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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 0-15960
U.S. TECHNOLOGIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
STATE OF DELAWARE
(STATE OF OTHER JURISDICTION OF 73-1284747
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1130 CONNECTICUT AVENUE, SUITE 700
WASHINGTON, DC 20006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES.)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 466-3100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES [X] NO [ ]
The aggregate market value of voting common stock held by non-affiliates of
the Registrant at June 29, 2001 was approximately $5,052,164
The number of shares outstanding of the Registrant's Common Stock, par
value $0.02 per share, at June 29, 2001 was 29,610,786 shares.
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TABLE OF CONTENTS
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PART I............................................................................... 1
ITEM 1. BUSINESS ................................................................... 1
Overview ................................................................... 1
Overview of Associated Companies............................................ 1
Yazam Acquisition........................................................... 4
Series F Stock Waiver and Replacement Agreement............................. 5
Ownership Position in Our Associated Companies.............................. 5
PIE Business of USXX........................................................ 7
Employees................................................................... 16
Acquisitions................................................................ 17
ITEM 2. PROPERTIES.................................................................. 17
ITEM 3. LEGAL PROCEEDINGS........................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 18
PART II.............................................................................. 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................. 19
Market Information.......................................................... 19
Holders of Common Stock..................................................... 19
Dividends................................................................... 19
Recent Sales of Unregistered Securities..................................... 20
ITEM 6. SELECTED FINANCIAL DATA..................................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 23
Results of Operations....................................................... 23
Liquidity and Capital Resources............................................. 29
Effect of Inflation......................................................... 33
New Accounting Pronouncements............................................... 33
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995.................................. 34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK..................................................... 35
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 36
PART III............................................................................. 36
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS.......................................... 36
Executive Officers Who Are Not Directors.................................... 36
Board of Directors:
Board Size and Composition......................................... 36
Directors.......................................................... 37
Board Committees and Meetings...................................... 39
Board Compensation................................................. 40
Section 16(a) Beneficial Ownership Reporting Compliance............ 41
ITEM 11. EXECUTIVE COMPENSATION..................................................... 41
Executive Compensation...................................................... 41
Summary Compensation Table.................................................. 41
Stock Option Plans.......................................................... 43
Employment Agreements, Termination of Employment, and Change-In-Control..... 43
Compensation Committee Interlocks and Insider Participation................. 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................................. 44
Security Ownership.......................................................... 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 50
PART IV.............................................................................. 52
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES,
AND REPORTS ON FORM 8-K................................................ 52
SIGNATURES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS.................................................... F-2
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS...................................... F-40
INDEX OF EXHIBITS
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PART I
ITEM 1. BUSINESS
OVERVIEW
U.S. Technologies Inc. ("U.S. Technologies," "USXX" or the "Company")
develops 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 that
management believes have high growth potential. It is our strategy to actively
manage, develop, operate and promote collaboration among our network of
associated companies.
In April 2000, the Company completed its acquisition of E2Enet, Inc
("E2Enet"). E2Enet was a privately held company that had interests in several
development stage businesses. The acquisition of E2Enet provided the Company
with a platform to participate in the growing technology industry. The
completion of the E2Enet acquisition enhanced our opportunities for creative
development of promising early stage businesses.
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.
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 in the next twelve months. See,
"MANAGEMENT'S DISCUSSION AND ANALYSIS - Liquidity and Capital Resources," "SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT," "REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - Note 2.
U.S. Technologies was incorporated on September 9, 1986. Our principal
executive offices are located at 1130 Connecticut Avenue, NW, Suite 700,
Washington, DC 20036, and our phone number is (202) 466-3100.
OVERVIEW OF ASSOCIATED COMPANIES
We classify the technology companies in which we have interests as
associated companies. Our PIE businesses are described separately below. We have
acquired primarily interests in development stage technology companies. Through
December 31, 2000, we had acquired interests in or established the eight
technology companies listed below.
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29th Street Partners, Inc. ("29th Street Partners") operates an
e-commerce site for upscale cosmetics and accessories. 29th Street Partners
intends to follow a "clicks and bricks" investment strategy by also acquiring
high-end cosmetic specialty retailers and currently operates two retail stores
in Washington, D.C. and one retail store in Philadelphia, Pennsylvania. On
February 10, 2001, the assets of Bluemercury, Inc. ("Bluemercury"), an
associated Company in which we had approximately a 29% interest, were
contributed to 29th Street Partners, resulting in USXX having a 9.12% interest
in 29th Street Partners.
Buyline.net, Incorporated ("Buyline") developed B2B e-commerce
applications. Buyline was creating a proprietary Internet software program
designed to be a universal platform for entry-level B2B e-commerce, linking
buyers and sellers. Buyline's software application for RFP/RFQ (Request for
Proposal/Request for Quotation) technology was projected to be used in a full
range of on-line advertising on Internet-based directories and in commercial web
sites.
Subsequent to the E2Enet Acquisition, the Company reorganized Buyline,
and the Company also made an additional investment in Buyline, resulting in
Buyline becoming a consolidated subsidiary of the Company. U.S. Technologies
increased its holdings of Buyline to the present level by:
- helping Buyline retire outstanding debts to Accenture L.L.P.
("Accenture"), formerly known as Andersen Consulting through
an issuance of Company preferred stock to Accenture; and
- purchasing an additional equity interest in Buyline for
nominal consideration.
During the fourth quarter of 2000, the net book value of the assets of
Buyline was reduced to zero by an asset impairment charge, due to the loss of
its primary client and the inability to retain the management personnel
necessary to execute Buyline's business strategy. This resulted in a charge of
approximately $1,817,000 to earnings. At that time, the Company had
approximately a 64% equity interest in Buyline.
On December 27, 2000, the Company purchased 3,450,000 shares of Buyline
common stock for $345 from Northwood Ventures L.L.C. and Northwood Capital
Partners L.L.C., entities controlled by Peter G. Schiff and Henry T. Wilson,
members of the Company's Board of Directors
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. 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 dividend 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. Such
transaction was approved by at least a majority of the disinterested directors
of the Company.
Gomembers.com ("Gomembers") provides software that helps associations,
labor unions and professional societies manage a variety of tasks, including
payroll and Internet integration. Initially, E2Enet had invested in MEI Software
Systems, Inc. ("MEI"), which provided customized software systems to manage the
databases of trade associations, professional associations, fund-raising
organizations, and chambers-of-commerce. MEI was acquired by Gomembers on
November 7, 2000, thereby converting the Company's approximately 5% interest in
MEI to a 0.47% interest in Gomembers.
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OneMade, Inc. ("OneMade") provides an e-commerce community to serve
wholesalers, retailers, consumers, and artists active in the arts, hobby and
crafts industries.
PromiseMark, Inc. ("PromiseMark"), formerly known as Vipro Corporation,
is an Internet surety Company providing, among other services, repair guarantees
against computer viruses. PromiseMark has e-commerce relationships with a
leading Internet utility company, a credit card association, one of the largest
warranty claims administrators in the world, and over 170 Internet service
providers.
On June 26, 2001 the Company paid $500,000 to purchase shares of
PromiseMark's Series C preferred Stock and warrants to purchase shares of
PromiseMark's Series C-1 Preferred Stock as part of a financing by which
PromiseMark raised an additional $1.5 million to fund continuing operations. As
a result of this financing the Company had an approximately 16% equity interest
in PromiseMark.
Urban Box Office, Inc. ("UBO") intended to develop networked
multi-media web sites providing e-commerce services to Internet users interested
in urban culture, information, entertainment, and products. On November 3, 2000,
the date that UBO announced that it would be filing for bankruptcy, the Company
had approximately a 8% equity interest in UBO on a fully diluted basis. During
the fourth quarter, the investment in UBO was written off, resulting in
approximately a $3,014,400 charge to earnings for asset impairment.
Portris, Inc. (Portris), a software company formed in 2000, is
developing technology that is intended to manage efficiently business group
information over an Internet network. The Portris system would enable teams
simultaneously to exchange information and collaborate on documents over
networks.
On October 16, 2000, the Company completed the acquisition of a 30.4%
equity interest in Portris, Inc. Under the terms of the agreement, the Company
received its interest in Portris for an aggregate of $380,000, which includes
the cancellation of $250,000 of debt, which was included in the Company's notes
receivable as of September 30, 2000, and providing an additional $130,000 in
cash to Portris.
On May 15, 2001 the Company purchased shares of Portris' Series A-1
Convertible Preferred Stock in return for cancellation of $370,000 in promissory
notes and accrued interest, services rendered to Portris valued at $150,000 and
$185, 000 in cash. Pursuant to this transaction the Company increased its equity
interest in Portris to approximately 42%.
Final Arrangements LLC ("Final Arrangements") is an Internet start-up
that offers the ability to make funeral arrangements online. Initially, E2Enet
had invested in WebMilestones.com ("WebMilestones"). WebMilestones was acquired
by Final Arrangements on December 27, 2000, thereby converting the Company's
37.35% interest in WebMilestones to a 0.13% interest in Final Arrangements.
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YAZAM ACQUISITION
On March 27, 2001, the Company consummated its acquisition by merger of
Yazam.com, Inc ("Yazam"). Yazam had been engaged in seed-stage funding and
business development services to emerging internet and technology related
start-ups. At its peak, Yazam had investments in 26 portfolio companies in
several different countries and approximately 129 employees. Principally due to
reverses in the stock market, Yazam had effectively ceased capital raising and
investment operations in the fourth quarter of 2000 pending its liquidation or
sale.
The purchase price for Yazam was $22,000,000 in cash plus 27,374 shares
of the Company's Series F Convertible Preferred Stock and warrants to purchase
an aggregate of 8,000,000 shares of the Company's Common Stock at $0.34 per
share. Pursuant to the transaction, the Company principally obtained
approximately $28.9 million of cash held by Yazam at closing, investments in
various associated companies and a $1 million asset representing a business held
and under contract for sale that has since closed. The net result is that, in
addition to purchasing Yazam's interest in all of its associated companies and
operating subsidiaries, the Company acquired approximately $6.9 million in cash
and issued redeemable convertible preferred stock.
Of the investments in 26 associated companies acquired from Yazam at
the closing of the merger, Yazam prior to, the Merger wrote down its investment
in 19 of such companies, in accordance with an assessment of the respective
companies' cash position and potential to execute its business plan. The
associated companies of Yazam are now being developed by existing U. S.
Technologies personnel including seven Yazam professionals that remained with
the Company after the Yazam Acquisition. Gregory FCA, the principal operating
subsidiary acquired in the transaction, is a public relations and investor
relations firm which will complement the Company's existing capabilities in
providing business development services to associated companies.
The Series F Stock issued in the transaction may be convertible into
27,374,000 shares of Common Stock of the Company. The issuance of shares of the
Company's Common Stock upon the exercise of the 8,000,000 warrants (as described
above) and the conversion of the Series F Convertible Preferred Stock into
Common Stock will require the prior amendment of the Company's charter to
increase the authorized common shares of the Company, as previously disclosed by
the Company. In the event that the Company's charter is not amended prior to
September 1, 2001, holders of the Company's Series F Convertible Preferred Stock
will have the right to put their shares to the Company in accordance with the
terms of the definitive merger agreement. The Yazam stockholders who received
shares of Series F Stock may require 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 $0.25 per common share), or a minimum of $6,843,500 in the
aggregate.
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SERIES F STOCK WAIVER AND REPLACEMENT AGREEMENT
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 19 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 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
(or $0.30 per share of Common Stock) during a ninety-day period beginning
September 30, 2002.
On July 19, 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 (or
$0.15 per share of common 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 the week of August 6, 2001.
OWNERSHIP POSITION IN OUR ASSOCIATED COMPANIES
From April 12, 2000 through December 31, 2000, we acquired interests in
or established eight technology companies. The six technology companies listed
below were owned by the Company and were still operating as of December 31,
2000. We classify companies in which we, directly or indirectly through wholly
owned subsidiaries, have interests as associated companies. We have indicated
below our percentage of equity ownership in each associated company. Our equity
ownership/voting power percentages have been calculated based on the issued and
outstanding common stock of each associated company, assuming the issuance of
common stock upon the exercise of outstanding options and warrants and the
conversion into common stock of outstanding convertible securities. Except where
we indicate otherwise, our equity ownership and voting power percentages are the
same.
For those companies in which our equity ownership or voting power
percentage is greater than 50%, we generally direct or control all of their
operating activities and account for them as a consolidated subsidiary. For
those companies in which our equity ownership or voting power percentage is at
least 20%, but not more than 50%, we generally have significant involvement in
and influence over their operating activities, with board representation and
rights to participate in material decisions and accordingly account for them on
the equity basis. For those companies in which our equity ownership and voting
power percentage is less than 20%, we may not be actively involved in their
management or day-to-day operations, but may have Board representation and may
offer or provide them advisory services and accordingly account for them on the
cost basis. We also seek to encourage and facilitate cooperation and mutual
assistance among our associated companies.
We have identified below by marking with an asterisk (*) each
associated company that is a development stage company. A development stage
company has not yet begun planned principal operations, or has begun planned
principal operations but has not yet generated significant revenue from those
operations. Whether a company is in the development stage is determined on a
case-by-case basis by that company's management. There is no specific revenue
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threshold that is applicable in all cases. A development stage company typically
will be devoting most of its efforts to activities such as financial planning,
raising capital, research and development, acquiring operating assets, and
recruiting and training personnel. Currently, five of our associated companies
are in the development stage. Our percentage ownership in any of the associated
companies is subject to change as we make new investments and our associated
companies accept new investments from us or other investors.
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ASSOCIATED COMPANY MARKET DATE FORMED ASSOCIATED SINCE EQUITY BOARD REPRESENTATION
OWNERSHIP
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29th Street Partners Provides e-commerce February May 1999 9.12% The Company may
(Formerly, Bluemercury, site for upscale 1999 E2Enet converted unilaterally designate
Inc.)(1)* female cosmetic its interest in one member.
products and Bluemercury to
www.bluemercury.com accessories. 29th Street Total Directors - 3
Partners in 2001
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Gomembers.com (Formerly Provides customized 1992 November 2000 0.47% None
MEI Software)(2) management software E2Enet made its
systems to manage initial
trade associations, investment in a
professional predecessor,
www.members.com associations and MEI, in
trade unions. September 1999.
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Onemade.com, Inc.(1)* Provides e-commerce April 1999 May 1999 12.25% The Company may
site that will serve unilaterally designate
participants in the one member and
arts, crafts, and jointly, with the
hobby industries. majority
stockholders,
designate one
www.onemade.com additional member.
Total Directors - 5
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Portris, Inc.(3)* Develops technology February October 2000 42.2% The Company may
to facilitate the 2000 unilaterally designate
simultaneous exchange two members.
of information and
collaboration on Total Directors - 9
documents over the
www.portris.com Internet.
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PromiseMark, Inc.(4)* Internet surety August October 1999 16.00% The Company may
Company which 1999 unilaterally designate
provides repair one member and jointly
guarantees against designate three
viruses that harm additional members.
www.promisemark.com computers. Total Directors - 7
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Final Arrangements, LLC Provides Internet April 2000 July 2000 0.13% None
(Formerly WebMilestones) publishing services. (The Company
(1)* converted its
interest in
WebMilestones
to Final
Arrangements in
www.arrangonline.com December 2001)
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(1) Information current as of March 31, 2001.
