Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 Incorporation) (I. R. S. Employer
Identification No.)
1130 Connecticut Avenue, NW, 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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [..]
The number of shares outstanding of the Registrant's common stock, par value
$0.02, as of October 31, 2001 was 104,643,061 shares.
PART I. Financial Information
Item 1. Financial Statements:
2
U.S. TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2001 2000
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,596,505 $ 6,110
Trade accounts receivable, net of reserves of $75,700
at September 30, 2001 and $158,000 at December 31, 2000 872,133 401,253
Inventories, net of reserves of $0 at September 30, 2001
and $80,000 at December 31, 2000 138,590 169,834
Prepaid expenses 97,701 81,848
------------- ------------
Total current assets 3,704,929 659,045
Property and equipment, net of accumulated depreciation
of $1,657,792 and $1,473,512 at September 30, 2001 and
December 31, 2000, respectively 514,105 656,820
Investments in affiliates 3,299,193 3,434,217
Other assets:
Notes receivable 298,526 90,000
Goodwill 889,720 -
Other assets 341,772 450
------------- --------------
Total other assets 1,530,018 90,450
------------- --------------
Total assets $ 9,048,245 $ 4,840,532
============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
3
U.S. TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2001 2000
---- ----
(Unaudited)
Current liabilities:
Accounts payable $2,747,584 $ 1,715,586
Accrued expenses 387,066 290,985
Obligation under put option - E2E acquisition - 2,000,010
Due to Yazam shareholders 1,236,345 -
Due to investors 2,438,324 -
Line of credit - 197,392
Notes payable 948,181 685,861
---------- -----------
Total current liabilities 7,757,500 4,889,834
---------- -----------
Series F convertible preferred stock:
$0.02 par value, votes as if converted to common
stock on certain issues, 27,374 shares
authorized, issued and outstanding 6,326,494 -
Shareholders' equity:
Common stock; $.02 par value; 500,000,000 shares
authorized; 93,493,440 and 29,086,786 issued and
outstanding at September 30, 2001
and December 31, 2000, respectively 1,869,869 592,216
Series A convertible preferred stock: $0.02 par value,
votes as if converted to common stock, 10,000,000
shares authorized; 615,000 and 625,000
issued and outstanding at September 30, 2001
and December 31, 2000, respectively 6,150,000 6,250,000
Series B mandatorily convertible preferred stock:
$0.02 par value, votes as if converted to common
stock on certain issues, 0 and 112,000 shares authorized,
issued and outstanding at September 30, 2001
and December 31, 2000, respectively - 11,200,000
Series C mandatorily convertible preferred stock:
$0.02 par value, votes as if converted to common stock
on certain issues, 8,750 shares authorized; 0 and 4,534 shares
issued and outstanding at September 30, 2001 and
December 31, 2000, respectively - 4,337,914
Series D mandatorily convertible preferred stock:
$0.02 par value, votes as if converted to common
stock on certain issues, 2,000 shares authorized;
0 and 1,552.5 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively - 170,775
Series E Convertible Preferred Stock: issuable 2,102,900 1,199,200
4
U.S. TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2001 2000
---- ----
(Unaudited)
Convertible Preferred Stock:
$0.02 par value, votes as if converted to common
stock on certain issues, 27,374 shares
authorized, issued and outstanding 1,387,296 -
Additional paid-in capital 47,623,922 27,601,507
Accumulated deficit (64,169,736) (51,400,914)
------------ ------------
Total shareholders' equity (5,035,749) (49,302)
------------ ------------
Total liabilities and shareholders' equity $ 9,048,245 $ 4,840,532
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
U.S. TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Ended September 30, Nine months ended September 30,
---------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Sales $ 1,307,524 $ 918,870 $ 2,949,993 $ 2,109,141
Operating costs and expenses:
Cost of sales 758,979 896,282 1,852,035 2,199,499
Selling expense 21,260 16,995 51,148 47,303
General and administrative expense 2,798,019 1,729,401 6,853,881 2,851,187
Impairment of long-lived assets 1,719,950 - 2,050,862 -
------------ ------------ ------------ ------------
Total operating costs and expenses 4,298,208 2,642,678 10,807,926 5,097,989
------------ ------------ ------------ ------------
Income (loss) from operations (3,990,684) (1,723,808) (7,857,933) (2,988,848)
Other income (expense)
Interest, net 15,899 (3,344) (70,666) (5,783)
Other, net 1,733 8,442 9,152 71,143
Equity in loss of investees (250,000) (149,684) (894,558) (154,121)
Gain (loss) on sale of subsidiary (100,000) - 640,696 -
------------ ------------ ------------ ------------
Total other income (expense) (332,368) (144,586) (315,376) (88,761)
------------ ------------ ------------ ------------
Net loss before minority interest $ (4,323,052) $ (1,868,394) $ (8,173,709) $ (3,077,609)
Minority interest in loss of subsidiary 236,643 - 236,643 -
------------ ------------ ------------ ------------
Net loss $ (4,086,409) $ (1,868,394) $ (7,936,666) $ (3,077,609)
Deemed dividend - - (4,595,510) (14,757,650)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $ (4,086,409) $ (1,868,394) $(12,532,176) $(17,835,259)
============ ============ ============ ============
Net loss per share:
Basic $ (0.08) $ (0.06) $ (0.34) $ (0.61)
============ ============ ============ ============
Diluted $ (0.08) $ (0.06) $ (0.34) $ (0.61)
============ ============ ============ ============
Shares used in per share calculation:
Basic 51,091,950 29,569,308 36,502,446 29,331,374
============ ============ ============ ============
Diluted 51,091,950 29,569,308 36,502,446 29,331,374
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
U.S. TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended September 30,
----------------------------------
2001 2000
------------ -----------
Cash flows from operating activities:
Net loss $ (7,936,666) $ (3,077,609)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 198,891 628,506
Equity in losses of investees 894,558 154,121
Impairment of long-lived assets 2,050,862 -
Gain on sale of subsidiary (640,696) -
Stock option compensation expense 15,864 -
Minority interest in loss of subsidiary (236,643) -
Changes in assets and liabilities, net of effect
of acquisitions and divestitures:
Accounts receivable 257,061 (404,719)
Inventories 31,244 (74,661)
Prepaid expense 438,585 38,426
Other assets 429,563 6,058
Accounts payable (444,604) (169,987)
Accrued expenses (2,933,470) (97,380)
Due to Yazam shareholders 1,236,345 -
------------ -----------
Net cash used in operating activities (6,639,106) (2,997,248)
------------ -----------
Cash flows from investing activities:
Net cash acquired in acquisitions 6,134,031 -
Investments in affiliates (1,527,752) (3,163,937)
Proceeds from affiliate liquidations 282,936 -
Proceeds received for affiliates 2,423,721 -
Decrease (increase) in notes receivable 402,921 (68,932)
Equipment purchases (42,055) (72,717)
------------ -----------
Net cash provided by (used in) investing activities 7,673,802 (3,305,586)
------------ -----------
Financing activities:
Proceeds from the issuance of notes payable 23,249,097 175,000
Payments of notes payable (22,399,706) (16,877)
Net payments under line of credit (197,392) -
Proceeds from convertible preferred stock
subscriptions 903,700 6,211,911
Proceeds from exercise of stock options
and warrants - 209,188
------------ -----------
Net cash provided by financing activities 1,555,699 6,579,222
------------ -----------
Net cash provided 2,590,395 276,391
Cash and cash equivalents, beginning of period 6,110 9,451
------------ -----------
Cash and cash equivalents, end of period $ 2,596,505 $ 285,842
============ ===========
7
U.S. TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental disclosures of cash flow information:
Supplemental schedule of non-cash investing activities:
There were no non-cash investing activities.
