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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to _____________
Commission File Number 0-15960
U.S. TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter.)
State of Delaware 73-1284747
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1130 Connecticut Avenue, N.W., Suite 700
Washington, DC 20036
(Address of principal executive offices.)
Registrant's telephone number, including area code: (202) 466-3100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-K.
YES |X| NO |_|
The aggregate market value of voting common stock held by non-affiliates
of the Registrant at March 31, 2002 was approximately $18,268,148.
The number of shares outstanding of the Registrant's Common Stock, par
value $0.02 per share, at March 31, 2002 was 142,696,221 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy (the "Definitive Proxy Statement") to be
filed with the Securities and Exchange Commission for the Company's 2002 Annual
Meeting of Stockholders are incorporated by reference in Part III of this Form
10-KSB.
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TABLE OF CONTENTS
Page
PART I...................................................................
ITEM 1. BUSINESS..................................................... 1
ITEM 2. PROPERTIES................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................ 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 10
PART II..................................................................
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.... 13
ITEM 6a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.... 20
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 20
PART III.................................................................
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTIONS 16(a) OF THE EXCHANGE ACT........ 21
ITEM 10. EXECUTIVE COMPENSATION....................................... 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................. 21
SIGNATURES .......................................................... 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... F-1
CONSOLIDATED FINANCIAL STATEMENTS........................................ F-2
INDEX OF EXHIBITS........................................................
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PART I
Item 1. Business
Overview
U.S. Technologies Inc. ("U.S. Technologies," "USXX" or the "Company")
develops a network of technology and related companies. The Company builds and
develops its associated companies by providing them with operational assistance,
capital support, industry expertise, other venture business services and access
to a strategic network of business relationships. The Company's associated
companies include technology and emerging growth companies that management
believes have high growth potential.
In April 2000, the Company completed its acquisition of E2Enet, Inc.
("E2Enet"). E2Enet was a privately held company that had interests in several
development stage businesses. The acquisition of E2Enet provided the Company
with a platform to participate in the growing technology industry and the E2Enet
acquisition enhanced our opportunities for creative development of promising
early stage businesses.
In March 2001, the Company completed its acquisition of Yazam.com, Inc.
("Yazam"). Yazam was a privately held company that was engaged in seed-stage
funding and providing services to emerging internet and technology related
start-ups. The acquisition of Yazam further expanded the company's strategy to
develop early stage technology companies.
Historically, the Company has been engaged, directly and through its
wholly owned subsidiary UST Industries, Inc. ("UST"), in the operation of
industrial facilities located within both private and state prisons, which are
staffed principally with inmate labor. UST's prison-based operations are
conducted under the guidelines of the 1979 Prison Industry Enhancement ("PIE")
program.
Current economic and business conditions have created a difficult
environment in which to raise capital and develop or sell early stage technology
companies. The Company's ability to execute its business plan and to continue as
a going concern will be dependant on its ability to raise capital in the next
twelve months. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS - Liquidity and
Capital Resources," "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT," "REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 2.
U.S. Technologies, a Delaware corporation, was incorporated on September
9, 1986 and our principal executive offices are located at 1130 Connecticut
Avenue, NW, Suite 700, Washington, DC 20036.
Acquisitions
In an effort to implement our business strategy of developing and
operating a network of technology companies, we made two significant
acquisitions as detailed below.
E2E Net, Inc.
On April 12, 2000, the Company acquired all of the outstanding stock of
E2Enet. At the time of acquisition, E2Enet owned interests in six development
stage technology companies. In consideration for the exchange of their E2Enet
shares, E2Enet's stockholders were issued 112,000 shares of Series B Mandatorily
Convertible Preferred Stock, which have a stated liquidation preference of
approximately $11,200,000. The Company also assumed liabilities in the aggregate
amount of approximately $3,980,000 in conjunction with the acquisition. Related
to the E2Enet acquisition, the Company agreed to raise new capital funds at or
prior to the closing of the E2Enet acquisition. To raise these funds, the
Company completed the private placement sale of $1,250,000 of additional shares
of its Series A Convertible Preferred Stock and $4,337,914 of its Series C
Mandatorily Convertible Preferred Stock to various accredited investors,
including affiliates of the Chief Executive Officer. The proceeds of these
offerings have been used primarily to finance additional investments in new and
existing technology businesses, the payment of costs incurred and liabilities
assumed in connection with the E2Enet Acquisition and related business
transactions and ongoing working capital needs.
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Yazam.com, Inc.
On March 27, 2001, the Company acquired all of the outstanding stock of
Yazam. Yazam had been engaged in seed-stage funding and business development
services to emerging internet and technology related start-ups. At its peak,
Yazam had investments in 26 companies in several different countries and
approximately 129 employees. Principally due to adverse capital market
conditions, Yazam had effectively ceased capital raising and investment
operations in the fourth quarter of 2000 pending its liquidation or sale.
The purchase price for Yazam was $22.0 million in cash, 27,374 shares of
the Company's Series F Convertible Preferred Stock and warrants to purchase an
aggregate of 8,000,000 shares of the Company's Common Stock at $0.34 per share.
Pursuant to the transaction, the Company acquired approximately $28.5 million of
cash held by Yazam at closing, investments in various associated companies and a
business under contract for sale for $1 million and assumed liabilities of $2.0
million.
Yazam, prior to the acquisition by USXX, wrote down its investment in 19
companies, in accordance with an assessment of the 26 associated companies'
financial condition and potential to execute its business plan. Existing U. S.
Technologies personnel are now developing the remaining associated companies of
Yazam. Gregory FCA, the principal operating subsidiary acquired in the
transaction, is a public relations and investor relations firm which was sold by
the Company on April 1, 2002.
Ownership Position in Our Associated Companies
From April 12, 2000 through December 31, 2001, we acquired interests in
or established 31 technology companies. As of December 31, 2001, the Company
owned interests in the technology companies listed below. We classify companies
in which we, directly or indirectly through wholly owned subsidiaries, have
interests as associated companies. We have indicated below our approximate
percentage of equity ownership in each associated company. Our approximate
equity ownership/voting percentages have been calculated based on the issued and
outstanding common stock of each associated company, assuming the issuance of
common stock upon the exercise of outstanding options and warrants and the
conversion into common stock of outstanding convertible securities. Our
percentage ownership in any of the associated companies is subject to change as
we make new investments and our associated companies accept new investments from
us or other investors.
For those companies in which our equity ownership percentage is greater
than 50%, we generally direct or control all of their operating activities we
account for them as consolidated subsidiaries. For those companies in which our
equity ownership percentage is at least 20%, but not more than 50%, we generally
have significant involvement in and influence over their operating activities,
with board representation and rights to participate in material decisions. We
account for them on the equity basis. For those companies in which our equity
ownership percentage is less than 20%, we may not be actively involved in their
management or day-to-day operations, but may have Board representation and may
provide them advisory services and accordingly we account for them on the cost
basis.
We have identified below by marking with an asterisk (*) each associated
company that is a development stage company. A development stage company has not
yet begun planned principal operations, or has begun planned principal
operations but has not yet generated significant revenue from those operations.
Whether a company is in the development stage is determined on a case-by-case
basis by that company's management. There is no specific revenue threshold that
is applicable in all cases. A development stage company typically will be
devoting most of its efforts to activities such as financial planning, raising
capital, research and development, acquiring operating assets, and recruiting
and training personnel. Currently, 7 of our associated companies are in the
development stage.
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Voting Voting
Associated Ownership Ownership
Associated Company Company December 31, December 31,
------------------ ------------ ------------
Since 2001 2000
----- ---- ----
Bluemercury April 2000 9.12% 9.12%
Gomembers.com November 2000 0.47% 0.47%
OneMade.com April 2000 12.25% 12.25%
Portris October 2000 42.20% 30.40%
PromiseMark, Inc. April 2000 16.86% 16.86%
Final Arrangements, LLC July 2000 0.13% 0.13%
3G Vision, Inc.* March 2001 6.28% N/A
Baobob, Inc.* March 2001 7.00% N/A
Mercantec, Inc. March 2001 0.7% N/A
Gammasite, Inc. March 2001 7.28% N/A
Incepto, Inc.* March 2001 6.58% N/A
Phlair, Inc.* March 2001 9.03% N/A
EZ Face March 2001 5.78% N/A
Quintessence Photonics, March 2001 1.48% N/A
Inc. *
Selis Networks, Inc.* March 2001 8.60% N/A
My Virtual Model/EZ March 2001 0.80% N/A
Size, Inc.
Global Commerce Zone, March 2001 1.33% N/A
Inc.
Mobile Economy, Inc.* March 2001 2.20% N/A
Plant America, Inc. May 2001 1.00% N/A
Xi Software, Inc. December 2001 100% N/A
Pursuant to various nominee agreements, the Company acts as nominee for
additional investors that participated in the various financings of certain
associated companies. Therefore, is some cases, the Company has a voting
ownership that exceeds the economic ownership listed in the table above.
Overview of Associated Companies
Below are summary descriptions of the business of each of our associated
companies:
Bluemercury, Inc. ("Bluemercury") owns high-end cosmetic specialty
retailers and currently operates two retail stores in Washington, D.C. and one
retail store in Philadelphia, Pennsylvania. Additionally, Bluemercury operates
an e-commerce site for cosmetics and accessories.
Gomembers.com ("Gomembers") provides software that helps associations,
labor unions and professional societies manage a variety of tasks, including
payroll and Internet integration. Initially, E2Enet had invested in MEI Software
Systems, Inc. ("MEI"), which provided customized software systems to manage the
databases of trade associations, professional associations, fund-raising
organizations, and chambers-of-commerce. MEI was acquired by Gomembers in
November 2000, thereby converting the Company's approximately 5% interest in MEI
to a 0.47% interest in Gomembers.
OneMade, Inc. ("OneMade") provides an e-commerce community to serve
wholesalers, retailers, consumers, and artists active in the arts, hobby and
crafts industries.
Portris, Inc. ("Portris"), is a software company, that developed
applications that would enable business work groups to exchange information and
collaborate on documents over networks.
In October 2000, the Company completed the acquisition of a 30.4% equity
interest in Portris, Inc. for aggregate consideration of $380,000. In May 2001,
the Company purchased an additional interest in Portris for $555,000 in cash and
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in-kind services. Pursuant to this transaction the Company increased its equity
interest in Portris to approximately 42%. In December 2000, Portis ceased
operations due to its inability to attract additional capital funding and
initial customers and partners for its software applications.
PromiseMark, Inc. ("PromiseMark"), formerly known as Vipro Corporation,
is an Internet surety company providing, among other services, repair guarantees
against computer viruses. PromiseMark 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.
Final Arrangements, LLC ("Final Arrangements") is an Internet start-up
that offers the ability to make funeral arrangements online. Initially, E2Enet
had invested in WebMilestones.com ("WebMilestones"). WebMilestones was acquired
by Final Arrangements in December 2000, thereby converting the Company's 37.35%
interest in WebMilestones to a 0.13% interest in Final Arrangements.
3G Vision, Inc. ("3G Vision") is a start-up that is developing with a
focus on video and image processing applications. 3G Vision's mission is to
upgrade low quality video into high-resolution video and images. 3G Vision's
solutions involve stitching and super-resolution technologies currently
unavailable on the market today.
Baobab, Inc. ("Baobob") is developing technology that will allow humans
to conduct a direct dialogue with machines, using natural spoken language as the
communication channel. In January 2001, Baobab raised $2.5 million from Intel
Capital, Big Sky Partners, and Yazam.
Mercantec, Inc. ("Mercantec") distributes complete e-commerce solutions
through Internet Service Providers and web hosting providers to small and
medium-sized businesses. Initially, Yazam had invested in CommerceTone Inc.
("CommerceTone"), which provides a powerful suite of eMarketing tools and
services that made Mercantec's products the most fully featured e-commerce
offering available in the marketplace. CommerceTone was acquired by Mercantec in
April 2001, thereby converting the Company's interest in CommerceTone to a 0.77%
interest in Mercantec.
Gammasite, Inc. ("Gammasite") is a technology provider of precise
information cataloging solutions for the enterprise market. The Gammasite's core
technology allows organizations to automatically classify large amounts of
unstructured information transforming unorganized data masses into organized,
easily retrievable taxonomies. The technology is based on the experience of
several scientists at the forefront of machine learning technologies.
Incepto, Inc. ("Incepto") provides software-based systems that ensure the
availability of business-critical databases while maintaining data and
transaction consistency and durability, without decreasing network performance.
Incepto's patent-pending technology clusters databases on independent local or
remote servers. It forms distributed database clusters that provide the highest
level of availability.
Phlair, Inc. ("Phlair") provides a comprehensive marketing and CRM
analytics solution for enterprises. Phlair has signed leading enterprise
clients, analyzes millions of impressions and provides reports that give clients
valuable visibility into their customer interactions leading to increased sales
and customer retention.
EZ Face, Inc. ("EZ Face") is the pioneer in the development of "Personal
Visualization" technology and in the creation of a "Virtual Mirror" utility
through which Internet users can visualize how they actually look when wearing
color cosmetics, jewelry, eyewear and other fashion accessories.
Quintessence Photonics Corporation ("Quintessence") was the first
graduate of DynaFund's EIR (Entrepreneur in Residence) program. The company
plans to develop and produce a family of lasers for telecommunications use based
on a proprietary approach developed by certain respected technologists.
Selis Networks, Inc. ("Selis") develops, markets and sells
next-generation IT performance monitoring and management products.
Revolutionizing the approach to IT network monitoring and management, Selis
focuses on business services, rather than network devices, providing managers
with online information and status reports on all the business services running
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on their networks. During the year ended December 31, 2001, the Company advanced
$540,000 to Selis in the form of secured notes which were converted into new
equity of Selis in March 2002, thus increasing the Company's ownership to
16.88%.
EZ Size, Inc. ("EZ Size") has developed a universal smart sizing service
that partners with the apparel industry to raise consumers' confidence that the
clothes they buy will fit them. The EZ Size process leverages technologies in
imaging and size acquisition; garment acquisition processes; and proprietary fit
algorithms. EZ Size's assets were acquired by My Virtual Model, Inc. ("MVM") and
the sole remaining EZ Size asset is its equity in MVM. MVM is an interactive
shopping solution with a variety of fashion and lifestyle applications.
Global Commerce Zone, Inc. ("Global Commerce Zone") provides the
technology infrastructure and services to facilitate international consumer
e-commerce.
Mobile Economy, Inc. ("Mobile Economy") offers business-to-business
infrastructure solutions and services to the emerging mobile-Internet industry.
Mobile Economy's technology supports leading mobile internet platforms such as
WAP and i-Mode and will be fully leveraged by upcoming 2.5G and 3G
next-generation cellular technologies.
Plant America, Inc. ("Plant America") is a e-commerce business focused on
providing products and communication channels to the commercial landscape and
garden market. The Company obtained its ownership interest through providing
certain services to Plant America.
Xi Software Inc. ("Xi Software") is a software company formed in December
2001 that designs and markets professional services automation tools that
enhance corporate and individual productivity. Xi Software's product family,
TimeAgent, monitors the amount of time a user spends in Microsoft applications
or browser windows and assigns billable time to clients and matters. Xi
Software's assets were contributed to Xi Software by USXX after USXX acquired
the assets through the foreclosure of notes due to USXX by Portris, another USXX
associated company.
PIE Business of USXX
The Company operates, through its wholly owned subsidiary UST Industries,
Inc., industrial facilities located within both private and state prisons. UST
staffs these facilities principally with inmate labor under the guidelines of
the PIE program. In 1979, Congress established the PIE program to encourage
state and local governments to create jobs for prisoners that approximate
private sector work, pay the local prevailing wages for similar work, and enable
inmates to acquire marketable skills to increase their chances for
rehabilitation and employment upon release.
Under a 1997 agreement with Wackenhut Corrections Corporation ("WCC"),
WCC allows the Company to operate as its industry PIE partner in any WCC-managed
correctional facility. WCC also has agreed to purchase products manufactured by
the Company to the extent feasible. WCC runs 47 correctional facilities in the
United States, Australia, England and Canada. In 1998, the company reached an
agreement with the States of California and Florida to expand its operations
into correctional facilities managed by those states.
UST currently operates an electronics plant at WCC's Lockhart, Texas
corrections facility which presently manufactures and repairs circuit boards and
performs various mechanical assembly operations on customer products which were
formerly assembled in Mexico. UST also operates a furniture manufacturing plant
in a state correctional facility located in Blythe, California which presently
manufactures office panel blanks for Unisource, Inc.
Electronics Manufacturing. UST provides contract manufacturing services
including cable and wire harness assembly, finished assembly rework and repair,
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 that the contract manufacturing segment represents
a growth opportunity for the outsourcing operations.
Original Equipment Manufacturers ("OEM") such as Cisco,
Hewlett-Packard, IBM, Lucent, Texas Instruments and others are increasingly
relying on contract manufacturers 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
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of outsourcing by the OEMs include improved time to market, access to state of
the art manufacturing facilities and technologies, and lower production and
procurement costs.
UST specializes in production of circuit boards which are ordered in
shorter production runs and therefore does not compete with the larger companies
in the industry who have invested in high speed production equipment capable of
continuous production runs creating hundreds of thousands of boards.
Furniture Manufacturing. Through its furniture manufacturing facility in
Blythe, California, UST manufactures office partitions and associated parts for
use in the office workstation industry. The facility is capable of producing a
high quality panel comparable to those produced and sold by Herman Miller and
Steelcase. UST's products are designed to be interchangeable with several
manufacturers of office furniture.
The major market served by the UST's furniture manufacturing facility is
the replacement or aftermarket office partition market. This market is dominated
by a few large companies which 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 January 2000, UST contracted with Unisource, Inc.
to produce their panels. This manufacturer requires approximately one-shift, out
of a possible three shifts, of the operating capabilities of the Blythe facility
and accounted for approximately 14% of UST's 2001 sales volume. UST is actively
seeking other customers to increase the plant's output and is negotiating with
Unisource to produce additional products, warehouse finished goods, and provide
order fulfillment services.