(2) Information current as of November 7, 2000.
(3) Information current as of May 15, 2001.
(4) Information current as of June 26, 2001.
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Of the six associated companies shown above, four have generated
revenues as of December 31, 2000.
Competition. We face intense competition to develop and acquire
interests in technology companies from traditional venture capital firms,
companies with business strategies similar to our own, corporate strategic
investors, other better financed Internet incubators and other capital
providers. Competitors with business strategies similar to our own include
publicly held CMGI,
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Internet Capital Group and Safeguard Scientifics, as well as private companies,
including Idealab. In addition, we may face competition from an emerging group
of online service providers that facilitate relationships between entrepreneurs
and venture capitalists, such as vcapital.com and Garage.com. We also will be
competing with corporate strategic investors that include Fortune 500 companies
that are developing Internet strategies and Internet capabilities as well as
investing in technology companies. Further, certain professional service firms,
directly or through affiliated private investment funds, provide capital and
services to technology companies that are clients. Many of our competitors have
more experience identifying and acquiring interests in technology companies, and
have greater financial and management resources, brand name recognition and
industry contacts than we do.
This intense competition could limit our opportunities to acquire
interests in associated companies or force us to pay higher prices to acquire
these interests. Further, the impact of this competition on the valuation of
technology companies could result in lower returns. In addition, some of our
competitors, including venture capital firms, private companies with business
strategies similar to ours and corporate strategic investors, may have a
competitive advantage over us because they have more flexibility than we do in
structuring acquisitions in companies because they do not need to acquire
majority or controlling interests in companies to avoid regulation under the
Investment Company Act, as discussed below.
Since we are principally acquiring interests in and developing
technology companies we are also competing against large and well-financed
technology companies, consulting firms and others for executives with
appropriate management expertise in discrete technology fields. Due to the rapid
growth and expansion of new technology, competition for experienced management
is fierce. Management believes that it has been able to attract well-qualified
personnel to help develop its associated companies and believes it can continue
to do so but can provide no assurances in this regard.
PIE BUSINESS OF USXX
U.S. Technologies operates, through its wholly owned subsidiary, LTI,
industrial facilities located within both private and state prisons. LTI staffs
these facilities principally with inmate labor under the guidelines of the PIE
program. In 1979, Congress established the PIE program to encourage state and
local governments to create jobs for prisoners that approximate private sector
work, pay the local prevailing wages for similar work, and enable inmates to
acquire marketable skills to increase their chances for rehabilitation and
employment upon release.
In this outsourcing capacity, U.S. Technologies solicits manufacturing,
assembly, repair, kitting, and fulfillment services and other businesses.
Through LTI, U.S. Technologies selects inmates in a competitive process and
trains them in the job skills needed for the contracted work as well as the
general job skills required to secure and hold long-term employment. Up to 80%
of the inmates' wages are withheld in order to pay fines, restitution to
victims, alimony, child support and taxes, and to reimburse the government for
the costs of their incarceration. According to the Federal Bureau of Justice and
Assistance, the PIE program has been successful in reducing the recidivism rate.
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Under a 1997 agreement with Wackenhut Corrections Corporation, WCC
allows U.S. Technologies to operate as its industry PIE partner in any
WCC-managed correctional facility. WCC also has agreed to purchase products
manufactured by the Company to the extent feasible. WCC runs 47 correctional
facilities in the United States, Australia, England and Canada. In 1998, U.S.
Technologies reached an agreement with the States of California and Florida to
expand its operations into correctional facilities managed by those states.
LTI operates an electronics plant at WCC's Lockhart, Texas corrections
facility which presently manufactures and repairs circuit boards for Dell,
Motorola, HDC and Texas Digital, among others. The Texas facility also performs
various mechanical assembly operations on customer products which were formerly
assembled in Mexico. LTI has a furniture manufacturing plant in a state
correctional facility located in Blythe, California which presently manufactures
office panel blanks for Unisource, Inc. LTI had completed construction of a
motorcycle parts manufacturing operation in a WCC facility in South Bay,
Florida. Because of financial problems of the motorcycle manufacturer, the
Company ceased managing at this facility on September 30, 2000. On October 27,
2000, the motorcycle manufacturer entered bankruptcy. Previously, the Company
operated a customer call center in a Draper, Utah correctional facility through
its wholly owned subsidiary Service-To-Industry ("STI"). The center was closed
during the first quarter of 1999 and has not reopened. STI still exists but no
longer has any operations.
Electronics Manufacturing. As a member of the Electronics Manufacturing
Provider industry, U.S. Technologies, through LTI, provides contract
manufacturing ("CM") services including cable and wire harness assembly,
finished assembly rework and repair, and printed circuit board assembly. Given
the emergence of new technologies and the proliferation of electronics into
virtually all segments of the world economy, management believes that the CM
segment represents a growth opportunity for the outsourcing operations.
Original Equipment Manufacturers ("OEM") such as Cisco,
Hewlett-Packard, IBM, Lucent, Texas Instruments and many others are increasingly
relying on CMs for assembly and other value-added services. Many OEMs have begun
to view outsourcing as a strategic tool which allows them to focus their efforts
on resources and core competencies resulting in improved flexibility and
responsiveness in all segments of their business. The benefits of outsourcing by
the OEMs include:
- improved time to market since new products can be turned on
quickly by a CM without the cost and time required for the OEM
to re-tool;
- access to state of the art manufacturing facilities and
technologies without the need for the OEM to invest in
facilities capital equipment; and
- lower production and procurement costs since CMs can
efficiently purchase many generic components.
Finally, CMs typically do not bear the same overhead and benefit
burdens incurred by OEMs.
The market for CM services is the multi-billion dollar electronics
industry. LTI specializes in production of circuit boards which are ordered in
shorter production runs and
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therefore does not compete with the larger companies in the industry who have
invested millions of dollars in high speed production equipment capable of
continuous production runs creating hundreds of thousands of boards. In fact,
approximately 25% of LTI's annual sales in 2000 were for the assembly of boards
under subcontract to larger CM's who could more cost effectively source low
volume boards from LTI than assemble them in house. LTI's customer base consists
of approximately 60 active customers.
Furniture Manufacturing. Through its furniture manufacturing facility,
U.S. Technologies manufactures office partitions and associated parts for use in
the office workstation industry. The facility is capable of producing a high
quality panel comparable to those produced and sold by Herman Miller and
Steelcase. LTI's product is designed to be interchangeable with several
manufacturers of office furniture.
The major market served by the LTI's furniture manufacturing facility
is the replacement or aftermarket office partition market. This market is
dominated by a few large companies which offer alternatives to purchasing the
higher priced products of Herman Miller and Steelcase. These companies offer
finished products which are interchangeable with the more expensive products,
but at a considerably lower price. In January 2000, LTI contracted with
Unisource, Inc. to produce their panels. This manufacturer requires
approximately one-shift, out of a possible three shifts, of the operating
capabilities of the Blythe facility and accounted for approximately 17% of LTI's
2000 sales volume. LTI is actively seeking other customers to increase the
plant's output and is negotiating with Unisource to produce additional products,
warehouse finished goods, and provide order fulfillment services
Motorcycle Manufacturing. LTI's motorcycle parts manufacturing and
assembly facility was located in a WCC facility in South Bay, Florida, and began
operations in the second quarter of 2000. Initially, the facility was designed
to manufacture, paint and polish various motorcycle body parts with the
intention of eventually accomplishing complete parts manufacture and assembly of
motorcycles.
Our motorcycle assembly plant had only one customer, American Quantum
Motorcycles. American Quantum filed for bankruptcy protection on October 27,
2000 and all of the Company's operations in South Bay have ceased pending the
outcome.
Business Strategy. During the past year, the Company had considered
selling its PIE business. Subsequently, management has decided to retain the PIE
business. The Company's strategy for LTI is to establish itself as a national
leader in the employment of prison labor in a variety of business sectors. To
that end, the Company utilizes the PIE program to perform its services by using
a low-cost, but highly motivated labor pool, in modern, clean and efficient
facilities. The Company intends to operate the business in a simple and
straightforward manner by maintaining corporate overhead at or below its present
level during the Company's expansion. The Company's strategy also includes the
following:
- Utilize existing expertise in electronics manufacturing to seek new
business opportunities and to fully utilize all of LTI's electronic
assembly facility in Lockhart, Texas;
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- Provide ancillary services such as the final assembly of products and
installation of parts associated with the primary electronics
manufacturing process;
- Expand the Company's furniture manufacturing operations by increasing
its modular furniture production capabilities and introducing other
furniture products; and
- Evaluate the Company's ability to provide value added services in
other markets where low cost labor without the soft costs of turnover,
absenteeism, vacations, holidays, and employer paid benefits would be
competitive advantages.
Management believes that additional capacity can be added, beyond the
existing facilities, without significant additional corporate overhead.
Growth Strategy. The Company has established a sound working
relationship with WCC and seeks to expand that relationship by going into
additional WCC facilities with available industry workspace to establish
successful PIE programs. The Company is also working with state-run
(non-privatized) correctional facilities where industrial workspace is available
to establish PIE work programs. The Company continues to seek additional
customers for its furniture manufacturing facility located in Blythe, California
and is evaluating several options regarding its opportunities for entry into the
fulfillment industry.
Customers. Historically, LTI has been and remains dependent upon
certain customers for a major portion of its sales. The top three customers,
Dell Computer, Unisource Office Furniture, and Vant Electronics, together
accounted for approximately 49% of LTI's sales for the year ended December 31,
2000. Amounts due from three customers, HDL Research Lab, Unisource Furniture
and Vant Electronics accounted for 67% of total receivables.
Markets. Within the electronics CM industry, the Company has promoted
its services primarily in the Southwest region of the United States. However,
recognizing that the market for its CM services is the multi-billion dollar
electronics industry, the Company intends to broaden it's marketing
geographically to capture additional business.
The major market served by the Company's furniture manufacturing
facility is the replacement workstation market. This market is dominated by a
few large companies who offer alternatives to purchasing the higher priced
products of Herman Miller and Steelcase. These companies offer finished products
which are interchangeable with the more expensive products, but at a
considerably lower price. The Company is negotiating with Unisource to produce
additional products such as work surfaces, and to fully integrate its production
of the partitions to include finishing the partitions with fabric and hardware,
packaging, warehousing, and order fulfillment. The Company is also actively
seeking other customers to increase the plant's output.
Suppliers and Raw Materials. The raw materials used in each of LTI's
industry segment are widely available from numerous suppliers. The Company does
not anticipate any difficulty in obtaining sufficient quantity and quality of
raw materials to satisfy the requirements of its customers.
Competition. The competition in the U.S. Technologies CM and furniture
manufacturing segments consists of numerous small, regional companies and a
significantly smaller group of
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large national companies. LTI competes directly with the smaller regional
companies and avoids the markets dominated by the national companies. In fact,
some of the largest national and international companies utilize LTI for
completion of short run production and rework tasks that are part of their own
processes but are too small for them to complete efficiently. When competing
with smaller regional companies, U.S. Technologies has a distinct cost advantage
created by being able to provide manufacturing facilities and without having to
incur the same fringe personnel costs (health benefits, turnover, absenteeism,
holidays, tardiness, and vacations, etc.) as companies that rely exclusively on
free-world employees.
Regulation of the PIE Business. Congress created the PIE Program in
1979 to encourage state and local governments to establish employment
opportunities for prisoners that approximate private sector work opportunities
and conditions. The program is designed to place inmates in a realistic working
environment, pay them the state or Federal minimum or prevailing wages for
similar work (whichever is greater), and enable them to acquire marketable
skills and work habits to increase their potential for successful rehabilitation
and meaningful employment upon release. The U.S. Department of Justice's Bureau
of Justice Assistance administers the PIE Program through its Corrections
Branch.
Each certified PIE Program must be determined to meet certain statutory
and guideline requirements so as to safeguard free world labor and industry and
to protect free enterprise. Mandatory criteria for participation in the PIE
Program are as follows:
- Inmates must be paid the prevailing local wage or state or Federal
minimum wage, whichever is greater, to protect private business from
unfair competition that would otherwise stem from the flow of
low-cost, prison made goods into the marketplace;
- Workers compensation and unemployment compensation benefits must be
provided;
- Inmate participation in the program must be voluntary and in writing;
- Organized labor and local private industry must be consulted prior to
the initiation of a new PIE industry;
- Participating companies must have written assurances from the
appropriate state agency that the new PIE industry will not result in
the displacement of workers employed prior to the program's
implementation, does not occur in occupations in which there is a
surplus of labor in the locality, and does not impair existing
contracts for services; and
- Deductions (not to exceed 80%) must be made from the inmates pay for
taxes, reasonable charges for room and board, family support, victims
compensation fund, and a mandatory savings account for the inmate, the
proceeds of which are available upon release.
In addition, each prison is also subject to laws and regulations
concerning the operation, management and supervision of prisoner employees,
which affects the operation of each of the Company's facilities. The Company's
PIE operations are also subject to all governmental workplace regulations
commonly associated with a service or manufacturing enterprise.
Regulation of our Associated Companies. U.S. companies that have more
than one hundred (100) stockholders or whose shares are publicly traded in the
U.S. and are, or hold
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themselves out to be, engaged primarily in the business of investing,
reinvesting or trading of securities are regulated by the Securities and
Exchange Commission (the "Commission" or "SEC") pursuant to the Investment
Company Act of 1940, as amended. Investment Company Act regulations are
inconsistent with USXX' strategy of actively managing, developing, operating and
promoting collaboration among its network of associated companies. USXX would
not be able to operate its business as a registered investment company.
Management of USXX believes that because of the planned structure of
USXX' interests in its associated companies and its business strategy, USXX is
not currently subject to regulation under the Investment Company Act. However,
USXX cannot assure you that the present structure of its associated Company
interests and its business strategy will preclude regulation under the
Investment Company Act, and USXX may need to take specific actions to avoid
regulation under the Investment Company Act that may not be in its best
interests or consistent with its strategy. To avoid regulation under the
Investment Company Act and related SEC rules, USXX may need to sell assets that
it would otherwise want to retain and may be unable to sell assets that it would
otherwise want to sell. In addition, USXX may be forced to acquire additional,
or retain existing, income-generating or loss-generating assets which it would
not otherwise have acquired or retained and may need to forego opportunities to
acquire interests in companies that it believed would benefit its business. If
USXX were forced to sell, buy or retain assets in this manner, it may be
prevented from successfully executing its business strategy.
Because gains, losses, income and asset values for technology
businesses can be highly volatile, and because future rounds of financing for
rapidly moving technology associated companies will dilute USXX' ownership
interests, the financial analyses relevant to its status under the Investment
Company Act will be subject to regular change. The audit committee of USXX'
board of directors, together with USXX' management, will decide financial and
other valuation issues relevant to determining USXX' compliance with the
Investment Company and related regulations.
E-commerce Regulation and Other Legal Uncertainties. There are several
new laws and regulations that affect the Internet and e-commerce. For example,
Congress recently enacted laws regarding online copyright infringement and the
collection of personal information and financial data. Additionally, the Federal
government has applied old rules and regulations to this new medium in certain
areas. E-commerce businesses are subject to the same numerous laws affecting
interstate and international commerce in general. However, the application of
these laws to online business is sometimes unclear and subject to litigation in
both domestic and foreign jurisdictions.
