------------ ------------
Total stockholders' equity (capital deficit) (220,792) 724,042
------------ ------------
Total liabilities and capital deficit $ 1,092,096 $ 2,367,533
============ ============
See accompanying notes to consolidated financial statements.
20
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Years ended December 31, 1999 1998 1997
---------------------------------------------------------------- ------------ ------------ ------------
NET SALES $ 3,764,785 $ 6,107,244 $ 4,166,626
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 4,458,881 5,349,459 3,424,313
Selling expense 43,658 313,283 70,869
General and administrative expense 1,988,113 2,788,104 1,118,310
Impairment of long-lived assets -- -- 1,408,839
Restructuring charge -- 90,000 196,903
Other - litigation -- -- 252,256
------------ ------------ ------------
Total operating costs and expenses 6,490,652 8,540,846 6,471,490
------------ ------------ ------------
Loss from operations (2,725,867) (2,433,602) (2,304,864)
------------ ------------ ------------
OTHER EXPENSE (INCOME)
Interest, net (28,893) 112,325 25,191
Other, net 202,271 18,782 (87,310)
Gain on sale of subsidiary (642,764) -- --
------------ ------------ ------------
Total other expense (income) (469,386) 131,107 (62,119)
------------ ------------ ------------
NET LOSS (2,256,481) (2,564,709) (2,242,745)
Preferred stock dividends 525,114 -- --
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,781,595) $ (2,564,709) $ (2,242,745)
============ ============ ============
Basic and diluted loss per common share $ (0.10) $ (0.09) $ (0.08)
============ ============ ============
Weighted average common shares outstanding 28,795,278 28,996,607 26,793,999
============ ============ ============
See accompanying notes to consolidated financial statements.
21
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
[Enlarge/Download Table]
SERIES A PREFERRED
COMMON TREASURY CONVERTIBLE COMMON TREASURY STOCK
STOCK STOCK PREFERRED STOCK STOCK STOCK SUBSCRIBED
---------- ---------- --------------- -------- ----------- -----------
BALANCE, January 1, 1997 21,857,263 -- $ -- $437,146 $ -- $ --
Stock issued, change in
control 5,507,130 -- -- 110,143 -- --
Note receivable - stockholder -- -- -- -- -- --
Stock options exercised 50,000 -- -- 1,000 -- --
Stock issued to retire debt 583,800 -- -- 11,676 -- --
Stock receivable 633,870 -- -- 12,677 -- --
Accrued interest on note
receivable - stockholder -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- -------- ----------- -----------
BALANCE, December 31, 1997 28,632,063 -- -- 572,642 -- --
Stock issued to retire debt 563,215 -- -- 11,264 -- --
Purchase of treasury shares -- (400,000) -- -- (227,684) --
Proceeds from convertible
preferred stock issuable -- -- -- -- -- 3,648,682
Advance to stockholder -- -- -- -- -- --
Accrued interest on note
receivable - stockholder -- -- -- -- -- --
Transfer to subsidiary to be
sold -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- -------- ---------- -----------
BALANCE, December 31, 1998 29,195,278 (400,000) -- 583,906 (227,684) 3,648,682
Redemption of shares -- (3,000,000) -- -- (1,050,000) --
Sale of treasury stock -- 3,000,000 -- -- 1,050,000 --
Proceeds from convertible
preferred stock issuable -- -- -- -- -- 1,641,021
Issuance of preferred stock -- -- 5,000,000 -- -- (5,000,000)
Compensatory stock option grants -- -- -- -- -- --
Net loss -- -- -- -- -- --
Cash dividends on
Series A preferred stock -- -- -- -- -- --
---------- -------- ---------- -------- ---------- -----------
BALANCE, December 31, 1999 29,195,278 (400,000) $5,000,000 $583,906 $ (227,684) $ 289,703
========== ======== ========== ======== ========== ===========
ADDITIONAL NOTE
PAID-IN ACCUMULATED RECEIVABLE- STOCK
CAPITAL DEFICIT STOCKHOLDER RECEIVABLE TOTAL
------------ ------------ ------------ ----------- -----------
BALANCE, January 1, 1997 $ 11,729,811 $(10,928,232) $ -- $(150,205) $ 1,088,520
Stock issued, change in
control 516,431 -- -- -- 626,574
Note receivable - stockholder -- -- (270,000) -- (270,000)
Stock options exercised 11,500 -- -- -- 12,500
Stock issued to retire debt 134,274 -- -- -- 145,950
Stock receivable -- -- (63,387) -- (50,710)
Accrued interest on note
receivable - stockholder -- -- (26,305) -- (26,305)
Net loss -- (2,242,745) -- -- (2,242,745)
------------ ------------ --------- --------- -----------
BALANCE, December 31, 1997 12,392,016 (13,170,977) (359,692) (150,205) (716,216)
Stock issued to retire debt 213,013 -- -- -- 224,277
Purchase of treasury shares -- -- -- -- (227,684)
Proceeds from convertible
preferred stock issuable -- -- -- -- 3,648,682
Advance to stockholder -- -- (151,212) -- (151,212)
Accrued interest on note
receivable - stockholder -- -- (25,502) -- (25,502)
Transfer to subsidiary to be
sold -- -- 536,406 -- 536,406
Net loss -- (2,564,709) -- -- (2,564,709)
------------ ------------ --------- --------- -----------
BALANCE, December 31, 1998 12,605,029 (15,735,686) -- (150,205) 724,042
Redemption of shares -- -- -- -- (1,050,000)
Sale of treasury stock -- -- -- -- 1,050,000
Proceeds from convertible
preferred stock issuable -- -- -- -- 1,641,021
Issuance of preferred stock -- -- -- -- --
Compensatory stock option grants 195,740 -- -- -- 195,740
Net loss -- (2,256,481) -- -- (2,256,481)
Cash dividends on
Series A preferred stock (525,114) -- -- -- (525,114)
------------ ------------ --------- --------- -----------
BALANCE, December 31, 1999 $ 12,275,655 $(17,992,167) $ -- $(150,205) $ (220,792)
============ ============ ========= ========= ===========
See accompanying notes to consolidated financial statements.
22
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31, 1999 1998 1997
----------------------------------------------------------- ------------ ------------- ------------
OPERATING ACTIVITIES
Net loss $(2,256,481) $(2,564,709) $(2,242,745)
Adjustments to reconcile net loss to
net cash used in operating activities:
Net loss from activities of subsidiary held for sale -- 972,892 --
Gain on sale of subsidiary (642,764) -- --
Depreciation and amortization 178,230 68,573 179,194
Loss (gain) on disposal of assets 178,496 (118,000) --
Advances, net of deficit in operating results,
to subsidiary held for sale (711,682) (767,450) --
Impairment of long-lived assets -- -- 1,408,839
Restructuring costs -- 90,000 --
Inventory valuation allowance -- -- 306,888
Provision for bad debts 66,064 122,000 18,000
Compensatory stock option grants 195,740 -- --
Changes in assets and liabilities,
net of effects of acquisition
Receivables 311,612 (353,648) (120,680)
Inventory 325,280 (510,922) 90,406
Prepaid expenses (9,509) (25,587) (3,971)
Other assets 28,367 (29,005) (10,903)
Accounts payable (119,790) 747,196 (238,363)
Accrued expenses (203,965) (501,951) 53,033
----------- ----------- -----------
Net cash used in operating activities (2,660,402) (2,870,611) (560,302)
----------- ----------- -----------
INVESTING ACTIVITIES
Net proceeds from disposal of assets 1,076,000 118,000 --
Proceeds from collection of notes and
other receivables -- 385,194 --
Advances to former shareholder (200,000) -- --
Purchase of equipment (475,347) (431,298) (58,942)
Net cash paid for acquisition -- (730,000) --
----------- ----------- -----------
Net cash provided by (used in) investing activities 400,653 (658,104) (58,942)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from convertible preferred
stock issuable 1,641,021 3,648,682 --
Sale of treasury stock 1,050,000 -- --
Proceeds from issuance of long-term debt 11,760 -- 36,000
Principal payments on notes payable (18,607) (6,909) (6,179)
Preferred stock dividends paid (525,114) -- --
Proceeds from issuance of convertible debentures -- 224,277 --
Purchase of treasury stock -- (227,684) --
Issuance of common stock -- -- 588,364
----------- ----------- -----------
Net cash provided by financing activities 2,159,060 3,638,366 618,185
----------- ----------- -----------
Increase (decrease) in cash (100,689) 109,651 (1,059)
CASH, beginning of period 110,140 489 1,548
----------- ----------- -----------
CASH, end of period $ 9,451 $ 110,140 $ 489
=========== =========== ===========
See accompanying notes to consolidated financial statements.
23
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
U.S. Technologies Inc. (the "Company") performs labor and service intensive
"outsourcing" work for Fortune 1000 and other select companies. Currently, the
work is performed by inmates in detention facilities located in Texas and
California under the guidelines of a 1979 Federal Government Program known as
the Prison Industry Enhancement program ("PIE"). The Company performs
electronic and furniture assembly, manufacturing, enhancement, rework,
packaging and sorting of products.
The Company operates in privatized prisons under an exclusive agreement with
Wackenhut Corrections Corporation ("WCC"), a leading developer and manager of
privatized correctional and detention facilities in the United States, Canada,
the United Kingdom and Australia. The agreement with the WCC also permits the
Company to contract with state and federally operated facilities. WCC is the
second largest manager of privatized correctional facilities in the United
States. Currently WCC manages 35 detention facilities in the United States and
has begun construction on new industry buildings at certain of its sites for
use by the Company. WCC does not have an ownership interest in the Company.
The Company's wholly-owned subsidiaries include Labor-to-Industry Inc. ("LTI"),
Service-to-Industry Inc. ("STI") and through February 12, 1999, GWP, Inc.
("GWP"). LTI produces labor intensive tangible products and STI is a service
provider operating an inbound/outbound call center. GWP is a holding company
for a 51% interest in Technology Manufacturing and Design, Inc. ("TMD"). TMD is
a "free-world" (i.e., non-prison) contract manufacturer of electronic circuit
boards.
LTI operations included electronics-related assembly for all years presented,
furniture-related assembly commencing September 1998, and cut-and-sew operations
commencing May 1998. The cut-and-sew operations were discontinued in February
1999. STI operated the call center from June 1998 and temporarily suspended
operations in January 1999. The 51% interest in TMD was acquired effective
October 5, 1998. On February 15, 1999, GWP including its interest in TMD were
sold to Mr. Kenneth H. Smith, the former president of the Company as part of a
severance agreement (Notes 2 and 3).
The consolidated statements of operations, cash flows and changes in
stockholders' equity include the accounts of the Company and its subsidiaries,
including GWP and TMD, subsidiaries held for sale at December 31, 1998. Since
GWP and TMD were sold during 1999, the net assets as of December 31, 1998 are
recorded in the accompanying balance sheet as "Net investment in and advances
to subsidiary held for sale." All material intercompany accounts and
transactions are eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less from the date of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined by the average cost
method, or market.
