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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
__X__ Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2002
____ Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from ______________ to _______________
Commission file number: 0-15960
U.S. TECHNOLOGIES INC.
(Exact name of small business issuer as specified in its charter)
Delaware 73-1284747
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1130 Connecticut Avenue, NW
Suite 700
Washington, DC 20036
(Address of principal executive offices)
(202) 466-3100
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes___
No___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of May 1, 2002, the Registrant had 142,696,221 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- ----
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U.S. TECHNOLOGIES INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................. 3
Condensed Consolidated Statements of Operations....... 4
Condensed Consolidated Statements of Cash Flows....... 5
Notes to Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis or
Plan of Operation.................................... 11
PART II - Other Information
Item 1. Legal Proceedings .................................... 14
Item 2. Changes in Securities................................ 14
Item 3. Default Upon Senior Securities....................... 14
Item 4. Submission of Matters to a Vote of Security Holders.. 14
Item 5. Other Information ................................... 14
Item 6. Exhibits and Reports on Form 8-K..................... 15
Signatures ..................................................... 16
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U.S. TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, December 31,
2002 2001
ASSETS (Unaudited)
Current assets:
Cash $ 52,277 $ 94,532
Trade accounts receivable, net of reserves of
$42,215 and $ 77,621, respectively 142,745 132,909
Inventory, net 92,357 137,155
Subsidiary held for sale (Note 3) 420,000 420,000
Prepaid expenses 12,507 3,777
------- -------
Total current assets 720,386 788,373
Property and equipment, net of accumulated
depreciation of $1,650,988
and $1,623,488, respectively 300,824 342,230
Investments in Associated Companies (Note 4) 2,032,179 2,830,519
Notes receivable 295,406 252,406
Other assets 386,859 386,859
---------- -----------
Total assets $3,735,654 $ 4,600,387
========== ===========
CURRENT LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable- trade $2,865,103 $2,507,287
Accrued expenses 616,684 604,868
Series F Preferred - Redemption Value (Note 5) 5,383,719 5,383,719
Due to Yazam Shareholders 1,236,345 1,236,345
Notes payable - related parties 236,611 1,507,210
Notes payable 2,786 5,120
---------- ----------
Total current liabilities 10,341,248 11,244,549
Series F Preferred Stock - Redemption Value (Note 5) 942,827 942,827
Commitments and Contingencies (Note 8)
Capital Deficit:
Series A Convertible Preferred Stock; votes as if
converted to common stock; $0.02 par value;
1,000,000 shares authorized; 58,500 and 123,860
shares issued and outstanding at March 31, 2002
and December 31, 2001, respectively 585,000 1,238,600
Series F Convertible Preferred Stock; $0.02 par
value, 27,234 shares authorized; 27,234 shares
issued and outstanding at March 31, 2002 and
December 31, 2001, respectively 1,387,244 1,387,244
Series G convertible junior preferred stock; $0.02
par value, 5,000 shares authorized; 2,256.6 and
335 shares issued and outstanding at March 31,
2002 and December 31, 2001, respectively 2,256,600 335,000
Common stock; $.02 par value; 500,000,000 shares
authorized; 142,696,221 and 137,339,868 shares
issued and outstanding at March 31, 2002
and December 31, 2001, respectively 2,853,925 2,746,798
Additional paid-in-capital 54,258,708 53,712,235
Accumulated deficit (68,889,898) (67,006,866)
----------- -----------
Total capital deficit (7,548,421) (7,586,989)
---------- -----------
Total liabilities and capital deficit $3,735,654 $ 4,600,387
========== ===========
See accompanying notes to condensed consolidated financial statements.