Although there generally remains a desire by legislators and regulators
to keep the Internet as unfettered as possible with new rules and regulations,
the Internet's popularity, increased use and its impact on consumers will
undoubtedly foster the adoption of additional laws and regulations on a local,
state and federal level, as well as globally. Current laws and regulations cover
issues such as the collection and use of data from website visitors and related
privacy issues, pricing, content, copyrights, trademarks, promotions,
distribution and quality of goods and services, registration of domain names and
use, and export and distribution of encryption technology. The enactment of
additional laws or regulations may impede the growth
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of the technology industry, which could decrease the revenues of our associated
companies and place additional economic burdens on them.
Other specific areas of legislative and regulatory activity include:
Taxes. Through the Internet Tax Freedom Act of 1998, Congress has
enacted a three-year moratorium, ending on October 21, 2001, on the application
of discriminatory, multiple or special taxes by the states on Internet access or
on products and services delivered over the Internet. Congress further declared
that there will be no federal taxes on goods, services and information sold
exclusively over the Internet until the end of the moratorium. However, this
moratorium does not prevent states from taxing activities or goods and services
that the states would otherwise have the power to tax. Furthermore, the
moratorium does not apply to some state taxes on Internet access that were in
place before the moratorium was enacted, provided the tax was generally imposed
and actually enforced. The moratorium also does not affect federal and state
income taxes on the taxable income of e-commerce businesses.
Online Privacy. In the past year, there has been considerable
legislative and regulatory activity in regards to the protection of consumer
privacy and the collection, distribution, and disclosure of personal and
financial data online. The protection of privacy on the Internet is also
becoming an area of increased litigation in state, federal and foreign courts.
The Children's Online Privacy Protection Act of 1998 ("COPPA") requires
that all commercial website operators and online services that are directed to
children under the age of thirteen or who knowingly collect personal information
from children (including the use of cookies and other tracking mechanisms) must
obtain verifiable parental consent before collecting, using or disclosing such
information. Additional requirements include posting of a website Privacy
Notice, which must explain how the collection of personal information will be
treated, in a "clear and prominent" place on the webpage and each area where the
information is collected. Violators are subject to civil judgments and $10,000
fines per violation. State Attorneys General are also authorized to enforce
COPPA via state action. The Federal Trade Commission ("FTC") issued regulations
for COPPA that became effective in April 2000.
The Financial Services Modernization Act of 1999 (also known as the
Gramm-Leach-Bliley Act) governs the disclosure and sharing of nonpublic personal
information to affiliates and third parties by a "financial institution,"
including information collected and shared over the Internet. Financial
institutions are not limited to traditional banks or savings and loans, but
defined broadly to encompass companies providing services such as leasing real
or personal property (or acting as an agent, broker, or advisor in such
leasing), providing investment, financial or economic advisor services, and
operating a travel agency in connection with such services. The Act also
restricts distribution of personal information such as social security numbers,
credit history and loan application information without a customer's consent.
The FTC's regulations implementing this new law were adopted May 2000 and are
effective July 2001.
In addition to its new regulations, the FTC has issued numerous
guidelines on its long-standing prohibition on unfair or deceptive acts and
practices in sales, advertising, marketing and promotional activities and the
application of these rules to the Internet and e-commerce. The
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same consumer protection laws that apply to commercial activities in other media
such as television and cable also apply to Internet transactions. Therefore, the
FTC's Mail or Telephone Order Merchandise Rule, Telemarketing Sales Rule,
Disclosure of Written Consumer Product Warranty Terms and Conditions Rule, and
others also apply to online activity.
The FTC has issued several substantive reports and recommendations for
legislation to Congress in the areas of consumer protection. For example, in its
third report on Internet privacy, "Privacy Online: Fair Information Practices in
the Electronic Marketplace," released May 2000, the FTC concluded that
self-regulation by most commercial websites to protect the privacy of Internet
consumers was not effective. Thus, the FTC asked for congressional authority to
regulate Internet privacy given the failure of most web sites to meet standards
of disclosure for personal information. The FTC also asked for Congressional
authority to regulate "online profiling," the process by which network
advertising companies manage and provide advertising for unrelated websites
based on tracking consumer data and Internet usage. It issued a report, "Online
Profiling: Benefits and Concerns," and testified before the U.S. Senate Commerce
Committee in June 2000. After the report was issued, a group of Internet
advertising companies negotiated with the FTC to establish self-imposed privacy
standards that would circumvent new legislation. The FTC made specific
recommendations to Congress in July 2000 following its negotiations with the
Internet advertising industry. Currently, there are no pending bills which would
implement these recommendations.
In addition, in 1998 the European Union ("EU") directed its member
nations to enact much more stringent privacy protection laws than are generally
found in the United States. The U.S. Department of Commerce has negotiated an
agreement with the EU that will create a "safe harbor" for U.S. companies that
agree to a voluntary self-regulatory code. The "U.S. Safe Harbor Privacy
Principles" will allow the exportation of personal information from European
citizens, including corporate employees. The Agreement was expected to become
effective late July 2000. However, due to a number of unsettled areas its
effectiveness was delayed until its eventual passage in November 2000. Under the
safe harbor, as enacted, an EU organization can ensure that it is sending
information to an organization that is complying with the safe harbor by
checking it against a list of organizations which self-certify that they comply
with the safe harbor. The list of self-certifying organizations is available on
the Department of Commerce's Website.
Private industry initiatives and standards have also developed
concerning privacy issues, primarily as a means to circumvent new legislation
and regulation. In addition to compliance with governmental regulation, we and
our associated companies may decide that it is in our best interest to comply
with industry standards or public opinion regarding privacy issues voluntarily.
Online Content. The distribution and visual depiction of objectionable
content on the Internet such as obscenity and child pornography is regulated
under multiple criminal statutes and enforced by various local, state and
federal law enforcement agencies. Internet Service Providers ("ISPs") and
operators could be liable for "aiding and abetting" such illegal action if the
distribution or reproduction of such material via its system is known.
There is also legislation that serves to protect online service
providers from civil liability in causes of actions such as libel and copyright
infringement. The Communications Decency Act
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("CDA"), part of the Telecommunications Act of 1996, provides for the protection
for "Good Samaritan" blocking and screening of offensive material. The Act
states that no provider or user of an interactive computer service shall be
treated as the publisher or speaker of any information provided by another
information content provider. Operators are protected from civil liability if
they merely pass along the content of others, even if an operator in good faith
monitors the website for the removal of material the provider or user considers
to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or
otherwise objectionable, whether or not such material is constitutionally
protected. However, an unresolved issue is the definition of "provider."
Furthermore, the CDA has no effect on criminal law, intellectual property law,
or state law.
Protections from copyright infringement fall under the Digital
Millennium Copyright Act of 1998 ("DMCA"), which created a safe harbor for
online service providers from copyright liability for certain actions. ISPs are
not liable when they conduct transitory communications, system caching, storage
of information on systems or networks at direction of users, and use of
information location tools. However, the DMCA does not offer protection from
copyright infringement claims for music, literary or other creative content,
issues currently in litigation in federal and foreign courts.
Domain Names. The authority for the distribution and maintenance of web
site addresses (i.e., domain names) generally is provided by the Internet
Corporation for Assigned Names and Numbers ("ICANN"), which was established in
1998. The World Intellectual Property Organization ("WIPO") is also involved in
the administration of domain names and has adopted new enforcement provisions
for violators of registration procedures and trademark infringement, to be
administered by ICANN. The distribution of web site addresses in the United
States and in foreign countries has changed drastically with the growth of new
registration companies and the pending addition of new generic top-level domain
names (i.e., .bus). As a result, our associated companies may not be able to
acquire or maintain relevant web site addresses in all countries where they
conduct business.
In 1999, Congress enacted the Anti-Cybersquatting Consumer Protection
Act of 1999, to address domain name cybersquatting, which is the practice of
registering an Internet address of an established trademark with the hopes of
selling the Internet address to the affected company. The legislation also
includes a prohibition on the registration of a domain name that is the name of
another living person or a name that is confusingly similar to that name. The
scope of the Act has not been precisely defined and the definition of
cybersquatting has been challenged in numerous courts. Furthermore, several
foreign jurisdictions have adopted stringent cybersquatting laws. Even more
countries are reviewing the issue. As a result of increased legislation and
trademark laws generally, we or our associated companies may be subject to
liability based on use of domain names or trademarks that allegedly infringe the
rights of third parties.
Regulation of Communications Facilities. To some extent, the rapid
growth of the Internet in the United States has been due to the relative lack of
government intervention in the marketplace for Internet access. This lack of
intervention may not continue in the future. For example, the Federal
Communications Commission ("FCC") began a formal proceeding in
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September, 2000 on the issue of access to a cable company's platform by multiple
ISPs. Non-affiliated ISPs have requested that the FCC regulate broadband
Internet access over cable systems in much the same manner as telephone
services, which could slow the deployment of broadband Internet access services.
Additionally, local telephone carriers have petitioned the FCC to regulate
Internet service providers in a manner similar to long distance telephone
carriers by imposing access fees on the providers. The FCC is also expected to
address the issue of payment of reciprocal compensation to telephone companies
which terminate ISP traffic. This FCC decision could offset the relationships
and arrangements for the provision of these services. Because of these
proceedings or others, new laws or regulations could be enacted which could
burden the companies that provide the infrastructure on which the Internet is
based, slowing the rapid expansion of the medium and its availability to new
users.
Business Opportunities. An amendment to the Delaware General
Corporation Law, which became effective on July 1, 2000, clarifies that a
corporation has the power to waive in advance, in its certificate of
incorporation or by action of its board of directors, the corporation's interest
or expectations in business opportunities or classes or categories of business
opportunities, as those opportunities may be defined by the corporation. These
classes or categories of opportunities could be defined in many different ways,
including by type of business, by who originated the business opportunity, by
who has the interest in the business opportunity, by the period of time, or by
the geographical location. Our Board of Directors may consider and take action
as permitted by this new statutory provision. If we waive an opportunity in
accordance with this provision, a director would not be required to present the
waived opportunity to us, even if pursuing the opportunity could be in our best
interest, and instead could present it to other businesses, including the
director's own business.
In addition to the specific issues outlined above, other generally
applicable laws may also affect our associated companies and us. The exact
applicability of many of these laws to Internet e-commerce is, however,
uncertain.
EMPLOYEES
As of December 31, 2000, the Company employed approximately 120
persons, 13 are production and administrative personnel, 2 are members of
executive management, and 105 are inmates. None of the Company's employees are
represented by a union. We believe that our relationship with our employees is
very strong.
The Company benefits from a strongly motivated labor force which is
hard working and productive for several reasons:
- Inmates employed by LTI learn work habits and skills transferable to
outside employment when they are released; and
- Employed inmates have meaningful and productive jobs with LTI that
provide a greater sense of accomplishment than other tasks within the
institution.
U.S. Technologies employed approximately seven people in its executive
offices in Washington, D.C. as of December 31, 2000.
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ACQUISITIONS
On September 27, 2000, the Company entered into an agreement to acquire
by merger On-Site Sourcing, Inc., a provider of digital imaging, document
management and litigation reprographics for approximately $35 million in U.S.
Technologies' Common Stock and cash. The merger agreement terminated, pursuant
to its terms, on March 31, 2001 and the parties are not currently in
negotiations to merge.
ITEM 2. PROPERTIES.
Our wholly owned subsidiary, LTI, operates in a minimum security prison
in Texas under an agreement with WCC, the Texas Department of Criminal Justice,
the Division of Pardons and Parole and the City of Lockhart, Texas. The lease on
the Lockhart facility provides approximately 27,800 square feet of manufacturing
and office space through January 31, 2004, and provides an automatic three year
extension unless notification has been given by either party at least six months
prior to the expiration date of the current term. The amount of square footage
may be increased or decreased depending upon the number of prisoners to be
employed. The lease also provides for annual rental rates of $1.00 per year for
the primary term and the first renewal term thereafter. Occupancy fees for
successive renewal terms are to be negotiated by written agreement of the
parties. LTI also operates in a minimum-security prison at Chuckawalla Valley
State Prison located in Blythe, California. The lease on the Blythe facility
provides approximately 36,300 square feet of manufacturing and office space
through October of 2006. The lease provides for monthly payments of $726.
U.S. Technologies leases executive office space in Washington, D.C. The
office is approximately 8,200 square feet and the lease provides for monthly
payments of $24,000. The lease on the office expires on December 31, 2004. The
Company subleased some of this office space to some of its associated companies.
U.S. Technologies' operations and accounting center is currently
co-located in the offices of The Spear Group in Norcross, Georgia. James V.
Warren, a director of the Company, is the co-founder and President of The Spear
Group. We had a management services arrangement with The Spear Group to provide
operating, accounting and administrative services to our prison facilities.
During the year ended December 31, 2000, we paid the Spear Group approximately
$97,000 pursuant to this arrangement. Such arrangement terminated in mid-March
2001. U.S. Technologies did not have a lease on the space it occupies at The
Spear Group and paid $9,400 in rent to The Spear Group during the year-ended
December 31, 2000.
ITEM 3. LEGAL PROCEEDINGS.
On July 16, 1995, the Company was served with a citation in Texas
Industrial Services vs. U.S. Technologies Inc., County Court at Law No. 2 of
Travis County, Texas. The suit alleges that the Company is liable for certain
debts of a former subsidiary, American Microelectronics, Inc. on the theory that
the Company was doing business as AMI. The petition seeks damages totaling
approximately $54,000. The Company has asserted a defense and no activity has
taken place on the suit since September 1995.
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On October 31, 1996, a consent order was signed by Mr. William Meehan,
the Company's former president, in the case of Environmental Protection Agency
v. Senson Corp. LTD., Docket No. TSCA-09-96-0002, agreeing among other things to
pay a civil penalty. The penalty was never paid and is estimated to be
approximately $7,000.
On May 6, 1997, Mr. Meehan filed a lawsuit in the 98th Judicial
District Court for Travis County, Texas seeking payment of certain wages and
other benefits totaling approximately $330,000. This action was settled during
June of 2000 for approximately $155,000.
On July 14, 1997, Ryan Corley sued the Company, in the case styled Ryan
Corley vs. U.S. Technologies, Case No. 97-08065, in the 250th Judicial District
of Travis County, Texas, alleging that he is entitled to four months severance
pay in the amount of approximately $30,000. This case is being vigorously
defended by the Company.