24
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Impairment
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, requires that long-lived assets and certain intangibles to be held and used
by the Company be reviewed for impairment. The Company periodically assesses
whether there has been a permanent impairment of its long-lived assets, in
accordance with SFAS No. 121. A write-down of assets due to impairment was
required for the year-ended December 31, 1997, in the amount of approximately
$1.4 million (Note 4).
Property and Depreciation
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, renewals and improvements of property and equipment
are capitalized. Expenditures for repairs, maintenance and gains or losses on
disposals are included in operations. Depreciation is computed using the
straight-line method over the following estimated lives:
[Download Table]
ESTIMATED LIVES
---------------
Equipment 5-7 years
Furniture and fixtures 7 years
Leasehold Improvements 6 years
Revenue Recognition and Accounts Receivable
Revenue is recognized when the product is shipped. An allowance for doubtful
accounts is provided based on periodic review of the accounts.
Restructuring Costs
The Company records the costs of severance and lay-offs related to the
Company's employees in accordance with Emerging Issues Task Force ("EITF")
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring).
Income Taxes
The Company accounts for income taxes under the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates. The Company
provides a valuation allowance against its deferred tax assets to the extent
that management estimates that it is "more likely than not" that such deferred
tax assets will not realized.
25
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Share
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
which is effective for fiscal years ending after December 15, 1997. Basic
earnings per common share are based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of convertible preferred stock, stock options and warrants. For
all periods presented diluted earnings per share have not been presented
because the impact of the assumed exercise of convertible preferred stock,
stock options and warrants would have been anti-dilutive. The impact of the
assumed exercise may have a dilutive effect in the future.
Stock Option Plans
Effective in 1997, the Company adopted the disclosure - only option of SFAS No.
123, Accounting for Stock Based Compensation. SFAS No. 123 requires that
companies that do not choose to account for stock based compensation as
prescribed by the statement shall disclose the pro forma effects on earnings
and earnings per share as if the expense recognition provisions of SFAS No. 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the effects
of SFAS No. 123. Compensation expense is computed for options granted to
non-employees using the Black-Scholes option pricing model.
Use of 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates for many reasons including
risks and uncertainties. Potential risks and uncertainties include such factors
as the financial strength of the electronics manufacturing industry, sales in
the electronics manufacturing industry and competition.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets are not materially different from
their fair values.
26
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 137 delayed the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2001, to affect its
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. RESTRUCTURINGS AND FUTURE OPERATIONS
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company incurred significant losses during each of the three years in the
period ended December 31, 1999, and had working capital deficiencies at
December 31, 1999 and 1998.
In January 1997, as part of the transaction through which control of the
Company passed to the new management team, the Company received a significant
infusion of equity capital of approximately $536,000. This capital infusion was
used to finance the expansion of the Company's operations. The new management
team took immediate steps to cut costs and improve production management,
product quality and customer service. All the steps resulted in an immediate
increase in revenues with existing customers and opportunities to serve new
customers. These steps also resulted in the recognition of a restructuring
charge to recognize the cost of severance and lay-off of excess personnel of
approximately $197,000.
The new management team also made a thorough evaluation of the value of the
assets acquired by prior management and took appropriate steps to write-off the
value of assets which would not be realized, totaling approximately $1,409,000,
and obsolete inventory, in the amount of approximately $307,000. The new
management team acted to resolve most of the outstanding litigation, inherited
from prior management, recognizing a charge of approximately $252,000. The
Company's new management also converted approximately $119,000 of the Company's
long-term debt and $27,000 of accrued interest into equity.
In 1998, further steps were taken to turn around the negative financial results
of the Company. These steps included raising capital from an issuance of
convertible debentures, entering into a $5 million preferred stock investment
agreement with USV Partners, LLC ("USV") and cost reductions from
termination of certain executive, management and inmate personnel.
27
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional steps taken in 1999 included closing one unprofitable division
temporarily (the call center operators of STI) and another unprofitable
division indefinitely (the cut and sew operations of LTI), and obtaining the
resignations of Mr. Kenneth H. Smith, chairman of the board of directors,
president and chief executive officer, and Mr. James C. Melton, Sr., member of
the board of directors and executive vice president.
GWP acquired its interest in TMD during 1998. TMD was initially expected to
complement the Company's existing business operations. However, TMD continued to
generate significant operating losses and was sold subsequent to year-end to Mr.
Smith in conjunction with his severance agreement (see Note 3).
The Company has filled the vacancies left by Mr. Smith's resignation with Mr. C.
Gregory Earls. Mr. Earls is a substantial investor in the Company and a member
of the board of directors. Mr. Earls is also the sole member of USV Management,
LLC, the manager of USV. Through USVC, Mr. Earls has successfully assisted the
Company gain access to investment capital and has committed to generate
additional capital for the Company as necessary.
On November 29, 1999, the Company, James V. Warren and J.L. (Skip) Moore
entered into a Management Agreement (the "Management Agreement"). Under the
terms of the Management Agreement, Mr. Warren was elected a Director,
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer
of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer
of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman
and Chief Executive Officer of the Company were modified to include Mr. Warren.
Also, under the terms of the Management Agreement, Mr. Moore was elected to
serve as the Company's Executive Vice-President and Chief Operating Officer.
The accounting functions of the Company have also been moved from the Company's
manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance
with the terms of the Management Agreement.
In connection with the Management Agreement, the Company issued stock options
for 1,500,000 shares to Mr. Warren and 400,000 shares to Mr. Moore. These
options have a fair market value in the aggregate of $195,740, which has been
included within general and administrative expense in the accompanying 1999
statement of operations.
Finally, as further discussed in Note 18, subsequent to December 31, 1999, the
Company has commenced private placements to raise between $6,250,000 and
$10,000,000.
The Company's continued existence is dependent upon its ability to continue to
resolve its liquidity problems and begin to generate positive earnings and cash
flow from operations. While there is no assurance that such problems can be
resolved, the Company believes there is a reasonable expectation of achieving
that goal through cash generated from operations (as a result of new management
of the company by individuals with significant industry experience), the
expansion of operations and the sale of additional stock through private
placements. Should the Company be unable to achieve its financial goals, the
Company may be required to significantly curtail its operations.
3. BUSINESS COMBINATION
As described in Note 1, GWP acquired a 51% interest in TMD for $730,000 in
October 1998 and subsequently sold GWP including its 51% interest in TMD to Mr.
Smith in February 1999.
28
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarize the fair values of the assets acquired and
liabilities assumed in connection with the acquisition:
[Download Table]
Current assets $ 1,237,312
Property and equipment 2,096,196
Net assets held for sale 275,000
Other assets, including goodwill 2,482,466
Current liabilities (2,709,148)
Other liabilities (2,651,826)
-----------
$ 730,000
===========
Net assets held for sale represent a circuit board design operation of TMD,
sold in December 1998. Net operating results of the circuit board design
operation were not significant.
In conjunction with the acquisition, the Company guaranteed the future purchase
of the 49% minority interest of TMD. The purchase price of the minority
interest is based on a multiple of earnings before interest, taxes,
depreciation and amortization ("EBITDA"), to be completed between October 2000
and October 2001.
The accompanying statement of operations include net sales of approximately
$948,000 and $2,119,000, respectively, net loss of approximately $124,000 and
$973,000, respectively, and net loss per share of less than $0.01 and $0.03,
respectively, attributed to TMD for the years ended December 31, 1999 and 1998.
However, because of the sale of TMD subsequent to year-end, unaudited pro forma
results of operations for the years ended 1999, 1998 and 1997 are not
considered meaningful and have not been presented.
On February 11, 1999, Kenneth H. Smith resigned as President and Chief
Executive Officer of and as a director of the Company. Pursuant to the
severance agreement entered into between the Company and Mr. Smith, the Company
sold its wholly owned subsidiary, GWP to Mr. Smith. The sole asset of GWP was
an ownership interest in an amount of capital stock of TMD, which represented a
controlling interest in TMD. This majority interest in TMD was acquired by GWP
in early October 1998 for $730,000, which was contributed by the Company to GWP
for the express purpose of purchasing TMD stock. In addition to contributing to
GWP the funds necessary to complete the purchase of a controlling interest in
TMD, from early October, 1998 through February 11, 1999, the Company through
GWP also contributed
29
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $1,337,000 in working capital funds to TMD. The Company also
guaranteed certain existing obligations of TMD, including the repayment of
TMD's Fidelity Funding Inc. loan, pursuant to the Loan and Security Agreement
between TMD and Fidelity Funding, Inc., dated as of November 30, 1998.
The net liabilities of GWP and its interest in TMD, and the Company's net
investment in and advances to GWP, TMD and Mr. Smith at December 31, 1998, are
summarized as follows:
[Download Table]
Current assets $ 1,572,243
Property and equipment 1,848,503
Other assets, including goodwill 2,734,750
Current liabilities (4,357,782)
Notes payable (2,770,626)
-----------
Net liabilities (972,912)
Investments and advances 1,497,470
-----------
Net investments and advances $ 524,558
===========
The sale of GWP was concluded on February 15, 1999. The total purchase price
for GWP was approximately $2,451,000. This amount represented the Company's
estimate of its investment in TMD through February 11, 1999 and certain legal
and other transactional costs Mr. Smith agreed to assume. A portion of the
purchase price for GWP was paid in the form of a promissory note executed by
Mr. Smith in the principal amount of $1,234,832 bearing interest annually at
the Wall Street Journal's prime rate of interest plus two percent (2%). The
principal amount of Mr. Smith's promissory note and any accrued unpaid interest
were due and payable in full on February 15, 2002. Mr. Smith and TMD also
agreed to guarantee any of TMD's obligations for which the Company was a
guarantor. Repayment of the promissory note and the performance of Mr. Smith's
guaranty obligations to the Company were secured by Mr. Smith's pledge to the
Company of his 3,000,000 shares of the Company's Common Stock. The performance
of GWP's guaranty obligations to the Company was secured by GWP's pledge to the
Company of all of its stock holdings in TMD.
A portion of the purchase price was paid through Mr. Smith's sale of 3,366,152
shares of Common Stock to USV, a limited liability company controlled by
Gregory Earls, the Co-Chairman of the Company's Board of Directors and Co-Chief
Executive Officer of the Company. The aggregate purchase price of these shares
was approximately $1,076,000. USV paid this purchase price directly to the
Company, which applied such funds toward the amount payable by Mr. Smith to the
Company in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that
date for a share of Common Stock, as quoted on the OTC Bulletin Board. The
closing sale price on April 1, 1999 was $0.35 per share, for a total sale price
of $1,050,000. The aggregate sale price of $1,050,000, less the expenses
associated with the sale, was applied in reduction of Mr. Smith's indebtedness
to the Company. The 3,000,000 shares of Common Stock were sold to USV. In
payment of the $1,050,000 sale price, USV executed a promissory note in favor
of the Company. This promissory note was secured by USV's pledge of the
3,000,000 shares of Common Stock it purchased on April 1, 1999 and was paid in
full by October 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse judgment
is rendered against the Company by any court of competent jurisdiction in
connection with its guaranty obligations of TMD, or (iii) any new default under
Mr. Smith's promissory note. The note amount of $525,000 was outstanding at
December 31, 1999. Due to the uncertainty related to the collection of this
note, the company fully reserved this amount.