Business Strategy. The Company's strategy for UST is to establish itself
as a cost efficient contract manufacturer and outsourcing provider using 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 by maintaining corporate overhead at or
below its present level. The Company's strategy also includes the following:
o Utilize existing expertise in electronics manufacturing to seek new
business opportunities and to fully utilize all of UST's electronic
assembly facility in Lockhart, Texas;
o Provide ancillary services such as the final assembly of products
and installation of parts associated with the primary electronics
manufacturing process;
o Expand UST's furniture manufacturing operations by increasing its
modular furniture production capabilities and introducing other
furniture products; and
o Evaluate UST's ability to provide value added services in other
markets where low cost labor without the soft costs of turnover,
absenteeism, vacations, holidays, and employer paid benefits would
be a competitive advantage.
Management believes that additional capacity can be added, beyond the
existing facilities, without significant additional corporate overhead.
Customers. Historically, UST has been and remains dependent upon certain
customers for a major portion of its sales. The top three customers, Dell
Computer, Unisource Office Furniture, and Circuit Check, Inc. together accounted
for approximately 40% of UST's sales for the year ended December 31, 2001.
Amounts due from two customers, SCI Systems and Unisource Office Furniture
accounted for 44% of total receivables.
Suppliers and Raw Materials. The raw materials used in each of UST's
facilities 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 contract manufacturing and furniture
manufacturing business consists of numerous small, regional companies and a
significantly smaller group of large national companies. UST competes directly
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with the smaller regional companies and avoids the markets dominated by the
national companies. In fact, some of the largest national and international
companies utilize UST for completion of short run production and rework tasks
that are part of their own processes but are too small for them to complete
efficiently. When competing with smaller regional companies, UST has a distinct
cost advantage created by being able to provide manufacturing facilities without
having to incur the same personnel costs as companies that rely exclusively on
free-world employees.
Regulation of the PIE Business. 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, 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:
o 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;
o Workers compensation and unemployment compensation benefits must be
provided;
o Inmate participation in the program must be voluntary and in
writing;
o Organized labor and local private industry must be consulted prior
to the initiation of a new PIE industry;
o 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; and
o 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 UST's facilities. The Company's PIE
operations are also subject to all governmental workplace regulations commonly
associated with a service or manufacturing enterprise.
Government Regulations and Legal Uncertainties
Investment Company Act of 1940. U.S. companies that have more than one
hundred (100) stockholders or whose shares are publicly traded in the U.S. and
are, or hold themselves out to be, engaged primarily in the business of
investing, reinvesting or trading of securities are regulated by the Securities
and Exchange Commission (the "Commission" or "SEC") pursuant to the Investment
Company Act of 1940, as amended. Investment Company Act regulations are
inconsistent with USXX' strategy of actively managing, developing, operating and
promoting collaboration among its network of associated companies. USXX would
not be able to operate its business as a registered investment company.
Management of USXX believes that because of the planned structure of
USXX's interests in its associated companies and its business strategy, USXX is
not currently subject to regulation under the Investment Company Act. However,
USXX cannot assure you that the present structure of its associated companies
interests and its business strategy will preclude regulation under the
Investment Company Act, and USXX may need to take specific actions to avoid
regulation under the Investment Company Act that may not be in its best
interests or consistent with its strategy. To avoid regulation under the
Investment Company Act and related SEC rules, USXX may need to sell assets that
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it would otherwise want to retain and may be unable to sell assets that it would
otherwise want to sell. In addition, USXX may be forced to acquire additional,
or retain existing, income-generating or loss-generating assets which it would
not otherwise have acquired or retained and may need to forego opportunities to
acquire interests in companies that it believed would benefit its business. If
USXX were forced to sell, buy or retain assets in this manner, it may be
prevented from successfully executing its business strategy.
Because gains, losses, income and asset values for technology businesses
can be highly volatile, and because future rounds of financing for our
technology associated companies will dilute USXX's ownership interests, the
financial analyses relevant to its status under the Investment Company Act will
be subject to regular change. The audit committee of USXX's board of directors,
together with USXX' management, will decide financial and other valuation issues
relevant to determining USXX' compliance with the Investment Company Act and
related regulations.
E-commerce Regulation and Other Legal Uncertainties. There are several
new laws and regulations that affect the Internet and e-commerce. For example,
Congress recently enacted laws regarding online copyright infringement and the
collection of personal information and financial data. Additionally, the Federal
government has applied old rules and regulations to this new medium in certain
areas. E-commerce businesses are subject to the same numerous laws affecting
interstate and international commerce in general. However, the application of
these laws to online business is sometimes unclear and subject to litigation in
both domestic and foreign jurisdictions.
Although there generally remains a desire by legislators and regulators
to keep the Internet as unfettered as possible with new rules and regulations,
the Internet's popularity, increased use and its impact on consumers will
undoubtedly foster the adoption of additional laws and regulations on a local,
state and federal level, as well as globally. Current laws and regulations cover
issues such as the collection and use of data from website visitors and related
privacy issues, pricing, content, copyrights, trademarks, promotions,
distribution and quality of goods and services, registration of domain names and
use, and export and distribution of encryption technology. The enactment of
additional laws or regulations may impede the growth of the technology industry,
which could decrease the revenues of our associated companies and place
additional economic burdens on them.
Other specific areas of legislative and regulatory activity include:
Taxes. Through the Internet Tax Freedom Act of 1998, Congress has enacted
a three-year moratorium, ending on October 21, 2001, on the application of
discriminatory, multiple or special taxes by the states on Internet access or on
products and services delivered over the Internet. Congress further declared
that there will be no federal taxes on goods, services and information sold
exclusively over the Internet until the end of the moratorium. However, this
moratorium does not prevent states from taxing activities or goods and services
that the states would otherwise have the power to tax. Furthermore, the
moratorium does not apply to some state taxes on Internet access that were in
place before the moratorium was enacted, provided the tax was generally imposed
and actually enforced. The moratorium also does not affect federal and state
income taxes on the taxable income of e-commerce businesses.
Business Opportunities. An amendment to the Delaware General Corporation
Law, which became effective on July 1, 2000, clarifies that a corporation has
the power to waive in advance, in its certificate of incorporation or by action
of its board of directors, the corporation's interest or expectations in
business opportunities or classes or categories of business opportunities, as
those opportunities may be defined by the corporation. These classes or
categories of opportunities could be defined in many different ways, including
by type of business, by who originated the business opportunity, by who has the
interest in the business opportunity, by the period of time, or by the
geographical location. Our Board of Directors may consider and take action as
permitted by this new statutory provision. If we waive an opportunity in
accordance with this provision, a director would not be required to present the
waived opportunity to us, even if pursuing the opportunity could be in our best
interest, and instead could present it to other businesses, including the
director's own business.
In addition to the specific issues outlined above, other generally
applicable laws may also affect our associated companies and us. The exact
applicability of many of these laws to Internet e-commerce is, however,
uncertain.
Competition
We face intense competition to develop and acquire interests in
technology companies from traditional venture capital firms, companies with
business strategies similar to our own, corporate strategic investors, other
better financed Internet incubators and other capital providers. Competitors
Page 9
with business strategies similar to our own include publicly held CMGI, Internet
Capital Group and Safeguard Scientifics, as well as private companies, including
Idealab. In addition, we may face competition from an emerging group of online
service providers that facilitate relationships between entrepreneurs and
venture capitalists, such as vcapital.com and Garage.com. We also will be
competing with corporate strategic investors that include Fortune 500 companies
that are developing Internet strategies and Internet capabilities as well as
investing in technology companies. Further, certain professional service firms,
directly or through affiliated private investment funds, provide capital and
services to technology companies that are clients. Many of our competitors have
more experience identifying and acquiring interests in technology companies, and
have greater financial and management resources, brand name recognition and
industry contacts than we do.
This intense competition could limit our opportunities to acquire
interests in associated companies or force us to pay higher prices to acquire
these interests. Further, the impact of this competition on the valuation of
technology companies could result in lower returns. In addition, some of our
competitors, including venture capital firms, private companies with business
strategies similar to ours and corporate strategic investors, may have a
competitive advantage over us because they have more flexibility than we do in
structuring acquisitions in companies because they do not need to acquire
majority or controlling interests in companies to avoid regulation under the
Investment Company Act, as discussed above.
Employees
As of December 31, 2001, excluding our non-consolidated associated
companies and our discontinued operations, the company employed approximately 7
persons in corporate and administrative functions and 99 persons in the PIE
business. None of the Company's employees are represented by a union. We
consider our relationships with our employees to be good.
Item 2. Properties.
U.S. Technologies leases executive office space in Washington, D.C. The
office is approximately 8,200 square feet and the lease provides for monthly
payments of $24,000. The lease on the office expires on December 31, 2004. The
Company has occasionally subleased some of this office space to certain
associated companies and other entities.
Our wholly owned subsidiary, UST, operates in a minimum-security prison
in Lockhart, Texas. The lease on the Lockhart facility provides approximately
27,800 square feet of manufacturing and office space through January 31, 2004,
and provides an automatic three year extension unless notification has been
given by either party at least six months prior to the expiration date of the
current term. The amount of square footage may be increased or decreased
depending upon the number of prisoners to be employed. UST 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 October 2006. The lease
provides for monthly payments of $726.
The Company is also obligated under several leases and subleases for
office space in Virginia and New York that it assumed in conjunction with the
Yazam acquisition that it currently does not occupy and has no future intended
use for. The Company is attempting to renegotiate or terminate such leases.
Item 3. Legal Proceedings.
On January 3, 2001, Vektronix S.A. de C.V. and Rodolfo Avala-Avarzagoitia
sued the Company in the 22nd Judicial District Court of Caldwell County, Texas
for fraudulent inducement to enter a contract with UST, breach of warranty and
breach of contract for an unspecified amount of damages. The Company has filed a
counterclaim for breach of contract and a claim on the personal guarantee of
Rodolfo Avala-Avarzagoitia and is seeking $114,777 in actual damages and
recovery of costs. Limited discovery has been initiated and the Company will
vigorously contest this matter. Management does not believe the results of this
litigation will be material to the Company.
Presently, the Company is a party to two pending lawsuits involving
Kenneth H. Smith ("Smith"), the former president, CEO and chairman of the Board
of Directors of the Company. In February 1999, Smith resigned from USXX and
entered into a severance agreement with the Company. In connection with his
Page 10
severance agreement, Smith agreed to sell 3,366,152 shares of USXX stock that he
owned for $875,200. in order to pay all or a portion of the then-outstanding
loans due from him to USXX. Additionally, Smith purchased from USXX the stock of
a wholly owned subsidiary called GWP, Inc. for a $1,234,832 purchase money
promissory note. Smith pledged an additional 3 million shares of USXX stock as
collateral to secure that note. In addition to the right to purchase GWP from
USXX, Smith, was to receive $125,000 as severance. In March 1999, USXX deemed
Smith to be in default of the purchase money promissory note, and when Smith
failed, after proper notice, to cure the default, USXX foreclosed on the note
and sold the 3 million shares of USXX stock that Smith had pledged. USXX applied
the sale proceeds against the outstanding amount of the note, resulting in a
deficiency of $525,000 still owing to USXX on Smith's note related to the
purchase of GWP. Smith then negotiated a Forbearance and Waiver Agreement with
USXX, dated April 15, 1999, in which the Company agreed to temporarily postpone
further collection of the deficiency and Smith agreed, among other things, to
the amount of the deficiency, to the legality of USXX's foreclosure and sale of
his pledged shares, and to a release of any claims he may have had against USXX
and any of its affiliates, officers, directors or representatives.
USXX commenced a lawsuit against Smith on November 9, 2001, in the federal
district court in Austin, Texas. In that case, USXX seeks to reduce to judgment
the outstanding balance of $525,000 plus interest on Smith's indebtedness to the
Company under the purchase money promissory note that he executed in connection
with his purchase of GWP from the Company in February 1999. Additionally, Smith
filed a lawsuit against USXX and others (including Gregory Earls, current CEO of
the Company), on November 13, 2001 in the Superior Court of Fulton County,
Georgia. In his complaint, Smith alleges that USXX still owes him a portion of
the $125,000 severance promised under the severance agreement. Notwithstanding
the release of claims set forth in the April 15, 1999 Forbearance and Waiver
Agreement, Smith has also made claims for fraud, misrepresentation, conversion,
breach of fiduciary duty, rescission, conspiracy and civil RICO, all of which
are based upon his contention that, in connection his February 1999 severance
from the Company, he was misled into selling and pledging the 6,366,152 shares
of USXX stock that he then owned. His complaint seeks compensatory damages in
excess of $41 million, which he contends was the value of the shares of stock
that he sold and pledged at their highest traded value between February 1999 and
the present.
In March 2002, the Company removed Smith's Georgia Superior Court case to
the federal district court in Atlanta, Georgia, which court then dismissed all
of Smith's claims except his claim for additional severance payments. The
Company disputes that additional severance payments are due, but given the
existence of a factual dispute, could not move to dismiss that claim at the
initial pleadings stage.
USXX has indicated that it intends to vigorously pursue collection of
Smith's outstanding indebtedness, although we are not presently aware of any
information regarding Smith's ability to pay. Additionally, USXX has vigorously
defended against Smith's lawsuit against the Company. Since both lawsuits are at
the initial stages and no discovery has been conducted, we are not in a position
to be able to provide an evaluation of the likelihood of a favorable or
unfavorable outcome or an estimate of the amount or range of potential exposure.
From time to time the Company is subject to claims and suits that arise
in the ordinary course of its business. While it is not possible to predict the
ultimate outcome of these matters, the Company believes that any losses
associated with any of such matters will not have a material effect on the
Company's business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter ended December 31, 2001, no matters were
submitted to a vote of security holders of the Company.
Page 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Market Information
The Company's Common Stock has been quoted on the OTC Bulletin Board
under the symbol "USXX" except for the period from May, 2001 until November 12,
2001 during which it was suspended as a result of its failure to file timely the
Form 10-K for the year ending December 31, 2000. However, during that time, the
Company's Common Stock was still traded over-the-counter.
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 quarter ended
March 31, 2002 and the years ended December 31, 2001 and 2000. Prices are as
quoted on the OTC Bulletin Board System or the over-the-counter market.
Quotations reflect inter-dealer prices without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.
Bid
High Low
2002
1st Quarter...................... $0.30 $0.09
2001
4th Quarter...................... $0.35 $0.05
3rd Quarter...................... $0.38 $0.05
2nd Quarter...................... $0.55 $0.10
1st Quarter...................... $0.53 $0.13
2000
4th Quarter...................... $0.86 $0.11
3rd Quarter...................... $1.22 $0.63
2nd Quarter...................... $2.91 $1.00
1st Quarter...................... $5.75 $0.15
On March 28, 2002, the closing bid price of the Company's Common Stock, as
quoted on the OTC Bulletin Board system, was $0.20.
Holders of Common Stock
As of March 31, 2002, there were 609 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 any
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 has raised capital and completed acquisitions through the
offer and sale of securities that are exempt from registration under the
Securities Act of 1933 pursuant to the exemptions from registration provided by
Regulation D promulgated under the Securities Act, Section 4(2) of the
Securities Act or otherwise. As follows are discussions of the sales of
unregistered securities by the Company for the three fiscal years ended December
31, 2001:
Page 12
Year Ended December 31, 2001
On March 27, 2001, in connection with the Company's acquisition of
Yazam.com, Inc., the Company issued 27,374 shares of Series F Preferred Stock,
which are convertible into 27,374,000 shares of the Company's Common Stock, and
warrants to purchase 8,000,000 shares of Company Common Stock.
During 2001, the Company issued 6,512,137 shares of common stock pursuant
to subscriptions during 2000 and 2001 to purchase mandatorily convertible
preferred stock with conversion prices of $0.76 and $0.21 per common share. USV
Partners, LLP ("USV Partners") an affiliate of the CEO of the Company, purchased
1,857,990 shares of common stock in this offering for cash of $394,800.
During late 2001, the Company issued 335 shares of Series G Convertible
Junior Preferred Stock for net cash proceeds of $335,000 to various accredited
investors. The outstanding Series G Preferred Stock is convertible into
2,233,333 shares of the Company's Common Stock. Subsequent to December 31, 2001,
the Company issued an additional 1,921.6 Shares of Series G Preferred Stock for
net proceeds of $1,921,600, which is convertible into 12,810,667 shares of the
Company's Common Stock. Greg Earls, the CEO of the Company, purchased 1,000.5
shares of Series G Stock for $1,000,500.
Year Ended December 31, 2000
On April 12, 2000, the Company received funds for 4,534 shares of Series C
Stock for an aggregate of $4,534,000. Net of issuance costs of $196,806,
proceeds of the offering were $4,337,914. The Series C Stock converted into an
aggregate of 3,126,895 shares of Common Stock in August 2001. Of these shares,
USV Partners purchased 2,750 shares for $2,750,000.
On April 12, 2000, the Company raised $1,250,000 through the sale of
125,000 shares of Series A Preferred Stock, which are convertible into
10,245,900 shares of Common Stock to USV Partners. Upon the conversion of all
Series A Preferred Stock held by USV Partners in November 2001, USV received
39,641,011 shares of Common Stock.
During the fiscal year ended December 31, 2000, the Company received a
total of approximately $5,784,000 in connection with the private placement of
Series A Preferred Stock and Series C Preferred Stock.
In April 2000 in conjunction with the E2Enet Acquisition, E2Enet's
stockholders were issued shares of Series B Preferred Stock, which have a total
liquidation preference aggregating $11,200,000. Upon their mandatory conversion
in August 2001, these shares of Series B Preferred Stock were converted into
approximately 56,000,000 shares of Common Stock.