As part of our acquisition of E2Enet, the Company agreed to assume a
$2,000,010 put agreement. The put agreement provided that two former E2Enet
stockholders who were founders of one of the E2Enet associated companies (the
"Blue Rock Founders") may put their E2Enet stock to Jonathan Ledecky, a founding
shareholder of E2Enet for $2,000,010 in the aggregate. In the E2Enet
acquisition, the Blue Rock Founders' shares were exchanged, collectively, for
107.56 shares of our Series B Stock. Together, the Blue Rock Founders' shares of
Series B Stock were converted into 537,800 shares of our Common Stock. As part
of the acquisition of E2Enet, USXX agreed to assume E2Enet founder Jonathan
Ledecky's obligations under the put agreement. The Blue Rock Founders did not
consent to this assignment, which consent was required pursuant to the terms of
the put agreement. On May 15, 2000, the Blue Rock Founders gave notice to
Jonathan Ledecky that they were exercising their put. On June 19, 2000, the Blue
Rock Founders filed suit against Mr. Ledecky in the U.S. District Court for the
District of Columbia alleging that he had failed to perform under the Put
Agreement. On August 10, 2000, Mr. Ledecky filed an answer generally denying all
of the allegations in the plaintiff's complaint. On March 30, 2001, this matter
was settled with the Company paying Mr. Ledecky $1,994,750 to cover the costs of
his settlement with the Blue Rock Founders.
On January 3, 2001, Verktronix S.A. de C.V. and Rodolfo
Avala-Avarzagoitia sued the Company in the 22nd Judicial District Court of
Caldwell County, Texas for fraudulent inducement to enter a contract with LTI,
breach of warranty and breach of contract for an unspecified amount of damages.
The Company has filed a counterclaim for breach of contract and is seeking
$114,777 in damages and will vigorously contest this matter. Management does not
believe the results of this litigation will be material to the Company.
From time to time the Company is subject to claims and suits that arise
in the ordinary course of its business. While it is not possible to predict the
ultimate outcome of these matters, the Company believes that any losses
associated with any of such matters will not have a material effect on the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter ended December 31, 2000, no matters were
submitted to a vote of security holders of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock had been quoted on the OTC Bulletin Board
under the symbol "USXX" until being suspended as a result of its failure to file
timely this Form 10-K. However, the Company's Common Stock may still be traded
over the counter. The Company anticipates that its Common Stock will resume
being quoted on the OTC Bulletin Board shortly after the Company becomes current
in its reporting obligation.
The following table sets forth the high and low bid prices of the
Company's Common Stock in the over-the-counter market for the quarter ended
March 31, 2001 and the years ended December 31, 2000, 1999 and 1998. Prices are
as quoted on the OTC Bulletin Board System. Quotations reflect inter-dealer
prices without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
BID
-------------------------
HIGH LOW
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2001
1st Quarter $0.5312 $0.1250
2nd Quarter $0.5468 $0.0937
2000
4th Quarter $0.8600 $0.1100
3rd Quarter $1.2200 $0.6300
2nd Quarter $2.9100 $1.0000
1st Quarter $5.7500 $0.1500
1999
4th Quarter $0.2600 $0.1000
3rd Quarter $0.4100 $0.2100
2nd Quarter $0.4600 $0.3200
1st Quarter $0.5900 $0.3400
1998
4th Quarter $0.6300 $0.3800
3rd Quarter $0.7100 $0.4200
2nd Quarter $0.9000 $0.6400
1st Quarter $0.9200 $0.4400
On June 29, 2001, the closing bid price of the Company's Common Stock, as quoted
on the OTC Bulletin Board system, was $0.4531.
HOLDERS OF COMMON STOCK
As of June 29, 2001, there were 538 holders of record of the Company's
Common Stock. This number is exclusive of beneficial owners whose securities are
held in street name.
DIVIDENDS
The Company has not declared or paid any cash dividend on its Common
Stock. The policy of the Board of Directors of the Company is to retain any
earnings for the expansion and development of the Company's business. Future
dividend policy and the payment of dividends, if
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any, will be determined by the Board of Directors in light of circumstances then
existing, including the Company's earnings, financial condition and other
factors deemed relevant by the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
The Company has raised capital and completed acquisitions through the
offer and sale of securities that are exempt from registration under the
Securities Act of 1933 pursuant to the exemptions from registration provided by
Regulation D promulgated under the Securities Act, Section 4(2) of the
Securities Act or otherwise. The Company completed its acquisition of E2Enet
pursuant to the E2E Stock Exchange Agreement. On April 12, 2000, the date of the
closing of the acquisition of E2Enet, the Company's offering of 5,184 shares of
Series C Stock for an aggregate of $5,184,000 was fully subscribed. Ultimately,
the Company received funds for 4,534 shares of Series C Stock for an aggregate
of $4,534,000. Net of issuance costs of $196,806, proceeds of the offering were
$4,337,914. These shares will be mandatorily converted into an aggregate of
3,126,895 shares of Common Stock when the Company amends its Charter to
authorize the issuance of additional Common Stock. Of these shares, USV
Partners, LLC purchased 2,750 shares for $2,750,000.
On April 12, 2000, the Company raised $1,250,000 through the sale of
125,000 shares of Series A stock, which are convertible into 10,245,900 shares
of Common Stock, to USV. Gregory Earls, the Company's Chairman and Chief
Executive Officer, is the sole member of the manager of USV. As of May 31, 2001
USV owned 507,140 shares of the 625,000 outstanding shares of Series A Stock.
Upon the conversion of such Series A Stock, USV would be entitled to receive
41,568,852 shares of Common Stock. USV and the Company entered into a Waiver
Agreement, dated as of March 1, 2000, whereby USV waived its right to convert
its Series A shares into Common Stock until the Company's stockholders approve
an amendment to the Company's Restated Certificate of Incorporation to increase
the number of authorized shares of Common Stock. On September 20, 2000, this
waiver was extended to include all other beneficial interests of Mr. Earls by an
agreement among Mr. Earls, the Earls Family Limited Partnership and the Company.
Mr. Earls and USV intend to convert all of their shares of Series A Stock to
Common Stock if and when the charter amendment becomes effective.
During the fiscal year ended December 31, 2000, the Company received a
total of approximately $5,784,000 in connection with the private placement of
Series A Preferred Stock and Series C Preferred Stock.
The proceeds of these private placement sales have been, and will
continue to be, used to finance additional investments in new and existing
technology businesses, the payment of costs incurred and liabilities assumed in
connection with the acquisition of E2Enet and related business transactions, and
the Company's ongoing working capital needs and operating expenses.
When the E2Enet Acquisition closed, E2Enet's stockholders were issued
shares of Series B Preferred Stock, which have a total liquidation preference
aggregating $11,200,000. Upon their mandatory conversion, these shares of Series
B Preferred Stock will be converted into approximately 56,000,000 shares of
Common Stock.
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On December 28, 2000, the Company entered into an agreement with
Buyline.net, Incorporated ("Buyline"), one of the Company's associated
companies, and Accenture. Buyline owed Accenture for software consulting and
other services performed for Buyline. In order to support Buyline's efforts to
satisfy in full the amount owed to Accenture, the Company issued to Accenture
1,552.5 shares of the Company's new Series D Mandatorily Convertible Preferred
Stock, par value $0.02 per share ("Series D Preferred"), which shares are
convertible into 1,552,500 shares of Common Stock of the Company. In
consideration for the Company issuing its Series D Preferred stock to Accenture,
Buyline issued to the Company 5,025,819 shares of Buyline Common Stock. Buyline
also issued shares of its Common Stock to Accenture, which shares represent
approximately 5.57% of the outstanding Common Stock of Buyline.
On March 27, 2001, in connection with the Company's merger with
Yazam.com, Inc., the Company issued warrants to purchase 8,000,000 shares of
Company Common Stock and 27,374 shares of Series F Preferred Stock, which
preferred shares are convertible into 27,374,000 shares of Company Common Stock
upon amendment of the Company's charter. See, "BUSINESS -- Subsequent Events."
On March 27, 2001, the Company and holders of Yazam Preferred
securities and Yazam Warrants ("Yazam Holders") entered into a Registration
Rights Agreement ("the Yazam Registration Rights Agreement"). Under the Yazam
Registration Rights Agreement, the Yazam Holders have the right to compel the
Company to register their respective shares at the Company's expense. The Yazam
Holders also have unlimited registration rights to be combined, at the Company's
expense, with certain registrations of any equity securities by the Company
("piggyback rights"), subject to restrictions which an underwriter might impose
for the sale of the shares. This Yazam Registration Rights Agreement expires by
its terms March 27, 2007.
The Company, USV Partners, Northwood Capital, Northwood Ventures,
Ledecky and other holders of the Company's Series B and C preferred stock,
entered into an agreement regarding registration rights for the Series A, Series
B, and Series C preferred stock and Common Stock into which they are to be
converted. Collectively, the stockholders party to the agreement have the right
on three occasions to compel the Company to register their respective shares at
the expense of the Company and rights on other occasions to have such
registration effected at the expense of the holders. These stockholders also
have unlimited registration rights to be combined, at the Company's expense,
with certain registrations of any equity securities by the Company piggyback
rights, subject to restrictions which might be imposed by an underwriter for the
sale of such shares.
During the year ended December 31, 2000, the Company recognized a
non-cash expense of approximately $14.8 million as a result of deemed beneficial
conversion features of the Series A, Series B and Series C Preferred Stock
issued in 2000. The beneficial conversion amount was calculated for each
respective preferred series as the excess of the market price of the Company's
Common Stock, or $2.188, on the April 12, 2000 measurement date over the
conversion price of the Series A, Series B and Series C Preferred Stock,
respectively $0.122, $0.200 and $1.450 times the number of the Company's common
shares to be issued on conversion of each preferred series.
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The following table presents the dilution of the Company's Common
Stock, which will result upon approval of the Company's Charter Amendment and
conversion of the Company's convertible preferred shares.
Common stock outstanding at December 31, 2000 29,610,786
Conversion of Series A Preferred Stock 51,229,508
Conversion of Series B Preferred Stock 56,000,000
Conversion of Series C Preferred Stock 3,126,895
Conversion of Series D Preferred Stock 1,552,500
Conversion of Series F Preferred Stock 27,374,000
-----------
168,893,689*
===========
* Does not include conversion of subscribed but unissued preferred
stock which is not determinable at the date of this report. Also does
not include shares which would be issuable upon exercise of stock
options and warrants.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth for the years ended December 31,
2000, 1999, 1998, 1997 and 1996 is derived from the Company's audited financial
statements. This information should be read in conjunction with the financial
statements for 2000, 1999 and 1998 and notes thereto included elsewhere herein
and "Management's Discussion and Analyses of Financial Condition and Results of
Operations" included in ITEM 7, which are incorporated herein by reference.
DECEMBER 31
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 2,692,378 $ 3,764,785 $ 6,107,244 $ 4,166,626 $ 1,410,498
Operating Costs and Expenses:
Cost of Sales 2,902,444 4,458,881 5,349,459 3,424,313 2,513,672
Selling Expenses 66,354 43,658 313,283 70,869 254,232
General and Administrative Expense (A)6,242,513 1,988,113 2,788,104 1,118,310 961,195
Impairment of Long-Lived Assets (B)12,304,800 -- -- 1,408,839 --
Restructuring Charge -- -- 90,000 196,903 --
Other - Litigation -- -- -- 252,256 --
Total Operating Costs 21,516,111 6,490,652 8,540,846 6,471,490 3,720,099
and Expenses
Loss From Operations (18,823,733) (2,725,867) (2,433,602) (2,304,864) (2,309,601)
Other Expense (Income)
Gain on Sale of Subsidiary -- (E)(642,764) -- -- --
Interest (34,383) (28,893) 112,325 25,191 20,277
Equity in Loss of associated
companies (A)640,350 -- -- -- --
Other (70,863) 202,271 18,782 (87,310) 253,134
Total Other 535,104 (469,386) 131,107 (62,119) 273,411
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DECEMBER 31
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ------------ ------------ ------------ ------------
Net Loss before share of Minority
Interest in loss of Subsidiary (19,358,837) (2,256,481) (2,564,709) (2,242,745) (2,583,012)
Minority Interest in loss of
Subsidiary (C)707,740 -- -- -- --
Net Loss (18,651,097) (2,256,481) (2,564,709) (2,242,745) (2,583,012)
Deemed Dividend (D)(14,757,650) -- -- -- --
Preferred Stock Dividend -- (F)525,114 -- -- --
Net Loss applicable to Common
Stockholders (33,408,747) (2,781,595) (2,564,709) (2,242,745) (2,583,012)
Basic and Diluted Loss Per Common Share (1.14) (0.10) (0.09) (0.08) (0.14)
Weighed Average Shares Outstanding 29,408,063 28,795,278 28,996,607 26,793,999 18,555,439
BALANCE SHEET DATA:
Working Capital (4,230,789) (794,439) (312,828) (849,592) (707,467)
Total Assets 4,840,532 1,092,096 2,367,533 869,742 2,652,682
Total debt(1) 883,253 41,064 47,912 54,821 144,000
Stockholders' Equity (Capital Deficit) (49,302) (220,792) 724,042 (419,911) 1,088,520
(1) Includes long-term debt, current maturity of long-term debt, capital lease obligations, line of credit and notes payable.
(A) In April 2000 the Company completed its acquisition of E2Enet. General
and administrative expenses increased as a result of the acquisition,
and the Company began recognizing its share of equity in the losses of
certain E2Enet affiliated companies accounted for on the equity method.
(B) During 2000 and in conjunction with the Company's ongoing evaluation of
its affiliated companies, impairment losses were recognized as a result
of certain associated companies ceasing operations or curtailing their
activities.
(C) The Company recorded the minority interest's share of losses of Buyline
during 2000.
(D) During 2000 the Company recorded deemed dividends on certain series of
its convertible preferred stock shares issued with beneficial
conversion features.
(E) In February 1999 the Company realized an approximate $643,000 gain upon
the sale of GWP.
(F) In November 1999, the terms of the Company's Series A Convertible
Preferred Stock were modified to cancel the right of the holders to
receive an annual dividend.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company (including the notes thereto)
included under ITEM 8.
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations
expressed as a percentage of total revenues for the periods indicated:
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DECEMBER 31
------------------------------
2000 1999 1998 1997
------ ---- ---- ----
STATEMENT OF OPERATION DATA:
Revenues 100% 100% 100% 100%
Operating Costs and Expenses:
Cost of Sales 108% 118% 88% 82%
Selling Expenses 3% 1% 5% 2%
General and Administrative Expense 232% 53% 46% 27%
Impairment of Long-Lived Assets 457% -- -- 34%
Restructuring Charge -- -- 1% 5%
Other - Litigation -- -- -- 6%
Total Operating Costs 800% 172% 140% 155%
and Expenses
Loss From Operations (700)% (72)% (40)% (55)%
Other Expense (Income):
Gain on Sale of Subsidiary -- (17)% -- --
Equity in Loss of associated companies 24% -- -- --
Interest (2)% (1)% 2% 1%
Other (3)% 5% -- (2)%
Total Other 20% (12)% 2% (1)%
Net Loss before share of Minority Interest (719)% (60)% (42)% (54)%
in loss of Subsidiary
Minority Interest in loss of Subsidiary 27% -- -- --
Net Loss (693)% (60)% (42)% (54)%
Deemed Dividends (549)% -- -- --
Preferred Stock Dividend -- 14% -- --
Net Loss applicable to Common Stockholders (1,241)% (74)% (42)% (54)%
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.
During the year ended December 31, 2000, the Company had net loss
applicable to common shareholders of $33,408,747 or $1.14 per weighted-average
share, on net sales of $2,671,378, as compared to a net loss applicable to
common shareholders of $2,781,595 or $0.10 per weighted-average share on net
sales of $3,764,785 for the year ended December 31, 1999. The net sales decrease
of 29% was primarily the result of 1999 including approximately six weeks of
sales for Technology Manufacturing & Design, Inc. ("TMD") of $948,000. The
Company's ownership interest in TMD was sold in mid-February 1999.