30
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company continues to be subject to the guarantee of the future purchase of
the 49% minority interest in TMD. Mr. Smith and TMD agreed to guarantee any of
TMD's obligations for which the Company was a guarantor.
4. IMPAIRMENT AND RESTRUCTURING CHARGE
As a result of changes in the Company's management in 1997, a thorough
evaluation of the Company's operations was undertaken, including, among other
things, the carrying value of long-lived assets in light of the recurring
operating losses and uncertainty regarding the recoverability of such assets.
Effective April 1, 1997, management determined that based on the current market
conditions and an analysis of the projected undiscounted future cash flows
calculated in accordance with the provisions of SFAS No. 121, the carrying
amount of its goodwill and investments in technology may not be recoverable. The
resultant impairment of these long-lived assets necessitated a write-down of
$1,408,839, comprised of unamortized goodwill and investments in technologies of
Newdat, Inc. and SensonCorp Limited, acquired in January 1995, and subsequently
administratively dissolved.
During 1997, management also evaluated personnel requirements in light of the
current level and mix of operating revenues. The evaluation resulted in
management, sales and administrative personnel being reduced from 16 to three,
and the number of inmate employees being reduced from approximately 125 to
approximately 75. Effective April 1, 1997, the Company recorded a restructuring
charge in the amount of $196,903 to record the costs of severance and lay-off
of excess personnel. The restructuring was completed as of June 30, 1997.
During 1998, the Company hired four management-level personnel to generate and
manage anticipated growth. Effective December 28, 1998, in light of actual
operations, three of these management-level personnel were terminated in
addition to one executive level officer. Total severance to be paid to these
individuals was approximately $49,000 plus an additional $41,000 in expenses,
which was recorded and accrued as restructuring charges as of their termination
date.
As described in Note 2, Messrs. Smith and Melton resigned effective February
11, 1999, and February 15, 1999, respectively. Total severance and other costs
related to their resignations of approximately $231,000 which was recognized by
the Company in the first quarter of 1999.
5. INVENTORIES
At December 31, inventories consisted of the following:
[Download Table]
1999 1998
-------- --------
Raw material $217,348 $511,766
Work in progress 42,180 239,243
Finished goods 1,047 60,846
-------- --------
260,575 811,855
Reserve for obsolescence -- 226,000
-------- --------
$260,575 $585,855
======== ========
The Company provided a reserve for obsolete raw materials which was charged to
operations of $0, $0 and
31
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$306,888, during the years ended December 31, 1999, 1998 and 1997,
respectively.
6. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
[Download Table]
1999 1998
---------- ----------
Equipment $1,419,825 $1,211,508
Furniture and fixtures 315,465 335,337
Leasehold improvements 166,081 161,895
---------- ----------
1,901,371 1,708,740
Less accumulated depreciation 1,329,988 1,208,991
---------- ----------
$ 571,383 $ 499,749
========== ==========
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$178,230, $68,573, and $90,072, respectively.
7. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
[Download Table]
1999 1998
---------- ----------
Compensation $ 200,873 $ 292,905
Property taxes 24,793 17,111
Accrued restructuring cost -- 90,000
Travel -- 63,950
Other 41,921 7,586
---------- ----------
$ 267,587 $ 471,552
========== ==========
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligation consisted of the following at
December 31:
[Download Table]
1999 1998
---------- ----------
Capital lease obligation, with monthly payments
of $778 through July, 2002 and
imputed interest of 9% $ 21,540 $ 28,834
5% unsecured note payable; due July 27, 2000 7,764 19,078
9% unsecured note payable; due October 1, 2000 11,760 --
---------- ----------
Total $ 41,064 $ 47,912
========== ==========
32
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Annual maturities of long-term debt and capital lease obligation are as
follows:
[Download Table]
CAPITAL
DECEMBER 31, NOTES LEASES TOTAL
-------------- ------------ -------------
2000 $ 19,524 $ 9,336 $ 28,860
2001 - 9,336 9,336
2002 - 5,446 5,446
------------- ------------ ------------
Subtotal 19,524 24,118 43,642
Less amounts representing interest - 2,578 2,578
------------- ------------ ------------
$ 19,524 $ 21,540 $ 41,064
============= ============ ============
During 1998, the Company converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,000 shares of the Company's stock.
9. LEASES
During 1997, the Company operated under a verbal lease and work program
agreement with WCC, The Texas Department of Criminal Justice, Division of
Pardons and Paroles ("TDCJ") and the City of Lockhart, Texas, for its LTI
operations to lease approximately 27,800 square feet of manufacturing and
office space. In 1998, WCC and the Company executed a written agreement
effective through January 31, 2001, which will include an automatic three-year
extension. The Company executed similar agreements with WCC and the California
Department of Corrections for its MacFarland, California facility and the State
of Utah, Department of Corrections, Division of Correctional Industries for its
Draper, Utah facility. The MacFarland agreement commenced on June 1, 1998 and
provides for 600 square feet with annual rentals of $1 per year through March
2001. The Draper agreement commenced in June 1998 and provides for 5,000 square
feet with annual rentals of $1 per year with renewal options through June 2004.
The Company entered into an agreement with the State of California, acting by
and through its Director of General Services, with the approval of the
Department of Corrections, to lease space in the Chuckawalla Valley State
Prison (CVSP) located in Blythe, California. The lease provides for
approximately 20,300 square feet of warehouse space, and approximately 16,000
square feet of office space for a total of 36,300 square feet, located within
the boundaries of CVSP. The lease commenced on September 1, 1998 and terminates
on August 31, 2003, with monthly payments of $726.
The Company leases approximately 3,000 square feet for its executive offices in
Marietta, Georgia, under a three-year operating lease expiring September 30,
2000. Monthly rentals under this lease are $4,287. The Company is obligated
under several operating leases for vehicles and office equipment.
33
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rentals due under operating leases are as follows:
[Download Table]
YEAR AMOUNT
---- -----------
2000 $ 82,279
2001 20,701
2002 20,701
2003 16,798
-----------
$ 140,479
===========
Rental expense for the years ended December 31, 1999 and 1998 and 1996 were
$84,994, $109,204, and $62,308, respectively.
10. INCOME TAXES
The Company incurred taxable losses for each of the three years ended December
31, 1999. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at December 31,
1999 and 1998 are as follows:
[Download Table]
1999 1998
------------- -------------
DEFERRED TAX ASSETS
Current assets and liabilities $ 283,000 $ 190,000
Net operating loss carryforwards 5,169,000 4,218,000
Valuation allowance (5,452,000) (4,408,000)
------------- -------------
$ -- $ --
============= =============
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $13,602,000 for federal income tax purposes that expire in years
2004 through 2014. The Company's utilization of losses prior to 1997 to offset
future taxable income is limited to approximately $574,000 per year as a result
of a change in control of the Company, in accordance with Internal Revenue Code
Section 382. Utilization of the losses and other deferred tax assets may be
further limited by alternative minimum tax provisions.
34
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of income tax computed at the United States federal
statutory tax rate (34 percent) to income tax benefit is as follows:
[Download Table]
1999 1998 1997
---------- ---------- ----------
Benefit at United States statutory rate $ (872,000) $ (872,000) $ (763,000)
State tax benefit (154,000) 154,000 135,000
Permanent differences (18,000) 30,000 214,000
Change in deferred tax asset
valuation allowance 1,044,000 688,000 414,000
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
11. STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Common Stock and Earnings Per Share
The Company had 40,000,000 authorized shares of $0.02 par value common stock
and 10,000,000 authorized shares of $0.02 par value preferred stock at December
31, 1999. Shares of common stock issued and outstanding were 29,195,278 at
December 31, 1999 and 1998.
Diluted EPS have not been presented due to stock options and warrants which
comprised common stock equivalents totalling 51,887,158, 267,400 and 267,400
for the years ended December 31, 1999, 1998 and 1997, respectively, being
anti-dilutive.
During 1996, the Company issued 1,845,300 shares of common stock to retire
outstanding notes payable of $571,237 to Carlton Technologies Ltd. At the time
the stock was issued to Carlton Technologies Ltd., only $421,032 of notes
payable was due; therefore a receivable of $150,205 has been recorded as a
reduction of stockholders' equity.
Effective January 1, 1997, a group of individuals entered into an agreement
with the then majority owners of the Company to acquire control of the Company.
The individuals were principally Mr. Smith and Mr. James V. Warren. Mr. Smith
served as the Company's Chairman of the Board of Directors, President and Chief
Executive Officer (CEO). As a part of the agreement, certain accounts
receivable, accrued expenses and notes payable arising from companies
controlled by former majority owners, Tintagel, Ltd., Laura Investments, Ltd.,
and Laura Technologies, Ltd., in the amount of $748,215 were contributed to
additional paid-in capital effective December 31, 1996. In 1997, in connection
with the foregoing acquisition, the Company issued 6,000,000 shares of the
Company's common stock in exchange for $536,613 and a note in
35
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the principal amount of $63,387 from Mr. Smith. The note receivable from Mr.
Smith has been recorded as a reduction in stockholders' equity. In addition,
the investor group led by Mr. Smith and Mr. Warren acquired an additional
9,169,000 shares of the Company's common stock from companies owned or
controlled by Tintagel, Ltd., and Komen Holdings Pty, Ltd., another affiliate
of the former majority owners.
During 1997, the Company converted $119,000 in aggregate principal of certain
notes payable plus accrued interest of $26,950 into 583,800 shares of the
Company's common stock. Also during 1997, the Company issued 87,000 shares of
the Company's common stock to Mr. Melton, and 54,000 shares of the Company's
common stock to Mr. C. Ray Brumbeloe, a former officer of the Company, at the
current market price.
During 1998, the Company converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,215 shares of the Company's stock.
During 1999, the Company exercised its rights under the pledge agreement and
sold 3,000,000 shares pledged by Mr. Smith (See note 3).
Warrants
In conjunction with issuance of $275,000 convertible debentures in January
1998, the Company granted the placement agent warrants to acquire 275,000
shares of Common Stock for $1. The warrants are exercisable for five years. All
of the warrants remain outstanding at December 31, 1999.