On March 27, 2001, the Company paid approximately $22,000,000, exchanged 27,374
shares of Series F Mandatorily Convertible Preferred Stock and granted
approximately 8,000,000 warrants for all of the outstanding shares of Yazam.net,
as described more fully in Note 3. In conjunction with the acquisition, net cash
was acquired as follows as follows:
Fair value of assets acquired $ 33,008,049
Cash paid (21,163,539)
Non-cash net assets acquired (4,495,000)
Due to Yazam shareholders (1,236,345)
------------
Net cash acquired in acquisition $ 6,113,165
============
The fair values of assets acquired and liabilities assumed are tentative.
The accompanying notes are an integral part of the consolidated
financial statements.
8
U.S. TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
This information reflects all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the statement of the financial
position of the Company as of September 30, 2001 and the results of operations
and cash flows for the three and nine months ended September 30, 2001. All
adjustments made have been of a normal recurring nature. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that these disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements are read in conjunction with the financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2000.
The basis for presentation for investments the Company acquires is accounted for
under one of three methods: consolidation, equity method or cost method. The
applicable accounting method is determined based on the Company's voting
interest in an investment, degree of influence over the operations and
controlling positions.
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 three years in the period ended
December 31, 2000, and had working capital deficiencies at December 31, 2000 and
December 31, 1999. 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"). As a result of
the acquisition of Yazam, the Company obtained approximately $6,900,000 in cash,
incurred approximately $800,000 in closing costs and assumed liabilities of
approximately $2,800,000, which will be used to support the Company's working
capital and investing requirements during 2001. In addition to the acquisition
cost for Yazam, the Company plans to selectively invest additional funds in
those acquired companies of Yazam which are 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.
If prior to September 1, 2001, the Company had been unable to issue sufficient
shares of its common stock to allow the conversion of the Series F Preferred
Stock and the exercise of the warrants issued to the former Yazam shareholders,
these former Yazam shareholders would have had the right to require the Company
to repurchase their Series F Preferred Stock for a price equal to the greater of
$250 per share or the average price of USXX's common stock for 20 days prior to
the required repurchase multiplied by 1,000. The minimum amount that the Company
would have needed to pay to the former Yazam stockholders had this repurchase
been required was approximately $6,844,000. However, prior to September 1, 2001,
the Company did increase the authorized common shares to a sufficient number to
allow the conversion of the Series F Preferred Stock and the exercise of the
warrants issued to the former Yazam shareholders. In order to mitigate the
potential impact of these repurchase requirements, the Company, prior to
September 1, 2001, entered into transactions with certain holders of the
Series F
9
Preferred Stock modifying their respective rights.
The Company's sources of funds to pursue acquisition opportunities and provide
working capital will come from equity transactions involving the sale of the
Company's capital. The Company's ability to attract investors to its equity
offerings and to support its business objectives is dependent upon its ability
to generate positive earnings (through increasing revenues and controlling costs
at its LTI operations and generating revenues as a result of providing services
to the Associated Companies) and cash flow from operations, complete the
development of its capital raising operations and attract investors to its
equity offerings. 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 condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
3. NATURE OF OPERATIONS
OVERVIEW
U.S. Technologies Inc. ("U.S. Technologies," "USXX" or the "Company")
develops and operates a network of technology and related companies. The
Company builds and develops 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. It is our strategy to actively manage, develop, operate and promote
collaboration among our network of associated companies.
The Company also performs labor and service intensive "outsourcing" work for
Fortune 1000 and other select companies. Currently, the work is performed by
inmates in detention facilities located in Texas and California under the
guidelines of a 1979 Federal Government Program known as the Prison Industry
Enhancement program ("PIE"). The Company performs electronic and furniture
assembly, manufacturing, enhancement, rework, packaging and sorting of products.
On April 12, 2000, the Company completed its acquisition of E2Enet, Inc
("E2Enet"). E2Enet was a privately held company that had made investments in
several development stage businesses. The acquisition of E2Enet provided the
Company with a platform to participate in the growing technology industry. The
completion of the E2Enet acquisition enhanced our opportunities for both
investment in, and creative development of early stage businesses.
In mid-March 2001, the Company concluded its management arrangement with The
Spear Group, which had been providing accounting and administrative support to
the Company and operating the Company's PIE businesses from Atlanta, Georgia.