In December, 2000, the Company entered into an agreement with Buyline.net,
Inc. ("Buyline"), one of the Company's associated companies, and Accenture
whereby the Company issued to Accenture 1,552.5 shares of the Company's Series D
Mandatorily Convertible Preferred Stock ("Series D Preferred"), in full
satisfaction of amounts owed by Buyline to Accenture. The Series D Preferred
were converted into 1,552,500 shares of Common Stock of the Company in August
2001.
Year Ended December 31, 1999
Commencing in July 1998, and continuing through May 1999, the Company
received $5,000,000 under an agreement with USV Partners which provided that the
Company would issue to USV Partners shares of its Series A Preferred Stock
pursuant to Regulation "D" promulgated under the Securities Act of 1933 and
warrants to purchase 500,000 shares of Common Stock. 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 Partners
in May 1999. In November 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.
Other Items
On March 27, 2001, the Company and holders of Yazam Preferred securities
and Yazam Warrants ("Yazam Holders") entered into a Registration Rights
Agreement ("the Yazam Registration Rights Agreement"). Under the Yazam
Registration Rights Agreement, the Yazam Holders have the right to compel the
Company to register their respective shares at the Company's expense. The Yazam
Holders also have unlimited registration rights to be combined, at the Company's
Page 13
expense, with certain registrations of any equity securities by the Company
("piggyback rights"), subject to restrictions which an underwriter might impose
for the sale of the shares. This Yazam Registration Rights Agreement expires by
its terms March 27, 2007.
The Company, USV Partners, Northwood Capital, Northwood Ventures, Ledecky
and other holders of the Company's Series B and C preferred stock, entered into
an agreement regarding registration rights for the Series A, Series B, and
Series C preferred stock and Common Stock into which they are to be converted.
Collectively, the stockholders party to the agreement have the right on three
occasions to compel the Company to register their respective shares at the
expense of the Company and rights on other occasions to have such registration
effected at the expense of the holders. These stockholders also have unlimited
registration rights to be combined, at the Company's expense, with certain
registrations of any equity securities by the Company piggyback rights, subject
to restrictions which might be imposed by an underwriter for the sale of such
shares.
During the years ended December 31, 2001 and 2000, the Company recognized
a non-cash expense of approximately $4.6 million and $14.8 million,
respectively, as a result of deemed beneficial conversion features of the Series
F Preferred Stock issued in 2001 and the Series A, Series B and Series C
Preferred Stock issued in 2000. The beneficial conversion amount was calculated
for each respective preferred series as the excess of the market price of the
Company's Common Stock on the measurement date over the conversion price of the
respective preferred series multiplied by the number of the Company's common
shares to be issued on conversion of each preferred series.
The following table presents the dilution of the Company's Common Stock
that will result upon the conversion of the Company's various convertible
preferred shares that are outstanding at December 31, 2001:
Common Stock outstanding at December 31, 2001............ 137,339,868
Conversion of Series A Preferred Stock................... 10,147,468
Conversion of Series F Preferred Stock................... 27,374,000
Conversion of Series G Preferred Stock................... 2,233,333
-----------
177,094,670*
===========
* Does not include shares that would be issuable upon exercise of stock
options and warrants.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following Management's Discussion and Analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including those set forth elsewhere
in this form 10-KSB and the risks discussed in other SEC filings. The following
discussion should be read in conjunction with our audited Consolidated Financial
Statements and related Notes thereto included elsewhere in this Form 10-KSB.
General
We are a company actively engaged in technology and e-commerce through
our ownership interests in our associated companies. As of December 31, 2001, we
owned interests in 20 technology and e-commerce companies that we refer to as
our associated companies. Although we refer to the companies in which we have
acquired an equity ownership interest as our "associated companies", we do not
act as an agent or legal representative for any of our associated companies, and
we do not have the power or authority to legally bind any of our associated
companies, and we do not have the types of liabilities in relation to our
associated companies that a majority owner of a company would have.
Page 14
Results of Operations
The following table sets forth the Company's results of operations on a
segment basis for the periods indicated:
Years ended December 31,
2001 2000
---- ----
Net Loss
Parent Company............................... $(8,305,240) $(17,686,011)
Associated Companies......................... (6,280,132) (15,080,631)
UST Industries, Inc.......................... (776,494) (642,105)
Discontinued Operations...................... (244,086) --
------------ ------------
Total Net Loss................................. $(15,605,952) $(33,408,747)
============= =============
Parent Company Operations
The parent company operations mainly consist of corporate administration,
investment strategy management and capital raising activities. The discussion of
the results of operations of the parent company segment is set forth below:
Years ended December 31,
2001 2000
---- ----
Revenues
Consulting revenues.......................... $ -- $ 21,000
----------- --------
Total revenues................................. -- 21,000
----------- ---------
Operating Costs and Expenses
General and administrative expense........... 3,529,985 3,126,121
Impairment of long-lived assets ............. 113,041 --
----------- ---------
Total operating costs and expenses............. 3,643,026 3,126,121
----------- ---------
Loss from operations........................... (3,643,026) (3,105,121)
------------ ----------
Other Income (Expense)
Interest, net................................ (65,451) 54,182
Other, net................................... (1,253) 122,617
------------ ----------
Net Loss....................................... (3,709,730) (2,928,361)
Deemed dividends............................... (4,595,510) (14,757,650)
------------ ------------
Net Loss Applicable to Common Shareholders..... $(8,305,240) $(17,686,011)
============ ============
The Company recorded general and administrative expenses of approximately
$3.5 million in 2001 as compared to approximately $3.1 million in 2000. The
major components of the expense for the year ended December 31, 2001 were $1.8
million of legal and accounting expenses incurred in conjunction with the
Company's acquisition of Yazam in March 2001 and other legal issues related to
litigation and SEC compliance. During 2000, the Company relocated its corporate
headquarters in Washington, DC. This was done to accommodate staff increases
necessary to manage its associated companies, which were acquired during 2000
and 2001. Company management is committed to aggressively monitoring the
performance of its associated companies to ensure that its return on investments
is maximized and felt that the increased expenses were required to accomplish
this goal.
During the year ended December 31, 2001, the Company recognized an
impairment of $113,041 related to the write-off of the remaining book value of
certain furniture, fixtures, computer equipment and leasehold improvements.
There was no comparable expense in the year ended December 31, 2000.
During the years ended December 31, 2001 and 2000, the Company recognized
a non-cash expense of $4,595,510 and $14,757,650, respectively, as a result of
deemed beneficial conversion features of the Series A, Series B, Series C and
Page 15
Series F Preferred Stock. The beneficial conversion amount was calculated for
each respective preferred series as the excess of the market price of the
Company's Common Stock on the measurement date over the conversion price of the
Series A, Series B, Series C and Series F Preferred Stock times the number of
the Company's common shares to be issued on conversion of each preferred series.
At December 31, 2001, the Company had net operating loss carryforwards
("NOL's")of approximately $33,000,000 that expire in various years through 2017
and future tax benefits of approximately $24,000,000. These include NOL's and
future benefits resulting from the acquisitions of E2E and Yazam. Under Section
382 of the Internal Revenue Code, a change in ownership, as defined, of over 50%
of the holdings of the largest shareholders results in a limitation on the
availability of NOL's. During the last several years there have been a number of
changes in capital structure, one or more of which may have been a "Section 382
change of ownership". The analysis is complex and subject to review by the
Internal Revenue Service. The future deductions from impairment losses would
also be similarly limited. Accordingly, while management believes that
approximately one half of the tax benefits indicated above are available to
offset future taxable income, there is a Section 382 limitation.
Associated Company Operations
The technology company operations consist of the results of associated
companies accounted for by the consolidation, equity or cost method and the
results of the former E2Enet and Yazam entities that manage the associated
companies. The discussion of the results of operations of the technology company
segment is set forth below:
Years ended December 31,
2001 2000
---- ----
Revenues
Product sales................................ $ -- $ --
----------- ---------
Total revenues................................. -- --
----------- ---------
Operating Costs and Expenses
General and administrative expense........... 2,245,440 2,843,221
Impairment of long-lived assets ............. 3,989,736 12,304,800
----------- ----------
Total operating costs and expenses............. 6,235,176 15,148,021
----------- -----------
Loss from operations........................... (6,235,176) (15,148,021)
------------ -----------
Other Income (Expense)
Interest, net................................ 19,584 --
Equity in loss of associated companies....... (394,558) (640,350)
Other, net................................... 330,018 --
----------- ---------
Net loss before share of minority interest
in loss of subsidiary......................... (6,280,132) (15,788,371)
Minority interest in loss of subsidiary........ -- 707,740
----------- ------------
Net Loss....................................... $(6,280,132) $(15,080,631)
============ =============
During the year ended December 31, 2001, the Company recorded an expense
of $3,989,736 resulting from the impairment of certain assets associated with
the acquired portfolios of E2Enet and Yazam. The impairment included $870,000 on
its investment in OneMade, $506,000 on its investment in PromiseMark, $427,000
on a write-down of the intangible intellectual property of Xi Software, $363,000
on a write-down on its notes to Selis, $355,000 on a write-off of its remaining
investment in Portris due to its ceasing of operations and $1,469,000 due to a
reduction of the estimated fair market value of the Company's investment in its
remaining associated companies. During the year ended December 31, 2000, the
Company recorded an expense of $12,304,800 resulting from the impairment of
certain assets associated with E2Enet. The impairment included approximately;
$3,014,400 due to the bankruptcy of Urban Box Office, $3,866,000 due to the 100%
write-off of goodwill associated with the April 2000 acquisition of E2Enet,
$1,817,000 due to the ceasing of Buyline's operations and $3,607,400 due to a
reduction of the estimated fair market value of the Company's investment in its
remaining associated companies.
During the years ended December 31, 2000 and 2001, the Company recorded
an expense of $394,558 and $640,350, respectively, representing the Company's
share of the losses of certain associated companies acquired from E2Enet and
Page 16
Yazam that are carried on the equity basis. Management does not expect to record
continuing expenses during 2002 as all associated companies are now carried on
the cost basis.
During the year ended December 31, 2001, the Company recorded other
income of $330,018, which was primarily related to a non-cash gain on the sale
of its investment in Buyline in June 2001 of $640,700 offset by approximately
$348,000 of expenses related to the write-off of Yazam-Israel assets and
reserves for lease termination costs.
During the year ended December 31, 2000, the Company recorded a reduction
of $707,740 in its net loss due to the portion allocable to the minority
ownership interest in the Company's consolidated subsidiary, Buyline. There was
no comparable reduction of expense recorded during the year ended December 31,
2001 as the Company's interest in Buyline was sold in June 2001.
UST Industries Operations
UST Industries operations consist of the manufacturing operators of the
Company and its prison-based businesses. The discussion of the results of
operations of the UST Industries segment is set forth below:
Years ended December 31,
2001 2000
---- ----
Revenues
Product sales................................ $ 2,246,766 $2,671,378
----------- ----------
Total revenues................................. 2,246,766 2,671,378
----------- ----------
Operating Costs and Expenses
Cost of sales................................ 2,295,517 2,902,444
Selling expense.............................. 56,792 66,354
General and administrative expense........... 537,398 273,171
Impairment of long-lived assets ............... 147,169 --
----------- ---------
Total operating costs and expenses............. 3,036,876 3,241,969
----------- ---------
Loss from operations........................... (790,110) (570,591)
------------ ---------
Other Income (Expense)
Interest, net................................ -- (19,799)
Other, net................................... 13,616 (51,715)
----------- ----------
Net Loss....................................... $ (776,494) $(642,105)
============ =========
Sales of the Company's electronics manufacturing operations for 2001 were
approximately $1,895,000 resulting in a decrease of 8.2 % compared to 2000.
Management's efforts to increase sales further in 2001 were adversely effected
by quality problems with existing electronics products, which reduced reorders
for 2001 and impaired the ability to attract new customers. The quality
problems, relating to training on manual electronic assembly operations have
been corrected by more extensive supervision of new employees and increased
emphasis on quality control. There were no significant changes in the customer
mix in electronics manufacturing operations for 2001 versus 2000. Management
continues to solicit new customers and encourage additional orders from existing
customers and expects these efforts to be successful.
Sales of the Company's furniture manufacturing operations for 2001 were
approximately $352,000 resulting in a decrease of 32.6% compared to 2000.
Management is attempting to locate new customers for its furniture manufacturing
operations, however due to the specialized nature of the facilities
manufacturing equipment, primarily for planning wooden products, the universe of
potential customers is limited.
Cost of sales, in the amount of $2,295,517, decreased as a percentage of
net sales to 102% for the year ended December 31, 2001 from $2,902,444, which
represented 109% of net sales, for the year ended December 31, 2000. The
decrease in the cost of sales percentage is primarily due to Lockhart's change
of customer mix resulting in the use of more customer supplied materials and
consequently reducing cost of sales as a percent of sales.
Page 17
Gross margin as a percentage of net sales has increased from a negative
8.6% during 2000 to a negative 2.2% in 2001. While the Company still is
experiencing negative gross margins on the manufacturing operations,
improvements have been made in controlling labor and other overhead costs that
have resulting in slight improvement in 2001. Management continues to solicit
customers with products which have longer production runs, but frequently longer
runs consist of smaller homogeneous circuit boards which go to facilities
equipped for high speed processing versus the Company's facility which is better
suited to larger circuit boards which require more hand assembly.
Selling expenses in the amount of $56,792 representing 3% of net sales
during the year ended December 31, 2001 compared to $66,354 representing 2% of
net sales for the year ended December 31, 2000. The increase in the selling
expenses percentage is primarily due to the increased use of outside commission
sales personnel.
General and administrative expenses totaled $537,398 for the year ended
December 31, 2001 representing 24% of net sales, compared to $273,171
representing 10% of net sales for the year ended December 31, 2000. Included in
general and administrative expense for the year ended December 31, 2001 were
legal expenses and settlements of $122,000 related to certain litigation and the
write-off of a bad debt of approximately $64,000.
The Company recorded and impairment expense of $147,169 in the year ended
December 31, 2001 mainly related to the write-off of fixed assets at its Utah
and Lockhart facilities of approximately $97,000 and the write-off of obsolete
inventory of approximately $50,000.
Liquidity and Capital Resources
During the years ended December 31, 2001 and 2000, the Company
experienced negative operating cash flows of $6,212,740 and $5,632,756,
respectively. Negative cash flows from operations resulted principally from
operating losses incurred during these years. The primary operating uses of cash
during 2001 were to fund net losses of $10,766,356, net of non-cash items such
as losses from impairment of assets of $4,249,946, depreciation of $227,320, and
equity in the losses of associated companies of $394,558. Net cash used in 2001
operating activities was unfavorably impacted by a decrease in accrued expenses
mainly related to the payment of $2,000,000 in April 2001 related
to the E2Enet put agreement. The primary operating uses of cash during 2000 were
to fund net losses of $18,651,097, net of non-cash items such as losses from
impairment of assets of $12,304,800, depreciation of $1,750,927, non-cash
expense of stock option issuance of $746,614, and equity in the losses of
associated companies of $640,350. Net cash used in 2000 operating activities was
unfavorably impacted by decreases of $703,979 and $ 1,057,661 in accounts
payable and accrued expenses, respectively, and minority interest in losses of a
subsidiary of $707,740.
During the year ended December 31, 2001, cash provided by investing
activities was $3,896,314 and was largely related to the $6,134,031 net
cash acquired in the acquisition of Yazam and offset by $1,463,961 used for
investments in associated companies and $993,771 for increases in notes
receivable from associated companies. During the year ended December 31, 2000,
investing activities used a net amount of $2,043,750, consisting primarily of
investments of $972,339 in associated companies and increases in notes
receivables from associated companies of $938,364.
Cash provided by financing activities of $2,404,848 and $7,673,165 during
2001 and 2000, respectively, were primarily the net proceeds from the sale of
preferred stock. During the year ended December 31, 2001, the Company raised
$1,188,700 by the sale of additional shares of its Series E Preferred Stock and
shares of its Series G Preferred Stock. During the year ended December 31, 2000,
the Company raised $5,784,000 by the sale of $1,250,000 of additional shares of
its Series A Preferred Stock to USV Partners and $4,534,000 of its newly created
Series C Preferred Stock to accredited investors. Of the 4,534 shares of Series
C Preferred issued, USV Partners purchased 2,725 shares for $2,725,000. The
proceeds of these offerings were used primarily to finance additional
investments in new and existing technology and Internet businesses the payment
of costs incurred and liabilities assumed in connection with the E2Enet
Acquisition and related business transactions and ongoing working capital needs.
Additionally, the Company received loan proceeds of $22.0 million on a
short-term note that was used to pay the cash portion of the Yazam acquisition
consideration. The note was paid back out of the cash acquired in the Yazam
acquisition.
The Series F Stock issued in the Yazam Acquisition is convertible into
27,374,000 shares of Common Stock of the Company. In conjunction with agreements
entered into by the Company and certain Series F stockholders, these
Page 18
stockholders may require the Company to repurchase their shares of Series F
Stock on September 30, 2002 for $300 per share or a total of $5,383,719. The
remaining Series F stockholders can require the Company to repurchase their
shares of Series F Stock for a price per share of the average price of Company
Common Stock as reported on the OTC BB (or other applicable nationally
recognized market quotation system) for the 20 trading days prior to the date of
the request multiplied by 1,000, but not less than $100 per share of Series F
Stock (or $0.10 per common share) or a minimum of $942,827. Because of these
repurchase options, the redemption value of of the Series F Convertible
Preferred Stock will not be included in the Company's stockholders' equity.
The Company cannot determine whether the holders of Series F Stock will
require the repurchase or with certainty whether the average price per share
will exceed $0.10 in these circumstances and therefore cannot with certainty
estimate the maximum financial obligation to repurchase the Series F Convertible
Preferred Stock. Currently, the Company is exploring several alternatives with
regard to its obligations under the repurchase obligation including negotiating
with Series F stockholders to amend or waive the repurchase obligation. However,
if the Company is required to fund its obligation to repurchase Series F Stock,
it may have to raise additional funds to do so and there can be no assurance
that the Company will be able to raise such additional funds.