Convertible Preferred Stock Issued with Warrants
Commencing on July 9, 1998 and continuing through May 11, 1999, the Company
received $5,000,000 under an agreement with USV which provided that the Company
would issue to USV warrants to purchase 500,000 shares of Common Stock (the
"Warrants") and shares of its Series A Preferred Stock pursuant to Regulation
"D" promulgated under the Securities Act of 1933. Of the $5,000,000, amounts
received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The
shares of Series A Preferred Stock and the Warrants were issued to USV on May
11, 1999. The net proceeds to the Company were used to provide working capital
to support the Company's 1999 and 1998 operations and fund the 1998 purchase of
a controlling interest in TMD by the Company's wholly owned subsidiary, GWP. The
Earls Family Limited Partnership made a contribution of approximately $400,000
to USV, which allowed USV to complete the payment of the $500,000 purchase price
for the Warrants and the Series A Preferred Stock to the Company. The Earls
Family Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of
the Company's Board of Directors and the Co-Chief Executive Officer of the
Company, controls both USV and the Earls Family Limited Partnership. Promptly
after USV was issued the Warrants, USV transferred the Warrants to the Earls
Family Limited Partnership. On November 29, 1999, the terms of the Series A
Preferred Stock were amended to cancel the right of the holders of the Series A
Preferred Stock to receive an annual dividend and to change the conversion price
for the Series A Preferred Stock to $0.122. The amended Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock setting
forth these changes was filed with the Delaware Secretary of State on December
31, 1999.
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership has the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of Series A Preferred Stock were converted and the Warrants
were exercised in full, the holders of such securities would be entitled to
receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one
share of Common Stock at a price of $1.00 per share. If all of USV's shares of
Series A Preferred Stock were converted, USV would be
36
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entitled to receive 47,649,758 shares of Common Stock. Because that amount
exceeds the number of shares of Common Stock available for issuance under the
Company's Restated Certificate of Incorporation, USV and the Company entered
into an agreement, dated March 1, 2000, whereby USV waived its right to convert
its shares of Series A Preferred Stock until an appropriate amendment to the
Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State.
Stock Compensation Plans
Prior to 1997, the Company created three qualified and four nonqualified stock
options plans that provide for the granting of incentive and nonqualified
options to purchase the Company's Common Stock to selected officers, other key
employees, directors and consultants. General terms provide for three-year
vesting beginning one year from date of grant, with an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after the employee's termination, or ten years from the date of
grant. The qualified and nonqualified option plans have 531,600 and 290,000,
shares, respectively, available for grant.
During 1999, the Company created the U.S. Technologies, Inc. 1999 Stock Option
Plan to provide for the granting of incentive and nonqualified options to
purchase the Company's Common Stock to selected officers, other key employees,
directors and consultants. General terms provide for an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after the employees terminations, or ten years from the date of
grant. The maximum number of shares that can be reserved under this plan is
3,115,000.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock Based Compensation, effective for the Company
beginning January 1, 1996. SFAS No. 123 defines a "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. If a company elects to use the intrinsic
value method, then pro forma disclosures of earnings and earnings per share are
required as if the fair value method of accounting was applied. The effects of
applying SFAS No. 123 in the pro forma disclosures are not necessarily
indicative of future amounts because the pro forma disclosures do not take into
account the amortization of the fair value of awards prior to 1995.
Additionally, the Company is expected to grant additional awards in future
years.
The Company has elected to account for its stock options under the intrinsic
value method outlined in APB No. 25. The fair value method requires use of
option valuation models, such as The Black-Scholes option valuation model, to
value employee stock options, upon which a compensation expense is based. The
Black-Scholes option valuation model was not developed for use in valuing
employee stock options. Instead, this 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 pride volatility.
Because the Company's 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, it is
management's opinion that the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options. Under the
intrinsic value method, compensation expense is only recognized if the exercise
price of the employee stock option is less than the market price of the
underlying stock on the date of grant.
37
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with SFAS No. 123, the fair value for the Company's employee
stock options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the year
ended 1999 (no options were granted during 1997 or 1998).
[Download Table]
Risk-free interest rate 5.4%
Dividend yield -%
Volatility factor 75.0%
Weighted-average expected life (in years) 5.0
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
[Download Table]
1999 1998 1997
------------ ------------ ------------
Net loss applicable to common shareholders
As reported $(2,781,595) $(2,564,709) $(2,242,745)
Pro forma (2,939,384) (2,564,709) (2,242,745)
Earnings per share
As reported (0.10) (0.09) (0.08)
Pro forma (0.10) (0.09) (0.08)
A summary of stock option activity, and related information for the years 1997,
1998 and 1999 follows. (There was no activity in 1998):
[Enlarge/Download Table]
QUALIFIED PLANS NONQUALIFIED PLANS
--------------------------------- -----------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ------------- -----------------
Outstanding at January 1, 1997 113,580 2.50 -- --
Granted -- -- -- --
Exercised (50,000) 0.25 -- --
Forfeited or canceled (46,180) 4.27 -- --
--------- ----- --------- -----
Outstanding at December 31, 1997
and 1998 17,400 0.54 -- --
Granted 1,495,000 0.12 1,975,000 0.12
Exercised -- -- -- --
Forfeited or canceled -- -- -- --
--------- ----- --------- -----
Outstanding at December 31, 1999 1,512,400 0.13 -- --
========= ===== ========= =====
Options exercisable at:
December 31, 1997 and 1998 17,400 0.54 -- --
December 31, 1999 1,512,400 0.14 1,975,000 0.12
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1999 is $0.10 per share.
38
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company granted options, outside the option plans described
above, to four other parties to purchase 200,000 shares of the Company's Rule
144 stock at $0.50 per share exercisable at various times through May 17, 2001.
The Company also granted to a former board member the option to purchase
150,000 shares at $0.125 per share through May 25, 1999. The validity of the
options granted to the former board member has been questioned by the Company
based on several factors. The Company is evaluating the status of these options
and will take appropriate actions based on that determination. As of December
31, 1998 and 1999, 100,000 of the $0.50 options and all of the $0.125 options
remain outstanding.
The range of exercise prices of all outstanding and exercisable options at
December 31, 1999, is $0.125 - $0.84375, with a weighted average exercise price
of $0.15. The options have remaining contractual lives of 0.4 - 9.8 years, with
a weighted average contractual life of 9.7 years.
12. BUSINESS AND CREDIT CONCENTRATION
The Company is dependent upon certain customers for a major portion of its
sales. High End (a customer of the LTI segment) accounted for 15% of sales for
the years ended December 31, 1999. The sales of services to IBM represented
approximately 43% and 66% for the years ended December 31, 1998 and 1997,
respectively. Texas Instruments accounted for approximately 7% and 19% of total
sales for the years ended December 31, 1998 and 1997, respectively. Amounts due
from three customers, Dell, Vektronix (customers of the LTI segment) and AIS (a
customer of the LTI - Blythe segment) , constituted 87% of the Company's
accounts receivable at December 31, 1999. IBM and Texas Instruments, along with
other customers, High End Systems and Wyle EMG, comprised approximately 16% of
net accounts receivable at December 31, 1998. The Company generally does not
require collateral on its trade accounts receivable.
During all years presented, the Company's operations were primarily in
electronics manufacturing. Until such time as the Company successfully expands
into the call center, furniture manufacturing, and other industries, the
Company will be economically dependent on the health of the electronics
manufacturing industry and the niche in which it provides products and
services.
The Company is also dependent on WCC since the operations of its primary
operating facility is subject to the work program agreement described in Note
9, above.
13. RELATED PARTIES
As of December 31, 1998, the Company had notes and interest receivable from Mr.
Smith aggregating approximately $536,000 in the accompanying balance sheet under
the caption "Net investments in and advances to subsidiary held for sale." In
early 1999, in connection with Mr. Smith's resignation and his purchase of GWP
from the Company, Mr. Smith paid the amount of proceeds of the sale of 3,366,152
shares of Common Stock to USV and executed a three-year note for approximately
$1.2 million in connection with the purchase of GWP (Note 3).
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $38,000, $11,000 and $17,000 for 1999,
1998 and 1997, respectively. During 1998, the Company converted $275,000 of
debentures and accrued interest into 563,215 shares of common stock.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that
date for a share of Common Stock, as quoted on the OTC Bulletin Board. The
closing sale price on April 1, 1999 was $0.35 per share, for a total sale price
of $1,050,000. The aggregate sale price of $1,050,000, less the expenses
associated with the sale, was applied in reduction of Mr. Smith's indebtedness
to the Company. The 3,000,000 shares of Common Stock were sold to USV. In
payment of the $1,050,000 sale price, USV executed a promissory note in favor
of the Company.
39
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FOURTH QUARTER ADJUSTMENTS
Significant adjustments increasing the fourth quarter loss in 1999 and 1998 are
indicated below. There were no significant adjustments increasing the fourth
quarter loss in 1997.
[Download Table]
1999 1998
-------- --------
Increase of allowance on note from former officer $288,000 $ --
Increase of allowance for doubtful accounts -- 140,000
Accrued expenses -- 90,000
-------- --------
Aggregate adjustment $288,000 $230,000
======== ========
Aggregate adjustment per common share $ 0.01 $ 0.01
======== ========
16. SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing the performance. The
Company's chief operating decision makers aggregate operating segments based on
the location of the segment and whether it is prison-based or free-world. Based
on the quantitative thresholds specified in SFAS 131, the Company has determined
that it has four reportable segments. The five reportable segments are USXX
(Marietta, Georgia), LTI (Lockhart, Texas), TMD (Georgetown, Texas) and STI
(Draper, Utah) and LTI Blythe (Blythe, California). USXX is the corporate
office, LTI is a prison-based manufacturer of computer circuit boards, TMD is a
freeworld manufacturer of computer circuit boards, STI is a prison-based
inbound/outbound call center and LTI Blythe is a prison-based furniture
manufacturer. Other segments include manufacturing of modular office furniture
components and cut-and-sew operations.
The accounting policies of the operating segments are the same as those
described in Note 1, Summary of Significant Accounting Policies. Segment
amounts disclosed are prior to any elimination entries made in the
consolidation. The chief operating decision-makers evaluate performance of the
segments based on operating results and EBITDA. EBITDA represents earnings
before interest expense, provision (benefit) for income taxes, depreciation and
amortization, restructuring and special charges. EBITDA is not a measurement in
accordance with generally accepted accounting principles ("GAAP") and should
not be considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
profitability or liquidity. All companies do not calculate EBITDA in the same
manner and, accordingly, EBITDA may not be comparable with other companies.