These operating services for the PIE businesses are now being handled from the
Company's office in Orlando, Florida. The accounting and administrative support
functions were consolidated in the Company's executive offices in Washington,
DC. In connection with these changes, Jim Warren, while retaining his position
as a Director, stepped down as Co-Chairman and Co-Chief Executive Officer of the
Company and Skip Moore resigned as an officer with the Company.
On March 27, 2001, the Company consummated its acquisition of Yazam.com, Inc
("Yazam"). Yazam, a privately held company, had been engaged in seed-stage
funding and business development services to emerging Internet and technology
related start-ups. Due to the fact that the acquisition of Yazam occurred on
March 27, 2001, just prior to the end of the quarter on March 31, 2001, the
acquisition, for accounting purposes, was recorded as if it occurred on March
31, 2001. Therefore, results of operations for the quarter ended March 31, 2001
do not include the operating results of Yazam. These four days of operations
were not
10
material to the consolidated financial statements of the Company. The results of
operations for the quarter and nine months ended September 30, 2001, include the
operating results of Yazam for the six months ended September 30, 2001. (See
"Yazam Acquisition" below)
Historically, the Company has been engaged, through its wholly owned-subsidiary,
Labor-to-Industry Inc. ("LTI"), in the operation of industrial facilities
located within both private and state prisons, which are staffed principally
with inmate labor. LTI's prison-based operations are conducted under the
guidelines of the 1979 Prison Industry Enhancement ("PIE") program.
4. YAZAM ACQUISITION
On March 27, 2001, the Company acquired Yazam, which made early stage
investments in several development stage technology businesses. The details of
the purchase of Yazam have been reported by the Company in its Forms 8-K filed
on March 1, 2001, as amended April 11, 2001 and May 25, 2001. Financial
information for the Yazam acquisition has been presented in a Form 8-K/A, which
was filed on August 7, 2001.
At the date of closing the assets of Yazam totaled approximately $33.0 million.
Yazam assets included approximately $28.5 million of cash, a public and investor
relations services company called Gregory Communications FCA ("Gregory FCA"), a
$0.5 million asset representing a business held and under contract for sale that
has since closed, a $1.7 million investment in 26 associated companies, plus
office equipment and other assets.
In consideration for the purchase of Yazam the Company paid $22,000,000 in cash
plus 27,374 shares of the Company's Series F Convertible Preferred Stock, which
may be convertible into 27,374,000 shares of common stock of the Company, and
warrants to purchase an aggregate of approximately 8,000,000 shares of the
Company's common stock at $0.34 per share. As of September 30, 2001,
approximately $20.8 million of the cash portion of the purchase price had been
paid to Yazam shareholders, with the balance (or approximately $1.2 million) of
the cash portion to be paid during the quarter ended December 31, 2001.
The Company obtained a loan from Safra National Bank of New York for the entire
cash portion of the Yazam purchase price. The loan carried an interest rate of
1.0% over the three-month LIBOR rate and was secured by a portion of the cash
held by Yazam as of the closing date and was repaid in full during April 2001.
The issuance of shares of the Company's common stock upon the exercise of such
warrants or the conversion of the Series F Convertible Preferred Stock into
common stock required the amendment of the Company's charter to increase the
number of authorized common shares of the Company. The Company's shareholders,
at their annual meeting in August 2001, voted to increase the aggregate number
of authorized shares of common stock of the Company from 40 million to 500
million shares.
In mid-July, 2001, the Company began negotiations with certain significant
holders of the Series F Stock to obtain waivers of their put. Because of both
the redemption rights, the Series F Convertible Preferred Stock will not be
included in the Company's stockholders' equity as reported on March 31, 2001.
On July 18 and 20, 2001 the Company entered into Waiver and Replacement
Agreements with respect to the Series F Stock held by the two largest holders of
that class. The Waiver and Replacement Agreements provide for a waiver of their
right to redeem their shares after March 27, 2003 that is set forth in the
Series F Certificate of Designations. In return, the holders of those shares of
Series F Stock received the right to require the Company to purchase their
shares at a purchase price of $300.00 per share (or $0.30 per share of Common
Stock) during a ninety-day period beginning September 30, 2002.
11
On July 18, 2001, the Carlyle Group entered into a Waiver and Replacement
Agreement with the Company. On July 20, 2001, various affiliates of the Texas
Pacific Group ("TPG") entered into an agreement to sell their shares of Series F
Stock to USV Partners at $150.00 per share of Series F stock by August 3, 2001
and USV entered into a Waiver and Replacement Agreement with respect to those
shares. USV and its assignees expect to close the transaction soon.
The above acquisition was accounted for using the purchase method. The
operations of Yazam have been included in the accompanying statements of
operations since April 1, 2001. The unaudited results of operations, as if Yazam
had been acquired at the beginning of periods ended December 31, 2000 and
September 30, 2001, are as follows:
December 31, September 30
2000 2001
--------------- --------------
Net revenues $4,826,576 $3,820,724
Net loss $(78,563,099) $(18,828,859)
Net loss per share $(2.67) $(0.52)
Weighted average shares outstanding 29,408,063 36,502,446
5. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
For the nine months ended September 30, 2001, the Company's equity in losses of
investees acquired as part of the Yazam acquisition and being accounted for by
the equity method has been estimated at a loss of $500,000, based on the results
of the quarter ended March 31, 2001. Such amount has been included in "Equity
in loss of investees".
6. INVENTORIES
At September 30, 2001 and December 31, 2000, inventories consisted of the
following:
2001 2000
-------- --------
Raw materials $110,310 $231,177
Work in progress 18,052 18,272
Finished Goods 10,228 385
Reserve for Obsolescence - (80,000)
-------- --------
$138,590 $169,834
======== ========
7. NOTES RECEIVABLE
During the nine months ended September 30, 2001, the Company advanced to
Portris, Inc, ("Portris"), a U.S. Technologies associated company, approximately
$471,000 for working capital purposes, in exchange for promissory notes equal to
such amount. Portris is a software company that is developing an information
management system that facilitates performance of interactive team oriented
projects over the Internet. During May 2001, $385,000 of these promissory notes
were cancelled and exchanged for equity of Portris, thereby increasing the
Company's ownership interest in Portris from 30.4% to 42.2%. As of June 30,
2001,
12
Portris owed the Company approximately $176,000 under promissory notes.