Historically, the capital the Company needed, both for working capital
and to pursue acquisition opportunities, has exceeded the Company's cash flows
from operations. These shortfalls have been met by the Company's ability to
raise capital through equity transactions involving the Company's convertible
preferred stock. The Company's independent certified public accountants have
raised this matter in their Report on the Consolidated Financial Statements as
contributing to uncertainty over the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern depends on its
ability to raise capital in the next twelve months. Current economic and
business conditions have created a difficult environment in which to raise
capital. The Company's ability to execute its business plan is, and its ability
to continue as a going concern may be, dependant on its ability to raise
capital. See, "BUSINESS - Overview," "SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT," "REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 2.
Management expects that additional funds will be invested in new
and existing associated companies during 2002. The Company is committed to
providing adequate capital to UST's manufacturing operations to improve
operations, increase sales and improve profitability. The sources of funds to
cover these investments and to provide the Company's working capital will come
from operations, sales of the Company's preferred stock and possible sale of
investments in associated companies.
The Company's ability to support its business objectives is dependent
upon its ability to generate cash flow from operations, complete the development
of its capital raising operations and attract investors to its equity offerings.
While there is no assurance that these objectives can be attained, the Company
believes there is a reasonable expectation of achieving these goals. Should the
Company be unable to achieve its objectives and successfully execute its
business plan, the Company may be required to significantly curtail its
acquisition and investment activities.
Critical Accounting Policies
The Company carries its investments in associated companies at cost, as it
does not believe that it has a significant degree of influence over its
investees. The cost amounts are written down, where appropriate for impairment.
The impairment analysis takes into account factors such as business plan
development, analysis of financial and operating data, ability to attract
additional investment capital, retention of key personnel, valuation of
additional investments from other investors and other factors. Charges for
impairment were approximately, $4,250,000 and $12,305,000 for the years ended
December 31, 2001 and 2000, respectively.
Effect of Inflation
Inflation has not had a material impact on the Company's operations.
Page 19
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that all
derivative financial instruments be recognized as either assets or liabilities
in the balance sheet. SFAS No. 133, which was effective for the first quarter of
2001, has not had a material impact on the Company's results of operations,
financial position or cash flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles, effective January 1, 2002. The Company does not believe that the
adoption of these pronouncements will have a material impact on its financial
statements.
FASB also recently issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 143 requires the recognition of a liability for the
estimated cost of disposal as part of the initial cost of a long-lived asset.
SFAS No. 144 supersedes SFAS No. 121 to supply a single accounting approach for
measuring impairment of long-lived assets, including segment of a business
accounted for as a discontinued operation or those to be sold or disposed of
other than by sale. The Company believes that adopting these pronouncements on
its financial statements will not have a material impact on its financial
statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements in this Annual Report on Form 10-KSB contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and are
made on the basis of management's plans and current analyses of the Company, its
business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. Current economic and business conditions have created a
difficult environment in which to raise capital. The Company's ability to
execute its business plan is, and its ability to continue as a going concern may
be, dependant on its ability to raise capital. The above factors, in some cases,
have affected, and in the future could affect, the Company's financial
performance and could cause actual results for 2002 and beyond to differ
materially from those expressed or implied in such forward-looking statements,
even if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.
This Form 10-KSB also contains forward-looking statements concerning
acquisitions and investments, and prospects for acquisitions and investments.
The Company cautions that the actual developments and results of the Company's
acquisitions and investments may differ from its expectations. There can be no
assurance that the conditions necessary to completing any acquisition,
investment or related financing transaction will be satisfied, or that any such
prospective event will occur. Additional investments by the Company or an
unrelated person in any of the Company's associated companies provide no
assurance that such associated company will succeed or that the Company's
investments will be recovered or profitable. The Company's assets and
operations, including results of operations, would be affected materially by the
extent to which the Company and the Company's associated companies continue to
have access to financing sources on reasonable terms in order to pursue its and
their business plans, by the success or failure of the business plans of the
Company, and the Company's associated companies, by economic conditions
generally and particularly in the developing technology market, by competition
and technological changes in the Company's and the Company's associated
companies industries and businesses, and by the results of the Company's and the
Company's associated companies operations if and when operating. In addition,
the occurrence of any of the foregoing events or the failure of any of the
foregoing events to occur would materially affect the Company's assets,
operations and results of operations. See, "BUSINESS - Overview," "MANAGEMENT'S
DISCUSSION AND ANALYSIS - Liquidity and Capital Resources," "REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - Note 2.
Page 20
Item 6a. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk. The Company presently has no derivative financial
instruments. However, the carrying value of other financial instruments, such as
accounts receivable, notes receivable, accounts payable and notes payable
approximate fair value because of their short-term nature. During the years
ended December 31, 2001 and 2000, the Company had a line of credit whereby
interest was based on the prime rate and exposed the Company to interest rate
risk in the event that the prime rate increased and the Company had outstanding
balances under the line of credit. The line of credit was retired as of June 30,
2001.
Impairment Risk. At December 31, 2001, we held ownership interests in 20
associated companies that were not publicly traded. We assess the net realizable
value of these associated companies on a regular basis to determine if we have
incurred any other than temporary decline in the value of our investment. For
the year ended December 31, 2001, we incurred approximately $4,250,000 in
impairment charges, related mainly to our investment in associated companies. We
may incur additional impairment charges in future periods.
Foreign Exchange Risk. Because we have interests in companies that are
domiciled outside the United States, we are subject to foreign currency risk. To
the extent that we maintain deposits in any country outside the United States,
we will be subject to changes in the relative values of the dollar and the
currency of the associated company.
Item 7. Financial Statements and Supplementary Data.
The following Consolidated Financial Statements, and the related Notes
thereto of U.S. Technologies Inc. and the Report of Independent Certified
Public Accountants are set forth on pages F-1 through F-28 and are filed as a
part of this Form 10-KSB.
Report of Independent Certified Public Accountant.......................... F-1
Consolidated Balance Sheets -- December 31, 2001 and December 31, 2000..... F-2
Consolidated Statements of Operations -- Years ended December 31, 2001 and
December 31, 2000 ........................................................ F-4
Consolidated Statements of Stockholder's Equity -- Years ended December 31,
2001 and December 31, 2000 ............................................... F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 2001
and December 31, 2000 .................................................... F-10
Notes to Consolidated Financial Statements................................. F-12
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
a. Change in Certified Public Accountants
The accounting firm BDO Seidman, L.L.P. ("BDO Seidman") was the Company's
independent certified public accountant for the fiscal year ended December 31,
2000 and had served in that capacity since the year ended December 31, 1997. In
a decision approved by the Audit Committee of the Company's Board of Directors,
BDO Seidman was dismissed as the Company's independent public accountants on
August 16, 2001. BDO Seidman's report on the Company's financial statements for
the years ended December 31, 1999 and 2000 contained no adverse opinions or
disclaimer of opinions, and was not qualified as to audit scope, accounting
principles or uncertainties, except that BDO Seidman included an explanatory
paragraph that discusses factors that raise substantial doubt about the
Company's ability to continue as a going concern in its report on the Company's
financial statements for the year ended December 31, 2000. During the years
ended December 31, 1999 and 2000, and through August 16, 2001, the Company
believes it had no disagreements with its independent certified public
accountants on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure. The Company requested that
BDO Seidman furnish it with a letter addressed to the Securities and Exchange
Commission stating that they agree with the foregoing; and providing any
appropriate disclosure pursuant to Regulation S-K, Item 304(a)(1)(v). On
September 6, 2001, BDO Seidman provided the Company a letter, addressed to the
Commission, stating that it agreed with the Company's statements except for
certain internal control issues and provided the information required by the
Commission's Regulation S-K, Item 304(a)(1)(v). The Company confirms that BDO
Seidman advised it of the Item 304(a)(1)(v) information as so described in their
letter. A copy of the BDO Seidman letter was attached to the Form 8-K/A as filed
on August 16, 2001 and is incorporated by reference herein.
Page 21
b. New Independent Certified Public Accountants
The accounting firm, Radin Glass & Co., LLP ("Radin, Glass"), was engaged
for the purpose of reviewing, and reviewed, the Registrant's unaudited interim
financial statements for the quarters ended June 30, 2001 and September 30,
2001, included in the Company's Form 10-Q's for the related periods. Radin,
Glass performed the Company's post-acquisition audit of Yazam.com Inc. for the
years ended December 31, 1999 and 2000 that were previously filed with the
Commission. Radin, Glass was also engaged to be its independent public
accountants to audit the Registrant's financial statements for the year ended
December 31, 2001 and 2000.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
We incorporate by reference the information contained under the captions
"Election of Directors ", "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Executive Officers" in our Definitive Proxy Statement relative
to our annual meeting of stockholders, to be filed within 120 days after the end
of the year covered by this Form 10-KSB Report pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Item 10. Executive Compensation.
We incorporate by reference the information contained under the captions
"Executive Compensation", "Compensation Tables" and "Other Forms of
Compensation" in our Definitive Proxy Statement relative to our annual meeting
of stockholders, to be filed within 120 days after the end of the year covered
by this Form 10-KSB Report pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
We incorporate by reference the information contained under the captions
"Security Ownership of Certain Beneficial Owners and Directors and Officers" in
our Definitive Proxy Statement relative to our annual meeting of stockholders,
to be filed within 120 days after the end of the year covered by this Form
10-KSB Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
Item 12. Certain Relationships and Related Transactions.
We incorporate by reference the information contained under the captions
"Certain Relationships and Related Transactions" in our Definitive Proxy
Statement relative to our annual meeting of stockholders, to be filed within 120
days after the end of the year covered by this Form 10-KSB Report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The exhibits required by Item 601 of Regulation S-B are filed herewith.
(See Index of Exhibits)
(b) Reports on Form 8-K filed during the last quarter of the year ended
December 31, 2001:
(1) On September 6, 2001, the Company filed a Current Report on Form 8-K/A
to report under Item 4 additional disclosure regarding changes to the
Company's Certifying Accountant.
(2) On November 20, 2001, the Company filed a Current Report on Form 8-K to
report under Item 4 the appointment of Radin, Glass & Co., LLP to be
its independent public accountants.
Page 22
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
15th day of April, 2002.
U.S. TECHNOLOGIES INC.
By:/s/ GREGORY EARLS
---------------------
Gregory Earls
Chairman and
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 U.S.
Technologies Inc. and in the capacities indicated.
Signature Title Date
/s/ GREGORY EARLS Chief Executive Officer and Director April 15, 2002
- ------------------------
Gregory Earls
/s/ ARTHUR J. MAXWELL Director April 15, 2002
- ------------------------
Arthur J. Maxwell
/s/ GEORGE J. MITCHELL Director April 15, 2002
- ------------------------
George J. Mitchell
/s/ JAMES V. WARREN Director April 15, 2002
- ------------------------
James V. Warren
/s/ WILLIAM H. WEBSTER Director April 15, 2002
- ------------------------
William H. Webster
/s/ MICHAEL R. SKOFF Chief Financial Officer April 15, 2002
- ------------------------
Michael R. Skoff Principal Accounting Officer
*By: /s/ GREGORY EARLS
---------------------
Gregory Earls
Attorney-in-fact
Page F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
U.S. Technologies Inc.
Washington, D.C.
We have audited the accompanying consolidated balance sheets of U.S.
Technologies Inc. as of December 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity (capital deficit), and cash flows
for each of the two years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
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. at December 31, 2001 and 2000, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital and net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Radin, Glass & Co., LLP
Certified Public Accountants
New York, NY
April 10, 2002
Page F-2
U.S. TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000
- ------------ ---- ----
ASSETS
Current Assets
Cash.................................................. $ 94,532 $ 6,110
Trade accounts receivable, net of reserves of
$77,621 and $158,000................................. 132,909 401,253
Inventory, net ....................................... 137,155 169,834
Subsidiary held for sale (Note 16).................... 420,000 --
Prepaid expenses...................................... 3,777 81,848
-------- --------
Total current assets.................................... 788,373 659,045
PROPERTY AND EQUIPMENT, net of accumulated depreciation 342,230 656,820
INVESTMENTS IN ASSOCIATED COMPANIES (Notes 3 and 4 ).... 2,830,519 3,434,217
NOTES RECEIVABLE ....................................... 252,406 90,000
OTHER................................................... 386,859 450
-------- --------
Total assets............................................$4,600,387 $4,840,532
========== ==========
CURRENT LIABILITIES AND CAPITAL DEFICIT
Current Liabilities
Accounts payable......................................$2,507,287 $1,715,586
Accrued expenses...................................... 604,868 290,985
Series F Preferred - Redemption Value (Note 10)....... 5,383,719 --
Due to Yazam Shareholders............................. 1,236,345 --
Obligation under put option assumed in conjunction
with E2E acquisition................................. -- 2,000,010
Line of credit ....................................... -- 197,392
Notes payable - related parties....................... 1,507,210 21,300
Notes payable ........................................ 5,120 664,561
-------- --------
Total current liabilities...............................11,244,549 4,889,834
NOTES PAYABLE AND CAPITAL LEASE OBLIGATION, less
current portion........................................ -- --
---------- ---------
Total liabilities.......................................11,244,549 4,889,834
---------- ---------
SERIES F PREFERRED - Redemption Value (Note 10)......... 942,827 --
COMMITMENTS AND CONTINGENCIES (Notes 2 and 15)
Page F-3
U.S. TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000
- ------------ ---- ----
CAPITAL DEFICIT (Note 10)
Series A convertible preferred stock; votes as if
converted to common stock; $0.02 par value;
1,000,000 shares authorized; 123,860 and 625,000
issued and outstanding............................ 1,238,600 6,250,000
Series B mandatory convertible preferred stock;
votes as if converted to common stock on certain
issues; $0.02 par value; 0 and 112,000 shares
authorized, issued and outstanding................ -- 11,200,000
Series C mandatory convertible preferred stock;
votes as if converted to common stock on certain
issues; $0.02 par value; 8,750 shares authorized;
0 and 4,534 shares issued and outstanding......... -- 4,337,914
Series D mandatorily convertible preferred stock;
votes as if converted to common stock on certain
issues; $0.02 par value; 2,000 shares authorized;
0 and 1,552.5 shares issued and outstanding....... -- 170,775
Mandatorily convertible preferred stock issuable;
10,000 shares authorized; none issued and outstanding -- 1,199,200
Series F convertible preferred stock; $0.02 par
value, 27,234 shares authorized; 27,234 and 0 shares
issued and outstanding............................ 1,387,244 --
Series G convertible junior preferred stock; $0.02
par value, 5,000 shares authorized; 335 and 0 shares
issued and outstanding............................ 335,000 --
Common stock; $.02 par value; 500,000,000 shares
authorized; 137,339,868 and 29,610,786 shares
issued and outstanding............................ 2,746,798 592,216
Additional paid-in capital......................... 53,712,235 27,601,507
Accumulated deficit................................ (67,006,866)(51,400,914)
----------- -----------
Total capital deficit................................ (7,586,989) (49,302)
----------- -----------
Total liabilities and capital deficit................ $4,600,387 $4,840,532
=========== ===========
See accompanying notes to consolidated financial statements.
Page F-4
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001 2000
- ------------------------ ---- ----
Revenues
Product sales................................ $2,246,766 $2,671,378
Consulting revenues.......................... -- 21,000
--------- ----------
Total revenues................................. 2,246,766 2,692,378
--------- ---------
Operating Costs and Expenses
Cost of sales................................ 2,295,517 2,902,444
Selling expense.............................. 56,792 66,354
General and administrative expense, including
non-cash compensation expense of $15,864 and
$746,614.................................... 6,312,823 6,242,513
Impairment of long-lived assets.............. 4,249,946 12,304,800
---------- ----------
Total operating costs and expenses............. 12,915,078 21,516,111
---------- ----------
Loss from operations........................... (10,668,312) (18,823,733)
----------- -----------
Other Income (Expense)
Interest, net................................ (45,867) 34,383
Equity in loss of associated companies....... (394,558) (640,350)
Other, net................................... (348,558) 70,863
Gain on sale of subsidiary................... 690,472 --
--------- ---------
Net loss from continuing operations before minority
interest in loss of subsidiary............... (10,766,356) (19,358,837)
Minority interest in loss of subsidiary...... -- 707,740
----------- ------------
Net loss from continuing operations before deemed
dividends................................... (10,766,356) (18,651,097)
Deemed dividends............................. (4,595,510) (14,757,650)
----------- ------------
Net loss from continuing operations............ (15,361,866) (33,408,747)
Discontinued operations (Note 16(b)):
Loss from operations of discontinued subsidiary (175,804) --
Loss on disposal of subsidiary............... (68,282) --
------------ ------------
Net Loss....................................... $(15,605,952) $(33,408,747)
============ ============
Basic and diluted loss per common share:
Net loss from continuing operations.......... $(0.28) $(1.14)
Loss from operations of discontinued subsidiary -- --
Loss on disposal of subsidiary............... -- --
------ ------
Net loss..................................... $(0.28) $(1.14)
====== ======
Weighted average common shares outstanding..... 56,199,140 29,408,063
See accompanying notes to consolidated financial statements.