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U.S. TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 2002 AND MARCH 31, 2001
Three Months Ended
------------------
March 31, March 31,
2002 2001
----- ----
(Unaudited) (Unaudited)
Revenues
Product sales $ 332,862 $ 602,607
Operating costs and expenses
Cost of sales 363,845 606,240
Selling expense 9,671 19,694
General and administrative expense 971,951 592,631
Impairment of long-lived assets (Note 3) 867,059 --
--------- ---------
Total operating costs and expenses 2,212,526 1,218,565
--------- ---------
Loss from operations (1,879,664) (615,958)
Other income (expense)
Interest, net 35 (90,618)
Equity in loss of associated companies -- (97,937)
Other, net (3,403) 495
------ --------
Total other income (expense) (3,368) (188,060)
Net loss before deemed dividends (1,883,032) (804,018)
Deemed dividends -- (6,022,280)
---------- -----------
Net loss $(1,883,032) $(6,826,298)
=========== ===========
Basic and diluted net loss per common share $ (0.01) $ (0.23)
======= =======
Weighted average number of common shares
outstanding 139,565,074 29,610,786
=========== ==========
See accompanying notes to condensed consolidated financial statements.
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U.S. TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31, 2002 AND MARCH 31, 2001
Three Months Ended
------------------
March 31, March 31,
2002 2001
------ ------
(Unaudited) (Unaudited)
Operating activities
Net loss $(1,883,032) $ (804,018)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 28,660 34,634
Equity in losses of associated companies -- 97,937
Loss (gain) on disposal of assets 3,060 --
Impairment of long-lived assets 867,059 --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables (9,836) 7,879
Inventory 44,798 39,115
Prepaid expenses (8,730) (26,887)
Accounts payable 357,816 (863,535)
Accrued expenses 11,816 424,183
Due to Yazam Shareholders -- 5,568,884
-------- ---------
Net cash (used in) provided by operating activities (588,389) 4,478,192
Investing activities
Net proceeds from disposal of assets 15,968 --
Investments in affiliates (75,000) (164,299)
Cash advances on notes receivable (43,000) --
Capital expenditures -- (38,838)
Net cash acquired in (paid for) acquisitions -- 6,113,165
Change in other assets -- (7,500)
-------- ---------
Net cash (used in) provided by investing activities (102,032) 5,902,528
Financing activities
Proceeds from convertible preferred stock
issued or issuable 921,100 589,300
Net borrowings under line of credit -- 3,064
Net proceeds from notes payable-related parties (270,100) --
Proceeds from issuance of notes payable -- 22,319,451
Principal payments on notes payable (2,334) (109,740)
------- ----------
Net cash provided by financing activities 648,666 22,802,075
Increase (decrease) in cash (41,755) 33,182,795
Cash, beginning of period 94,532 6,110
-------- -----------
Cash, end of period $ 52,777 $33,188,905
======== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ -- $ 83,058
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
Conversion of notes payable - related parties into
Series G Preferred Stock 1,000,500 --
Series F preferred stock issued in conjunction
with Yazam acquisition -- 7,713,790
Deemed dividends related to Series F preferred -- 6,022,280
stock
See accompanying notes to condensed consolidated financial statements.
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U.S. TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2002
NOTE 1: BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The interim financial information furnished herein was prepared from the books
and records of U.S. Technologies Inc. and its subsidiaries ("USXX" or the
"Company") as of March 31, 2002 and for the periods ended March 31, 2002 and
2001, without audit; however, such information reflects all normal and recurring
accruals and adjustments which are, in the opinion of management, necessary for
a fair presentation of financial position and of the statements of operations
and cash flows for the interim period presented. The interim financial
information furnished herein should be read in conjunction with the consolidated
financial statements included in this report and the consolidated financial
statements and notes contained in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2001. The interim financial information
presented is not necessarily indicative of the results from operations expected
for the full fiscal year.
The Company 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. Additionally,
the Company performs electronic manufacturing and furniture assembly services
through its wholly-owned subsidiary UST Industries.
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.