40
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information by segment follows (in thousands):
[Enlarge/Download Table]
LTI
1999 USXX LTI TMD STI BLYTHE OTHER TOTAL
----------------- -------- ------- ----- ------ ------ ----- -------
Net sales $ -- $ 1,901 $ 948 $ 22 $ 876 $ 18 $ 3,765
Operating profit
(loss) (1,461) (837) (66) (67) (243) (52) (2,726)
Depreciation
and
amortization 8 53 50 22 43 2 178
EBITDA (1,809) (67) (112) (61) (344) (57) (2,450)
Total assets $ 2,887 $ 576 $ -- $ 115 $ 346 $ -- $ 3,924
======= ======= ===== ===== ===== ==== =======
1998 USXX LTI TMD STI OTHER TOTAL
----------------- -------- ------ ------- ------- ------- -------
Net sales $ -- $3,918 $ 2,119 $ 13 $ 57 $ 6,107
Operating profit
(loss) (1,552) 212 (660) (262) (172) (2,434)
Depreciation
and
amortization 1 9 33 14 12 69
EBITDA (1,503) 394 (698) (181) (91) (2,079)
Total assets $ 4,386 $1,031 $ 657 $ 337 $ 215 $ 6,626
======= ====== ===== ===== ===== =======
1997 USXX LTI TMD STI OTHER TOTAL
----------------- -------- ------ ------- ------- ------- -------
Net sales $ -- $4,167 $ -- $ -- $ -- $ 4,167
Operating profit
(loss) (1,706) 152 -- -- (751) (2,305)
Depreciation
and
amortization 1 67 -- -- 111 179
EBITDA (578) 397 -- -- -- (181)
Total assets $ 2,956 $ 532 $ -- $ -- $ -- $ 3,488
======= ====== ===== ===== ===== =======
41
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
December 31,
----------------------------------
1999 1998
------------ ------------
(in thousands)
Assets
Total segment assets $ 3,924 $ 6,626
Eliminations (2,832) (4,258)
------------ ------------
Reported total assets $ 1,092 $ 2,368
============ ============
17. CONTINGENCIES
The Company had guaranteed certain liabilities, of up to $2.5 million, and the
purchase of the minority interest in TMD, based on a multiple of earnings
before interest, taxes, depreciation and amortization (Note 3). On February 16,
1999, in the case styled Fidelity Funding vs. Ken Smith, et al, in the 14th
Judicial District of Dallas County, Texas, Fidelity Funding, Inc. (Fidelity)
sued Mr. Smith and the Company in the amount of $839,449, the amount allegedly
owed by Technology Manufacturing and Design, Inc., ("TMD") to Fidelity under a
secured credit facility extended by Fidelity to TMD in November of 1998. The
suit resulted after the Company sold its 51% interest in TMD to Mr. Smith and
after TMD filed bankruptcy. The suit seeks to enforce a payment guaranty of the
Company with respect to the balance of principal and accrued interest owed by
TMD to Fidelity under this secured credit facility. The bankruptcy court for
the Western District of Texas has permitted Fidelity to collect the remaining
principal and interest due under this credit facility from the accounts
receivable securing this credit facility. As a result, Fidelity decided not to
pursue its action against the Company and on June 17, 1999, filed a nonsuit,
dismissing this lawsuit.
The Company is involved in several lawsuits related to prior management and
claims against companies acquired or controlled by prior management. One of
these suits claim that the Company is liable as a successor-in-interest for
amounts owned by entities whose assets were acquired by the Company. The
aggregate amount claimed under this lawsuit, including interest and attorney
fees, is approximately $54,000. Management believes the claim is without merit,
and accordingly is vigorously defending the lawsuit.
The Company is involved in two lawsuits brought by former management employees
who claim to be entitled to certain severance benefits and back pay. The
aggregate amount claimed under these lawsuits, including interest and attorney
fees, is approximately $360,000. Management is vigorously defending these
lawsuits.
Effective April 1, 1997 the Company accrued a charge in the amount of $252,256
to recognize the costs which were deemed to be "probable" under SFAS No. 5,
Accounting for Contingencies, to resolve outstanding litigation. As of December
31, 1999 and 1998, the remaining balance of this accrual to resolve outstanding
litigation was $28,000.
18. SUBSEQUENT EVENTS
On February 21, 2000, the Company entered into an agreement ("E2E Acquisition
Agreement") to acquire all of the outstanding stock of E2Enet, Inc. ("E2E").
The Company initially agreed to acquire E2E by purchasing all of E2E's
outstanding stock in exchange for shares of a Series B Mandatorily Convertible
42
Preferred Stock, par value $0.02 per share ("Series B Preferred Stock"), to be
newly created by the Company. However, in late March 2000, it became clear that
if the E2E Acquisition remained structured as a share exchange, the transaction
would not qualify for treatment as a tax-free exchange because certain
stockholders of E2E would receive consideration other than voting stock of the
Company. To preserve the tax-free nature of the E2E Acquisition, the Company,
E2E and certain stockholders of E2E agreed on April 5, 2000 to change the
structure of the E2E Acquisition from a share exchange to a merger between E2E
and a wholly-owned subsidiary of the Company, U.S. Technologies Acquisition
Sub, Inc. ("U.S. Technologies Acquisition"). Accordingly, the Company proposes
to acquire E2E by causing U.S. Technologies Acquisition to merge with and into
E2E. U.S. Technologies Acquisition will be the surviving corporation of this
merger, and upon the consummation of this merger, U.S. Technologies Acquisition
will change its name to E2E Net, Inc. As a result, upon the completion of the
E2E Acquisition, E2E will become a wholly owned subsidiary of the Company.
When the E2E Acquisition closes, E2E's stockholders will be issued shares of
Series B Preferred Stock, which will have a stated liquidation preference
aggregating approximately $11,200,000, and certain minority stockholders of E2E
will also receive options to purchase shares of the Company's common stock, par
value $0.02 ("Common Stock"). Upon their mandatory conversion as described
below, these shares of Series B Preferred Stock will be converted into
approximately 56,000,000 shares of Common Stock.
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the
closing of the E2E Acquisition. To raise these funds, the Company recently
commenced the private placement sale of $1,250,000 of additional shares of its
Series A Convertible Preferred Stock, par value $0.02 (the "Series A Preferred
Stock"), to USV Partners, LLC ("USV"), a limited liability company controlled
by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer,
which is the Company's largest shareholder, and at least $5,000,000 and up to
$8,750,000 of its newly created Series C Mandatorily Convertible Preferred
Stock, par value $0.02 ("Series C Preferred Stock"), to accredited investors.
The Company has thus far received subscriptions or indications of interest for
the purchase of approximately $5,200,000 of its Series C Preferred Stock, of
which approximately $3,000,000 consists of subscriptions by USV. In connection
with the private placements of the Series A Preferred Stock and the Series C
Preferred Stock, the Company has received to date subscriptions for a total of
approximately $6,450,000. The Series C Preferred Stock would be convertible
into shares of Common Stock at a conversion price per share ranging from $0.90
to $2.00, which will be determined based on the closing sale price for a share
of Common Stock on the closing date of the E2E Acquisition, as quoted on the OTC
Bulletin Board. The proceeds of these offerings will be used primarily to
finance additional investments in new and existing Internet businesses that
focus on B2B and B2C e-commerce, the payment of costs incurred and liabilities
assumed in connection with the E2E Acquisition and related business
transactions and ongoing working capital needs.
The Company intends, and is required by the E2E Acquisition Agreement to call a
meeting of its stockholders for the purpose of amending the Company's Restated
Certificate of Incorporation. The proposed amendment (the "Charter Amendment")
will increase the number of shares of Common Stock the Company is authorized to
issue to an amount sufficient to permit the conversion to Common Stock of all
of the Company's then-outstanding shares of all of its authorized and
designated series of convertible preferred stock, including the Company's
Series A Preferred Stock, the Series B Preferred Stock to be issued to E2E's
stockholders, and the Series C Preferred Stock. In addition to authorizing a
sufficient number of shares of Common Stock to permit conversion to Common
Stock of all of the Company's outstanding shares of convertible preferred
stock, the Charter Amendment's proposed increase to the number of shares the
Company is authorized to issue will also include an amount sufficient to permit
the conversion to Common Stock of any other then-outstanding securities or
options, which are convertible into or otherwise permit the holder thereof to
purchase or otherwise receive shares of Common Stock. Upon the acceptance of
the Charter Amendment by the Secretary of State of the State of Delaware, the
Series B Preferred Stock and the Series C Preferred Stock will automatically be
converted into shares of Common Stock. USV has also indicated its intention to
convert all of its shares of Series A Preferred Stock to Common Stock at that
time.
The Company also announced that it will expand its Board of Directors in
connection with the completion of the E2E Acquisition. The new directors will
also stand for election at the Company's next annual meeting, which also is
when the Company expects to present the Charter Amendment for Stockholder
approval.
43
E2E has various interests in several development stage Internet e-commerce
companies. These portfolio companies principally include:
- Buyline.net, Inc. ("Buyline"). Buyline is a developer of B2B
e-commerce applications, and is developing a proprietary
Internet software program designed to be a universal platform
for entry-level B2B e-commerce, linking buyers and sellers.
Buyline's application for RFP/RFQ technology (Request for
Proposal/Request for Quotation) will be used in a full range
of on-line advertising, on Internet based directories, and in
commercial web sites.
- VIPRO Corporation ("Vipro"). Vipro is an Internet surety
company, which provides repair guarantees against viruses that
harm computers. The Company has e-commerce relationships with
a leading Internet utility company, a credit card association,
one of the largest warranty claims administrators in the world
and over 170 Internet service providers.
- Urban Box Office Network, Inc. ("UBO"). UBO is a developer of
networked multi-media web sites that will provide e-commerce
services to participants interested in urban culture,
information, entertainment and products.
- OneMade, Inc. ("OneMade"). OneMade is a developer of an
e-commerce community that will serve participants in the
arts, crafts, and hobby industries. OneMade intends to
connect wholesalers, retailers, consumers and artists in
these fields.
- bluemercury, Inc. ("bluemercury"). bluemercury operates an
e-commerce site for upscale cosmetic products and
accessories. It intends to pursue a "clicks and bricks"
strategy by also acquiring high-end cosmetic specialty
retailers.
- MEI Software Systems, Inc. ("MEI"). MEI provides customized
software systems to manage the databases of trade
associations, professional associations, fund-raising
organizations and chambers of commerce.
The Company intends to restructure some of E2E's investments in its portfolio
companies and provide these entities with additional working capital to
stimulate their further growth and expansion. E2E's initial investment in
Buyline will be restructured and increased so that Buyline becomes a controlled
operating subsidiary. On February 28, 2000, Buyline and the Company entered into
an Agreement in Principle (the "Buyline Agreement"), which provides that E2E
will invest $3,000,000 in Buyline and will receive in exchange shares of
Buyline's common stock. This investment will consist of (1) the conversion of
E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment
of in kind services already rendered, and (3) an additional $1,000,000 cash
investment. In addition, the two principal stockholders and creditors of E2E
will each invest $250,000 in Buyline. Simultaneous with entering into the
Buyline Agreement, the Company hired a technology executive who will become
Buyline's President and Chief Executive Officer.
The Company presently expects to complete definitive documentation for, and to
complete, the Buyline restructuring shortly after closing the E2E Acquisition.
Upon the consummation of the transactions contemplated by the Buyline Agreement,
the Company, through E2E, will be the controlling shareholder of Buyline, and
will designate and supervise the Buyline management team.
44
Also, on March 13, 2000, the Company reached an agreement with Vipro to invest
directly or indirectly through E2E an additional $1,000,000 in Vipro, on or
before April 12, 2000, in exchange for additional equity in the form of shares
of Vipro's Series B Convertible Preferred Stock. On the same day, one of the
principal creditors and stockholders of E2E that will become a stockholder of
the Company upon the completion of the E2E Acquisition invested $1,000,000 in
Vipro on terms identical to the Company's pending investment.