Page F-5
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series B
Series A Mandatorily
Shares Convertible Convertible
Common Treasury Preferred Preferred
Stock Stock Stock Stock
----- ------- ---------- ----------
BALANCE, DECEMBER 31, 1999...... 29,195,278 (400,000) $5,000,000 $ --
Stock issuances related to
exercise of options and
warrants and stock issued in
connection with the
Buyline acquisition.......... 815,508 -- -- --
Retirement of treasury stock... (400,000) 400,000 -- --
Issuance of Series A and C
Preferred Stock for cash
Series B Preferred Stock
in connection with the E2E
acquisition and related deemed
dividends..................... -- -- 1,250,000 11,200,000
Issuance of Series D preferred
stock to settle liability of a
subsidiary.................... -- -- -- --
Proceeds from convertible
preferred stock issuable...... -- -- -- --
Compensatory stock option grants -- -- -- --
Net loss....................... -- -- -- --
---------- --------- ---------- ----------
BALANCE, DECEMBER 31, 2000...... 29,610,786 -- 6,250,000 11,200,000
Issuance of Convertible
Preferred Series G for cash.. -- -- -- --
Proceeds from convertible
preferred stock issuable..... -- -- -- --
Issuance of Series F in
connection with the Yazam
acquisition and related deemed
dividends.................... -- -- -- --
Issuance of common stock upon
conversion of Preferred Stock 108,250,309 -- (5,011,400)(11,200,200)
Issuance on exercise of
warrants..................... 2,773 -- -- --
Cancellation on non-payment
of subscription.............. (524,000) -- -- --
Compensatory stock option
grants....................... -- -- -- --
Series F redemption
adjustment................... -- -- -- --
Net loss...................... -- -- -- --
---------- --------- ---------- ----------
BALANCE, DECEMBER 31, 2001...... 137,339,868 $ -- $ 1,238,600 $ --
=========== ========= =========== ==========
Page F-6
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series C Series D Series A
Mandatorily Mandatorily Convertible Convertible
Convertible Convertible Preferred Preferred
Preferred Preferred Stock Stock
Stock Stock Issuable Issuable
---------- ----------- ---------- --------
BALANCE, DECEMBER 31, 1999...... $ -- $ -- $ 289,703 $ --
Stock issuances related to
exercise of options and
warrants and stock issued in
connection with the Buyline
acquisition -- -- -- --
Retirement of treasury stock.. -- -- -- --
Issuance of Series A and C
Preferred Stock for cash
Series B Preferred Stock in
connection with the E2E
acquisition and related
deemed dividends 4,337,914 -- (289,703) --
Issuance of Series D
preferred stock to settle
liability of a subsidiary -- 170,775 -- --
Proceeds from convertible
preferred stock issuable -- -- -- 1,199,200
Compensatory stock option
grants..................... -- -- -- --
Net loss.................... -- -- -- --
---------- --------- ---------- ---------
BALANCE, DECEMBER 31, 2000.... 4,337,914 170,775 -- 1,199,200
Issuance of Convertible
Preferred Series G for cash. -- -- -- --
Proceeds from convertible
preferred stock issuable.... -- -- -- 853,700
Issuance of Series F in
connection with the Yazam
acquisition and related
deemed dividends............ -- -- -- --
Issuance of common stock
upon conversion of
Preferred Stock.............(4,337,914) (170,775) -- (2,052,900)
Issuance on exercise of
warrants.................... -- -- -- --
Cancellation on non-payment
of subscription............ -- -- -- --
Compensatory stock option
grants....................... -- -- -- --
Series F redemption
adjustment................... -- -- -- --
Net loss.................... -- -- -- --
---------- --------- ---------- ----------
BALANCE, DECEMBER 31, 2001.... $ -- $ -- $ -- $ --
========== ========= ========== ==========
Page F-7
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series F Series G
Convertible Convertible
Preferred Preferred
Stock Stock
--------- ---------
BALANCE, DECEMBER 31, 1999.................. $ -- $ --
Stock issuances related to exercise of
options and warrants and stock issued in
connection with the Buyline acquisition -- --
Retirement of treasury stock.............. -- --
Issuance of Series A and C Preferred Stock
for cash Series B Preferred Stock
in connection with the E2E acquisition
and related deemed dividends.............. -- --
Issuance of Series D preferred stock
to settle liability of a subsidiary...... -- --
Proceeds from convertible preferred stock
issuable................................... -- --
Compensatory stock option grants............ -- --
Net loss.................................... -- --
------ --------
BALANCE, DECEMBER 31, 2000.................... -- --
Issuance of Convertible Preferred Series
G for cash................................. -- 335,000
Proceeds from convertible preferred stock
issuable................................... -- --
Issuance of Series F in connection with
the Yazam acquisition and related deemed
dividend................................... 7,713,790 --
Issuance of common stock upon conversion
of Preferred Stock........................ --
Issuance on exercise of warrants............ -- --
Cancellation on non-payment of subscription. -- --
Compensatory stock option
grants..................................... -- --
Series F redemption
adjustment..................................(6,326,546) --
Net loss..................................... -- --
--------- ----------
BALANCE, DECEMBER 31, 2001.....................$1,387,244 $ 335,000
========== ==========
Page F-8
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Common Treasury Paid-in Accumulated
Stock Stock Capital Deficit
----- ----- ------- -------
BALANCE, DECEMBER 31, 1999.... $ 583,906 $ (227,684) $12,125,450 $(17,992,167)
Stock issuances related to
exercise of options and
warrants and stock
issued in connection with
the Buyline acquisition..... 16,310 -- 191,477 --
Retirement of treasury stock. (8,000) 227,684 (219,684) --
Issuance of Series A and C
Preferred Stock for cash
Series B Preferred Stock
in connection with the E2E
acquisition and related
deemed dividends............ -- -- 14,757,650 (14,757,650)
Issuance of Series D preferred
stock to settle liability of
a subsidiary................ -- -- -- --
Proceeds from convertible
preferred stock issuable.... -- -- -- --
Compensatory stock option
grants...................... -- -- 746,614 --
Net loss..................... -- -- -- (18,651,097)
--------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 2000..... 592,216 -- 27,601,507 (51,400,914)
Issuance of Convertible
Preferred Series G for cash.. -- -- -- --
Proceeds from convertible
preferred stock issuable -- -- -- --
Issuance of Series F in
connection with the Yazam
acquisition and related
deemed dividends............ -- -- 4,595,510 (4,595,510)
Issuance of common stock upon
conversion of Preferred
Stock...................... 2,165,006 -- 20,607,983 --
Issuance on exercise of
warrants................... 55 -- 880,887 --
Cancellation on non-payment
of subscription............ (10,480) -- 10,480 --
Compensatory stock option
grants..................... -- -- 15,869 --
Series F redemption
adjustment................. -- -- -- --
Net loss.................... -- -- -- (11,010,442)
---------- --------- ---------- ------------
BALANCE, DECEMBER 31, 2001....$2,746,798 $ -- $53,712,235 $(67,006,866)
========== ========= =========== ============
Page F-9
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Total
-----
BALANCE, DECEMBER 31, 1999............................... $ (220,792)
Stock issuances related to exercise of options and
warrants and stock issued in connection with the
Buyline acquisition................................... 207,787
Retirement of treasury stock........................... --
Issuance of Series A and C Preferred Stock for cash
Series B Preferred Stock in connection with the E2E
acquisition and related deemed dividends.............. 16,498,211
Issuance of Series D preferred stock to settle
liability of a subsidiary............................. 170,775
Proceeds from convertible preferred stock issuable..... 1,199,200
Compensatory stock option grants....................... 746,614
Net loss............................................... (18,651,097)
-----------
BALANCE, DECEMBER 31, 2000............................... (49,302)
Issuance of Convertible Preferred Series G for cash.... 335,000
Proceeds from convertible preferred stock issuable..... 853,700
Issuance of Series F in connection with the Yazam
acquisition and related deemed dividends.............. 7,713,790
Issuance of common stock upon conversion
of Preferred Stock................................... --
Issuance on exercise of warrants....................... 880,942
Cancellation on non-payment of subscription............ --
Compensatory stock option grants....................... 15,869
Series F redemption adjustment......................... (6,326,546)
Net loss............................................... (11,010,442)
-----------
BALANCE, DECEMBER 31, 2001............................... $ (7,586,989)
=== ===== ============
See accompanying notes to consolidated financial statements.
Page F-10
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 2000
- ------------------------ ---- ----
OPERATING ACTIVITIES
Net loss...................................... $(10,766,356) $(18,651,097)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from activities of subsidiary held
for sale................................... (244,086) --
Gain on sale of subsidiary.................. (640,696) --
Depreciation and amortization................. 227,320 1,750,927
Equity in losses of associated companies.... 394,558 640,350
Loss (gain) on disposal of assets........... -- 42,706
Loss on settlement of note receivable....... -- 76,726
Impairment of long-lived assets............. 4,249,946 12,304,800
Minority interest in loss of subsidiary..... -- (707,740)
Inventory valuation allowance............... -- 80,000
Provision for bad debts..................... -- 158,000
Issuance of stock options................... 15,864 746,614
Changes in operating assets and liabilities,
net of effects of
acquisitions:
Receivables............................... 268,344 (363,964)
Inventory................................. 32,679 10,741
Prepaid expenses.......................... 78,071 40,796
Other assets.............................. (170,303) 25
Accounts payable.......................... 791,701 (703,979)
Accrued expenses.......................... 1,550,228 (3,057,671)
Obligation under put option assumed in
conjunction with E2E acquisition......... (2,000,010) 2,000,010
----------- ---------
Net cash used in operating activities........... (6,212,740) (5,632,756)
----------- ----------
INVESTING ACTIVITIES
Net proceeds from disposal of assets.......... 282,936 --
Investments in affiliates..................... (1,463,961) (972,339)
Cash advances on notes receivable............. (993,771) (938,364)
Capital expenditures.......................... (42,055) (210,861)
Net cash acquired in (paid for) acquisitions.. 6,113,165 77,814
--------- ----------
Net cash provide by (used in) investing
activities..................................... 3,896,314 (2,043,750)
----------- ----------
FINANCING ACTIVITIES
Proceeds from convertible preferred stock
issued or issuable........................... 1,188,700 6,497,411
Investments by minority interests............. -- 707,740
Issuance of common stock...................... -- 167,523
Net borrowings under line of credit........... (197,392) 197,392
Net proceeds from notes payable-related parties 1,485,910 --
Proceeds from issuance of notes payable....... 22,000,000 151,673
Principal payments on notes payable........... (22,072,370) (48,574)
------------ ----------
Net cash (used in) provided by financing
activities..................................... 2,404,848 7,673,165
--------- -----------
Increase (decrease) in cash..................... 88,422 (3,341)
CASH, beginning of period....................... 6,110 9,451
----------- ---------
CASH, end of period............................. $ 94,532 $ 6,110
=========== =========
Page F-11
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 2000
- ------------------------ ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest......... $ 83,058 $17,000
Cash paid during the year for taxes............ -- --
Supplemental schedule of non-cash investing
and financing activities:
Conversion of notes receivable into investments
in Associated Companies........................ 555,000 771,638
Conversion of note receivable acquired in E2E
acquisition to investment in Associated
Companies..................................... -- 747,500
Note payable issued for payment of the premium
of an insurance policy......................... -- 85,000
Common stock issued in conjunction with Buyline
acquisition -- 40,264
Series B mandatorily convertible preferred stock
issued in conjunction with E2E acquisition... -- 11,200,000
Series D mandatorily convertible preferred stock
issued to settle the liability of a subsidiary -- 170,775
Series F convertible preferred stock issued in
conjunction with Yazam acquisition............. 7,713,790 --
Deemed dividends relative to Series A, B, C
and F preferred stock 4,595,510 14,757,650
On March 27, 2001, the Company exchanged 27,434 Shares of Series F convertible
preferred stock for all the outstanding shares of Yazam (See Note 3). In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including net cash
acquired of $ 6,113,165........................... $33,008,049
Cash paid.......................................... (22,000,000)
Warrants issued.................................... (880,000)
Value of Series F convertible preferred shares
issued............................................ (7,713,790)
Acquisition costs.................................. (399,914)
-----------
Liabilities assumed................................ $ 2,014,345
===========
On April 12, 2000, the Company exchanged 112,000 shares of Series B mandatorily
convertible preferred stock for all of the outstanding shares of E2E (See Note
3). In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired....................... $15,180,000
Value of Series B mandatorily convertible preferred
shares issued...................................... (11,200,000)
-----------
Liabilities assumed................................. $ 3,980,000
===========
On April 26, 2000, the Company acquired a controlling interest in Buyline in
exchange for conversion of existing notes and additional cash investment.
Additionally, the Company acquired additional shares of Buyline from its founder
in exchange for 23,008 shares of Company common stock. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of net assets acquired, including net cash
acquired of $77,814.................................. $2,400,000
Notes receivable converted into Buyline equity........ (1,131,000)
Value of Company common shares issued................. (40,000)
-----------
Liabilities assumed................................... $ 1,229,000
===========
See accompanying notes to consolidated financial statements.
Page F-12
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of the Company and Basis of Presentation
U.S. Technologies Inc. (the "Company" or "USXX") develops technology and
emerging growth companies. USXX identifies companies with high growth potential
to optimize their performance by deploying operational assistance, capital
support, and industry expertise. The Company also performs labor and service
intensive "outsourcing" work for Fortune 1000 and other select companies through
its subsidiary. 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.
In April, 2000, the Company acquired E2Enet, Inc., ("E2E") formerly a privately
held technology services company. In March 2001, the Company acquired Yazam.com,
Inc. ("Yazam") which was engaged in seed stage funding to technology related
start-ups. E2E and Yazam made early stage investments in development stage
technology business ("Associated Companies"). Subsequent to the acquisitions of
E2E and Yazam, the Company's focus is developing and operating a network of
technology and related companies. The Company builds and develops Associated
Companies by providing them with operational assistance, capital support,
industry expertise and other business services.
The consolidated statements of operations, cash flows and changes in
stockholders' equity include the accounts of the Company and its subsidiaries.
All material intercompany accounts and transactions are eliminated.
Accounting for Investments in Associated Companies
The various interests that the Company acquires in its Associated Companies are
accounted for under three broad methods: consolidation, equity and cost method.
The accounting method applied is generally determined based on the Company's
voting interest in the Associated Company.
Consolidation - Associated Companies in which the Company owns more than 50% of
the outstanding voting securities are accounted for under the consolidation
method of accounting. Under this method, the subsidiary company's results are
reflected within the Company's financial statements. All significant
intercompany accounts and transactions are eliminated. Participation of other
stockholders in the earnings or losses of the consolidated subsidiary is
reflected as minority interest such that the Company's results of operations
reflect only the Company's share of such earnings or losses.
Equity Method - Associated Companies over which the Company exercises
significant influence are accounted for under the equity method of accounting.
Whether or not the Company exercises significant influence with respect to the
investee company depends on several factors, including but not limited to: an
ownership interest level of 20% to 50% in the voting securities of the
associated company, active participation on the associated company's board of
directors, approval of the associated company's operating and budgetary
decisions, and other ownership rights which allow the Company to exercise
significant control over the associated company. Under the equity method of
accounting, an associated companies results of operations are not reflected
within the Company's consolidated accounts, however, the Company's share of the
earnings or losses of the associated company is reflected in the caption "equity
in loss of investees" in the statement of operations.
Page F-13
Cost Method - Investments not accounted for under the consolidation or equity
methods of accounting are accounted for under the cost method of accounting.
Under this method, the Company's share of the earnings or losses of the
associated company is not included in the statement of operations. However, cost
method impairment charges are recognized in the statement of operations if
circumstances indicate a permanent impairment.
Effective January 1, 2001, the Company determined that all of its investments in
associated companies, except for Portris, Inc., should be accounted for on the
cost method. Management does not believe that it is able to exercise a
significant degree of control and in no case owns more than 20% of the voting
shares. The carrying values as of January 1, 2001 or the balances on the date of
acquisition have been used as the cost as of those dates.
Asset Impairment
The Company evaluates quarterly the carrying value for financial statement
purposes of its interests in, and advances to, each of its Associated Companies
for impairment. These evaluations of impairment are based on achievement of
business plan objectives and milestones of each Associated Company, the fair
value of each ownership interest and advance relative to its carrying value, the
financial condition and prospects of the associated company, and other relevant
factors. For financial statement purposes, the fair value of the Company's
ownership interests in, and advances to, privately held Associated Companies is
generally determined based on the prices paid by third parties for ownership
interests in the Associated Companies, to the extent third party ownership
interests exist, or based on the achievement of business plan objectives and the
milestones. As discussed in Notes 3 and 4, the Company recognized losses of
$4,249,946 and $12,304,800 during the years ended December 31, 2001 and 2000,
respectively, related to the impairment of its investments in Associated
Companies and goodwill.
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the following
estimated lives:
Estimated Lives
Equipment........................ 5-7 years
Furniture and fixtures........... 7 years
Vehicles......................... 3 years
Leasehold Improvements........... Lesser of 6 years or term of lease
Revenue Recognition and Accounts Receivable
Revenue is recognized on the sale of products or services when the products are
shipped or the services are performed, all significant contractual obligations
have been satisfied, and the collection of the resulting receivable is
reasonably assured. Shipping, handling and warehousing costs are included in
costs of sales in the statement of operations.
An allowance for doubtful accounts is provided based on periodic review of the
accounts.
Page F-14
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. 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. The Company's net operating loss carryforwards are subject to
limitation based upon transactions occurring that resulted in a change in
control as defined in the Internal Revenue Code.
Loss Per Share
The Company presents basic and diluted loss per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Basic loss per common share are
based on the weighted average number of common shares outstanding during the
period. Diluted loss per share include the dilutive effect of convertible
preferred stock, stock options and warrants. However, for all periods presented
diluted loss 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.
Stock Option Plans
As permitted by SFAS No. 123, Accounting for Stock Based Compensation, the
Company accounts for stock 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. 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.
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.
Examples include the availability of funding for technology companies, valuation
of technology companies, bad debts and fixed asset lives. Actual results could
vary from these estimates.
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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that all
derivative financial instruments be recognized as either assets or liabilities
in the balance sheet. SFAS No. 133, which was effective for the first quarter of
2001, has not had a material impact on the Company's results of operations,
financial position or cash flows.
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles, effective January 1, 2002. The Company does not believe that the
adoption of these pronouncements will have a material impact on its financial
statements.
Page F-15
FASB also recently issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 143 requires the recognition of a liability for the
estimated cost of disposal as part of the initial cost of a long-lived asset.