NOTE 2: GOING CONCERN
Our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001 was
prepared on a going concern basis that contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. However, we incurred a net loss from continuing operations of $10.8
million for the year ended December 31, 2001 and as of that date had a working
capital deficit of approximately $10.5 million and an accumulated deficit of
$67.0 million. Additionally, in the quarter ended March 31, 2002 we incurred a
net loss of approximately $1.9 million, had a working capital deficit of
approximately $9.6 million, and an accumulated deficit of $68.9 million. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
The Company has historically been able to raise capital through private equity
placements and debt financings. During 2001, we raised $1.2 million in private
equity placements and $1.5 million in debt financing. In the quarter ended March
31, 2002, the Company raised an additional $0.9 million in private equity
placements. We plan to fund operations through additional equity placements, new
debt financings and the possible sale of certain equity interests in our
associated companies.
The Company has entered into transactions with respect to certain shares of the
Series F Preferred Stock modifying their respective rights (see Note 5).
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 of 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.
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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
interim financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE 3: DISCONTINUED OPERATIONS
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 Gregory 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" on the
consolidated statement of operations. Revenues of Gregory FCA for the quarter
ended March 31, 2002 were approximately $554,000.
NOTE 4: INVESTMENTS ON ASSOCIATED COMPANIES AND
IMPARIMENT OF LONG-LIVED ASSETS
In the first quarter ended March 31, 2002, the Company invested an additional
$43,000 in Selis Networks in the form of a secured bridge loan. In April 2002,
the entire amount of outstanding loans to Selis totaling $568,000 were converted
into new Series B Preferred Stock of Selis Networks.
In the first quarter ended March 31, 2002, the Company made an initial
investment of $75,000 in Executive Private Aircraft Corporation ("EPAC") in
exchange for approximately 4% of the outstanding equity.
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. An impairment of $798,000 and $75,000 were recorded on the Company's
investments in Promisemark and EPAC, respectively. 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.
NOTE 5: CONVERTIBLE PREFERRED STOCK
The Company has outstanding convertible preferred stock as detailed below:
Series A Convertible Preferred Stock
During the three months ended March 31, 2002, 65,360 shares of Series A
Preferred Stock was converted into 5,356,353 shares of Common Stock of the
Company.
Series F Redeemable Convertible Preferred Stock
In conjunction with the acquisition of Yazam in March 2001, 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 Preferred Stock has
a stated liquidation preference aggregating approximately $6,000,000. Upon
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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 $6,022,280. This amount was recorded as a non-cash deemed dividend
during the quarter ended March 31, 2001, resulting in an increase in the net
loss applicable to common shareholders.
Pursuant to the original terms of the Series F Preferred, 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.
In July 2001, the Company entered into an agreement with a holder of 7,826
shares of Series F Preferred Stock that modified the redemption terms. Under
this agreement, the holder waived its right to require the Company to repurchase
its shares on or after September 1, 2001 upon the non-occurrence of certain
events, and their redemption rights as stated in the certificate of
designations. 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.
In July 2001, USV Partners agreed to purchase 10,120 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 that modified the redemption terms
and waived its right to require the Company to repurchase its shares on or after
September 1, 2001 upon the non-occurrence of certain events, and their
redemption rights as stated in the certificate of designations. USV Partners
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.
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
is classified as current liabilities on the consolidated balance sheet.
Series G Convertible Junior Preferred Stock
During 2001, the Company received $335,000 of cash from the sale of 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. During the three months ended March 31, 2002, the Company
issued an additional 1,921.6 shares of Series G Preferred Stock in exchange for
$921,100 in cash and the conversion of a portion of a note payable in the amount
of $1,000,500 due to the Chief Executive Officer.
The following table presents the dilution of the Company's common stock that
would result from the conversion of the Company's convertible preferred shares.
Common stock outstanding at March 31, 2002 142,696,221
Conversion of Series A Convertible Preferred Stock 4,792,795
Conversion of Series F Convertible Preferred Stock 27,374,000
Conversion of Series G Convertible Preferred Stock 15,044,000
----------
189,907,016 (a)
===========
(a) Does not include shares which would be issuable upon exercise of stock
options and warrants.