Sales of the Company's electronics manufacturing operations for 2000
were approximately $2,065,000 or 8.6% greater than 1999. Management's efforts to
increase sales further in 2000 were adversely effected by quality problems with
existing electronics products, which reduced reorders for 2000 and impaired the
ability to attract new customers. The quality problems, relating to training on
manual electronic assembly operations have been corrected by more extensive
supervision of new employees and increased emphasis on quality control. There
were no significant changes in the customer mix in electronics manufacturing
operations for 2000 versus 1999. Management continues to solicit new customers
and encourage additional orders from existing customers and expects these
efforts to be successful.
Sales of the Company's furniture manufacturing operations for 2000 were
approximately $522,000 or 40% less than 1999. The furniture manufacturing
operations in 1999 were dedicated
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to a single customer, Affordable Interior Systems, Inc. ("AIS") a national
company supplying modular office furniture to commercial accounts. In November
1999, AIS and the Company were unable to successfully renegotiate the
manufacturing contract and the contract was cancelled. It was not until February
2000 that the company was able to replace AIS with Unisource Office Furniture,
Inc. ("Unisource"), a company with operations primarily on the West Coast of the
United States. A combination of no sales for January and part of February of
2000 plus reduced sales to Unisource, compared to AIS, caused the decline in
sales. Management is attempting to locate new customers for its furniture
manufacturing operations, however due to the specialized nature of the
facilities manufacturing equipment, primarily for planning wooden products, the
universe of potential customers is limited.
Cost of sales, in the amount of $2,902,444, decreased as a percentage
of net sales to 109% for the year ended December 31, 2000 from $4,458,881, which
represented 118% of net sales, for the year ended December 31, 1999. The
decrease in the cost of sales percentage is primarily due to Lockhart's change
of customer mix resulting in the use of more customer supplied materials and
consequently reducing cost of sales as a percent of sales.
Gross margin as a percentage of net sales has decreased from a positive
12.4% during 1998 to negative 18.4% and a negative 8.6% during 1999 an 2000,
respectively. A primary cause of the decrease is a reduction in sales, exclusive
of the sales of TMD, of approximately $1,371,000 from 1998 to 2000 due primarily
to the loss of an electronics manufacturing contract with IBM to produce a
specific circuit board, known as the "Tiger" board. During 1998 Tiger board
production accounted for approximately $1,150,000 in sales and carried
approximately a 45% gross profit margin. The Company's electronics manufacturing
facility has been unable to attract another customer with a single product to
replace the Tiger board volume and instead consistently produces products with
differing manufacturing requirements and short production runs, resulting in
lower gross margin percentages. Management continues to solicit customers with
products which have longer production runs, but frequently longer runs consist
of smaller homogeneous circuit boards which go to facilities equipped for high
speed processing versus the Company's facility which is better suited to larger
circuit boards which require more hand assembly.
Selling expenses in the amount of $66,354 represented 2% of net sales
during the year ended December 31, 2000 compared to $43,658 representing 1% of
net sales for the year ended December 31, 1999. The increase in the selling
expenses percentage is primarily due to the increased use of outside commission
sales personnel.
General and administrative expenses totaled $6,242,513 for the year
ended December 31, 2000 which represented 234% of net sales, compared to
$1,988,113 which represented 53% of net sales for the year ended December 31,
1999. Included in general and administrative expense for the year ended December
31, 2000 were depreciation and goodwill amortization related to the 2000
acquisitions of E2Enet and Buyline of approximately $1,747,000, approximately
$1,115,000 related to general and administrative expenses of E2Enet and Buyline
and approximately $747,000 of compensation expense resulting from the granting
of stock options. The general and administrative expenses of Buyline amounted to
approximately $973,000 of the combined approximately $1,115,000 expenses of E2E
and Buyline during 2000. Due to the
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29
ceasing of operations of Buyline during December 2000, the Company expects the
general and administrative expenses of Buyline to be less than $50,000 during
2001. The balance of the increase, or approximately $761,000, was the result of
increased legal, staff and office expenses to accommodate the Company's
investment activities.
During 2000, the Company relocated its corporate headquarters in
Washington, DC to larger offices. This was done to accommodate staff increases
necessary to manage its associated companies, which were acquired during 2000
and 2001. Company management is committed to aggressively monitoring the
performance of its associated companies to ensure that its return on investments
is maximized and felt that the increased expenses were required to accomplish
this goal.
The Company expects to add additional staff and facilities during 2001
associated with its merger with Yazam, which will continue to staff offices in
New York and Israel. Management projects that these additional general and
administrative expenses will approximate $1,300,000 during the period following
the merger with Yazam, March 28, 2001 through December 31, 2001. These
expenditures will be required to manage the Company's 26 associated companies as
well as seek out new investment opportunities.
During the year ended December 31, 2000, the Company recorded an
expense of $12,304,800 resulting from the impairment of certain assets
associated with E2Enet. The impairment included approximately; $3,014,400 due to
the bankruptcy of Urban Box Office, $3,866,000 due to the 100% write-off of
goodwill associated with the April 2000 acquisition of E2Enet, $1,817,000 due to
the ceasing of Buyline's operations and $3,607,400 due to a reduction of the
estimated fair market value of the Company's investment in its remaining
associated companies. There was no comparable expense recorded during the year
ended December 31, 1999.
During the year ended December 31, 1999, the Company recorded a gain on
the sale of GWP, Inc. and its 51% interest in TMD in the amount of $642,764.
This gain was net of the write off of approximately $526,000, which represented
the full value of the note receivable resulting from the sale of GWP, Inc. There
was no comparable gain recorded during the year ended December 31, 2000.
During the year ended December 31, 2000, the Company recorded an
expense of $640,350 representing the Company's share of the losses of certain of
our associated companies acquired from E2Enet that are carried on the equity
basis. There was no comparable expense recorded during the year ended December
31, 1999. Management expects to record continuing expenses during 2001 as a
result of losses of associated companies carried on the equity basis. While the
extent of these non-cash losses is difficult to predict, management does not
expect these losses to exceed $1,250,000 during 2001.
During the year ended December 31, 2000, the Company recorded other
income of $70,863. During the year ended December 31, 1999, the Company recorded
other expense of $202,271. A significant part of this expense was $154,641,
which
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represented legal and accounting expenses incurred to secure the $5,000,000
subscription for the Company's convertible preferred stock.
During the year ended December 31, 2000, the Company recorded a
reduction of $707,740 in its net loss due to the portion allocable to the
minority ownership interest in the Company's consolidated subsidiary, Buyline.
There was no comparable reduction of expense recorded during the year ended
December 31, 1999.
During the year ended December 31, 2000, the Company recognized a
non-cash expense of approximately $14,757,650 as a result of deemed beneficial
conversion features of the Series A, Series B and Series C Preferred Stock. The
beneficial conversion amount was calculated for each respective preferred series
as the excess of the market price of the Company's Common Stock $2.188 on the
April 12, 2000, measurement date over the conversion price of the Series A,
Series B and Series C Preferred Stock, respectively $0.122, $0.200 and $1.450
times the number of the Company's common shares to be issued on conversion of
each preferred series.
During the year ended December 31, 1999, the Company recorded $525,114,
representing cash dividends paid on the Company's Series A Convertible Preferred
Stock. Under an agreement reached with the preferred stockholder in November
1999, no further dividends will be paid on the preferred stock in exchange for
the Company reducing the conversion price for each share of the Company's Common
Stock from $0.410 per share to $0.122 per share. There were no comparable
dividends paid during the year ended December 31, 2000.
Due to the continuing losses by the Company, the 100% reserve against
the Company's $14,347,000 net deferred tax asset continues to be recognized at
December 31, 2000. Additionally, as a result of the series of transactions which
resulted in a change in control of the Company as defined by the Internal
Revenue Code, the Company is limited in the utilization of net operating losses
generated prior to December 28, 2000 to $176,000 per year. Additionally, the
Company's merger with Yazam on March 27, 2001 resulted in another change in
control that would limit the utilization of net operating losses generated in
the period up to March 27, 2001.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
During the year ended December 31, 1999, the Company had net loss of
$2,781,595, or $0.10 per weighted-average share, on net sales of $3,764,785 as
compared to a net loss of $2,564,709 or $0.09 per weighted-average share on net
sales of $6,107,244 for the year ended December 31, 1998. The net sales decrease
of 38% was primarily the result of an approximate $2,000,000 sales decline at
the Company's Lockhart facility due to management changes, a reorganization of
the facility, and the loss of the sales contract with IBM for manufacturing the
Tiger Board during 1999. Additionally, 1999 included approximately six weeks of
sales for TMD ($948,000) while 1998 included thirteen weeks sales for TMD
($2,119,000). The Company's ownership interest in TMD was purchased in October
1998 and sold in mid-February 1999.
Cost of sales, in the amount of $4,458,881, increased as a percentage
of net sales to 118% for the year ended December 31, 1999, from $5,349,459,
which represented 88% of net sales, for the year ended December 31, 1998. The
increase in the cost of sales percentage is primarily due to; Lockhart's cost of
sales exceeding its sales as a result of uneconomical material purchases and
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31
inefficient use of labor, start up costs at other locations, during the period
of management change and reorganization.
Selling expenses in the amount of $43,658 represented 1% of net sales
during the year ended December 31, 1999, compared to $313,283 representing 5% of
net sales for the year ended December 31, 1998. The decrease in the selling
expenses percentage is primarily due the sale of TMD which accounted for
approximately $186,000 in selling expense in 1998, but only $8,000 in 1999. The
balance of the change was attributable to sales at Lockhart being produced from
in-house operations personnel rather than outside commission sales people.
General and administrative expenses totaled $1,988,113 for the year
ended December 31, 1999, which represented 53% of net sales, compared to
$2,788,104 which represented 46% of net sales for the year ended December 31,
1998. Included in general and administrative expense for the year ended December
31, 1999 were; severance expenses of approximately $228,000, related to the
former President and former Senior Vice President of the Company, approximately
$196,000 of compensation expense recorded as the result of the grant of stock
options, approximately $178,000 of operating expenses related to a temporary
manufacturing facility used by the Company until the Company's Blythe,
California, facility was fully operational, bad debt expense of $140,000 and
$116,000 in legal and accounting costs related to the attempted acquisition of
AIS. These expenses equaled 23% of net sales.
During the year ended December 31, 1998, the Company recorded
restructuring charges of $90,000 to account for primarily payroll cost
associated with reorganizations of the Company's management staff.
During the year ended December 31, 1999, the Company recorded a gain on
the sale GWP and its 51% interest in TMD in the amount of $642,764. This gain
was net of the write off of approximately $526,000, which represented the full
value of the note receivable resulting from the sale of GWP. There were no
comparable gains recorded during the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recorded other
expense of $202,271. A significant part of this was $154,641, which represented
legal and accounting expenses incurred to secure the $5,000,000 subscription for
the Company's convertible preferred stock. There was no comparable expense
during the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recorded a charge
of $525,114, for dividends paid on the Company's convertible preferred stock.
Under an agreement reached with the preferred stock holder in November 1999, no
further dividends will be paid on the preferred stock in exchange for the
Company's reducing the conversion price for each share of the Company's Common
Stock from $0.410 per share to $0.122 per share. There was no comparable expense
during the year ended December 31, 1998.
Due to the continuing losses by the Company, the 100% reserve against
the Company's $5,452,000 net deferred tax asset continues to be recognized at
December 31, 1999. Additionally, as a result of the series of transactions
through which the Company's new management gained control, in 1999, the Company
is limited in the utilization of prior
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32
accumulated net operating losses and anticipates that, as of December 31, 2000,
approximately $574,000 per year of net operating losses were available to offset
future annual taxable income.
LIQUIDITY AND CAPITAL RESOURCES.
During the three years ended December 31, 2000, 1999, and 1998 the
Company experienced negative operating cash flows of $5,632,756, $2,660,402 and
$2,870,611, respectively. Negative cash flows from operations resulted
principally from operating losses incurred during these years. The primary
operating uses of cash during 2000 were to fund net losses of $18,651,097, net
of non-cash items such as losses from impairment of assets of $12,304,800,
depreciation of $1,750,927, non-cash expense of stock option issuance of
$746,614, and equity in the losses of associated companies of $640,350. Net cash
used in 2000 operating activities was unfavorably impacted by decreases of
$703,979 and $ 1,057,661 in accounts payable and accrued expenses, respectively,
and minority interest in losses of a subsidiary of $707,740. The primary
operating uses of cash during 1999 were to fund net losses of $2,256,481 plus a
non-cash gain on the sale of TMD of $642,764 and cash advances of $711,682 to
TMD prior to its sale. Net cash used in 1999 operating activities was favorably
impacted by depreciation of $178,230 and decreases in inventories and accounts
receivable of $325,280 and $311,548, respectively, offset by declines in accrued
expenses of $203,965. The primary operating uses of cash during 1998 were to
fund operating losses of $2,564,709, net of a $972,892 non-cash loss from the
operations of TMD and less $767,450 cash transfers to TMD. The 1998 net cash
used in operating activities was adversely effected by increases in accounts
receivable and inventories of $367,648 and $510,922, respectively and a decrease
in accrued expenses of $501,951, while being favorably impacted by a $747,196
increase in accounts payable.
During the year ended December 31, 2000, investing activities used a
net amount of $2,043,750, consisting primarily of investments of $972,339 in
associated companies and increases in notes receivables from associated
companies of $938,364. During the year ended December 31, 1999, investing
activities provided a net amount of $400,653. This amount was negatively
impacted by advances of $200,000 to a former shareholder and equipment purchases
of $475,347. This amount was positively impacted the collection of $1,076,000
proceeds from the sale of the subsidiary held for sale. During the year ended
December 31, 1998, investing activities used $658,104. The 1998 activity was
unfavorably impacted by the purchase of GWP and its interest in TMD for $730,000
and equipment purchases of $431,298. The 1998 activity was favorably impacted by
collections on notes receivable of $385,194 and proceeds from the sale of assets
of $118,000.
Cash provided by financing activities of $7,673,165, $2,159,060 and
$3,638,366 during 2000, 1999 and 1998, respectively, were primarily the net
proceeds of preferred stock, Common Stock and debt issuance.
Commencing on July 9, 1998, and continuing through May 11, 1999, the
Company received $5,000,000 of a total commitment of $5,000,000 under an
agreement with USV which provided that the Company would issue to USV Warrants
to purchase 500,000 shares of Common Stock and shares of its Series A Preferred
Stock pursuant to Regulation "D"
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33
promulgated under the Securities Act of 1933. Of the $5,000,000, amounts
received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The
shares of Series A Preferred Stock and the Warrants were issued to USV on May
11, 1999. The net proceeds to the Company of approximately $4,850,000, after
legal and other costs, were used to provide working capital to support the
Company's 1999 and 1998 operations and fund the 1998 purchase of a controlling
interest in TMD by the Company's wholly owned subsidiary, GWP. The Earls Family
Limited Partnership made a contribution of approximately $400,000 to USV, which
allowed USV to complete the payment of the $5,000,000 purchase price for the
Warrants and the Series A Preferred Stock to the Company. The Earls Family
Limited Partnership is a member of USV. Gregory Earls, the Chairman of the
Company's Board of Directors and the Chief Executive Officer of the Company,
controls both USV and the Earls Family Limited Partnership. Promptly after USV
was issued the Warrants, USV transferred the Warrants to the Earls Family
Limited Partnership. On November 29, 1999, the terms of the Series A Preferred
Stock were amended to cancel the right of the holders of the Series A Preferred
Stock to receive an annual dividend and to change the conversion price for the
Series A Preferred Stock to $0.122. The amended Certificate of Designations,
Preferences and Rights of the Series A Preferred Stock setting forth these
changes was filed with the Delaware Secretary of State on December 31, 1999.