During July 2001 the $176,000 of promissory notes outstanding as of June 30,
2001 were cancelled and exchanged for equity of Portris, thereby increasing the
Company's ownership interest in Portris from 42.2% to 50.3%.
During the six months ended September 30, 2001, the Company advanced to Selis,
Inc, ("Selis"), a U.S. Technologies associated company, approximately $297,000
for working capital purposes, in exchange for promissory notes equal to such
amount. Selis is a software company that is developing web-based network
management systems. As of September 30, 2001, Selis owed the Company
approximately $297,000 under promissory notes.
Effective as of June 30, 2001, the Company sold all of its shares of
Buyline.net, Incorporated to an entity wholly owned by Gregory Earls, the CEO of
the Company. As consideration for such shares, the purchaser delivered to the
Company a promissory note in the principal amount of $100,000. The promissory
note, plus accrued interest, will become due and payable only upon the earlier
of, and only to the extent of: (i) any distributions by Buyline or (ii) the
sale by such purchaser of its shares of Buyline. The Company has the right to
repurchase for $250,000 such Buyline shares at any time prior to June 30, 2004.
Due to neither of these conditions being met, the Company recorded a reserve of
$100,000 against the collectability of this note during the quarter ended
September 30, 2001. Such transaction was approved by at least a majority of the
disinterested directors of the Company. The gain the Company recorded on the
sale of Buyline of approximately $741,000 during the quarter ended June 30, 2001
was reduced to $641,000 during the quarter ended September 30, 2001.
8. CONVERTIBLE PREFERRED STOCK
During the nine months ended September 30, 2001, the Company raised, through
subscriptions for convertible preferred stock, approximately $904,000. This
brings the total raised through the convertible preferred stock offering to
approximately $2,103,000. As of the date of this report, the offering of the
convertible preferred stock has not closed. The proceeds from the convertible
preferred stock offering will be used primarily to finance additional
investments in new and existing technology companies and ongoing working capital
needs.
On the closing date of the Yazam acquisition, the Company issued 27,374 shares
of the Company's Series F Convertible Preferred Stock, which may be convertible
into 27,374,000 shares of common stock of the Company, and warrants to purchase
an aggregate of approximately 8,000,000 shares of the Company's common stock at
$0.34 per share. (See "Yazam Acquisition" above)
The following table presents the dilution of the Company's common stock, which
can result since the Company's Charter Amendment increasing the number of
authorized common shares from 30 million to 500 million shares was approved in
August 2001 now allows the conversion of the Company's convertible preferred
shares.
Common stock outstanding at September 30, 2001 93,493,440
Conversion of Series A Convertible Preferred Stock 50,409,836 (a)
Conversion of Series B Mandatorily Convertible Preferred Stock - (b)
Conversion of Series C Mandatorily Convertible Preferred Stock - (b)
Conversion of Series D Mandatorily Convertible Preferred Stock - (b)
Conversion of Series F Convertible Preferred Stock 27,374,000
-----------
171,277,276 (c)
===========
13
(a) A total of 10,000 shares of Series A Preferred Stock were converted to
819,672 common shares in July 2001. An additional 228,587 shares of series A
Preferred Stock were converted to 18,736,603 shares of common stock in October
2001.
(b) All of the Series B, C and D Mandatorily Convertible Preferred Stock were
converted to common shares on August 30, 2001, resulting in the issuance of
63,586,982 shares of the Company's common stock..
(c) Does not include conversion of subscribed but unissued preferred stock,
which has not been established at the date of this report. Also does not include
shares, which would be issuable upon exercise of stock options and warrants.
Including the above described conversions of the Company's preferred stock the
total of the Company's common shares outstanding as of October 31, 2001 was
104,643,061 shares.
The terms of the Series A Preferred Stock permits them to vote as if the Series
A Preferred Stock was already converted to Common Stock. The terms of the
Series C Preferred Stock, the Series D Preferred Stock and the Series F
Preferred Stock did not permit the holders thereof to vote on the Charter
Amendment, but otherwise permitted them to vote as if the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series
F Preferred Stock were already converted to Common Stock. On August 30, 2001,
all of the Series B, C and D Preferred Stock were converted to common.
The Company and certain holders of the Company's Series A, B and C Preferred
Stock entered into a registration rights agreement for the registration of the
shares of common stock into which the Series A, Series B, and Series C Preferred
Stock are convertible. 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. This request must
be made by one third of the shares covered by this agreement. 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.
On March 27, 2001, the Company and certain holders of the Company's Series F
Preferred Stock entered into a registration rights agreement as part of the
merger agreement. Under the Series F registration rights agreement, the holders
have the right to compel the Company to register their respective shares at the
Company's expense. The holders also have Piggyback Rights, subject to
restrictions, which an underwriter might impose for the sale of the shares. This
Series F registration rights agreement expires by its terms on March 27, 2007.
Based on the conversion terms of the Series F Convertible Preferred Stock, and
the market price of the Company's common stock on the date of issuance of the
Series F Convertible Preferred Stock, the Company recognized the existence of a
beneficial conversion feature in the amount of $4,595,510, as adjusted in the
quarter ended September 30, 2001. This amount was recorded as a non-cash deemed
dividend in the quarter ended March 31, 2001, resulting in an increase in the
net loss applicable to common shareholders.
9. STOCK OPTIONS
On April 27, 2001 the Company granted 2,870,000 stock options to employees,
5,900,000 stock options to directors and 1,645,000 stock options to consultants,
both exercisable at market value or $.28 per share. The options vest over a
three or four year period and expire on April 27, 2011. The Company has recorded
the
14
options granted to employees and directors at their intrinsic value in
accordance with APB 25, Accounting for Stock Issued to Employees, consequently
there was no impact on the Company's financial statements as a result of this
grant.
