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
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
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.
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
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
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.
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
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.
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.
ITEM 4.
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.
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.
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
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.
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
U.S. TECHNOLOGIES INC.
CONTENTS
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
U.S. Technologies Inc.
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
See accompanying notes to consolidated financial statements.
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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.
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:
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.
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.
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.
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.
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:
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
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:
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.
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:
The Company provided a reserve for obsolete raw materials which was charged to operations of $0, $0 and
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:
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:
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligation consisted of the following at December 31:
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Annual maturities of long-term debt and capital lease obligation are as follows:
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.
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rentals due under operating leases are as follows:
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:
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.
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:
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
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
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.
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).
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:
A summary of stock option activity, and related information for the years 1997, 1998 and 1999 follows. (There was no activity in 1998):
The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during 1999 is $0.10 per share.
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.
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.
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.
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information by segment follows (in thousands):
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
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.
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10.
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:
(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
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.
ITEM 11.
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
(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.
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.
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.
* 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.
(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
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
ITEM 13.
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
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.
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.
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.
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
U.S. Technologies Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1999, 1998 and 1997
NOTE: These valuation and qualifying accounts were deducted from the assets to which they apply.
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:
INDEX OF EXHIBITS
- -------------- *To be provided herewith