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NOTE 6: EARNINGS PER SHARE
The Financial Accounting Standards Board's Statement No. 128, "Earnings per
Share", requires companies to report basic earnings per share (EPS) and diluted
EPS. Basic EPS is calculated by dividing net earnings by the weighted average
number of common shares outstanding during the year. Diluted EPS is calculated
by dividing net earnings by the weighted average number of common shares
outstanding during the year plus the incremental shares that would have been
outstanding upon the assumed exercise of eligible stock options, warrants and
the conversion of certain preferred equity securities. Included in EPS for the
quarter ended March 31, 2001 is a charge of $6.0 million related to the deemed
dividend on the Company's convertible preferred stock. For the quarters ended
March 31, 2002 and March 31, 2001, the effect of the exercise of stock options,
warrants and the conversion of preferred stock would be anti-dilutive, and
therefore, diluted earnings (loss) per share is equal to basic earnings (loss)
per share as disclosed in the consolidated statements of operations.
NOTE 7: 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.
Summary information by segment follows (in thousands):
Associated
March 31, 2002 USXX Companies UST Total
---- --------- --- -----
Revenues........................... $ -- $ -- $ 333 $ 333
Operating loss..................... (691) (1,116) (123) (1,930)
Depreciation and amortization...... -- 3 26 29
Total segment assets............... $ 594 $ 2,620 $ 522 $ 3,736
Associated
March 31, 2001 USXX Companies UST Total
---- ---------- --- -----
Revenues........................... $ -- $ -- $ 603 $ 603
Operating loss..................... (462) (3) (151) (616)
Depreciation and amortization...... 1 5 29 35
Total segment assets............... $ 9,728 $31,920 $ 928 $42,576
NOTE 8: 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, $150,000 in Promisemark and $35,000 in EPAC, all
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of which are Associated Companies. As of May 15, 2002, the Company has fulfilled
only $50,000 of its funding obligations and could be subject to claims by
Baobab, Promisemark, EPAC or other investors.
The Company has various contractual lease obligations, of which 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.
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Item 2. 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-QSB 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 in the Form 10-KSB for the year ended December
31, 2001.
Results of Operations
The following table sets forth the Company's results of operations on a segment
basis for the periods indicated:
Three months ended March 31,
2002 2001
---- ----
Net Loss
Parent Company $ (691,256) $(6,556,621)
Associated Companies (1,069,020) (101,199)
UST Industries, Inc. (122,756) (168,478)
----------- -----------
Total Net Loss $(1,883,032) $(6,826,298)
=========== ===========
Sales of the Company's electronics and furniture manufacturing operations for
the quarter ended March 31, 2002 were approximately $333,000 resulting in a
decrease of 44.8 % compared to the comparable quarter of 2001. The uncertain
economic environment has negatively impacted the majority of the Company's
customers which, in turn, has resulted in a decrease in orders and backlog for
the Company.
Cost of sales, in the amount of approximately $364,000, increased as a
percentage of net sales to 109% for the quarter ended March 31, 2002 from
approximately $606,000, which represented 101% of net sales, for the quarter
ended March 31, 2001. The increase in the cost of sales percentage is primarily
due to allocation of fixed manufacturing overheads to a lower revenue base.
Gross margin as a percentage of net sales has decreased to a negative 9.3%
during 2002 from a negative 0.1% in 2001. The Company currently is experiencing
negative gross margins on the manufacturing operations due to reduced revenue
volumes.
The Company recorded general and administrative expenses of approximately
$972,000 in the quarter ended March 31, 2002 as compared to approximately
$593,000 in the quarter ended March 31, 2001. The increase is in part due to an
increase in operations due to the acquisition of Yazam in March 2001. Major
components of the expense for the quarter ended March 31, 2002 were $358,000 of
legal and accounting expenses incurred in conjunction with certain transactions
and other legal issues related to litigation and SEC compliance. Additionally,
the Company incurred approximately $175,000 in expenses related to the
operations of Xi Software, a wholly owned subsidiary formed in December 2001.
During the quarter ended March 31, 2002, the Company recorded an expense of
$867,000 resulting from the impairment of certain assets associated with the
acquired portfolios of E2Enet and Yazam. The impairment included $798,000 on its
investment in Promisemark and $75,000 on its investment in EPAC. During the
quarter ended March 31, 2001, there was no comparable expense.