The Company has recorded the options granted to consultants at fair value on the
grant date in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, using the Black Scholes option pricing model. During the quarter
ended June 30, 2001, the Company recorded an expense of approximately $16,000 as
a result of the stock options granted to consultants.
10. ADDITIONAL PAID-IN CAPITAL
During the nine months ended September 30, 2001, the Company increased
additional paid in capital by approximately $20,022,000. The components of this
increase were; $14,437,000 conversion of the Series B, C and D Convertible
Preferred Stock to common, a $4,595,000 deemed dividend created by beneficial
conversion features of the Series F mandatorily convertible preferred stock,
$880,000 value of warrants issued in the Yazam acquisition, $94,000 resulting
from the conversion of preferred shares to common shares and $16,000 expense
recorded associated with the grant of stock options to consultants.
11. SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing the performance. The
Company's chief operating decision makers aggregate operating segments based on
the location of the segment and whether it is prison-based or free-world. Based
on the quantitative thresholds specified in SFAS 131, the Company has determined
that it has four reportable segments for the three and nine months periods ended
September 30, 2001 and September 30, 2000. The four reportable segments are USXX
(Washington, DC), LTI (Lockhart, Texas and Blythe, California) ("LTI"), the
Company's technology investments ("TECHNOLOGY") and Gregory FCA (Philadelphia,
Pennsylvania). USXX is the corporate office, LTI is a prison-based manufacturer
of computer circuit boards and modular office furniture components. The
Company's technology investments consist of ownership interests in approximately
34 technology companies, which were primarily acquired through the acquisition
of E2E and Yazam. Gregory FCA is a wholly owned subsidiary of Yazam, which
provides public and investor relations services (see Note 4).
15
Summary information by segment as of and for the three and nine months ended
September 30, 2001 and 2000 follow (in thousands):
(a) (c)
USXX LTI GREGORY TECHNOLOGY Other Total
------- ------- ------- ------- ----- --------
Nine months ended September 30
2001
Net sales $ -- $ 1,883 $ 1,067 $ -- $ -- $ 2,950
Operating loss (2,832) (500) (52) (4,474) -- (7,858)
Total Assets (b) 2,687 946 854 4,561 -- 9,048
2000
Net sales $ -- $ 2,025 $ -- $ -- $ 84 $ 2,109
Operating profit (loss) (1,810) (213) -- (946) (20) (2,989)
Total Assets (b) 3,885 1,541 -- 14,351 -- 19,777
Three months ended September 30
2001
Net sales $ -- $ 828 $ 480 $ -- $ -- $ 1,308
Operating loss (990) (77) (46) (2,878) -- (3,991)
Total Assets (b) 2,687 946 854 4,561 -- 9,048
2000
Net sales $ -- $ 889 $ -- $ -- $ 30 $ 919
Operating profit (loss) (932) 10 -- (768) (34) (1,724)
Total Assets (b) 3,885 1,541 -- 14,351 -- 19,777
(a) Amounts shown in the "LTI" column were previously shown separately as
"LTI" and "LTI - Blythe".
(b) Represents net book value of assets.
(c) Gregory FCA is a wholly owned subsidiary of Yazam. See Yazam
acquisition disclosure in Note 4.
12. LOSS PER SHARE
The Company presents basic and diluted earnings per share in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share". Basic earnings per common share is based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share does
not include the dilutive effect of common stock equivalents for the nine months
and three months ended September 30, 2001 and 2000 because stock options and
warrants which comprised common stock equivalents would have been anti-dilutive.
16
Per
(Loss) Shares share
(Numerator) (Denominator) amount
-------------- ------------- ---------
Nine months ended September 30, 2001:
Net loss available to common shareholders $(12,532,176) 36,502,446 $(0.34)
Effect of dilutive potential common shares:
Stock options - -
Warrants - -
------------ ----------
Diluted net loss $(12,532,176) 36,502,446 $(0.34)
============ ========== ======
Nine months ended September 30, 2000:
Net loss available to common shareholders $(17,835,259) 29,331,374 $(0.61)
Effect of dilutive potential common shares:
Stock options - -
Warrants - -
------------ ----------
Diluted net loss $(17,835,259) 29,331,374 $(0.61)
============ ========== ======
Three months ended September 30, 2001:
Net loss available to common shareholders $ (4,086,409) 51,091,950 $(0.08)
Effect of dilutive potential common shares:
Stock options - -
Warrants - -
------------ ----------
Diluted net loss $ (4,086,409) 51,091,950 $(0.08)
============ ========== ======
Three months ended September 30, 2000:
Net loss available to common shareholders $ (1,868,394) 29,569,308 $(0.06)
Effect of dilutive potential common shares:
Stock options - -
Warrants - -
------------ ----------
Diluted net loss $ (1,868,394) 29,569,308 $(0.06)
============ ========== ======
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of
17
when those assets were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
The adoption of SFAS No. 141 and SFAS No. 142 is not expected to have a material
effect on the Company's financial position, results of operations and cash flows
in 2002 and subsequent years.
Effective January 1, 2001, the Company adopted SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--
a replacement of SFAS No. 125. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities and revises the accounting standards for securitizations and
transfers of financial assets and collateral. The adoption of this standard on
January 1, 2001 did not have a material effect on the Company's results of
operations and financial position. This standard also required new disclosures
in 2000. Such requirements were not applicable to the Company.