E2E has not been actively involved in the development of its portfolio
companies' business strategies, operations and management teams. Many of these
portfolio companies are now largely supported by later stage investors and
managed by executive groups independent of E2E. With the exception of Buyline,
it is anticipated that E2E will retain its minority equity position in these
original portfolio companies. It is anticipated that in the future the Company
principally will follow the investment precedent established by its proposed
restructuring of Buyline by seeking ownership positions, voting interests and
management roles in new portfolio companies that provide the Company, through
E2E, operating control of such portfolio company.
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers and directors of the Company:
[Download Table]
Name Age Position with the Company
---- --- -------------------------
Gregory Earls (1)(2) 53 Co-Chairman and Co-Chief Executive Officer
James V. Warren (2) 55 Co-Chairman and Co-Chief Executive Officer
J. L. (Skip) Moore (3) 45 Executive Vice-President and Chief Operating Officer
(1) On February 11, 1999, Mr. Earls was elected to the positions of Chairman
of the Company's Board of Directors and Chief Executive Officer. Since
November 29, 1999, Mr. Earls has served as the Co-Chairman of the Board of
Directors and the Co-Chief Executive Officer with James V. Warren.
(2) On November 29, 1999, Mr. Warren was elected a Director, Co-Chairman of
the Company's Board of Directors and Co-Chief Executive Officer of the
Company. In his positions as Co-Chairman and Co-Chief Executive Officer of
the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman
and Chief Executive Officer of the Company were modified to include Mr.
Warren. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Appointment of New Management Team."
(3) On November 29, 1999, Mr. Moore was elected to serve as the Executive Vice-
President and Chief Operating Officer of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Appointment of New Management Team."
DIRECTORS AND EXECUTIVE OFFICERS
The Company's By-Laws provide that the Board of Directors shall consist of not
less than one nor more than 15 members. Each member of the Board of Directors
is elected for a one-year term and until his or her successor is elected and
qualified. The Company intends to expand its Board of Directors in connection
with its completion of the E2E Acquisition. The new directors will also stand
for election at the Company's next annual meeting. See "Business - E2E
Acquisition." The Company's current directors and executive officers are as
follows:
Gregory Earls has served as Director of the Company since April, 1998. On
February 11, 1999, he was elected to the positions of Chairman of the Board
and Chief Executive Officer of the Company. Since November 29, 1999, Mr. Earls
has served as the Co-Chairman and Co-Chief Executive Officer with James V.
Warren. Mr. Earls is also the President and a Director of U.S. Viewing
Corporation, an investment management company he founded in 1986. Mr. Earls
also serves as President and a Director of Equitable Production Funding of
Canada, Inc., a communications holding company. From 1992 to 1996, he served as
Chairman of the Board of Directors of Health and Sciences Television Network,
Inc., a distributor of educational programming. In addition, Mr. Earls has also
served as a member of the Board of Directors of Jayhawk Acceptance Corporation,
a finance company of which he was a founder in 1994. Mr. Earls graduated from
the University of Virginia in 1967.
James V. Warren has served as a Director of the Company since November 29, 1999
and has been a significant shareholder of the Company for several years. At the
same time as his appointment as a Director he also began, along with Mr. Earls,
sharing responsibilities as the Company's Co-Chairman of the Board and Co-Chief
Executive Officer. Mr. Warren is co-founder and President of The Spear Group, a
global professional management company, located in Atlanta, Georgia, which
develops and implements solutions for managing personnel and human resources.
Mr. Warren has over 35 years experience in a broad range of management, sales
and marketing and project management positions.
J. L. (Skip) Moore has served as Executive Vice-President and Chief Operating
Officer of the Company since November 29, 1999. Mr. Moore is responsible for
all operating activities of the Company's prison based
47
outsourcing facilities. Most recently Mr. Moore served as Chief Operating
Officer of The Spear Group. Previously he was Chief Executive Officer of
Med-Quip, Inc., a medical products distribution company located in Atlanta,
Georgia. Since receiving his B.A. Degree from Elon College in 1977, Mr. Moore
has held a series of progressively responsible management and executive
positions with various companies.
KEY EMPLOYEES AND CONSULTANTS
Larry C. Cobb, a consultant who assists the Company in meeting its public filing
requirements, has been providing services to the Company since May 1998. Mr.
Cobb's experience includes over 25 years of financial and accounting management
with private and public companies in the manufacturing, construction, retail and
service industries. Since 1994, Mr. Cobb has been an independent consultant
specializing in turn-arounds, reorganizations and start-ups. Mr. Cobb received
his BS degree in accounting from Mississippi State University in 1972 and a
Master of Professional Accountancy degree from Georgia State University in 1978.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain officers and persons who own more than 10% of the
outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Company's Common
Stock held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under Section 16(a). Except as set forth below, to the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company and representations that no other reports were required, during
1999, the Company has complied with all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% shareholders.
Certain holders of more than 10% of the Company's outstanding Common Stock and
directors and officers of the Company failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934. For each such
stockholder, director or officer, the number of late reports and number of
transactions that were not reported on a timely basis are set forth below:
- J.L. (Skip) Moore, the Company's Executive Vice President and
Chief Operating Officer, inadvertently failed to file on a
timely basis a Form 3 under Section 16(a), which was required
to report Mr. Moore's appointment as an executive officer of
the Company on November 29, 1999.
- USV, a beneficial owner of more than 10% of the Company's
outstanding Common Stock, inadvertently failed to file on a
timely basis a Form 4 under Section 16(a), which was required
to report changes in USV's beneficial ownership of Common
Stock on November 29, 1999.
- Gregory Earls, the Company's Co-Chairman and Co-Chief
Executive Officer, inadvertently failed to file on a timely
basis a Form 4 under Section 16(a), which was required to
report changes in Mr. Earls' beneficial ownership on November
29, 1999. Mr. Earls also inadvertently failed to file, on a
timely basis, a Form 5, which was required to report changes
in Mr. Earls' beneficial ownership during fiscal year 1999
attributable to the issuance to Mr. Earls on November 5, 1999
of presently exercisable options under the Company's 1999
Stock Option Plan to purchase 850,000 shares of Common Stock.
48
ITEM 11. EXECUTIVE COMPENSATION.
The table below sets forth all cash and cash equivalent remuneration paid by
the Company and its subsidiaries during the years ended December 31, 1999, 1998
and 1997 to each Co-Chief Executive Officer of the Company and the only other
executive officer of the Company whose compensation for 1999 exceeded $100,000
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
Annual Compensation Long-Term Compensation
----------------------- ------------------------------------------------
Restricted All
Stock Options/ LTIP Other
Fiscal Salary Bonus Other Award(s) SARs Payouts Compensation
Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($)
Gregory Earls (1)
Co-Chairman of the Board 1999 99,918 0 0 0 850,000 0 0
President and 1998 0 0 0 0 0 0 0
Co-Chief Executive Officer 1997 0 0 0 0 0 0 0
James V. Warren (2)
Co-Chairman of the Board 1999 0 0 0 0 1,500,000 0 0
President and 1998 0 0 0 0 0 0 0
Co-Chief Executive Officer 1997 0 0 0 0 0 0 0
John P. Brocard (3)
Senior Vice-President and 1999 113,750 0 0 0 175,000 0 0
General Counsel 1998 110,000 0 0 0 0 0 0
1997 37,500 0 0 0 0 0 0
(1) Mr. Earls was appointed to the position of Chief Executive Officer of the
Company on February 11, 1999. Since November 29, 1999, Mr. Earls has
served as the Co-Chief Executive Officer with James V. Warren.
(2) Mr. Warren was appointed to the position of Co-Chief Executive Officer of
the Company on November 29, 1999.
(3) Effective January 31, 2000, the Company terminated Mr. Brocard's employment
with the Company.
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for travel expenses incurred in serving
on the board of directors. Directors do not receive any compensation for
attendance at meetings of the board of directors.
STOCK OPTION PLANS
The Company's Employee Incentive Stock Option Plans of 1990 and 1996 (the
"Plans") were adopted by the Board of Directors and approved by the Company's
stockholders on June 8, 1990 and July 25, 1996, respectively. The purpose of
the Plans is to attract and retain qualified personnel. The Plans provide that
the aggregate fair market value of the shares of Common Stock for which any
participant may be granted incentive stock options in any calendar year shall
not exceed $100,000 plus any "unused limited carryover" as determined under
Section 422A(c) of the Internal Revenue Code of 1954, as amended. No options
may be granted under the Plans after October 5, 1999 and April 29, 2006,
respectively.
The Plans are administered by the Board of Directors of the Company who
determine, subject to the provisions of the Plans, to whom options are granted
and the number of shares of the common stock subject to option. The exercise
price of such options granted under the Plans must equal at least 100% of the
fair market value of the Common Stock on the date the option is granted.
49
The Plans also provide that no option shall be exercisable more than three
months after termination of an option holder's employment with the Company,
unless such termination of employment occurs by reason of death or permanent
and total disability. In the event of the death or disability of an option
holder while an employee of the Company, the options which were otherwise
exercisable by the option holder or his legal representative or beneficiary of
his estate, may at any time within one year from the date of the option
holder's death or disability be exercised. In no event, however, shall an
option be exercisable after 10 years from the date it was granted.
On May 4, 1993 and September 3, 1993, the Company adopted the 1993 and 1993A
Nonqualified Stock Option Plans, respectively. These plans reserved 500,000 and
800,000 shares respectively, of Common Stock to be granted to non-employees,
directors, and/or other persons associated with the Company whose services have
benefited the Company.
On April 14, 1994, the Company adopted the 1994 Nonqualified Stock Option Plan.
This plan reserved 800,000 shares of Common Stock to be granted and issued to
its officers, directors, employees and/or consultants whose services have
benefited the Company.
During November 1996, the Company adopted the 1996 Nonqualified Stock Option
Plan. The plan reserved 800,000 shares of Common Stock to be granted and issued
to its officers, directors, employees and/or consultants whose services have
benefited the Company.
During 1996, the Company's prior management granted options, outside the option
plans described above, to four other parties to purchase 200,000 shares of the
Company's Rule 144 stock at $0.50 per share exercisable at various times
through May 17, 2001.
During the year ended December 31, 1998, no options were issued or exercised
under the terms of the previously referenced option plans.
On November 1, 1999, the Board of Directors of the Company adopted the 1999
Stock Option Plan (the "1999 Stock Option Plan"). The 1999 Stock Option Plan
reserved 3,115,000 shares of Common Stock to be issued to officers, directors
and key employees of the Company and its subsidiaries and affiliates. On
February 21, 2000, the Board of Directors of the Company approved amendments to
the 1999 Stock Option Plan, which included, among other things, the
authorization to make option grants under such plan to consultants and an
increase in the amount of shares of Common Stock available for sale under the
1999 Stock Option Plan to 22,500,000, subject to certain conditions including
the effectiveness of the Charter Amendment. See "Business - E2E Acquisition."