SFAS No. 144 supersedes SFAS No. 121 to supply a single accounting approach for
measuring impairment of long-lived assets, including segment of a business
accounted for as a discontinued operation or those to be sold or disposed of
other than by sale. The Company believes that adopting these pronouncements on
its financial statements will not have a material impact on its financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. Going Concern
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 two years in the period ended
December 31, 2001, and had working capital deficiencies at December 31, 2001 and
2000. These circumstances raise substantial doubt about the Company's ability to
continue as a going concern.
On March 27, 2001, the Company acquired Yazam.com Inc. ("Yazam") (see Note 3).
As a result of the acquisition of Yazam, the Company obtained approximately
$6,100,000 in cash (and assumed liabilities of approximately $2,000,000), which
was used to support the Company's working capital and investing requirements
during 2001. In addition to the acquisition cost for Yazam, the Company
selectively invested additional funds in those acquired companies of Yazam which
were deemed to have the most potential to achieve their strategic business
objectives. Any return may be realized through future cash flows from the
acquired companies or through the sale of the acquired companies, once their
business operations are properly developed.
The Company has entered into transactions with respect to certain shares of the
Series F Preferred Stock modifying their respective rights (see Note 10).
Subsequent to September 30, 2002, certain former Yazam shareholders have the
right to put their shares of Series F Preferred Stock to the Company for a
minimum amount that is approximately $5,384,000. Additionally, the Company still
owes certain former shareholders of Yazam approximately $1,236,000 cash in
consideration for their Yazam stock.
The Company's ability to support its business objectives is dependent upon its
ability to raise capital, primarily through sales of convertible preferred stock
and common stock. The Company's continued ability to access the capital markets
may be dependant on its ability to generate cash flow from, positive earnings or
realizing a return from the cash flow of, or sale of its interests in, one or
more of its Associated Companies. Should the Company be unable to raise
sufficient capital to meet its cash flow needs, the Company may be required to
significantly curtail its operations and investing activities. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. See Note 15 for Commitments and Contingencies.
3. Business Combinations
Acquisition of Yazam
On March 27, 2001, the Company acquired Yazam, a company previously providing
seed-stage funding and business development services to emerging Internet and
technology start-ups, for approximately $22 million in cash plus 27,374 shares
of Series F Preferred Stock (which are convertible into 27,374,000 shares of
USXX common stock) and warrants to purchase 8,000,000 shares of USXX stock for
$0.34 per share. Based on the conversion terms of the Series F Preferred Stock
and the market price of the Company's common stock on the date of issuance of
the Series F Preferred Stock, the Company recognized the existence of a
beneficial conversion feature in the amount of $4,595,510. This amount was
recorded as a deemed dividend during the first quarter of 2001, resulting in an
increase in the net loss applicable to common shareholders. This acquisition was
accounted for as a purchase, and the results of operations of Yazam are included
in the Company's consolidated results of operations from the date of the
acquisition.
Page F-16
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed in connection with the acquisition:
Investments in associated companies........................... $ 1,691,511
Cash acquired................................................. 28,513,049
Other assets.................................................. 2,803,489
Accounts payable and accrued expenses......................... (2,014,345)
------------
$30,993,704
===========
The following unaudited pro-forma condensed consolidated financial data assume
that the acquisition of Yazam, as described above, occurred at the beginning of
each fiscal year presented. This data has been prepared for comparative purposes
only and does not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated,
or which may result in the future.
2001 2000
---- ----
Revenues............................................. $4,570,829 $6,949,885
Net loss applicable to common shareholders........... (21,575,039) (72,568,320)
Basic and diluted net loss per common share.......... $ (0.38) $ (2.47)
E2Enet, Inc. and Associated Companies
On April 12, 2000, the Company acquired all of the outstanding stock of E2E by
merging E2E into a wholly owned subsidiary of the Company, U.S. Technologies
Acquisition Sub, Inc., which subsequently changed its name to E2E net, Inc. As a
result, upon the completion of the E2E acquisition, E2E became a wholly owned
subsidiary of the Company. This transaction was accounted for as a purchase. The
results of operations of E2E are included in the Company's consolidated
financial statements from the date of acquisition.
In consideration for the exchange of their E2E shares, E2E's stockholders were
issued 112,000 shares of Series B Mandatorily Convertible Preferred Stock, which
have a stated liquidation preference aggregating approximately $11,200,000. The
Company also assumed liabilities in the aggregate amount of approximately
$3,980,000 in conjunction with the acquisition. The Company agreed, under the
E2E Acquisition Agreement, to raise new capital funds at or prior to the closing
of the E2E Acquisition. To raise these funds, the Company completed the private
placement sale of $1,250,000 of additional shares of its Series A Convertible
Preferred Stock (the "Series A Preferred Stock"), to USV Partners, and
$4,337,914 of its Series C Mandatorily Convertible Preferred Stock ("Series C
Preferred Stock"), to various accredited investors including USV Partners.
E2E had ownership interests ranging from 5.65% to 29.05% in six development
stage technology companies at the time of the acquisition. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed in connection with the acquisition:
Investments in associated companies............................ $ 8,953,000
Note receivable - Buyline...................................... 748,000
Goodwill....................................................... 4,989,000
Other assets................................................... 490,000
Accounts payable and accrued expenses.......................... (1,980,000)
Accrued put obligation......................................... (2,000,000)
-----------
$11,200,000
===========
In connection with the E2E acquisition, the Company agreed to assume the
obligation of a former E2E shareholder under a put agreement with the
shareholders of a former E2E Associated Company. This put option was exercised
following the closing of the E2E acquisition, and the Company recorded a
liability in the amount of $2,000,010, equal to the number of shares covered by
the put option multiplied by the option's strike price. This obligation was
settled in cash during April 2001.
Page F-17
The following unaudited pro-forma condensed consolidated financial data assume
that the acquisition of E2E, as described above, occurred on January 1, 2000.
This data has been prepared for comparative purposes only and does not purport
to be indicative of the results of operations which actually would have resulted
had the acquisition occurred on the date indicated, or which may result in the
future.
2000
----
Revenues................................................ $ 2,671,378
Net loss applicable to common shareholders.............. (34,443,024)
Basic and diluted net loss per common share............. (1.17)
4. Investments in Associated Companies and Impairment of Long-lived Assets
The following summarizes the carrying value of the Company's ownership interests
in Associated Companies accounted for under the equity method or cost method of
accounting. The ownership interests are classified according to applicable
accounting methods at December 31, 2001 and 2000.
2001 2000
---- ----
Equity Method.......................................... $ -- $ 194,760
Cost Method............................................ 2,830,519 3,239,457
--------- ---------
$2,830,519 $3,434,217
========== ==========
The Company has restructured some of E2E's and Yazam's Associated Companies and
provided these entities with additional working capital, investment or loans in
the years ended December 31, 2001 and 2000 as described below.
On April 12, 2000, the Company closed an agreement with Promisemark to invest an
additional $1,000,000 in Promisemark, another E2E Associated Company, for
additional equity in the form of shares of Promisemark Series B Convertible
Preferred Stock. In June, 2001, the Company invested an additional $500,000 for
additional equity in the form of shares of Promisemark Series C Convertible
Preferred Stock.
On October 16, 2000, the Company completed the acquisition of a 30.4% equity
interest in Portris, Inc. ("Portris"). Portris is a software company that is
developing an information management system that facilitates performance of
interactive team oriented projects over the internet. Under the terms of the
agreement, the Company received a 30.4% equity interest in Portris for an
aggregate of $380,000, by canceling $250,000 of debt and providing additional
cash to Portris. In May 2001, the Company invested an additional $555,000 in
Portris that resulted in an increase in the Company's ownership interest to
42.0%. Additionally, the Company made advances to Portris in the form of secured
promissory notes in an aggregate amount of $559,000 during 2001. In December
2001, the Company foreclosed on the assets of Portris and Portris ceased
operations. The Company contributed the assets acquired from Portris to a new
wholly owned entity named Xi Software, which is currently assessing the market
potential for the assets.
E2E's initial investment in Buyline was increased so that Buyline became a
controlled operating subsidiary on April 26, 2000, as a result of the Company
acquiring 20,700,005 shares of Buyline's common stock. The Buyline shares were
issued to the Company in exchange for (1) the conversion to Buyline's common
stock of USXX's and E2E's existing loans to Buyline (including accrued
interest), (2) acknowledgment of in-kind services already rendered by E2E, and
(3) approximately $1,000,000 cash invested by the Company. On April 26, 2000,
the Company issued 23,008 shares of its common stock to Buyline's founder in
exchange for 634,699 shares of Buyline's common stock. As a result of these
transactions, the Company became the controlling shareholder of Buyline. In
conjunction with certain executive resignations and other business plan
execution issues, Buyline abandoned its software, ceased operations and stopped
pursuing business opportunities on December 1, 2000.
On December 28, 2000, the Company and Buyline settled a liability of Buyline's
through the issuance of equity securities. In settlement of a payable to a
vendor for software consulting and other services, the Company issued 1,552.5
shares of Series D Mandatorily Convertible Preferred Stock and Buyline issued
2,589,794 shares of common stock to the vendor. The Company received from
Buyline in consideration for their role in this transaction 5,025,819 additional
Page F-18
shares of Buyline common stock. As of December 31, 2000, the Company's ownership
percentage of Buyline was approximately 64%. During the year ended December 31,
2000, losses in the amount of $707,740 were allocated to Buyline's minority
shareholders.
As a result of the events discussed above, management determined during the
fourth quarter of 2000 that the recorded goodwill and certain other long-lived
assets related to the Buyline operation was permanently impaired. The Company
realized an impairment loss of approximately $1,817,000 which is included in the
E2E segment during 2000. On June 30, 2001, the Company sold its investment in
Buyline to a company controlled by the Chief Executive Officer (see Note 13).
On July 5, 2000, the Company completed the acquisition of approximately a 37%
interest in WebMilestones.com, LLC ("WebMilestones"), an Internet services
company that provided a site for publishing obituary notices that can be
accessed through the Internet's World Wide Web. The Company invested $400,000 in
WebMilestones, of which $100,000 was in the form of equity and $300,000 in a
note. On December 27, 2000, all of the membership interests of WebMilestones
were exchanged for membership interests in Final Arrangements, LLC ("Final
Arrangements"), the largest publisher of online obituaries and a provider of
software to manage funeral homes. The Company received a 0.1267% ownership
interest in Final Arrangements in connection with this transaction.
On November 3, 2000, all of the common and preferred shares of MEI were
exchanged for common stock of gomembers.com, Inc. ("gomembers"), a provider of
software solutions for member-based organizations. The Company received a 0.47%
ownership interest in gomembers in connection with this transaction.
On November 3, 2000, UBO filed for bankruptcy protection.
The Company recorded approximately $794,000 in excess investment over its share
of the underlying equity in the net assets of companies acquired during the year
ended December 31, 2000, accounted for under the equity method of accounting.
Amortization expense of approximately $259,000 is included in "equity in losses
of associated companies" in the accompanying consolidated statement of
operations for the year ended December 31, 2000. This excess was being amortized
over a three-year period.
In connection with the Company's ongoing evaluation of its Associated Companies,
management determined that several of the Company's Associated Companies had
suffered permanent declines in value and, accordingly, recorded a loss on
impairment as detailed below. Such impairment analysis takes into account
factors such as business plan development, analysis of financial and operational
data, ability to attract additional investment capital, retention of key
personnel, valuation of additional investments from other investors and other
factors.
2001 2000
---- ----
E2Enet goodwill....................................... $ -- $3,866,000
Promisemark........................................... 506,500 1,457,500
Urban Box Office...................................... -- 3,014,000
Xi Software........................................... 426,750 --
OneMade............................................... 870,000 1,602,500
Buyline............................................... -- 1,817,000
Portris............................................... 355,200 --
Selis investment and notes receivable................. 362,600 --
Soneta................................................ 342,500 --
CoreMarkets........................................... 250,000 --
Other................................................. 1,136,396 547,800
--------- ---------
$4,249,946 $12,304,800
========== ===========
Page F-19
5. Inventories
At December 31, inventories consisted of the following:
2001 2000
---- ----
Raw material....................................... $ 105,542 $ 231,177
Work in progress................................... 24,193 18,272
Finished goods..................................... 7,420 385
--------- ---------
137,155 249,834
Reserve for obsolescence........................... -- (80,000)
--------- ---------
$ 137,155 $ 169,834
========= =========
The Company provided a reserve for obsolete raw materials of $80,000 during the
year ended December 31, 2000. During the year ended December 31, 2001, the
related inventory was written off and changed to the reserve.
6. Property and Equipment
At December 31, property and equipment consisted of the following:
2001 2000
---- ----
Equipment............................................ $1,646,257 $1,414,387
Furniture and fixtures............................... 150,911 502,614
Leasehold improvements............................... 168,550 213,331
--------- ---------
1,965,718 2,130,332
Less accumulated depreciation........................ (1,623,488) (1,473,512)
---------- ----------
$ 342,230 $ 656,820
========= ==========
Depreciation expense for the years ended December 31, 2001 and 2000 was $227,320
and $142,697, respectively.
7. Note Receivable
Associated Companies
The Company had advances to Associated Companies of $ 252,406 and $90,000 on
December 31, 2001 and 2000, respectively, that are classified as Notes
Receivable. Such advances bear interest rates of 8% and are generally
convertible into equity of the Associated Companies.
Sale of Subsidiaries - GWP
The Company sold GWP, a wholly owned subsidiary, to Kenneth H. Smith, the former
President and Chief Executive Officer of the Company in February 1999. The total
purchase price for GWP was approximately $2,451,000. 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. The principal amount of Mr. Smith's
promissory note and any accrued unpaid interest were initially due and payable
in full on February 15, 2002. Repayment of the promissory note was secured by
Mr. Smith's pledge to the Company of his 3,000,000 shares of the Company's
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 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. 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
Page F-20
$525,000. The promissory note has not been repaid. As of December 31, 2001 and
2000, the Company has recorded a valuation allowance equal to the amount
outstanding.
8. Notes Payable and Capital Lease Obligation
Notes payable and capital lease obligations consisted of the following at
December 31:
2001 2000
---- ----
Buyline.net, Inc. note payable, original principal
$650,000 payable $18,000 per month, accelerated
under certain conditions; interest accrues at
Prime Rate; in payment default at December 31,
2000. Collateralized by the Company's investment
in Buyline........................................... $ -- $ 587,071
Unsecured note payable to an insurance company payable
in monthly installments of $7,793 plus interest at
7.49% maturing in July 2001 -- 52,889
Unsecured, non interest-bearing notes payable to
related parties upon demand 1,507,210 21,300
5% unsecured note payable; in default at December 31,
2000; requiring an 18% default interest rate......... -- 8,745
Capital lease obligation, with monthly payments of
$778 and imputed interest of 9%...................... 5,120 15,856
---------- --------
1,512,330 685,861
Less current maturities............................... (1,512,330) (685,861)
---------- --------
$ -- $ --
========== =========
The capital lease obligation is secured by certain equipment.
9. Income Taxes
Provisions for federal and state income taxes consist of the following:
Years ending December 31, 2001 2000
- ------------------------- ---- ----
Deferred
Federal.................................... $(3,500,000) $(6,040,000)
State...................................... (600,000) (1,066,000)
--------- -----------
(4,100,000) (7,106,000)
Change in deferred tax asset valuation allowance,
including net of change due to acquisitions... 4,100,000 7,106,000
----------- ---------
$ -- $ --
=========== ===========
The reconciliation of income tax computed at the United States federal statutory
tax rate (34 percent) to income tax benefit is as follows:
2001 2000
---- ----
Benefit at United States statutory rate...... $(3,854,000) $(6,341,000)
State tax benefit............................ (453,000) (746,000)
Permanent differences........................ 1,524,000 (19,000)
Change in deferred tax asset valuation
allowance, net of changes due to acquisitions . 2,783,000 7,106,000
--------- ---------
$ -- $ --
=========== ============
Page F-21
Significant components of the Company's deferred tax assets at December 31, 2001
and 2000 are as follows:
2001 2000
---- ----
Deferred tax assets
Current assets and liabilities.................... $ -- $ 295,000
Impairment losses................................. 9,400,000 4,476,000
Net operating loss carryforwards (Federal and
state)........................................... 12,000,000 9,576,000
Valuation allowance.................................. (21,400,000) (14,347,000)
----------- -----------
$ -- $ --
=========== =========
At December 31, 2001, the Company had net operating loss carryforwards
("NOL's")of approximately $33,000,000 that expire in various years through 2017
and future tax benefits of approximately $24,000,000. These include NOL's and
future benefits resulting from the acquisitions of E2E and Yazam. Under Section
382 of the Internal Revenue Code, a change in ownership, as defined, of over 50%
of the holdings of the largest shareholders results in a limitation on the
availability of NOL's. During the last several years there have been a number of
changes in capital structure, one or more of which may have been a "Section 382
change of ownership". The analysis is complex and subject to review by the
Internal Revenue Service. The future deductions from impairment losses would
also be similarly limited. Accordingly, while management believes that
approximately one half of the tax benefits indicated above are available to
offset future taxable income, there is a Section 382 limitation.
10. Stockholders' Equity (Capital Deficit)
Common Stock and Loss Per Share
The Company had 500,000,000 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, 2001.
Diluted loss per share data is not presented as convertible preferred stock,
stock options and warrants which comprised common stock equivalents totaling
62,291,195, and 122,365,470 for the years ended December 31, 2001 and 2000,
respectively, are anti-dilutive.
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. During 2000,
warrants to acquire 137,500 shares of Common Stock were exercised. At December
31, 2001, warrants to acquire 137,500 shares of Common Stock remain outstanding.
In conjunction with the acquisition of Yazam, the Company issued 8,000,000
warrants to purchase the Company's Common Stock at $0.34 per share for a period
of four years. At December 31, 2001, a total of 7,997,227 warrants related to
the Yazam acquisition remain outstanding.