In 2000, the Financial Accounting Standards Board (FASB) issued Interpretation
(FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation,
an interpretation of Accounting Principles Board Opinion No. 25. Interpretation
No. 44 clarifies the application of APB No. 25 to the definition of an employee
for purposes of applying APB No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. The Company's policies have been amended for the adoption of FIN
No. 44.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, the Company has
reviewed its accounting policies for the recognition of revenue. SAB No. 101 was
required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance
on applying generally accepted accounting principles to revenue recognition in
financial statements. The company's policies for revenue recognition are
consistent with the views expressed within SAB No. 101. See note 1, "Summary of
Significant Accounting Policies," for a description of the Company's policies
for revenue recognition.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS 133 requires an entity to measure
all derivatives at fair value and to recognize them in the balance sheet as an
asset or liability, depending on the entity's rights or obligations under the
applicable derivative contract. The Company will designate each derivative as
belonging to one of several possible categories, based on the intended use of
the derivative. The recognition of changes in fair value of a derivative that
affect the income statement will depend on the intended use of the derivative.
If the derivative does not qualify as a hedging instrument, the gain or loss on
the derivative will be recognized currently in earnings. If the derivative
qualifies for special hedge accounting, the gain or loss on the derivative will
either (i) be recognized in income along with an offsetting adjustment to the
basis of the item being hedged or (ii) be deferred in other comprehensive income
and reclassified to earnings in the same period or periods during which the
hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. SFAS 138 Accounting For Certain
Derivative Instruments and Certain Hedging Activities, Amendment of SFAS No.
133, liberalized the application of SFAS 133 in a number of areas.
The Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the Company does not expect
adoption of the new standard on January 1, 2001, to affect its financial
statements.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) included in
the Company's form 10-K for the year ended December 31, 2000.
Results of Operations
- ---------------------
The following analysis compares the results of operations for the three-month
and nine-month periods ended September 30, 2001 to the comparable periods ended
September 30, 2000.
Net sales during the three months ended September 30, 2001 were $1,307,524
compared to $918,870, during the three months ended September 30, 2000. The
increase in net sales in the amount of $388,654, was primarily due to sales by
Gregory FCA, which was acquired in the purchase of Yazam on March 27, 2001, of
approximately $480,000. Sales for LTI increased by approximately $90,000 for
the quarter due to increased sales at LTI's Texas electronics manufacturing
facility resulting from increased demand for technology products.
Net sales during the nine months ended September 30, 2001 were $2,949,993,
compared to $2,109,141 during the nine months ended September 30, 2000. The
increase in net sales in the amount of $840,852, was primarily due to sales of
Gregory FCA, which was acquired in the purchase of Yazam on March 27, 2001, of
approximately $1,067,000. Sales for LTI decreased by approximately $226,000 for
the nine-month period due to decreased sales at LTI's California furniture
manufacturing facility resulting from decreased demand from the sole customer
that serves the facility.
In the three months ended September 30, 2001, cost of goods sold was $ 786,979,
which represented 95% of the net sales of LTI. The net sales of Gregory FCA
are not used in the calculation since Gregory FCA is a service company and
therefore does not have cost of sales. During the three months ended September
30, 2000, cost of goods sold was $896,282, which represented 98% of net sales.
The decrease in cost of sales percentage is a result of increased sales in
the LTI's Texas electronics manufacturing facility, resulting in a decrease in
fixed costs as a percentage of increased sales.
In the nine months ended September 30, 2001, cost of goods sold was $1,852,035,
which represented 98% of the net sales of LTI. The net sales of Gregory FCA
are not used in the calculation since Gregory FCA is a service company and
therefore does not have cost of sales. During the nine months ended September
30, 2000, cost of goods sold was $2,199,499, which represented 104% of net
sales. The decrease in cost of sales percentage is a result of increased sales
in the LTI's Texas electronics manufacturing facility, resulting in a decrease
in fixed costs as a percentage of increased sales.
Selling expenses during the three months ended September 30, 2001 were $21,260,
representing 3% of the net sales of LTI. During the three months ended
September 30, 2000, selling expenses in the amount of $16,995 represented 2%
of net sales. The increase in selling expenses percentage was the result of
more sales generated from outside sales personnel, rather than internally
generated.
Selling expenses during the nine months ended September 30, 2001 were $51,148,
representing 3% of net sales. During the nine months ended September 30, 2000,
selling expenses in the amount of $47,303 represented 2% of net sales. The
percentage increase in selling expenses was the result of an increase in sales
generated from outside sales personnel, rather than internally generated sales.
19
General and administrative expenses during the three months ended September 30,
2001 were $2,798,019, which represented 214% of net sales and an increase of
approximately $1,069,000 over the prior year. During the three months ended
September 30, 2000, general and administrative expenses were $1,729,401, which
represented 188% of net sales. The increase in general and administrative
expenses is primarily due to the acquisition of Yazam on March 27, 2001 which
accounted for approximately $1,206,000 of the increase over prior year. The
increase in general and administrative expenses is also due to the fact that
effective July 1, 2001, Portris became a wholly consolidated subsidiary of the
Company, due to the Company's ownership interest in Portris exceeding 50% as of
that date. General and administrative expenses of Portris during the quarter
ended September 30, 2001 were approximately $476,000. General and
administrative expenses otherwise declined approximately $613,000 from the
prior year.
General and administrative expenses during the nine months ended September 30,
2001 were $6,853,881, which represented 232% of net sales and an increase of
approximately $4,003,000 over the prior year. The increase in general and
administrative expenses is primarily due to the acquisition of Yazam on March
27, 2001 which accounted for approximately $3,141,000 or 78% of the $4,003,000
increase over the prior year. The increase in general and administrative
expenses is also due to the fact that effective July 1, 2001, Portris became a
wholly consolidated subsidiary of the Company, due to the Company's ownership
interest in Portris exceeding 50% as of that date. General and administrative
expenses of Portris during the quarter ended September 30, 2001 were
approximately $476,000, or 12% of the $4,003,000 increase over the prior year.
The balance of the increase for 2001 was the result of additional accounting
and legal costs associated with the acquisition of Yazam and current and
amended SEC document filings. During the nine months ended September 30, 2000,
general and administrative expenses were $2,851,187, which represented 135% of
net sales.