As of December 31, 1999 USV had the right to convert its shares of
Series A Preferred Stock to Common Stock at any time. Likewise, the Earls Family
Limited Partnership had the right to exercise its Warrants to purchase Common
Stock at any time. If these 500,000 shares of Series A Preferred Stock were
converted and the Warrants were exercised in full, the holders of such
securities would have been entitled to receive 41,483,606 shares of Common
Stock. Because that amount exceeds the number of shares of Common Stock
available for issuance under the Company's Restated Certificate of
Incorporation, USV and the Company entered into an agreement, dated March 1,
2000, whereby USV waived its right to convert its shares of Series A Preferred
Stock until an appropriate amendment to the Company's Restated Certificate of
Incorporation is filed with the Delaware Secretary of State. See "Business -
E2Enet Acquisition."
During the year ended December 31, 2000, the Company raised, in
accordance with the E2Enet Acquisition Agreement, $5,784,000. To raise these
funds, the Company sold $1,250,000 of additional shares of its Series A
Preferred Stock, to USV, a limited liability Company controlled by Gregory
Earls, the Company's Chairman and Chief Executive Officer, which is the
Company's largest shareholder, and $4,534,000 or, $4,337,914 net of issuance
costs, of its newly created Series C Preferred Stock, to accredited investors.
Of the 4,534 shares of Series C Preferred issued, USV purchased 2,725 shares for
$2,725,000. The Series C Preferred Stock is convertible into shares of the
Company's Common Stock at a conversion price per share of $1.45, which was
determined based on the closing sale price for a share of Common Stock on the
closing date of the E2Enet Acquisition, as quoted on the OTC Bulletin Board.
Conversion of the 125,000 shares of the Series A Preferred Stock would result in
the issuance of approximately 10,246,000 shares of the Company's Common Stock.
Conversion of all 4,534 shares of the Series C Preferred Stock would result in
the issuance of approximately 3,127,000 shares of the Company's Common Stock.
The proceeds of these offerings were used primarily to finance additional
investments in new and existing Internet businesses that focus on B2B and B2C
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e-commerce, the payment of costs incurred and liabilities assumed in connection
with the E2Enet Acquisition and related business transactions and ongoing
working capital needs. See "Business - E2Enet Acquisition."
Working capital decreased by $3,295,826 from a negative $794,439 as of
December 31, 1999, to a negative $4,090,265 as of December 31, 2000. The most
significant components of the decrease in working capital were the accrual of a
liability of approximately $2,000,000 related to the guarantee of a put
obligation assumed in the E2Enet acquisition and increases in notes payable, of
approximately $686,000 and accounts payable for E2Enet, of approximately
$387,000, for E2Enet and Buyline combined. Gross accounts receivable increased
by $157,964 to $559,253, representing approximately 78 days sales, at December
31, 2000, from $401,289, representing approximately 51 days sales as of December
31, 1999. The increase in accounts receivable was due to clients not paying
accounts due according to the terms of their purchase orders. Inventory
decreased by $90,741 to $69,834 at December 31, 2000 from $260,575 at December
31, 1999. During the year ended December 31, 2000, accounts payable increased by
$711,349, including approximately $507,000 related to E2E to $1,715,586,
including $352,562 resulting from manufacturing activities which represented 52
days cost of sales, from $1,004,237, including $318,490 resulting from
manufacturing activities which represented 47 days cost of sales in the year
ended December 31, 1999.
Working capital decreased by $481,611 from a negative $312,828 as of
December 31, 1998, to a negative $794,439 as of December 31, 1999. Gross
accounts receivable decreased by $11,686 to $401,289, representing approximately
51 days sales, at December 31, 1999, from $712,975, representing approximately
52 days sales as of December 31, 1998. Inventory decreased by $325,280 to
$260,575 at December 31, 1999 from $585,855 at December 31, 1998 primarily as a
result of decreased sales at the LTI facility in Lockhart, Texas. During the
year ended December 31, 1999, accounts payable increased by $160,064 to
$1,004,237, including $318,490 resulting from manufacturing activities which
represented 47 days cost of sales, from $844,173, including $577,359 resulting
from manufacturing activities which represented 89 days cost of sales in the
year ended December 31, 1998.
The Series F Stock issued in the Yazam Acquisition may be convertible
into 27,374,000 shares of Common Stock of the Company. 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 will require the
prior amendment of the Company's charter to increase the authorized common
shares of the Company, as previously disclosed by the Company. In the event that
the Company's charter is not amended prior to September 1, 2001, holders of the
Company's Series F Convertible Preferred Stock will have the right to sell their
shares to the Company in accordance with the terms of the definitive merger
agreement. The Yazam stockholders who receive shares of Series F Stock may
require the Company after such date to repurchase their shares of Series F Stock
for a price per share of the average price of Company Common Stock as reported
on the OTC BB (or other applicable nationally recognized market quotation
system) for the 20 trading days prior to the date of the request multiplied by
1,000, but not less than $250 per share of Series F Stock (or $0.25 per common
share) or a minimum of $6,843,500. Because of this repurchase option, the Series
F Convertible Preferred Stock will not be included in the Company's
stockholders' equity at the end of the first quarter of 2001.
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The Company cannot determine with certainty whether the average price
per share will exceed $0.25 in these circumstances and therefore cannot with
certainty estimate the maximum financial obligation to repurchase the Series F
Convertible Preferred Stock. Currently, the Company is exploring several
alternatives with regard to its obligations under the repurchase obligation
including negotiating with Series F stockholders to amend or waive the
repurchase obligation or possibly delivering presently authorized but unissued
Company Common Stock to Series F stockholders to the extent to which they put
their shares to the Company. However, if the Company is required to fund its
obligation to repurchase Series F Stock, it may have to raise additional funds
to do so and there can be no assurance that the Company will be able to raise
such additional funds. See, "BUSINESS - Series F Stock Waiver and Replacement
Agreement."
Historically, the capital the Company needed, both for working capital
and to pursue acquisition opportunities, have exceeded the Company's cash flows
from operations. These shortfalls have been met by the Company's ability to
raise capital through equity transactions involving the Company's convertible
preferred stock. The Company's independent certified public accountants have
raised this matter in their Report on the Consolidated Financial Statements as
contributing to uncertainty over the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern depends on its
ability to raise capital in the next twelve months. Current economic and
business conditions have created a difficult environment in which to raise
capital. The Company's ability to execute its business plan is, and its ability
to continue as a going concern may be, dependant on its ability to raise
capital. See, "BUSINESS - Overview," "SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT," "REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 2.
The Company's sources of funds to pursue acquisition opportunities and
provide working capital during 2001 will come from equity transactions involving
the Company's convertible preferred 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 Company has allocated approximately $150000 of its projected
capital expenditures to equipment additional at LTI's electronics manufacturing
facility. The Company is committed to providing adequate capital to LTI'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.
Management projects that approximately $1-2,000,000 will have to be raised
during 2001, through the preferred stock sales to accomplish the Company's
goals.
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
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plan, the Company may be required to significantly curtail its acquisition and
investment activities.
EFFECT OF INFLATION.
Inflation has not had a material impact on the Company's operations.
NEW 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 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
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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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Certain statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and are
made on the basis of management's plans and current analyses of the Company, its
business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. Current economic and business conditions have created a
difficult environment in which to raise capital. The Company's ability to
execute its business plan is, and its ability to continue as a going concern may
be, dependant on its ability to raise capital. The above factors, in some cases,
have affected, and in the future could affect, the Company's financial
performance and could cause actual results for 2001 and beyond to differ
materially from those expressed or implied in such forward-looking statements,
even if experience or future changes make it clear that any projected results
expressed or implied therein will not be realized.
This Form 10-K also contains forward-looking statements concerning
acquisitions and investments, and prospects for acquisitions and investments.
The Company cautions that the actual developments and results of the Company's
acquisitions and investments may differ from its expectations. There can be no
assurance that the conditions necessary to completing any acquisition,
investment or related financing transaction will be satisfied, or that any such
prospective event will occur. Additional investments by the Company or an
unrelated person in any of the Company's associated companies provide no
assurance that such associated company will succeed or that the Company's
investments will be recovered or profitable. The Company's assets and
operations, including results of operations, would be affected materially by the
extent to which the Company and the Company's associated companies continue to
have access to financing sources on reasonable terms in order to pursue its and
their business plans, by the success or failure of the business plans of the
Company, and the Company's associated companies, by economic conditions
generally and particularly in the developing technology market, by competition
and technological changes in the Company's and the Company's associated
companies industries and businesses, and by the results of the Company's and the
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Company's associated companies operations if and when operating. In addition,
the occurrence of any of the foregoing events or the failure of any of the
foregoing events to occur would materially affect the Company's assets,
operations and results of operations. See, "BUSINESS - Overview," "MANAGEMENT'S
DISCUSSION AND ANALYSIS - Liquidity and Capital Resources," "REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - Note 2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk. The Company presently has no derivative financial
instruments. However, the carrying value of other financial instruments, such as
accounts receivable, notes receivable, accounts payable and notes payable
approximate fair value because of their short-term nature. During the year ended
December 31, 2001, the Company had a line of credit. The interest payable on the
line of credit that was based on the prime rate and exposed the Company to
interest rate risk in the event that the prime rate increased and the Company
had outstanding balances under the line of credit. The line of credit was
retired as of June 30, 2001.
Impairment Risk. At December 31, 2000, we held ownership interests in 6
associated companies that were not publicly traded. We assess the net realizable
value of these associated companies on a regular basis to determine if we have
incurred any other than temporary decline in the value of our investment. For
the year ended December 31, 2000, we incurred approximately $12,305,000 in
impairment charges, related mainly to our investment in associated companies and
the goodwill and/or specific assets associated with our investment in
consolidated companies. We may incur additional impairment charges in future
periods.
Foreign Exchange Risk. Because we now have interests in companies that
are domiciled outside the United States, we are subject to foreign currency
risk. To the extent that we maintain deposits in any country outside the United
States, we will be subject to changes in the relative values of the dollar and
the currency of the associated company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of U.S. Technologies
Inc. and Report of Independent Certified Public Accountant are set forth on
pages F-1 through F-40 of the Consolidated Financial Statements herein:
Report of Independent Certified Public Accountant
Consolidated Balance Sheets -- December 31, 2000 and December 31, 1999.
Consolidated Statements of Earnings -- Years ended December 31, 2000, December
31, 1999 and December 31, 1998.
Consolidated Statements of Stockholder's Equity -- Years ended December 31,
2000, December 31, 1999 and December 31, 1998.
Consolidated Statements of Cash Flows -- Years ended December 31, 2000, December
31, 1999 and December 31, 1998.
Notes to Consolidated Financial Statements.
Quarterly data (unaudited) for U.S. Technologies Inc. for the years ended
December 31, 2000 and December 31, 1999. (See Note 20).
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The executive officers of the Company are elected annually by and serve
at the pleasure of the Board for one year or until their successors are elected
and qualified. The following executive officers of the Company were, or are, not
directors:
David Ledecky became associated with the Company in March 2000 as a
consultant and served as Vice-President of operations from May 2000 until
December 2000 when he resigned from the Company. From May 1999 to August 1999,
Mr. Ledecky was Senior Vice-President and chief operating officer of E2Enet,
Inc. Mr. Ledecky was a co-founder, director, senior vice-president, and chief
legal administrative officer of Building One Services Corporation (formerly
Consolidated Capital Corp. and Ledecky Brothers LLC, predecessor of Building One
Services Corporation) from February 1997 to May 1999. From December 1992 to
February 1997, Mr. Ledecky was an attorney at the Washington, D.C. law firm of
Gomez, Boyd & Luskin. Age: 40.
J.L. (Skip) Moore served as Executive Vice-President and Chief
Operating Officer of the Company from November 1999 until March 2001. Mr. Moore
was responsible for all operating activities of the Company's prison-based
outsourcing facilities until March 15, 2001, when he resigned from the Company.
Prior to joining the Company, Mr. Moore had been employed by the Spear Group in
a number of capacities, most recently as chief operating officer. During his
tenure at the Spear Group, Mr. Moore served as director and officer of several
of the Spear Group's subsidiaries. Age: 46
Richard C. Legge, Jr. ("Rick") accepted the position of President of
Labor-To-Industry in March 2001. From October 2001 to March 2001 he served as
acting President of BuyLine.net, one of our associated companies, where his role
was to develop a strategy to preserve shareholder value in this struggling
e-commerce company. From May 1997 to October 2000 Rick was Division Manager of
Joelson-Taylor Products a large regional manufacturer of building products. For
the twelve years ended in 1997 Rick lead the growth and international expansion
of CES Wireless Electronics where he held positions including Sales Manager,
Engineering Manager, V.P. Business Development and President, and then through a
management buyout became Principle Owner and Chairman. Rick has over twenty
years of electronics manufacturing experience and has led several successful
turn-arounds.
Allyson Holland joined the Company in May 2001 as Vice President of
Finance, Controller and Principal Accounting Officer. From 1999 to 2001 Ms.
Holland was Vice President of Finance and Administration with Direct Capital
Securities Inc., an e-commerce company and capital access firm. From 1998 to
1999 Ms. Holland was Chief Financial Officer and Compliance Officer of Halbert
Hargrove, an investment advisory firm and broker dealer. From 1997 to 1998 Ms.
Holland was Chief Financial Officer of DBC Securities, a broker dealer and bond
analytic company. Ms. Holland has over twenty years experience in the securities
and financial services industries including Drexel Burnham and Lambert, Beverly
Hills, where she worked in the High Yield and Convertible Bond Department as
Vice President of the Business Management Division.
BOARD OF DIRECTORS
BOARD SIZE AND COMPOSITION
The Company's Bylaws provide that the Board of Directors shall consist
of not less than one nor more than fifteen members. Each member of the Board of
Directors is elected for a one-year term and until his or her successor is
elected and qualified. The Board of Directors voted to expand its size to eight
members in April, 2000 in connection with the Company's acquisition of E2Enet,
in June, 2000 to nine members and in May, 2001 up to ten members. With respect
to the ten present directors of the Company, eight of such directorships are
governed by a voting agreement, dated as of April 12, 2000, by and among the
Company, USV Partners, LLC, James V. Warren, Northwood Ventures LLC, Northwood
Capital Partners LLC and Jonathan J. Ledecky. Under the voting agreement, each
of the parties has agreed to vote all of their U.S.