During the quarter ended March 31, 2001, the Company recorded an expense of
$97,937 representing the Company's share of the losses of certain associated
companies acquired from E2Enet and Yazam that were carried on the equity basis.
Management does not expect to record equity income or losses during 2002 as all
associated companies are now carried on the cost basis.
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During the quarter ended March 31, 2001, the Company recognized a non-cash
expense of $6,022,280 as a result of deemed beneficial conversion features of
the Series F Preferred Stock. The beneficial conversion amount was calculated
for as the excess of the market price of the Company's Common Stock on the
measurement date over the conversion price of the Series F Preferred Stock times
the number of the Company's common shares to be issued on conversion of the
Series F Preferred Stock.
Liquidity and Capital Resources
During the quarter ended March 31, 2002, the Company experienced negative
operating cash flows of approximately $588,000. The primary operating uses of
cash during 2002 were to fund net losses of $1,883,000, net of significant
non-cash items such as losses from impairment of assets of $867,000. Net cash
used in 2002 operating activities was favorably impacted by increases in
accounts payable and accrued expenses of approximately $370,000. During the
quarter ended March 31, 2001, the Company experienced positive operating cash
flows of approximately $4.5 million. The primary operating uses of cash were to
fund net losses of $804,000. Net cash provided by operating activities in 2001
was favorably impacted by an increase of $5.6 million in cash that was due to be
paid to Yazam stockholder pursuant to the acquisition of Yazam in March 2001
that was not paid until subsequent to March 31, 2001.
During the quarter ended March 31, 2002, cash used in investing activities was
$102,000 and was related to two investments in associated companies. Net cash
provided by investing activities of $5,902,528 during the three months ended
March 31, 2001 consisted primarily of $6,113,165 net cash acquired in the Yazam
acquisition after legal and accounting fees related to the acquisition offset by
$164,000 invested in associated companies.
Cash provided by financing activities of $649,000 during the quarter ended March
31, 2002 was primarily the net proceeds from the sale of preferred stock of
$921,000 offset by the repayment of $270,000 on loans made to the Company by
certain affiliates of the Chief Executive Officer. The proceeds of these
offerings were used primarily to finance additional investments in new and
existing technology businesses and ongoing working capital needs. Net cash
provided by financing activities of $22,802,075 during the three months ended
March 31, 2001 was primarily due to proceeds of $22,000,000 on a note issued to
provide the cash portion of the Yazam acquisition and the receipt of net
proceeds from the subscription of preferred stock of $589,300. The Yazam
acquisition note was paid in full during April 2001.
The Series F Preferred Stock issued in March 2001 in conjunction with 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 Preferred stockholders, these stockholders may require the Company to
repurchase their shares of Series F Preferred Stock on September 30, 2002 for
$300 per share or a total of $5,383,719. The remaining Series F Preferred
stockholders can require the Company to repurchase their shares of Series F
Preferred 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
Preferred Stock (or $0.10 per common share) or a minimum of $942,827. Because of
these repurchase options, the redemption value 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 Preferred 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 Preferred stockholders to amend or waive the
repurchase obligation. However, if the Company is required to fund its
obligation to repurchase Series F Preferred Stock, it may have to raise
Page 13
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 for
the year ended December 31, 2001 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.
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.
Page 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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. 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
Forbearance and Waiver Agreement, Smith 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
with his February 1999 severance from the Company, he was misled into selling
and pledging 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. The Company 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, the Company 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 2. Changes in Securities.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Page 15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K was filed on April 15, 2002 reporting the
disposition of Gregory Communications FCA, Inc. under Item 2.
- Acquisition or Disposition of Assets.
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. TECHNOLOGIES, INC.
Date: May 20, 2002 /s/ Gregory Earls
---------------------------
Gregory Earls
Chairman and
Chief Executive Officer
Date: May 20, 2002 /s/ Michael R. Skoff
----------------------------
Michael R. Skoff
Chief Financial Officer