During the three months ended September 30, 2001, the Company had a net loss
available to common shareholders of $4,086,409 or $ (0.08) per weighted-average
share. The loss for the three months ended September 30, 2001, includes a loss
of $250,000, which represents the Company's estimated share of losses from
associated companies accounted for under the equity method, an asset impairment
charge of approximately $1,720,000 resulting from a $338,000 write-off of
investments in four (4) associated companies which ceased operations during the
quarter, the $1,010,000 write-down of investments in six (6) other associated
companies based on comparisons of current valuations for each respective
company to the carrying value of the respective company and a reduction of
approximately 744,000 in the value of certain operating assets acquired in the
Yazam acquisition. During the three months ended September 30, 2000 the
company reported a net loss available to common shareholders of $1,868,394 or
$(0.06) per weighted-average share. The loss for the three months ended
September 30, 2000, included a loss of $149,684, which represents the Company's
share of losses from associated companies accounted for under the equity
method.
During the nine months ended September 30, 2001 the Company had net loss
available to common shareholders of $12,532,176or $(0.34) per weighted-average
share. The loss for the nine months ended September 30, 2001, includes a non-
cash deemed dividend of $4,595,510 resulting from beneficial conversion
features associated with the Company's Series F Convertible Preferred Stock and
a loss of $894,558, which represents the Company's share of losses from
associated companies accounted for under the equity method. Additionally an
asset impairment charge of approximately $2,051,000 resulting from a $588,000
write-off of investments in five (5) associated companies which ceased
operations during the six-months ended September 30, 2001, the $1,010,000
write-down of investments in six (6) other associated companies based on
comparisons of current valuations for each respective company to the carrying
value of the respective company and a reduction of approximately $744,000 in
the value of certain operating assets acquired in the Yazam acquisition. Also
write-offs of certain fixed assets associated with the Company's call center
operations, which were discontinued in a prior period, were recorded during the
20
period. During the nine months ended September 30, 2000, the Company reported
a net loss available to common shareholders of $ $17,835,259 or $(0.61) per
weighted-average share. . The loss for the nine months ended September 30,
2000, includes a non-cash deemed dividend of $14,757,650 resulting from
beneficial conversion features associated with the Company's Series A, B and C
Convertible Preferred Stock and a loss of $154,121, which represents the
Company's share of losses from internet businesses accounted for under the
equity method.
Effective as of June 30, 2001, and included in the Company's operating results
for the nine months ended September 30, 2001, the Company sold all of its
shares of Buyline.net, Incorporated to an entity wholly owned by Gregory Earls,
the CEO of the Company. As consideration for such shares, the purchaser
delivered to the Company a promissory note in the principal amount of $100,000.
The promissory note, plus accrued interest, will become due and payable only
upon the earlier of, and only to the extent of: (i) any distributions by
Buyline or (ii) the sale by such purchaser of its shares of Buyline. Due to
further analysis of the probability either of these conditions occurring the
Company recorded, during the quarter ended September 30, 2000, a $100,000
reserve against the value of the note receivable The Company has the right to
repurchase for $250,000 such Buyline shares at any time prior to June 30, 2004.
Such transaction was approved by at least a majority of the disinterested
directors of the Company. As a result the Company recorded a net gain on the
sale of Buyline of approximately $641,000.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 2001 and 2000, the Company
experienced negative operating cash flows of $6,639,106 and $2,997,248
respectively. Negative operating cash flows in the nine months ended September
30, 2001 resulted principally from the $(7,936,666) net loss incurred during
that period, a decrease of $2,933,470 in accrued liabilities, which included a
payment of approximately $2,000,000 for the put obligation assumed by the
Company in the E2E acquisition and a decrease of approximately $445,000 in
accounts payable. These negative effects were mitigated by approximately
$3,144,000 in non-cash expenses, including asset impairments, equity in investee
losses and depreciation, recorded during the period. Negative operating cash
flow in the nine months ended September 30, 2000 resulted principally from the
$(3,077,609) net loss incurred during that period, an increase in accounts
receivable of $404,719 and a decrease in accounts payable of $169,987, offset by
depreciation and amortization of $628,506. The depreciation and amortization of
$628,506 is primarily the result of the amortization of goodwill and legal
expenses associated with the Company's acquisition activities.
Net cash provided by investing activities of $7,673,802 during the nine months
ended September 30, 2001 consisted primarily of $6,113,165 net cash acquired in
the Yazam acquisition after legal and accounting fees related to the
acquisition, approximately $2,424,000 collected and temporarily held for the
benefit of affiliated companies, which was subsequently paid to the respective
affiliated company during October 2001 and $500,000 collected as a result of the
sale of certain assets of Yazam. Net cash provided by investing activities
during the quarter ended September 30, 2001 was reduced by approximately
$1,528,000 invested in affiliates. Net cash used in investing activities of
$3,305,586 during the nine months ended September 30, 2000 was primarily the
result of the acquisition of E2E by the Company and cash advances to affiliated
companies.
Net cash provided by financing activities of $1,555,699 during the nine months
ended September 30, 2001 was primarily due the receipt of net proceeds from the
subscription of preferred stock of $903,700 and approximately $650,000 in
temporary loans from USV Partners, a company managed by the Company's CEO,
Gregory Earls. The $22,000,000 Yazam acquisition note, which was obtained
during March 2001 to fund the cash portion of the Yazam acquisition, was paid in
full during April 2001. Net cash provided by financing activities of $6,579,222
during the nine months ended September 30, 2000 was primarily due to the
21
receipt of net proceeds from the subscription of preferred stock of $6,211,911
and proceeds from the exercise of common stock options and warrants of $209,188.
As identified by the above discussion and analysis, the Company did not produce
a profit from operations in the nine months ended September 30, 2001.
Management has initiated steps to increase sales and reduce unnecessary costs.
However, completing the Company's business plans will require additional
investment and working capital. To provide for this investment and working
capital, the Company raised, during the nine months ended September 30, 2001,
approximately $7,500,000 through the Yazam purchase and the subscription of its
unissued convertible preferred stock.