In early November 1999, the Company granted 1,510,000 options under the 1999
Stock Option Plan to a total of thirteen employees and consultants. These
options carried an exercise price of $0.125 per share, based on the closing sale
price of the Common Stock on November 5, 1999. These options were fully vested
at the time of grant. On November 29, 1999, the Company issued 1,900,000 options
under the 1999 Stock Option Plan to two newly appointed executive officers of
the Company. Pursuant to a Management Agreement executed by these two
individuals and the Company on November 29, 1999, these options carried an
exercise price of $0.122 per share and were fully vested at the time of grant.
See "Certain Relationships and Related Transactions."
BONUS PLAN
On July 14, 1989, the Company's Board of Directors adopted a bonus plan that
sets aside 1%, 2%, and 3% of sales as long as the Company maintains a pre-tax
income of 10%, 15%, and 20% of sales, respectively. The performance standards
will be based on quarterly operating periods. Bonuses are accrued quarterly and
allocated as of the end of each calendar year. No employees have vested rights
in the bonus plan. The Board of Directors of the Company acts as a committee to
determine who participates and the actual amount of the individual bonuses. No
bonuses were paid during 1999, 1998 or 1997 under this plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 20, 2000 with
respect to the beneficial ownership of the Company's Common Stock, by (i) each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each Named Executive Officer and (iii) each
director and executive officer of the Company, and (iv) the directors and
executive officers of the Company as a group.
50
[Download Table]
Shares of
Common Stock Percentage of
Beneficial Owner Beneficially Owned (1) Outstanding Shares (2)
----------------- ---------------------- ----------------------
Gregory Earls (3) 49,214,758 62.74%
Co-Chairman, President and
Co-Chief Executive Officer
USV Partners LLC (4) 47,649,758 61.81%
James. V. Warren (5) 7,857,152 25.39%
Co-Chairman and
Co-Chief Executive Officer
J. L. (Skip) Moore (6) 442,000 1.48%
Executive Vice-President and
Chief Operating Officer
John P. Brocard (7) 95,000 *
Former Senior Vice-President and
General Counsel
All Officers and Directors as a 57,608,910 71.70%
Group (4 individuals)
* Indicates less than one percent (1%)
(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares, or has the right within 60 days to have or share,
voting or investment power or both. Beneficial ownership as reported in the
above table has been determined in accordance with Rule 13d-3 of the Exchange
Act.
(2) The percentage of ownership reported for each person, entity or group
appearing on the foregoing table is based on the 29,444,278 shares of Common
Stock outstanding as of March 20, 2000 plus any shares of Common Stock such
person, entity or group is entitled to receive upon the conversion of
convertible securities or exercise of options that presently are or within
sixty (60) days of March 20, 2000 will be convertible or exercisable.
(3) The amount shown includes 850,000 shares Mr. Earls is entitled to purchase
upon the exercise of presently exercisable stock options issued to Mr. Earls
under the Company's 1999 Stock Option Plan (the "1999 Stock Option Plan"). The
amount shown also includes 47,649,758 shares of Common Stock issuable to USV
upon the conversion of the 500,000 shares of the Company's Series A Preferred
Stock held directly by USV. Further, of the amount shown, 500,000 shares
represent shares of Common Stock issuable to The Earls Family Limited
Partnership upon the exercise of Warrants held directly by the Earls Family
Limited Partnership. 6,366,152 shares of Common Stock held directly by USV are
also included in the amount shown. Mr. Earls, the Co-Chairman and Co-Chief
Executive Officer of the Company, is the sole member of USV Management, LLC,
the manager of USV and is the President of the General Partner of the Earls
Family Limited Partnership, Kandax Corporation. The power of USV to vote and
dispose of the shares of Common Stock it directly owns and would directly own
upon the conversion of the Series A Preferred Stock it owns is exercised
through Mr. Earls. The power of the Earls Family Limited Partnership to vote
and dispose of the shares of Common Stock it would directly own upon the
exercise of the Warrants it owns is exercised through Mr. Earls. Additionally,
of the amount shown, 315,000 shares are owned directly by Equitable Production
Funding, Inc. By virtue of his majority ownership of the outstanding shares of
Equitable Production Funding, Inc., Mr. Earls beneficially owns the shares of
Common Stock directly held by Equitable Production Funding, Inc.
(4) See note (3) above. USV's address is 2001 Pennsylvania Avenue, N.W., Suite
675, Washington, D.C. 20006.
51
(5) The amount shown includes 1,500,000 shares Mr. Warren is entitled to
purchase upon the exercise of presently exercisable stock options issued to Mr.
Warren under the 1999 Stock Option Plan. In addition, of the amount shown,
38,500 shares are owned directly by Mr. Warren's wife, Jane G. Warren. Mr.
Warren shares the power to vote or to direct the vote of and dispose or direct
the disposition of the 38,500 shares of Common Stock directly owned by his wife.
(6) The amount shown includes 400,000 shares Mr. Moore is entitled to purchase
upon the exercise of presently exercisable stock options issued to Mr. Moore
under the 1999 Stock Option Plan.
(7) Effective January 31, 2000, the Company terminated Mr. Brocard's employment
with the Company.
Option/SAR Grants in Last Fiscal Year
[Enlarge/Download Table]
Potential
Realized Value at
Assumed Annual Alternative
Rates of Stock Price to (f) and (g)
Appreciation Grant Date
Individual Grants for Option Term Value
--------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
% of
Number of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise Grant
SARs Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10%($) Value $
--------------------------------------------------------------------------------------------------------------
Gregory Berls 850,000 24,5% .122 November 2009 $244,800 $448,000 $103,700
James AV Warran 1,500,000 43,2% .122 November 2009 $432,000 $777,000 $183,000
Ken Smith -- -- -- -- -- -- --
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
[Enlarge/Download Table]
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized ($) Unexercisable Unexercisable
------------------------------------------------------------------------------------------------
Gregory Earls -- -- 850,000/0 $110,500/$0
James AV Warran -- -- 1,500,000/0 $195,000/$0
Ken Smith -- -- -- --
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On February 11, 1999, Kenneth H. Smith and the Company entered into a Severance
Agreement (the "Severance Agreement"). Under the terms of the Severance
Agreement, Mr. Smith resigned from his positions as the Company's President,
Chief Executive Officer and as a Director. The Company agreed to retain Mr.
Smith as an independent contractor for six (6) months and pay Mr. Smith
$125,000 in six (6) equal installments for such consulting services. In
addition, the Company agreed to pay Mr. Smith approximately $4,800, as
reimbursement for certain automobile expenses.
Pursuant to the Severance Agreement entered into between the Company and Mr.
Smith, the Company sold its wholly owned subsidiary, GWP, to Mr. Smith. The
sole asset of GWP was an ownership interest in an amount of capital stock of
TMD, which represented a controlling interest in TMD. This majority interest in
TMD was acquired by GWP in early October 1998 for $730,000, which was
contributed by the Company to GWP for the express purpose of purchasing TMD
stock. In addition to contributing to GWP the funds necessary to complete the
purchase of a controlling interest in TMD, from early October 1998 through
February 11, 1999, the Company, through GWP, also contributed approximately
$1,337,000 in working capital funds to TMD. The Company also guaranteed certain
existing obligations of TMD, including the repayment of TMD's Fidelity Funding
Inc. loan, pursuant to the Loan and Security Agreement between TMD and Fidelity
Funding, Inc., dated as of November 30, 1998.
The sale of GWP was concluded on February 15, 1999. The total purchase price
for GWP was approximately $2,451,000. This amount represented the Company's
estimate of its investment in TMD through February 11, 1999 and certain legal
and other transactional costs Mr. Smith agreed to assume.
A portion of the purchase price for GWP was paid in the form of a promissory
note executed by Mr. Smith in the principal amount of $1,234,832 bearing
interest annually at the Wall Street Journal's prime rate of interest plus two
percent (2%). The principal amount of Mr. Smith's promissory note and any
accrued unpaid interest were due and payable in full on February 15, 2002. Mr.
Smith and TMD also agreed to guarantee any of TMD's obligations for which the
Company was a guarantor. Repayment of the promissory note and the performance
of Mr. Smith's guaranty obligations to the Company were secured by Mr. Smith's
pledge to the Company of his 3,000,000 shares of the Company's Common Stock.
The performance of GWP's guaranty obligations to the Company was secured by
GWP's pledge to the Company of all of its stock holdings in GWP.
The remaining balance of the purchase price for GWP was paid through Mr.
Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability
company controlled by Gregory Earls, the Co-Chairman of the Company's Board of
Directors and Co-Chief Executive Officer of the Company. The aggregate purchase
price of these shares was approximately $1,076,000. USV paid this purchase
price directly to the Company, which applied such funds toward the amount
payable by Mr. Smith to the Company in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that
date for a share of Common Stock, as quoted on the OTC Bulletin Board. The
closing sale price on April 1, 1999 was $0.35 per share, for a total sale price
of $1,050,000. The aggregate sale price of $1,050,000, less the expenses
associated with the sale, was applied in reduction of Mr. Smith's indebtedness
to the Company. The 3,000,000 shares of Common Stock were sold to USV. In
payment of the $1,050,000 sale price, USV executed a
52
promissory note in favor of the Company. This promissory note was secured by
USV's pledge of the 3,000,000 shares of Common Stock it purchased on April 1,
1999 and was paid in full by October 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse
judgment is rendered against the Company by any court of competent jurisdiction
in connection with its guaranty obligations of TMD, or (iii) any new default
under Mr. Smith's promissory note.
On May 11, 1999, the Company issued 500,000 shares of its Series A Preferred
Stock to USV. The Company also issued Warrants to purchase 500,000 shares of the
Company's Common Stock to USV. The aggregate purchase price paid by USV for the
Series A Preferred Stock and the Warrants was $5,000,000. Promptly after USV was
issued the Warrants, USV transferred the Warrants to the Earls Family Limited
Partnership. Gregory Earls controls both USV and the Earls Family Limited
Partnership. On November 29, 1999, the terms of the Series A Preferred Stock
were amended to cancel the right of the holders of the Series A Preferred Stock
to receive an annual dividend and to change the conversion price for the Series
A Preferred Stock to $0.122. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources,"
and "Market for Registrant's Common Equity and Related Stockholder Matters -
Recent Sales of Unregistered Securities."
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earl's Family Limited Partnership has the
right to exercise its Warrants to purchase Common Stock at any time. Each
Warrant is exercisable for one share of Common Stock at a price of $1.00 per
share. If all of the outstanding shares of Series A Preferred Stock were
converted and the Warrants were exercised in full, the holders of such
securities would be entitled to receive 48,149,758 shares of Common Stock. If
all of USV's shares of Series A Preferred Stock were converted, USV would be
entitled to receive 47,649,758 shares of Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." Because that amount exceeds the
number of shares of Common Stock available for issuance under the Company's
Restated Certificate of Incorporation, USV and the Company entered into an
agreement, dated March 1, 2000, whereby USV waived its right to convert its
shares of Series A Preferred Stock until an appropriate Amendment to the
Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State. See "Business-E2E Acquisition."