Series A Convertible Preferred Stock
During 1998 and 1999, the Company received $5,000,000 under an agreement with
USV Partners which provided that the Company would issue to USV Partners
warrants to purchase 500,000 shares of Common Stock and 500,000 shares of its
Series A Preferred Stock. On November 29, 1999, the terms of the Series A
Preferred Stock were modified to cancel the right of the holders to receive an
annual dividend and to change the conversion price to $0.122. The Company may
not issue any stock with the same or senior preferences or priorities to this
series without the consent of the majority of this series' shareholders.
On April 12, 2000, the Company sold an additional 125,000 shares of Series A
Preferred Stock to USV Partners for $1,250,000. Based on the conversion terms of
the Series A Preferred Stock and the market price of the Company's common stock
on the date of issuance of the Series A Preferred Stock, the Company recognized
the existence of a beneficial conversion feature in the amount of $1,250,000.
Page F-22
This amount was recorded as a non-cash deemed dividend during 2000, resulting in
an increase in the net loss applicable to common shareholders.
Series B Mandatorily Convertible Preferred Stock
In conjunction with the acquisition of E2E, the Company issued 112,000 shares of
$.02 par value Series B Mandatorily Convertible Preferred Stock ("Series B
Preferred Stock") to former E2E stockholders. The Series B Preferred Stock has a
stated liquidation preference upon dissolution aggregating approximately
$11,200,000. Upon their mandatory conversion as described below, these shares of
Series B Preferred Stock converted into 56,000,000 shares of Common Stock in
August 2001. Based on the conversion terms of the Series B Preferred Stock and
the market price of the Company's common stock on the date of issuance of the
Series B Preferred Stock, the Company recognized the existence of a beneficial
conversion feature in the amount of $11,200,000. This amount was recorded as a
non-cash deemed dividend during 2000, resulting in an increase in the net loss
applicable to common shareholders.
The Company may not issue any stock with the same or senior preferences or
priorities to this series without the consent of the majority of this series'
shareholders.
Series C Mandatorily Convertible Preferred Stock
On April 12, 2000, the Company sold 4,534 shares of its Series C Mandatorily
Convertible Preferred Stock ("Series C Preferred Stock"), to accredited
investors for net proceeds of $4,337,914. The Series C Preferred Stock converted
into 3,129,900 shares of Common Stock at a conversion price per share of $1.45
in August 2001. Based on the conversion terms of the Series C Preferred Stock
and the market price of the Company's common stock on the date of issuance of
the Series C Preferred Stock, the Company recognized the existence of a
beneficial conversion feature in the amount of $2,307,650. This amount was
recorded as a non-cash deemed dividend during 2000, resulting in an increase in
the net loss applicable to common shareholders.
Series D Mandatorily Convertible Preferred Stock
On December 28, 2000, the Company issued 1,552.5 shares of $.02 par value Series
D Preferred Stock. All of the shares of Series D Preferred Stock were converted
into 1,552,500 shares of Common Stock at $1.00 per share in August 2001.
Mandatorily Convertible Preferred Stock Issuable
During 2001 and 2000, the Company received $853,700 and $1,199,200,
respectively, of cash for shares of a new class of preferred stock that was
originally intended to be designated as the Series E Mandatorily Convertible
Preferred Stock from a limited number of accredited investors. This class of
Preferred Stock issuable was converted into Common Stock at conversion prices
ranging from $0.21 to $0.76 per common share in lieu of the actual issuance of
Series E Preferred.
Series F Redeemable Convertible Preferred Stock
In conjunction with the acquisition of Yazam, the Company issued 27,374 shares
of $.02 par value Series F Convertible Preferred Stock ("Series F Preferred
Stock") to former Yazam stockholders. The Series F Redeemable Preferred Stock
has a stated liquidation preference aggregating approximately $6,000,000. Upon
their conversion, these shares of Series F Preferred Stock will be converted
into approximately 27,374,000 shares of Common Stock at $0.22 per share. Based
on the conversion terms of the Series F Preferred Stock and the market price of
the Company's common stock on the date of issuance of the Series F Preferred
Stock, the Company recognized the existence of a beneficial conversion feature
in the amount of $4,595,510. This amount is recorded as a non-cash deemed
dividend during 2001, resulting in an increase in the net loss applicable to
common shareholders.
Beginning on the second anniversary of the date of the first issuance of shares
of Series F Preferred Stock, and for a period of 90 days thereafter, each holder
of shares of Series F Preferred Stock shall have the right to require the
Company to redeem such holder's shares at a purchase price of $100 per share (as
adjusted for any combinations, consolidations, stock distributions or stock
dividends or similar events with respect to such shares).
Page F-23
In July 2001, the Company entered into an agreement with a holder of 7,826
shares of Series F Preferred Stock. Under this agreement the holder waived its
right to require the Company to repurchase its shares on or after September 1,
2001 and their redemption rights as stated in the certificate of designations if
the Charter Amendment described below did not occur. The holder received in
consideration the right to require the Company to repurchase its Series F
Preferred Stock for $300 per share for a ninety-day period beginning on
September 30, 2002. The Company also agreed to not purchase the Series F
Preferred Stock held by a certain holder without prior written consent. The
amount of the accretive dividend described above will change to reflect the
higher redemption price but it will be recorded over a longer period reflecting
the change in the earliest date before which the stock may be redeemed.
In July 2001, USV Partners agreed to purchase 10,119.77 shares of Series F
Preferred Stock from a group of current holders of such stock. USV Partners then
entered into an agreement with the Company and waived its right to require the
Company to repurchase its shares on or after September 1, 2001 and their
redemption rights as stated in the certificate of designations if the Charter
Amendment described below did not occur. USV received in consideration the right
to require the Company to repurchase its Series F Preferred Stock for $300 per
share for a ninety-day period beginning on September 30, 2002. The amount of the
accretive dividend described above will change to reflect the higher redemption
price but it will be recorded over a longer period reflecting the change in the
earliest date before which the stock may be redeemed.
In conjunction with the transactions described above with certain holders of
Series F Preferred Stock, the minimum amount that the Company would need to pay
to the former Yazam stockholders and USV Partners should this repurchase be
required on or after September 30, 2002 is approximately $5,384,000. This amount
isclassified as current liabilities on the consolidated balance sheet.
Series G Convertible Junior Preferred Stock
During 2001, the Company received $335,000 of cash for shares of a new class of
preferred stock that is designated as the Series G Convertible Junior Preferred
Stock ("Series G Preferred Stock") from a limited number of accredited
investors. The Series G Preferred Stock has liquidation preferences that are
junior to the liquidation preferences available to the Series A Preferred Stock
and the Series F Preferred Stock. The Series G Preferred Stock is convertible
into Common Stock at a conversion price of $0.15 per common share. Subsequent to
December 31, 2001, the Company received an additional $1,921,600 of cash from
the sale of Series G Preferred Stock.
Registration Rights
The Company and certain holders of the Company's Series A Preferred Stock and
the Series F Preferred Stock entered into an agreement regarding registration
rights for the Common Stock into which they are to be converted. Collectively,
the stockholders party to the agreement have the right to compel the Company to
register their respective shares at the expense of the Company at certain times
(no earlier than six months subsequent to conversion of such shares to Common
Stock) and rights on other occasions to have such registration effected at the
expense of the holders.
Preferred Stock Voting Rights
The terms of the Series A Preferred Stock and the Series F Preferred Stock
permits them to vote as if the Series A Preferred Stock and Series F Preferred
Stock were already converted to Common Stock.
Charter Amendment
The Company was obligated by the E2E and Yazam acquisitions to call a meeting of
its stockholders for the purpose of amending the Company's Restated Certificate
of Incorporation. The amendment (the "Charter Amendment"), which was passed in
August 2001, increased 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 outstanding shares of all of its authorized and
designated series of convertible preferred stock and any other 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
Page F-24
acceptance of the Charter Amendment by the Secretary of State of the State of
Delaware in August 2001, the Series B Preferred Stock, the Series C Preferred
Stock and the Series D Preferred Stock automatically converted into shares of
Common Stock.
Stock Compensation Plans
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. The option plan was amended in 2000 and 2001. General
terms provide for a three or four year vesting 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. Subject to stockholder approval, the maximum number of shares that can be
reserved under this plan as amended is 30,000,000.
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 2001 and 2000.
2001 2000
---- ----
Risk-free interest rate..................................... 5.0% 6.5%
Dividend yield.............................................. 0.0% 0.0%
Volatility factor........................................... 70.0% 70.0%
Weighted-average expected life (in years)................... 7.0 7.0
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
2001 2000
---- ----
Net loss applicable to common shareholders
As reported............................... $(15,605,952) $(33,408,747)
Pro forma................................. (16,315,172) (34,487,862)
Earnings per share
As reported............................... $ (0.28) $ (1.14)
Pro forma................................. (0.29) (1.18)
The grant date weighted-average fair value of options granted during 2001 was
$0.28, all of which related to options issued at exercise prices equal to the
market price of USXX stock on the respective grant dates. Compensation expense
recognized during 2001 and 2000 related to the Company's option plans was
$15,864 and $746,614, respectively, and is included in general and
administrative expense.
Page F-25
A summary of stock option activity, and related information for the years 2001
and 2000 follows:
Qualified Plans Nonqualified Plans
--------------- ------------------
Weighted- Weighted-
average average
exercise exercise
Options price Options price
------- -------- ------- -------
Outstanding at December 31, 1999... 1,512,400 $ 0.15 1,975,000 $ 0.12
Granted.......................... -- -- 6,961,667 1.17
Exercised........................ (530,000) 0.13 (125,000) 0.13
Forfeited or canceled............ (17,400) 0.59 (700,000) 1.16
----------- ------- ---------- -------
Outstanding at December 31, 2000... 965,000 0.16 8,111,667 0.92
Granted.......................... -- -- 8,865,000
0.28Exercised...................... -- -- -- --
Forfeited or canceled............ -- -- (4,040,000) 0.52
----------- ------- ----------- -------
Outstanding at December 31, 2001... 965,000 $ 0.16 12,936,667 $ 0.62
=========== ======= ========== =======
Options exercisable at:
December 31, 2000................ 965,000 $ 0.16 2,005,000 $ 0.63
December 31, 2001................ 965,000 0.16 3,270,834 0.70
During 2000, the Company modified options to purchase an aggregate of 750,000
shares held by two employees to accelerate vesting. These options had no
intrinsic value as of the date of the modification, therefore, no expense was
recognized as a result of this modification. Variable accounting will not be
applied prospectively for these options.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2001 Life Price 2001 Price
--------------- ---- ---- ----- ---- -----
$0.12 - $0.13 2,405,000 7.87 $0.12 2,405,000 $ 0.12
0.27 - 0.28 6,595,000 8.81 0.28 12,500 0.27
0.50 - 0.56 80,000 2.23 0.52 80,000 0.52
0.76 - 0.98 2,221,667 7.57 0.89 871,667 0.89
1.34 - 1.56 2,600,000 8.41 1.52 866,667 1.52
----------- ------ ------ --------- ------
13,901,667 8.08 $ 0.62 4,235,834 $ 0.70
=========== ====== ====== ========= ======
Page F-26
11. Operating Leases
The Company and its subsidiaries lease their operating facilities under
non-cancelable leases that expire through 2010. The Company is also obligated
under several other operating leases for various vehicles and office equipment.
Future minimum rentals due under non-cancellable operating leases are as
follows:
Year Amount
2002............................................... $ 570,406
2003............................................... 570,406
2004............................................... 583,806
2005............................................... 268,338
Thereafter......................................... 1,386,900
----------
$3,379,856
==========
Rental expense for the years ended December 31, 2001 and 2000 was approximately
$796,000, and $213,000, respectively.
Of the above lease obligations, approximately $2,515,000 relate to facilities
that the Company does not occupy and has no further intention to use. The
Company has provided for estimated anticipated losses in connection with the
settlement or re-lease of these facilities.
12. Businesses and Credit Concentration
The Company is dependent upon certain customers of the UST Segment for a major
portion of its sales. Three customers accounted for approximately 19%, 14%, and
7%, respectively, of the Company's sales for the year ended December 31, 2001.
Three customers accounted for approximately 18%, 17% and 14%, respectively, of
the Company's sales for the year ended December 31, 2000. Amounts due from two
customers of the UST segment, constituted 44% of the Company's accounts
receivable at December 31, 2001. Amounts due from three customers, constituted
67% of the Company's accounts receivable at December 31, 2000. The Company
generally does not require collateral on its trade accounts receivable.
13. Related Parties
During the year ended December 31, 2001, certain affiliates of the Chief
Executive Officer loaned monies to the Company for working capital purposes.
Such loans are non-interest bearing and were due on demand. Amounts outstanding
under these loans totaled $1,507,210 at December 31, 2001 and were classified as
Notes Payable - Related Parties.
On June 30, 2001, the Company sold its investment in Buyline to a company
controlled by the Chief Executive Officer of the Company. In exchange for the
stock of Buyline, the Company received a non-recourse note (except to the extent
of the stock pledge) with a face value of $100,000, which has been fully
reserved for. The note bears interest at 7% and is payable only to the extent of
dividend distributions paid by Buyline to the buyer or cash proceeds received by
the buyer related to the sale of Buyline stock.
During the year ended December 31, 2001, certain affiliates of the Chief
Executive Officer were paid $241,859 by the Company as reimbursement for certain
legal, accounting and administrative expenses incurred on behalf of the Company
from 1998 through December 31, 2001.
During 2001 and 2000, the Company paid approximately $36,000 and $97,000,
respectively, to The Spear Group, a company controlled by a director of the
Company for certain accounting and administrative support functions.
During 2000, the Company received consulting revenues of approximately $21,000
from two of its Associated Companies for capital raising assistance.
Page F-27
During 2001 and 2000, the Company received approximately $50,000 and $115,000,
respectively, from certain Associated Companies for management and facilities
fees. Such amounts have been included as a reduction of general and
administrative expense in the consolidated statement of operations.
During the years ended December 31, 2001 and 2000, the Chief Executive Officer,
certain affiliates of the Chief Executive Officer and certain affiliates of
directors and former directors purchased common stock and preferred stock of the
Company for net proceeds of $559,300 and $4,306,700, respectively.
14. Segment Information
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. Based on the quantitative
thresholds specified in SFAS 131, the Company has determined that it has three
reportable segments. The three reportable segments are USXX, Associated
Companies and UST. USXX is the corporate office, Associated Companies represent
the technology operations of the Company, and UST is the prison-based
manufacturer of computer circuit boards and modular office furniture components.
The accounting policies of the operating segments are the same as those
described in Note 1. Segment amounts disclosed are prior to any elimination
entries made in the consolidation.
Summary information by segment follows (in thousands):
Associated
2001 USXX Companies UST Total
- ---- ---- --------- --- -----
Revenues........................... $ -- $ -- $ 2,247 $ 2,247
Operating loss..................... (3,643) (6,235) (790) (10,668)
Depreciation and amortization...... 2 115 110 227
Total segment assets............... $ 749 $ 3,250 $ 603 $ 4,602
Associated
2000 USXX Companies UST Total
- ---- ---- --------- --- -----
Revenues........................... $ 21 $ -- $ 2,671 $ 2,692
Operating loss..................... (3,733) (14,814) (413) (18,960)
Depreciation and amortization...... 430 1,318 2 1,750
Total segment assets............... $ 2,791 $ 3,434 $ 865 $ 7,090
A reconciliation of total segment assets to the Company's consolidated total
assets follows:
December 31,
2001 2000
---- ----
Assets
Total segment assets.............................. $ 4,602 $ 7,090
Intercompany eliminations......................... (2) (2,249)
-------- -------
$ 4,600 $ 4,841
======= ======
Page F-28
15. Commitments and Contingencies
From time to time, the Company is subject to claims and suits that arise in the
ordinary course of its business. While it is not possible to predict the
ultimate outcome of these matters, the Company believes that any losses
associated with any of such matters will not have a material effect on the
Company's business, financial condition or results of operations.
Pursuant to various agreements, the Company has committed to invest an
additional $250,000 in Baobab and $150,000 in Promisemark, both of which are
Associated Companies. As of April 5, 2002, the Company has only fulfilled
$50,000 of its funding obligations and could be subject to claims by Baobab,
Promisemark or other investors.
16. Subsequent Events
(a) Additional Investments in Associated Companies
In March 2002, the Company converted notes receivable in an amount of $568,000
for Selis into additional equity resulting in the Company's ownership interest
increasing from 8.6% at December 31, 2001, to 16.88% at March 31, 2002.
(b) Sale of Gregory FCA Communications Inc.
In April 2002, the Company sold its investment in Gregory FCA Communications
Inc. ("Gregory FCA"), a wholly owned subsidiary, to a group of buyers led by the
executives of Greogory FCA. In exchange for all of the capital stock of Gregory
FCA, the Company received $250,000 in cash, a promissory note for $50,000,
public relations and investor relations services valued at $120,000 payable over
a one-year period and contingent consideration in the form of a consulting fee
worth a minimum of $0 and a maximum of $460,000 in cash over the three-year
period ending March 31, 2005. As Gregory FCA has been sold, its operations have
been classified as "loss from operations of discontinued subsidiary" of the
consolidated statement of operations. Revenues of Gregory FCA for the year ended
December 31, 2001 were approximately $1,478,000.
17. Fourth Quarter Adjustments (Unaudited)
Significant adjustments increasing the fourth quarter loss in 2001 and 2000 are
indicated below.
2001 2000
---- ----
Impairment of long-lived assets....................... $2,199,000 $12,305,000
========== ===========
Aggregate adjustment per common share................. $ 0.04 $ 0.42
========= ===========
Page F-29
INDEX OF EXHIBITS
Exhibit No. Description
2.1 Stock Exchange Agreement among U.S.Technologies Inc., E2Enet, Inc. and
certain stockholders of E2Enet, Inc., dated as of February 21, 2000. (Filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed February
26, 2000, and incorporated herein by reference.)
2.2 Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by
and among the Company, US Technologies Acquisition Sub, Inc., E2Enet, Inc.,
Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan Ledecky
and certain other stockholders of E2Enet, Inc. (Filed as Exhibit 2.5 to the
Company's Annual Report on Form 10-K filed April 10, 2000, and incorporated
herein by reference.)