Under the terms of the Yazam Acquisition Agreement, the 27,374 shares of the
Company's Series F Preferred Stock are convertible into 27,374,000 shares of
Company common stock. Holders of Series F Preferred Stock would receive
preferential treatment in a liquidation of the Company over all existing holders
of Company common stock and Preferred Stock ("Existing Preferred Stock").
Pursuant to the Registration Rights Agreement, the Series F holders have demand
and piggyback registration rights. By the Company's 2001 Proxy Statement, which
was approved by a majority of the Company's shareholders in August 2001, the
Company amended its Charter to increase the number of authorized shares of
Company's common stock in order to authorize and reserve a sufficient number of
shares of common stock for issuance in connection with the conversion of the
Series F Stock and the exercise of the associated warrants. Had the Company not
authorized such additional number of shares of common stock as necessary for the
conversion of the Series F Stock and the exercise of the warrants prior to
September 1, 2001, the Yazam stockholders who received shares of Series F Stock
could have required the Company after such date to repurchase their shares of
Series F Stock for a price per share equal to 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 $250 per share of Series F
stock(or a total of $6,843,500). Due to the potential repurchase obligation, in
mid-July, 2001, the Company began negotiations with certain significant holders
of the Series F Stock to obtain waivers of their put. On July 18, 2001, the
Carlyle Group entered into a Waiver and Replacement Agreement with the Company.
On July 20, 2001, various affiliates of the Texas Pacific Group ("TPG") entered
into an agreement to sell their shares of Series F Stock to USV Partners at
$150.00 per share of Series F stock by August 3, 2001 and USV entered into a
Waiver and Replacement Agreement with respect to those shares. This agreement
is expected to close in during the fourth quarter of 2001. The Waiver and
Replacement Agreements provide for a waiver of their put as well as their right
to redeem their shares after March 27, 2003 that is set forth in the Series F
Certificate of Designations. In return, the holders of those shares of Series F
Stock received the right to require the Company to purchase their shares at a
purchase price of $300.00 per share of Series F stock during a ninety-day period
beginning September 30, 2002.
Further, for a ninety-day period beginning March 27, 2003, holders of the Series
F Preferred Stock will have the right to require the Company to redeem the
Series F Preferred Stock at a price of $100 per share, or a total of $2,734,400.
The Series F Stock has voting rights on an as-converted basis with Company
common stock and not as a separate class, except that the Series F holders are
not entitled to vote on the Charter Amendment. A vote of the holders of two-
thirds of the Series F Stock is required to approve any diminution in the rights
of the Series F Stock, and a vote of a majority of the Series F stock is
required before the Company may issue any securities with the same preference or
priority as, or with a preference or priority senior to, the Series F Stock. No
dividends will accrue or be payable at any time with respect to the Series F
Stock.
Due to the potential 2002 and 2003 repurchase requirements, the Company has
chosen to classify $6,326,494 of the carrying value of the Series F Convertible
Preferred Stock as a liability, rather than a part of shareholder's equity.
22
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 accountant's report
on the consolidated financial statements of the Company dated May 9, 2001
contained an explanatory paragraph regarding uncertainty about 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 and attain profitable operations. 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.
The Company's sources of funds to pursue acquisition opportunities and provide
working capital during 2001 will come from a combination of cash flows from
existing operations and if required, equity transactions involving the Company's
capital stock. Management projects approximately $1,800,000 will be invested in
new and existing associated companies during 2001. In addition, approximately
another $230,000 will be invested in capital expenditures. 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. Management projects that approximately
$1,000,000-2,000,000 will have to be raised during 2001, through preferred stock
sales to accomplish the Company's goals. However, there can be no assurance that
the Company can raise such amounts or if such amounts can be raised can be
raised on terms beneficial to the Company.
FORWARD-LOOKING INFORMATION
- ---------------------------
Certain statements in this quarterly report on form 10-Q contain "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, concerning prospective future events and results. Such
prospective events include the Company's ability to continue as a going concern,
acquisitions and investments and prospects for such acquisitions and
investments. U. S. Technologies cautions that actual developments and results
may differ materially from its prospective future events. There can be no
assurance that the conditions necessary to completing any prospective event will
occur. Additional investments in the Company or by the Company or an unrelated
person in any of the Company's associated companies provide no assurance that
the Company or such associated company will succeed or that the Company's
investments will be recovered or that the Company or any of its associated
companies will be profitable. The Company's assets and operations, including
results of operations, would be affected materially by either by occurrence of
any such event or the failure of any such event to occur, by the extent to which
it and its 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 its associated companies, by economic
conditions generally and particularly in the developing e-commerce market, by
competition and technology changes in its and its associated companies
industries and businesses, and by the results of its and its associated
companies operations if and when operating. The Company's assembly and other
outsourcing business activities involve a limited number of facilities serving a
limited number of companies, all of which are subject to material changes
outside the Company's control.
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PART II. OTHER INFORMATION
Item 1. through Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
A list of exhibits included as part of this report is set forth
in the Exhibit Index appearing elsewhere in this report, and is
incorporated by reference.
(b) Reports on form 8-K
During the quarter for which this report is filed, Registrant
filed a Current Report on form 8-K/A dated August 7, 2001,
providing financial disclosure information on the acquisition
Yazam.com, Inc, which occurred on March 27, 2001.
During the quarter for which this report is filed, Registrant
filed a Current Report on form 8-K dated August 22, 2001,
reporting changes to the Company's Certifying Accountant.
During the quarter for which this report is filed, Registrant
filed a Current Report on form 8-K/A dated September 6, 2001,
providing additional disclosure regarding changes to the
Company's Certifying Accountant.
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EXHIBIT INDEX
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Exhibit No. Description
- ----------- -----------
25
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 duly authorized officers.
U.S. TECHNOLOGIES INC.
(Registrant)
Date: November 14, 2001 /s/ Gregory Earls
-----------------
Gregory Earls
Chairman of the Board, Chief Executive Officer and
President
Date: November 14, 2001 /s/ Allyson Holland
-------------------
Allyson Holland
Vice President Finance and Controller
26