On November 29, 1999, the Company entered into a Management Agreement (the
"Management Agreement") with James V. Warren and J.L. (Skip) Moore. Under the
terms of the Management Agreement, Mr. Warren was elected a Director,
Co-Chairman and Co-Chief Executive Officer of the Company. In his positions as
Co-Chairman and Co-Chief Executive Officer of the Company, the Management
Agreement provides that Mr. Warren will serve together with Gregory Earls,
whose former positions as Chairman and Chief Executive Officer of the Company
were modified to include Mr. Warren. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Appointment of New Management
Team."
Also, under the terms of the Management Agreement, Mr. Moore was elected
Executive Vice President and Chief Operating Officer of the Company. The
Management Agreement further provided as follows:
- that the conversion price for the Series A Preferred Stock
will be changed to the average last sale price per share of
Common Stock for the 20 trading days immediately prior to the
execution date of the Management Agreement or a conversion
price of $0.122 per share;
- that USV will use its best efforts to sell at a price of ten
dollars ($10.00) per share in a private placement up to
300,000 shares of the Company's Series A Preferred Stock;
- that Mr. Warren be granted options under the Company's 1999
Stock Option Plan to purchase 1,500,000 shares of Common
Stock; and
- that Mr. Moore be granted options under the Company's 1999
Stock Option Plan to purchase 400,000 shares of Common Stock.
53
To raise funds in connection with the E2E Acquisition, the Company recently
commenced the private placement sale of $1,250,000 of additional shares of its
Series A Preferred Stock to USV and at least $5,000,000 and up to $8,750,000 of
its newly created Series C Preferred Stock to accredited investors. The Company
has thus far received subscriptions or indications of interest for the purchase
of approximately $5,200,000 of its Series C Preferred Stock, of which
approximately $3,000,000 consists of subscriptions by USV. In connection with
the private placements of the Series A Preferred Stock and the Series C
Preferred Stock, the Company has received to date subscriptions for a total of
approximately $6,450,000. These shares of Series A Preferred Stock and Series C
Preferred Stock will be issued to USV concurrent with the completion of the E2E
Acquisition, which is expected to occur in April once all closing conditions
have been satisfied. The proceeds of these private placement sales will be used
primarily to finance additional investments in new and existing internet
businesses that focus on B2B and B2C e-commerce, the payment of costs incurred
and liabilities assumed in connection with the E2E Acquisition and related
business transactions and ongoing working capital needs. See "Business-E2E
Acquisition."
The Company's operations and accounting center is currently co-located in the
offices of The Spear Group in Norcross, Georgia. James V. Warren, the
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer,
is the co-founder and President of The Spear Group. The Company is negotiating
a management services agreement with The Spear Group to provide operating,
accounting and administrative services to the Company's prison facilities.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of financial statements, financial statement schedules and
exhibits.
Report of Independent Certified Public Accountants on financial
statement schedule
Schedule II - Valuation and Qualifying Accounts, Years Ended December
31, 1999, 1998, and 1997
(b) Reports on Form 8-K filed during the last quarter of the year ended
December 31, 1999.
On December 8, 1999, the Company filed a Current Report on Form 8-K
describing the terms of the Management Agreement and the appointment
of two new executive officers of the Company.
(c) Exhibits:
The exhibits required by Item 601 of Regulation S-K are filed herewith.
(See Index of Exhibits)
(d) Financial Statement Schedules:
The Financial Statement Schedules required by Regulation S-X are filed
herewith.
54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated March 17, 2000, except for Note 18,
which is as of April 5, 2000, relating to the consolidated financial
statements of U.S. Technologies Inc., which is contained in Item 8 of this Form
10-K included the audit of the financial statement schedule listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in material
respects, the information set forth therein.
Atlanta, Georgia
March 17, 2000, except for Note 18,
which is as of April 5, 2000
55
U.S. Technologies Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998 and 1997
[Enlarge/Download Table]
Column A Column B Column C Column D Column E
----------------------------------------------------------------------------------------------------------
Additions
(1) (2)
Balance at Charged to Charged to Balance at
beginning cost and other end of
Classification of period expenses accounts Deductions period
----------------------------------------------------------------------------------------------------------
1999:
Accounts receivable -
bad debt reserve $140,000 $ 66,000 $ -- $206,000
Inventory
Obsolescence $211,000 $ -- $211,000 $ --
Note receivable officer -
uncollectible reserve $ -- $526,000 $ -- $ -- $526,000
1998:
Accounts receivable -
bad debt reserve $ 18,000 $136,000 $ 14,000 $140,000
Inventory
Obsolescence $834,000 $ -- $623,000 $211,000
1997:
Accounts receivable -
bad debt reserve $ 90,953 $ 18,000 $ 90,953 $ 18,000
Inventory
Obsolescence $585,000 $306,888 $ 57,888 $834,000
NOTE: These valuation and qualifying accounts were deducted
from the assets to which they apply.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, U.S. Technologies Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 5th day of
April, 2000.
U.S. TECHNOLOGIES INC.
By: /s/ Gregory Earls
---------------------------------------
Gregory Earls
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
[Download Table]
Signature Title Date
--------- ----- ----
/s/ Gregory Earls Co-Chief Executive Officer April 5, 2000
---------------------- Co-Chairman of the Board of Directors -------------
Gregory Earls Acting Principal Accounting Officer
/s/ James V. Warren Co-Chief Executive Officer April 5, 2000
---------------------- Co-Chairman of the Board of Directors -------------
James V. Warren
57
INDEX OF EXHIBITS
[Enlarge/Download Table]
Exhibit No. Description
----------- -----------
2.1 - Stock Exchange Agreement among U.S. Technologies Inc., E2Enet, Inc. and certain
stockholders of E2Enet, Inc., dated as of February 21, 2000, as amended (Filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 28, 2000, and
incorporated herein by reference)
2.2 - Stock Purchase Agreement by and between U.S. Technologies Inc. and Kenneth Smith,
dated as of February 15, 1999 (Filed as Exhibit 2.6 to the Company's Current Report on
Form 8-K, dated February 26, 1999, and incorporated herein by reference)
2.3 - Severance Agreement by and between U.S. Technologies Inc. and Kenneth Smith, dated as of
February 11, 1999 (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February
26, 1998, and incorporated herein by reference)
2.4 - Amended and Restated Stock Purchase Agreement by and between Technology Manufacturing & Design, Inc.
and GWP, Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 20, 1998,
and incorporated herein by reference)
*2.5 - Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by and among the Company, US
Technologies Acquisition Sub, Inc., E2E Net, Inc., Northwood Ventures LLC, Northwood Capital Partners
LLC, Johnathan Ledecky and certain other stockholders of E2E Net, Inc.
3.1 - Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the
Company's Annual Report for the year ended December 31, 1997 and incorporated herein
by reference)
3.2 - Restated By-Laws of the Company (Filed as Exhibit 3.2 to the Company's Annual Report for the year
ended December 31, 1997 and incorporated herein by reference)
4.1 - Form of Certificate evidencing Common Stock of the Company (Filed as Exhibit 3.1 to
Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 33-11720) and
incorporated herein by reference)
4.2 - Revised form of certificate evidencing Common Stock of the Company reflecting the change of the
name to U.S. Technologies Inc. (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
July 14, 1989, and incorporated herein by reference)
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4.3 - Rights Agreement, dated as of October 31, 1997, between the Company and American Securities Transfer
& Trust, Inc., as Rights Agent (Filed as Exhibit 4 to the Company's Current Report, dated as of October
31, 1997, and incorporated herein by reference)
4.4 - Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
of U.S. Technologies Inc., dated February 24, 1999 (Filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, dated May 26, 1999, and incorporated herein by reference)
*4.5 - Amended Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock of U.S. Technologies Inc., dated November 29, 1999
*4.6 - Waiver Agreement between USV Partners, LLC and the Company, dated March 1, 2000
10.1 - 1988 Employee Stock Option Plan, as amended (Filed as Exhibit 10(e) to the Company's
Registration Statement on Form S-8 (No. 33-29048) and incorporated herein by reference)
10.2 - 1990 Employee Stock Option Plan, as amended (Filed as Exhibit 10 to the Company's
Registration Statement on Form S-8 (No. 33-29048) and incorporated herein by
reference)
10.3 - 1993 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 33-62686) and incorporated herein by
reference)
10.4 - 1993A Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 33-69200) and incorporated herein by
reference
10.5 - 1994 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 33-78892) and incorporated herein by
reference)
10.6 - 1995 Employee Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (No. 333-16199) and incorporated herein by
reference)
10.7 - 1996 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 333-16199) and incorporated herein
by reference)
*10.8 - 1999 Stock Option Plan, as amended
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10.9 - Agreement between the Company and Wackenhut Corrections Corporation, dated June 30, 1977 (Filed
as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference)
10.10 - Amendment to Agreement between the Company and Wackenhut Corrections Corporation,
dated January 28, 1998 (Filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by reference)
*10.11 - Industry Work Program Agreement between the Wackenhut Corrections Corporation and
Labor-to-Industry Inc., dated as of April 22, 1998
10.12 - Investment Agreement between the Company and USV Partners, LLC, dated as of July 16,
1998 (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 26,
1999, and incorporated herein by reference)
*10.13 - Lease Agreement by and between the State of California and Labor-to- Industry, Inc.,
dated as of August 1, 1998
10.14 - Promissory Note, dated February 15, 1999, executed by Kenneth H. Smith in favor of
the Company, as amended (Filed as Exhibit 2.2 to the Company's Current Report on Form
8-K, dated February 26, 1999, and incorporated herein by reference)
10.15 - Agreement of Non-Dilution between Technology Manufacturing & Design, Inc. and the
Company, dated February 15, 1999 (Filed as Exhibit 2.3 to the Company's Current Report
on Form 8-K, dated February 26, 1999, and incorporated herein by reference)
10.16 - Stock Pledge and Guaranty Agreement by and between GWP, Inc. and the Company, dated
February 15, 1999 (Filed as Exhibit 2.4 to the Company's Current Report on Form 8-K,
dated February 26, 1999, and incorporated herein by reference)
10.17 - Stock Pledge and Guaranty Agreement by and between Kenneth H. Smith and the Company,
dated February 15, 1999 (Filed as Exhibit 2.5 to the Company's Current Report on Form
8-K, dated February 26, 1999, and incorporated herein by reference)
*10.18 - Industry Work Program Agreement by and between Wackenhut Corrections Corporation,
American Quantum Cycles, Inc. and the Company, dated as of October 19, 1999
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10.19 - Management Agreement by and between the Company, James V. Warren and J.L. (Skip)
Moore (Filed as Exhibit 5.1 to the Company's Current Report on Form 8-K, dated
December 8, 1999, and incorporated herein by reference)
*10.20 - Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures, LLC, Northwood
Capital Partners, LLC and the Company, dated March 13, 1999
*21.1 - Subsidiaries of the Registrant
*23.1 - Consent of BDO Seidman, LLP
*27.1 - Financial Data Schedule (for SEC use only)
--------------
*To be provided herewith
61
Dates Referenced Herein and Documents Incorporated by Reference
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