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Technologies Common Stock and all other U.S. Technologies securities then owned
or acquired so that the board of directors shall be composed of four directors
designated by USV Partners, LLC, two directors designated by Jonathan Ledecky
and two directors designated jointly by Northwood Ventures LLC and Northwood
Capital Partners LLC.
DIRECTORS
Eric D. Becker
Director Since May 2001
Eric Becker is a Managing Partner and co-founder of Sterling Venture
Partners. In 1983 Mr. Becker co-founded and served as a Managing General Partner
of Sterling Capital, Ltd. He also co-founded and served as chief executive
officer for Tango Communications, a Sterling portfolio company, prior to its
sale to a public company. Mr. Becker is a director of a number of Sterling
Venture Partners portfolio companies. He serves on the boards of the
Maryland/Israel Development Center, Port Discovery Children's Museum, and the
Garrison Forest School. Age: 39
Beth Dozoretz
Director since June 2000
Beth Dozoretz has been Senior Vice President and a Director of FHC
Health Systems since June 1998. In 1999, she was the National Finance Chair of
the Democratic National Committee. Prior to June 1998, she was primarily a
homemaker and active in charitable and political interests. Ms. Dozoretz is also
a member of the board of the U.S. Holocaust Memorial Museum, the Executive
Committee of the American Israel Public Affairs Committee, George Washington
University's National Council for Political Management, Harvard University's
John F. Kennedy School of Government Women's Leadership Section, the Rabin
Medical Center, the D.C. Jewish Community Center, and the Meridian House. Age:
49
Gregory Earls
Director since February 1999
Gregory Earls currently is the Chairman of the Board, the Chief
Executive Officer and the President of the Company. Mr. Earls presently is also
acting in the roles of Chief Financial Officer and Principal Accounting Officer
of the Company. Mr. Earls had been the Co-Chairman of the Board and Co-Chief
Executive Officer of the Company with James V. Warren from November 1999 until
March 15, 2001. Mr. Earls served as sole Chairman of the Company's Board of
Directors and sole Chief Executive Officer from February 1999 until he began to
share the positions with Mr. Warren in November 1999. Mr. Earls has been
President and Chief Executive Officer of U.S. Viewing Corporation, a private
investment management Company, since 1980. Mr. Earls is also president and a
director of privately held Equitable Production Funding of Canada, Inc., a film
licensing and communications holding Company. He is also president and a
director of National Networks, Inc., a private investment Company. From 1992 to
1996, he served as chairman of the board of directors of Health and Sciences
Television Network, Inc., a distributor of educational programming which was
acquired by Primedia, Inc. in
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1996. Mr. Earls has served as a director of Jayhawk Acceptance Corporation since
he co-founded the finance Company in 1994. Mr. Earls' previous business
experience also included work with a large investment banking firm in the
1990's. Age: 56
Arthur J. Maxwell
Director since April 2000
Since 1989 Arthur Maxwell has been president and chief executive
officer of Affordable Interior Systems, one of the largest business furniture
manufacturers in the U.S. Age: 43.
George J. Mitchell
Director since April 2000
The Honorable George J. Mitchell was a U.S. Senator from Maine from
1980 to 1995, and was Senator Majority Leader from 1989 to 1995. Since 1995,
Senator Mitchell has been senior counsel to Verner, Liipfert, Bernard, McPherson
& Hand of Washington, D.C., and senior counsel to Preti, Flaherty, Beliveau,
Pachios & Halley of Portland, Maine. Senator Mitchell was Chairman of the
Northern Ireland Peace Talks from 1996 to 1998. He also is a member of the board
of directors of Federal Express Corporation, Unum Provident Corporation, KTI,
Inc., The Walt Disney Company, Xerox Corporation, Starwood Hotels and Resorts,
Unilever NV, Casella Waste Systems, Inc. and Staples, Inc. Age: 67
Carl J. ("Rick") Rickertsen
Director since April 2000
Carl J. Rickertsen has been chief operating officer and a partner at
Thayer Capital Partners, a Washington, D.C. investment management firm, since
1994. Mr. Rickertsen heads Thayer Capital Partners' information technology
practice. He also is chairman of the board of directors of SAGA Systems, Inc.,
and a director of E-Plus Inc. and Global Vacation Group, Inc. Age: 41
Peter G. Schiff
Director since April 2000
Peter G. Schiff is President of Northwood Ventures LLC, a private
venture capital investment firm which he co-founded in 1983. He is also
President of Northwood Capital Partners LLC and managing general partner of
Rabbit Hollow Partners. Age: 49
James V. Warren
Director since November 1999
Mr. Warren was the Co-Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company from November 1999 until March 15, 2001. He and
Mr. Earls shared responsibilities as Co-Chairmen of the Board of Directors and
Co-Chief Executive Officers of the Company. Mr. Warren also is President and
Chief Executive Officer of The Spear Group, a global professional management
Company located in Atlanta, Georgia that he co-founded in
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1981. The Spear Group develops and implements solutions for personnel and human
resources management. Age: 67
William H. Webster
Director since April 2000
The Honorable William H. Webster has been a senior partner in the
Washington, D.C. office of the law firm of Milbank, Tweed, Hadley & McCloy since
1991. From 1987 to 1991, he was the Director of the U.S. Central Intelligence
Agency. Mr. Webster was Director of the Federal Bureau of Investigation from
1978 to 1987. He was a judge on the U.S. Court of Appeals, 8th Circuit, from
1973 to 1978. Age: 77
Henry T. Wilson
Director since April 2000
Henry T. Wilson has been a managing director of Northwood Ventures LLC
and Northwood Capital Partners LLC, private venture capital investment firms,
since 1991. From 1986 to 1991, he was a Vice-President for investment banking at
Merrill Lynch & Co. Age: 41
BOARD COMMITTEES AND MEETINGS
In the past year, the Board of Directors met three times, the
Compensation Committee met twice and the Audit Committee met once. All directors
attended at least 75% of the full board and individual committee meetings.
Executive Committee. The Board of Directors has an Executive Committee
composed of Gregory Earls, Carl J. Rickertsen and Peter G. Schiff. Mr. Earls
serves as the Executive Committee Chairman. This committee was formed, and its
members elected, by the Company's Board of Directors at its meeting held on May
15, 2000. During the intervals between meetings of the Board of Directors, this
committee has the authority to exercise all of the powers of the Board of
Directors in the management of the Company's business, property and affairs
unless restricted by statute, by the Company's Restated Certificate of
Incorporation, or by its Bylaws. This committee must exercise such authority in
the best interests of the Company and consistent with any specific directions of
the Board of Directors.
Pursuant to resolutions adopted by the Board of Directors of the
Company, the Board of Directors delegated to the Executive Committee the
authority to approve any of the Company's equity investments not exceeding
$1,000,000. Any such equity investments exceeding $1,000,000 requires the
approval of the entire Board of Directors.
Compensation Committee. The Board of Directors has a Compensation
Committee composed of George J. Mitchell, Carl J. Rickertsen and Peter G.
Schiff. Mr. Rickertsen serves as the Compensation Committee Chairman. This
committee was formed, and its members elected, by the Company's Board of
Directors at its meeting held on May 15, 2000. This Committee's responsibilities
include administration of the Company's option plans.
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Audit Committee. The Board of Directors has an Audit Committee composed
of William H. Webster, Henry T. Wilson, and Arthur Maxwell. Mr. Webster serves
as the Audit Committee Chairman. The Audit Committee was formed, and its members
elected, by the Company's Board of Directors on May 15, 2000. This committee has
the duties of recommending to the Board of Directors the appointment of
independent auditors, reviewing their charges for services, reviewing the scope
and results of the audits performed, reviewing the adequacy and operation of the
Company's internal accounting controls, and performing other accounting,
financial and operating control duties with respect to the Company. The
Company's Audit Committee is not required to have a charter. However, on
September 6, 2000, the Audit Committee approved and on September 12, 2000, the
Board of Directors adopted an Audit Committee Charter, a copy of which will be
attached as an Appendix to the Company's Proxy Statement for its Annual Meeting.
The Board of Directors believes that all members of the Audit Committee are
independent within the meaning of the NASD listing standards and SEC rules.
BOARD COMPENSATION
Directors of the Company are reimbursed for travel expenses related to
their service on the Board of Directors. This reimbursement was the sole
compensation directors received from the Company for their service as directors
until 2000 when directors were granted stock options. Mr. Earls and the outside
directors of the Company at the time of the closing of the E2E Acquisition were
each awarded 250,000 stock options as of February 21, 2000 at an exercise price
of $0.90. Those directors were Messrs. Webster, Mitchell, Rickertsen, Schiff,
Wilson and Earls. Outside director Beth Dozoretz received a similar award of
250,000 stock options as of June 1, 2000 at an exercise price of $0.98. These
options all have a three year vesting period.
The Chairmen of the three Board Committees are awarded 15,000 stock
options for their service. Such awards, with an exercise price of $1.34 per
share, were made on May 16, 2000 to each of Messrs. Earls, Rickertsen and
Webster. Each member, including the Chairmen, of the Board Committees are
awarded 25,000 stock options for their service. Such awards, with an exercise
price of $1.34 per share, were made on May 16, 2000, to each of Messrs. Earls,
Mitchell, Webster, Wilson and Maxwell. Because Messrs. Rickertsen and Schiff are
on two committees, they received 50,000 stock options each. All of these option
grants have a three year vesting period, which requires the directors' service
to continue through such period. These stock option awards and the June 1, 2000
grant to Beth Dozoretz were made subject to the condition that the Charter
Amendment authorizing additional Common Stock becomes effective.
On June 6, 2000, Mr. Earls was awarded 1,200,000 stock options as of
June 6, 2000 at an exercise price of $1.56. These options have a four year
vesting period.
On May 11, 2001, the Board of Directors were awarded 350,000 stock
options each for their services for the most recent year. Such awards were made
with an exercise price of $0.28 per share and have a three year vesting period,
which requires directors service to continue through such period. Each director
that served on a Board Committee received an additional 25,000 stock options.
Such awards were made to each of Messrs. Maxwell, Mitchell, Rickertsen, Schiff,
Webster and Wilson. Each director that served as a chairman of a Board Committee
received an additional 25,000 stock options. Such awards were made to Messrs.
Rickertsen and
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Webster. On the same date, Mr. Earls received 2,400,000 stock options for his
service to the Company over the past year.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, certain officers and persons who own more than 10% of the
outstanding Common Stock of the Company to file with the Securities and Exchange
Commission reports of changes in ownership of the Company's Common Stock held by
such persons. Officers, directors and greater than 10% stockholders also are
required to furnish the Company with copies of all forms they file under Section
16(a).
To the best of the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and representations that no
other reports were required, during 2000, the Company has complied with all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The table below sets forth compensation paid by the Company and its
subsidiaries for services rendered in all capacities during the year ended 2000
to each Co-Chief Executive Officer of the Company and the only other executive
officer of the Company whose compensation for 2000 exceeded $100,000.
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- --------------------------------------------------
RESTRICTED ALL
STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL FISCAL SALARY BONUS OTHER AWARDS(S) SARS PAYOUTS OTHER
POSITION YEAR ($) ($) ($) ($) (#) ($) COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------
Gregory Earls (1)
Chairman of the 2000 250,000 0 0 0 1,450,000 0 0
Board, President and 1999 99,918 0 0 0 850,000 0 0
Chief Executive 1998 0 0 0 0 0 0 0
Officer
James Warren (2)
Former Co-Chairman of 2000 0 0 0 0 0 0 0
the Board and Former 1999 0 0 0 0 1,500,000 0 0
Co-Chief Executive 1998 0 0 0 0 0 0 0
Officer
J.L. (Skip) Moore (3)
Executive Vice President 2000 111,023 0 0 0 300,000 0 0
1999 0 0 0 0 400,000 0 0
1998 0 0 0 0 0 0 0
(1) Mr. Earls was appointed Chief Executive Officer of the Company on
February 11, 1999. From November 29, 1999 to March 15, 2001, Mr. Earls
served as Co-Chief Executive Officer with James V. Warren.
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(2) Mr. Warren was appointed and served as Co-Chief Executive Officer of
the Company from November 29, 1999 until March 15, 2001
(3) Mr. Moore resigned from the Company in March 2001, the 300,000 options
granted to Mr. Moore were terminated on the date of his resignation.
OPTION GRANTS
INDIVIDUAL GRANTS POTENTIAL REALIZATION VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
OPTION TERM
-------------------------- ----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5%(3) 10%(3)
- ---------------------------------------------------------------------------------------------------------
Gregory Earls(4) 1,200,000(5) 17.5% 1.562 06/06/10 1,178,800 2,987,300
Gregory Earls 250,000 3.6% 0.90 02/21/10 139,600 354,600
J.L. (Skip) Moore 300,000 4.4% 1.343 06/06/10 253,400 642,000
(1) Unless otherwise noted, options vest on a three-year schedule.
(2) On the date of grant, all options were granted at market
price.
(3) The dollar amounts under these columns are the result of
calculations from the date of grant to the expiration of the
option at the 5% and 10% annual appreciation rates set by the
Securities and Exchange Commission and, therefore, are not
intended to forecast possible future appreciation, if any, in
the price of the Common Stock. No gain to the optionee is
possible without an increase in price of the Common Stock. In
order to reach the potential values set forth in the 5% and
10% columns of this table for options with a ten year term,
the price per share of the Company's Common Stock would be
$2.544, $1.450 and $2.188, respectively. In order to reach the
potential values set forth in the 10% column of this table for
options with a ten year term, the price per share of the
Company's Common Stock would be $4.051, $2.308 and $3.483,
respectively.
(4) These option grants are conditional; options may only be
exercised following amendment of the Company's Charter to
authorize the issuance of additional shares of Common Stock.
(5) These options vest equally over four years.
OPTIONS EXERCISED IN 2000 AND 2000 YEAR-END VALUES
(A) (B) (C) (D) (E)
- ------------------------------------------------------------------------------------------------------------------------
SHARES VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON REALIZED UNEXERCISED OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END ($)
NAME EXERCISE (#) ($) (#) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
Gregory Earls --- --- 1,200,000 / 1,450,000(1) - 0 -
James Warren --- --- 1,500,000 / 0 - 0 -
J.L. (Skip) Moore --- --- 400,000 / 300,000(1)(2) - 0 -
(1) These option grants are conditional; such options may only be
exercised following amendment of the Company's Charter to
authorize the issuance of additional shares of Common Stock.
(2) Mr. Moore resigned from the Company in March 2001, and the
300,000 options granted to Mr. Moore in the year ended
December 31, 2000 were terminated.
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STOCK OPTION PLANS
On November 1, 1999, the Board of Directors of the Company adopted the
1999 Stock Option Plan (the "1999 Stock Option Plan"). The 1999 Stock Option
Plan originally reserved 3,115,000 shares of Common Stock to be issued to
officers, directors and key employees of the Company and its subsidiaries and
affiliates. On February 21, 2000, the Board of Directors of the Company approved
amendments to the 1999 Stock Option Plan, which included, among other things,
the authorization to make option grants under such plan to consultants and an
increase in the amount of shares of Common Stock available for sale under the
1999 Stock Option Plan to 22,500,000, subject to certain conditions including
the effectiveness of the Charter Amendment. See "Business - E2E Acquisition."