2.3 Voting Agreement, dated April 12, 2000, by and among U.S. Technologies
Inc., USV Partners, LLC, James V. Warren, Northwood Ventures LLC, Northwood
Capital Partners LLC and Jonathan J. Ledecky. (Filed as Exhibit 2.3 to the
Company's Current Report on Form 8-K, filed April 27, 2000, and
incorporated herein by reference.)
2.4 Voting Agreement and Proxy, dated April 12, 2000, by and among USV
Partners, LLC, James V. Warren, and Gregory Earls for the benefit of the
holders of the Registrant's Series B Preferred Stock. (Filed as Exhibit 2.4
to the Company's Current Report on Form 8-K, filed April 27, 2000, and
incorporated herein by reference.)
2.5 Amended and Restated Registration Rights Agreement, dated April 12, 2000,
by and among U.S. Technologies Inc., USV Partners, LLC, Northwood Capital
Partners LLC, Northwood Ventures LLC, Jonathan J. Ledecky and certain other
stockholders of U.S. Technologies Inc. (Filed as Exhibit 2.5 to the
Company's Current Report on Form 8-K, filed April 27, 2000, and
incorporated herein by reference.)
2.6 Purchase Agreement, dated April 26, 2000, by and among E2Enet, Inc.,
Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan J. Ledecky
and Buyline.net Inc. (Filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K, filed May 11, 2000, and incorporated herein by reference.)
2.7 Stock Exchange Agreement, dated April 26, 2000, entered into by and among
U.S. Technologies Inc., E2Enet, Inc., and Lawrence Silverman. (Filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K, filed May 11,
2000, and incorporated herein by reference.)
2.8 WebMilestones.com, LLC Purchase Agreement, dated as of July 5, 2000, by and
among WebMilestones.com, LLC, and its members as of that date, including
E2Enet, Inc. and Charles D. Weiss. (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed July 20, 2000, and incorporated herein by
reference.)
2.10 Agreement and Plan of Merger, dated February 28, 2001, by and among U.S.
Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com. (Filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed March 1,
2001, and incorporated herein by reference.)
2.11 First Amendment to the Agreement and Plan of Merger, dated as of March 22,
2001, by and among U.S. Technologies Inc., U.S. Technologies Acquisition
Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K, filed April 11, 2001, and incorporated herein by reference.)
Page F-30
Exhibit No. Description
2.12 Registration Rights Agreement, dated as of March 27, 2001, by and among
U.S. Technologies Inc. and Certain Other Shareholders of U.S. Technologies
Inc. (Filed as Exhibit 2.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, and incorporated herein by reference.)
3.1 Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.1
to the Company's Annual Report for the year ended December 31, 1997 and
incorporated herein by reference.)
3.2 Amended Certificate of Incorporation of the Company.
3.3 Restated Bylaws of the Company. (Filed as Exhibit 3.2 to the Company's
Annual Report for the year ended December 31, 1997 and incorporated herein
by reference.)
4.1 Form of Certificate evidencing Common Stock of the Company. (Filed as
Exhibit 3.1 to Amendment No. 1 to the Company's Registration statement on
Form S-1 (No. 33-11720) and incorporated herein by reference.)
4.2 Revised form of certificate evidencing Common Stock of the Company
reflecting the change of the name to U.S. Technologies Inc. (Filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 14,
1989, and incorporated herein by reference.)
4.3 Rights Agreement, dated as of October 31, 1997, between the Company and
American Securities Transfer & Trust, Inc., as Rights Agent. (Filed as
Exhibit 4 to the Company's Current Report on Form 8-K, dated as of October
31, 1997, and incorporated herein by reference.)
4.4 Amended Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of U.S. Technologies Inc., dated February 24,
1999. (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K,
dated May 26, 1999, and incorporated herein by reference.)
4.5 Amended Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of U.S. Technologies Inc., dated November 29,
1999.(Filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, and incorporated herein by reference.)
4.6 Waiver Agreement between USV Partners, LLC and the Company, dated March 1,
2000. (Filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, and incorporated herein by reference.)
4.7 Waiver Agreement between The Earls Family Limited Partnership and Gregory
Earls, dated September 20, 2000. (Filed as Exhibit 4.6(a) to the Company's
Annual Report for the year ended December 31,2000 and incorporated herein
by reference.)
Page F-31
Exhibit No. Description
4.10 Certificate of Designations, Preferences and Rights of Series F Convertible
Preferred Stock of U.S. Technologies Inc., dated March 27, 2001. (Filed as
Exhibit 4.10 to the Company's Annual Report From 10-K, for the year ended
December 31, 2000, and incorporated herein by reference.)
*4.11Certificate of Designations, Preferences and Rights of Series G
Convertible Junior Preferred Stock of U.S. Technologies, Inc. dated January
28, 2002.
4.12 Form of U.S. Technologies Inc. Common Stock Purchase Warrant, dated as of
March 27, 2001. (Filed as Exhibit 4.11 to Annual Report on Form 10-K, for
the year ended December 31, 2000, and incorporated herein by reference.)
10.1 1999 Stock Option Plan, as amended. (Filed as Exhibit 10.1 to the Company's
Annual Report on Form 10-K, for the year ended December 31, 2000, and
incorporated herein by reference.)
10.2 1999 Stock Option Plan, as further amended, as of April 27, 2001. (Filed as
Exhibit 10.2 to the Company's Annual Report on Form 10-K, for the year
ended December 31, 2000, and incorporated herein by reference.)
10.3 Agreement between the Company and Wackenhut Corrections Corporation, dated
June 30, 1977. (Filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference.)
10.4 Amendment to Agreement between the Company and Wackenhut Corrections
Corporation, dated January 28, 1998. (Filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein reference.)
10.5 Industry Work Program Agreement between the Wackenhut Corrections
Corporation and Labor-to-Industry Inc., dated as of April 22, 1998. (Filed
as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, and incorporated herein by reference.)
10.6 Investment Agreement between the Company and USV Partners, LLC, dated as of
July 16, 1998. (Filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated May 26, 1999, and incorporated herein by reference.)
10.7 Lease Agreement by and between the State of California and
Labor-to-Industry, Inc., dated as of August 1, 1998. (Filed as Exhibit
10.13 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.)
10.7AAmendment No. 1 to Lease Agreement by and between the State of California
and Labor-to-Industry, Inc., dated as of March 24, 1999. (Filed as Exhibit
10.7A to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference.)
10.7BAmendment No. 2 to Lease Agreement by and between the State of California
and Labor-to-Industry, Inc., dated as of May 7, 2001. (Filed as Exhibit
10.7B to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference.)
Page F-32
Exhibit No. Description
10.8 Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures
LLC, Northwood Capital Partners LLC and the Company, dated March 13, 1999.
(Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, and incorporated herein by reference.)
10.9 Voting Agreement, dated as of April 26, 2000, by and among E2Enet, Inc.,
Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan J.
Ledecky, Silverman Trust and Lawrence Silverman. (Filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K, filed May 11, 2000, and
incorporated herein by reference.)
10.10Side Letter Voting Agreement and Buyline Stock Transfer, dated as of April
26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood
Capital Partners LLC and Jonathan J. Ledecky. (Filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated
herein by reference.)
10.11Waiver and Replacement Agreement by and between the Company and CEVP
Investment I LP, dated July 19, 2001. (Filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference.)
10.12Securities Purchase Agreement by and between USV Partners, L.L.C. and the
TPG entities, dated July 20, 2001. (Filed as Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, and
incorporated herein by reference.)
10.13Waiver and Replacement Agreement by and between the Company and USV
Partners, L.L.C., dated July 20, 2001. Filed as Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference.)
10.14Stock Purchase Agreement by and between Yazam.com, Gregory FCA and Buyer
dated April 1, 2002 (Filed as Exhibit 99.1 to the Company's Current Report
on Form 10-K filed April 15, 2002, and incorporated herein by reference.)
*21.1 Subsidiaries of the Registrant
* To be provided herewith.
Page 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
E2Enet, Inc.
Service-to-Industry, Inc.
Labor-to-Industry, Inc.
Yazam.com, Inc.
Yazam Ltd. (incorporated in Israel)
Yazam.com Capital Corp.
Yazam.com Financial Advisors Inc.
Gregory FCA Communications Inc.
Xi Software, Inc.
Each subsidiary of the Registrant has been organized and is a corporation
existing under the laws of the State of Delaware, except where otherwise noted.
Page 1
10-K Exhibit 4.11
EXHIBIT 4.11
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIES G CONVERTIBLE JUNIOR PREFERRED STOCK
OF U.S. TECHNOLOGIES INC.
U.S. Technologies Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), by its
Chief Executive Officer,
DOES HEREBY CERTIFY:
FIRST: That pursuant to the authority expressly vested in the Board of
Directors of the Corporation (the "Board") by the provisions of its Restated
Certificate of Incorporation, as amended (the "Charter"), the Corporation's
Board of Directors duly adopted as of January 28, 2002, the following resolution
providing for the designations and issuance of up to 5,000 shares of Series G
Convertible Junior Preferred Stock, par value $0.02 per share:
RESOLVED, that this Board of Directors, pursuant to the authority
expressly vested in it by the provisions of the Corporation's Restated
Certificate of Incorporation, as amended, and the General Corporation Law
of the State of Delaware, hereby authorizes the issuance from time to time
of a series of preferred stock, par value $0.02 per share, of the
Corporation and hereby fixes the designation, voting powers, preferences
and relative, participating, optional and other rights and the
qualifications, limitations or restrictions thereof, in addition to those
set forth in said Restated Certificate of Incorporation, as amended.
1. DESIGNATION AND AMOUNT
This series of preferred stock shall be designated as "Series G
Convertible Junior Preferred Stock" and shall have a par value of $0.02 per
share (the "Series G Preferred"). The number of authorized shares constituting
the Series G Preferred shall be 5,000 shares. Shares of the Series G Preferred
shall have a stated value of $1,000 per share (the "Stated Value"). The
Corporation may issue fractional shares of the Series G Preferred.
2. LIQUIDATION PREFERENCE
In the event of any bankruptcy, liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary (a "Liquidation"), each holder
of an outstanding share of Series G Preferred ("Preferred G Holder") at the time
thereof shall be entitled to receive, prior and in preference to any
distribution of any of the assets or funds of the Corporation to the holders of
equity securities of the Corporation ranking as to dividends or distributions of
assets on Liquidation of the Corporation junior to the Series G Preferred
("Junior Securities"), including the Corporation's common stock, par value $0.02
per share (the "Common Stock"), by reason of their ownership of such stock, but
after and subject to any such distribution to the holders of any equity
Page 2
securities of the Corporation ranking as to dividends on distributions of assets
on Liquidation of the Corporation senior to the Series G Preferred ("Senior
Securities"), including but not limited to the Series A Convertible Preferred
Stock (the "Series A Stock") and the Series F Convertible Preferred Stock (the
"Series F Stock"), an amount per share of Series G Preferred equal to 100% of
the Stated Value. If, upon a Liquidation, the assets and funds of the
Corporation legally available for distribution among the Preferred G Holders and
the holders of any other equity securities of the Corporation ranking, as to
Liquidation, on a parity with the Series G Preferred (the "Parity Stock"), shall
be insufficient to pay in full the Liquidation preference of the Series G
Preferred and liquidating payments on any Parity Stock, then no assets or funds
shall be distributed to the Preferred G Holders or to the holders of any Parity
Stock except to the extent that such assets or funds shall be distributed among
the Preferred G Holders and the holders of any Parity Stock ratably in
accordance with the respective amounts which would be payable upon Liquidation
on the Series G Preferred and any Parity Stock if all amounts payable thereon
were payable in full. Subject to the rights of the holders of shares of any
Senior Securities, after payment of the Liquidation preference of the Series G
Preferred and Parity Stock determined pursuant to this Section 2, the remaining
assets of the Corporation legally available for distribution shall be
distributed ratably to the holders of Junior Securities, including the Common
Stock.
3. CONVERSION
(a) Conversion. The conversion price for conversion of each share of
Series G Preferred shall be $0.15 per common share (the "Conversion Price").
Such price shall be adjusted to reflect any split, reverse split, stock or other
non-cash dividend, or similar subdivision or combination of the Corporation's
Common Stock, such adjustment to be determined by the Board in its reasonable
discretion. Each Preferred G Holder shall have the right to convert each such
share into fully-paid and nonassessable shares of Common Stock, pursuant to a
conversion rate equal to the Stated Value divided by the Conversion Price (the
"Conversion Rate").
(b) Procedures for Conversion.
(i) In order to convert shares of Series G Preferred stock into
shares of Common Stock therefor, a Preferred G Holder shall surrender such
holder's certificate or certificates therefor, duly endorsed for transfer, at
any time during normal business hours, to the Corporation at its principal
office or at such other office or agency then maintained by it for such purpose,
accompanied by (A) a written notice of such Preferred G Holder's election to
convert (the "Conversion Notice") and (B) an instrument of transfer in form
reasonably satisfactory to the Corporation and to any conversion agent, duly
executed by the registered Preferred G Holder or by such holder's duly
authorized attorney. As promptly as practicable after the surrender for
conversion of any Series G Preferred certificates ("Preferred Certificates") in
the manner provided in the preceding sentence but in any event within five (5)
business days after receipt of the Conversion Notice, the Corporation will
deliver or cause its transfer agent to deliver to the Preferred G Holder, Common
Stock certificates ("Common Stock Certificates") representing the aggregate
Page 3
number of shares of Common Stock issuable upon such conversion, issued in such
name or names as such holder may direct, and if the Series G Preferred stock is
exercised in part, a new certificate representing the Series G Preferred stock
that has not been converted. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares in proper order for conversion, and all rights of the Preferred G Holder,
solely with respect to the shares converted, shall cease at such time and the
person or persons in whose name or names the Common Stock certificates are to be
issued, shall be treated for all purposes as having become the record holder or
holders thereof at such time; provided, however, that any such surrender and
payment on any date when the stock transfer books of the Corporation shall be
closed shall constitute the person or persons in whose name or names the
certificates for such shares of Common Stock are to be issued as the record
holder or holders thereof for all purposes immediately prior to the close of
business on the next succeeding day on which such stock transfer books are
opened.
(ii) The Corporation shall not be required to issue fractional
shares of Common Stock upon conversion of shares of Series G Preferred. At the
Corporation's discretion, in the event the Corporation determines not to issue
fractional shares, then in lieu of any fractional shares to which the Preferred
G Holder would otherwise be entitled, the Corporation shall pay cash equal to
such fraction multiplied by the current market price as reasonably determined by
the Board in accordance with applicable law.
(iii) The issuance of Common Stock Certificates upon conversion
shall be made without charge for any issue, stamp or other similar tax in
respect of such issuance. However, if any such Common Stock Certificate is to be
issued in a name other than that of the holder of record of the shares
converted, the person or persons requesting the issuance thereof shall pay to
the Corporation the amount of any such tax which may be payable in respect of
any transfer involved in such issuance or shall establish, to the satisfaction
of the Corporation, that such tax has been paid or is not payable.
(c) Reservation of Stock Issuable Upon Conversion. The Corporation shall
take all steps necessary and appropriate to ensure that a sufficient number of
authorized but unissued shares of Common Stock will available to effect the
Conversion of the Series G Preferred.
(d) Reorganization, Merger or Sale of the Corporation.
(i) Notwithstanding any other provision hereof, in case of (A) any
reorganization or any reclassification of the capital stock of the Corporation
or (B) any sale of the Corporation or its assets if such transaction does not
constitute a Liquidation or is not subject to part (d) (iii) below, then, at the
election of a Preferred G Holder, concurrently with the consummation of such
reorganization, reclassification or sale of the Corporation, provision shall be
made so that each share of Series G Preferred shall thereafter be convertible
into the number of shares of stock or other securities or property (including
cash) to which a holder of the number of shares of Common Stock deliverable upon
conversion of each share of Series G Preferred would have been entitled assuming
conversion on the day immediately prior to the initial announcement of the
transaction or a proposed transaction that ultimately resulted in the
transaction. In any case, appropriate adjustment (as determined by the
Corporation's Board of Directors) shall be made in the application of the
provisions herein set forth with respect to the rights and interests thereafter
of the Preferred G Holders, to the end that the provisions set forth herein
Page 4
shall thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of Series G Preferred.
(ii) After the Corporation has determined to enter into a
transaction described in this Section 3(d)(i), and publicly announces that the
Corporation will enter into such transaction, the Corporation will provide
written notice to each Preferred G Holder setting forth the material terms of
the transaction, together with all relevant information regarding such
transaction at least 30 days prior to the proposed closing date of the
transaction.
(iii) In case of any merger, consolidation, reclassification or
other similar reorganization, to the extent the Corporation is not the surviving
entity, the Series G Preferred shall be converted into or exchanged for and
shall be entitled to receive the same consideration as they would have received
had they been converted on the day immediately prior to consummation of such
transaction.
4. RESTRICTIONS ON DIVIDENDS, STOCK SPLITS AND DISTRIBUTIONS
The Corporation shall not at any time or from time to time after the date
that the first share of the Series G Preferred is issued declare or pay any
dividends on or make other distributions in respect of any of its Junior
Securities, including, but not limited to, dividends paid or payable in cash,
the capital stock of the Corporation, or any other property.
SECOND: That such determination of the designations, preferences and the
relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, relating to the Series G Preferred, was
duly made by the Corporation's Board of Directors pursuant to the provisions of
the Corporation's Charter, and in accordance with the provisions of Section 151
of the General Corporation Law of the State of Delaware, as amended.
IN WITNESS WHEREOF, U.S. Technologies Inc. has caused this Certificate
of Designations to be executed as of this 28 day of January, 2002.
U.S. TECHNOLOGIES INC.
By: /s/ Gregory Earls
---------------------------------
Gregory Earls
Chief Executive Officer