On May 11, 2001, the Board of Directors of the Company approved
amendments to the 1999 Stock Option Plan, as amended, to authorize an increase
in the number of shares of Common Stock available for grants under the 1999
Stock Option Plan, as Amended to 30 million; provided, however that options
shall not be exercisable with respect to more than 8,000,000 shares unless the
Company's charter has been amended to authorize the issuance of at least
200,000,000 shares of Common Stock.
The Company granted 6,861,667 options under the 1999 Stock Option Plan
to twenty employees and consultants other than directors and named executive
officers in the year ended December 31, 2000. These options carry an exercise
price of either $0.90 or $1.343 per share, based on the closing sale price of
the Common Stock on the date of grant. On November 5, 1999, Gregory Earls was
granted 850,000 options at an exercise price of $0.125 per share.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
The Company added James V. Warren and J.L. (Skip) Moore to its
management team by entering into a Management Agreement, dated as of November
29, 1999, with Mr. Warren and Mr. Moore. Under the terms of the Management
Agreement, Mr. Warren was elected a director, co-chairman of the Company's board
of directors, and co-chief executive officer. Gregory Earls' positions as
chairman and chief executive officer of the Company were modified to include Mr.
Warren. Mr. Moore was elected to serve as the Company's executive vice-president
and chief operating officer. The accounting functions of the Company were moved
from the Company's manufacturing facility at Lockhart, Texas to Atlanta, Georgia
in accordance with the Management Agreement. Mr. Warren resigned his position as
co-chairman and co-chief executive officer effective March 15, 2001. Mr. Moore
resigned from the Company in March, 2001. See "Certain Relationships and Related
Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until May 15, 2000, the Board of Directors did not have a separate
compensation committee. Prior to May 15, 2000, all decisions regarding
management compensation were made by the full Board of Directors. From February
1999 to November 1999, Gregory Earls was the sole member of the Board of
Directors. From November 1999 until April 2000, the Board of
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47
Directors consisted solely of Gregory Earls and James V. Warren. During their
respective terms as directors, Messrs. Earls and Warren were also executive
officers of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP
The following table shows as of April 25, 2001, the number of all
shares of the Company's voting securities beneficially held by each director, by
each named executive officer and by each person known by the Company to
beneficially own 5% or more of any class of the Company's voting securities, and
by all directors and executive officers as a group. Except as otherwise
indicated, to our knowledge, each owner has sole voting and investment power
over his shares.
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48
SHARES OF
COMMON
STOCK
BENEFICIALLY
OWNED
ASSUMING
CONVERSION
OF ALL
VESTED AND
UNVESTED SHARES OF SHARES OF
OPTIONS AND SERIES A SERIES B
WARRANTS TO PREFERRED PREFERRED
ACQUIRE STOCK % OF STOCK % OF
COMMON % OF BENEFICIALLY SERIES A BENEFICIALLY SERIES B
NAME STOCK(1) CLASS(2) OWNED(1) CLASS OWNED(1) CLASS
- -----------------------------------------------------------------------------------------------------------------------------------
Gregory 6,043,027(5) 12.91% 587,000(6) 93.92% -- --
Earls(4)
USV Partners, 2,549,352 5.45% 507,140(9) 81.14% -- --
LLC(8)
Jonathan -- -- -- -- 52,641.85 47.00%
Ledecky(11)
Northwood
Ventures -- -- -- -- 49,656.77 44.34%
LLC(12)
Texas Pacific 1,109,055(14) 2.37% -- -- -- --
Group(13)
The Carlyle 857,671(14) 1.83% -- -- -- --
Group(15)
James V. 7,857,152(17) 16.79% 5,000(18) * -- --
Warren(16)
Northwood
Capital
Partners -- -- -- -- 7,094.17 6.33%
LLC(19)
Microdent 295,749(14) * -- -- -- --
Ltd.(20)
China
Development
Industrial 184,843(14) * -- -- -- --
Bank(21)
Peter G. 400,000(23) * -- -- -- --
Schiff(22)
Carl J. 415,000(25) * -- -- -- --
Rickertsen(24)
George J. 375,000(27) * -- -- 69.79(28) *
Mitchell(26)
William H 390,000(30) * -- -- -- --
Webster(29)
Henry T. 375,000(33) * -- -- -- --
Wilson(32)
Arthur J. 375,000(35) * -- -- -- --
Maxwell(34)
Beth 350,000(38) * -- -- -- --
Dozoretz(37)
J. L. (Skip) 400,000(40) * -- -- -- --
Moore(39)
David 700,000(42) 1.50% -- -- 174.26(43) *
Ledecky(41)
Accenture LLP
(f/k/a Andersen
Consulting -- -- -- -- -- --
L.L.P.)(44)
ALL DIRECTORS 17,680,179 37.78% 592,000 94.72% 244.05 *
AND EXECUTIVE
OFFICERS AS A
GROUP(45)
SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED
ASSUMING
CONVERSION % OF
OF ALL ALL CLASSES
OUTSTANDING COMBINED AND
CLASSES OF ALL
SHARES OF SHARES OF SHARES OF PREFERRED OUTSTANDING
SERIES C SERIES D SERIES F STOCK AND OPTIONS AND
PREFERRED PREFERRED PREFERRED EXERCISE OF WARRANTS
STOCK % OF STOCK % OF STOCK % OF ALL OPTIONS CONVERTED TO
BENEFICIALLY SERIES C BENEFICIALLY SERIES D BENEFICIALLY SERIES F AND WARRANTS COMMON
NAME OWNED(1) CLASS OWNED(1) CLASS OWNED(1) CLASS OUTSTANDING(1) STOCK(3)
- ------------------------------------------------------------------------ ------------ ------------------------------------------
Gregory 2,120(7) 46.76% -- -- -- -- 55,619,850(5) 29.89%
Earls(4)
USV Partners, 2,120(10) 46.76% -- -- -- -- 45,580,273 24.49%
LLC(8)
Jonathan -- -- -- -- -- -- 26,320,923 14.14%
Ledecky(11)
Northwood
Ventures -- -- -- -- -- -- 24,828,385 13.34%
LLC(12)
Texas Pacific -- -- -- -- 10,119.77 36.96% 11,228,825 6.03%
Group(13)
The Carlyle -- -- -- -- 7,825.96 28.59% 8,683,631 4.67%
Group(15)
James V -- -- -- -- -- -- 8,266,988 4.44%
Warren(16)
Northwood
Capital
Partners -- -- -- -- -- -- 3,547,085 1.91%
LLC(19)
Microdent -- -- -- -- 2,698.61 9.85% 2,994,359 1.61%
Ltd.(20)
China
Development
Industrial -- -- -- -- 1,686.63 6.16% 1,871,473 1.01%
Bank(21)
Peter G -- -- -- -- -- -- 400,000 *
Schiff(22)
Carl J -- -- -- -- -- -- 415,000 *
Rickertsen(24)
George J -- -- -- -- -- -- 409,893 *
Mitchell(26)
William H 150(31) 3.31% -- -- -- -- 493,448 *
Webster(29)
Henry T -- -- -- -- -- -- 375,000 *
Wilson(32)
Arthur J 500(36) 11.03% -- -- -- -- 719,828 *
Maxwell(34)
Beth -- -- -- -- -- -- 350,000 *
Dozoretz(37)
J. L. (Skip) -- -- -- -- -- -- 400,000 *
Moore(39)
David -- -- -- -- -- -- 787,131 *
Ledecky(41)
Accenture LLP
(f/k/a Andersen
Consulting -- -- 1,552.5 100% -- -- 1,552,500 *
L.L.P.)(44)
ALL DIRECTORS 2770 61.09% -- -- -- -- 68,237,138 36.67%
AND EXECUTIVE
OFFICERS AS A
GROUP(45)
* CONSTITUTES LESS THAN 1% OF THE COMPANY'S CLASS OF, OR FULLY-DILUTED, STOCK AS
APPLICABLE.
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49
(1) "Beneficial Ownership" includes shares for which an individual,
directly or indirectly, has or shares, or has the right within sixty
(60) days to have or share, voting or investment power or both.
Beneficial ownership as reported in the above table has been determined
in accordance with Rule 13d-3 of the Exchange Act, however, all options
awarded through April 25, 2001 are included without regard to Rule
13d-3. Options to purchase shares of Common Stock will be considered to
be vested if such options vest by June 24, 2001.
(2) The percentage of ownership reported for each person, entity or group
appearing in this column is based on the 29,086,786 shares of Common
Stock outstanding as of April 25, 2001, plus shares of Common Stock
issuable upon the exercise or conversion of all outstanding options and
warrants (including shares of Common Stock issuable upon the exercise
of all unvested options and shares of Common Stock issuable upon the
exercise or conversion of options and warrants which are not
exercisable or convertible until after the amendment of the Company's
Restated Certificate of Incorporation, as described herein (the
"Charter Amendment"). Assuming such exercises and conversions, the
Company would have 46,800,953 shares outstanding. For purposes of
calculating the percentage in this column, we have assumed that no
shares of the Company's preferred stock have been converted into shares
of Common Stock notwithstanding the fact that up to 38,000 shares of
Series A Preferred Stock under certain circumstances may be converted
into 3,114,734 shares of Common Stock.
(3) The percentage of ownership reported for each person, entity or group
appearing in this column is based on the 29,086,786 shares of Common
Stock outstanding as of April 25, 2001, plus shares of Common Stock
issuable upon the exercise or conversion of all outstanding options and
warrants and the conversion of all shares of Series A, Series B, Series
C, Series D and Series F Preferred Stock (including shares of Common
Stock issuable upon the exercise of all unvested options and all shares
of Common Stock issuable upon the exercise or conversion of options,
warrants, Series A, Series B, Series C, Series D and Series F shares
which are not exercisable or convertible until after the Charter
Amendment). Assuming such exercises and conversions, the Company would
have 186,083,856 shares of Common Stock outstanding.
(4) Mr. Earls is the Chairman and Chief Executive Officer of the Company.
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50
(5) This amount includes the following shares which may be deemed to be
beneficially owned by Mr. Earls: (i) 500,000 shares issuable upon the
exercise of warrants held directly by The Earls Family Limited
Partnership; (ii) 693,675 shares owned directly by Equitable Production
Funding, Inc.; (iii) 2,300,000 shares issuable upon the exercise of
stock options issued to Mr. Earls under the Company's 1999 Stock Option
Plan, as amended (the "1999 Plan"); and (iv) 2,549,352 shares of Common
Stock held by USV Partners, LLC ("USV"). Mr. Earls is the sole member
of USV Management, LLC, the manager of USV, and an investor in USV. For
purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr.
Earls may be deemed to be the beneficial owner of all shares owned by
USV. Mr. Earls disclaims beneficial ownership over the shares of Common
Stock held directly by USV, except for an amount of such shares held by
USV represented by Mr. Earls' pecuniary interest therein. This amount
excludes shares beneficially owned by James V. Warren.
For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr.
Earls may be deemed to be the beneficial owner of all shares owned by
James V. Warren because Mr. Earls is entitled to vote Mr. Warren's
shares solely for purpose of effecting the Charter Amendment. Mr. Earls
disclaims beneficial ownership over all shares of Common Stock
beneficially owned by Mr. Warren.
For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr.
Earls may be deemed to be the beneficial owner of all shares owned by
The Earls Family Limited Partnership and Equitable Production Funding,
Inc. because Mr. Earls owns all of the capital stock of Equitable
Production Funding, Inc. and controls The Earls Family Limited
Partnership.
Pursuant to an agreement entered into by Mr. Earls, USV and The Earls
Family Limited Partnership in favor of the Company, such parties have
agreed not to convert any securities held by them which are convertible
into shares of Common Stock (including options, warrants, Series A
preferred shares and Series C preferred shares) until after the Charter
Amendment.
Of the amount included in this column: (i) 1,233,333 shares of Common
Stock are issuable upon the exercise of vested options and warrants not
exercisable until after the Charter Amendment and (ii) an additional
1,066,667 shares of Common Stock are issuable upon the exercise of
unvested options which are not exercisable until after the Charter
Amendment.
(6) Such shares of Series A Preferred Stock are convertible into 48,114,754
shares of Common Stock. The amount shown includes 507,140 shares of the
Company's Series A Preferred Stock, which are convertible into
41,568,852 shares of Common Stock, held directly by USV. Mr. Earls is
the sole member of USV Management, LLC, the manager of USV, and an
investor in USV. For purposes of Rule 13d-3 of the Securities Exchange
Act of 1934, Mr. Earls may be deemed to be the beneficial owner of all
shares owned by USV. Mr. Earls disclaims beneficial ownership over the
shares of Common Stock held directly by USV, except for an amount of
such shares held by USV represented by Mr. Earls' pecuniary interest
therein.
Pursuant to an agreement entered into by Mr. Earls, USV and The Earls
Family Limited Partnership in favor of the Company, such parties have
agreed not to convert any securities convertible into shares of Common
Stock (including options, warrants, Series A preferred shares and
Series C preferred shares) until after the Charter Amendment.
(7) These 2,120 shares of Series C Preferred Stock, which are mandatorily
convertible into 1,462,069 shares of Common Stock after the Charter
Amendment, are held directly by USV. Mr. Earls is the sole member of
USV Management, LLC, the manager of USV. For purposes of Rule 13d-3 of
the Securities Exchange Act of 1934, Mr. Earls may be deemed to be the
beneficial owner of all shares owned by USV. Mr. Earls disclaims
beneficial ownership over the shares of Common Stock directly
beneficially owned by USV, except for an amount of such shares held by
USV represented by Mr. Earls' pecuniary interest therein.
Pursuant to an agreement entered into by Mr. Earls, USV and The Earls
Family Limited Partnership in favor of the Company, such parties have
agreed not to convert any securities held by them which are convertible
into shares of Common Stock (including shares of Series C Preferred
Stock) until after the Charter Amendment.
(8) USV's address is c/o U.S. Technologies Inc., 1130 Connecticut Avenue,
NW, Suite 700, Washington, D.C. 20036.
(9) Such shares of Series A Preferred Stock are convertible into 41,568,852
shares of Common Stock. Pursuant to an agreement entered into by USV in
favor of the Company, USV has agreed not to convert any securities held
by them which are convertible into shares of Common Stock (including
shares of Series A Preferred Stock) until after the Charter Amendment.
(10) Such shares of Series C Preferred Stock are mandatorily convertible
into 1,462,069 shares of Common Stock after the Charter Amendment.
Pursuant to an agreement entered into by USV in favor of the Company,
USV has agreed not to convert any securities held by it which are
convertible into shares of Common Stock (including shares of Series C
Preferred Stock) until after the Charter Amendment.
(11) Mr. Ledecky's address is c/o U.S. Technologies Inc., 1130 Connecticut
Avenue, NW, Suite 700, Washington, D.C. 20036.
(12) Northwood Ventures LLC's and Northwood Capital Partners LLC's address
is 485 Underhill Boulevard #205, Syosset NY 11791-3491. These entities
will be referred to herein together as "Northwood" and may be deemed to
be a "group" for purposes of Rule 13d of the Exchange Act.
(13) Texas Pacific Group's address is 201 Main Street, Suite 2420, Fort
Worth, Texas 76111. The amount shown includes: 5,608.18 shares of
Series F preferred stock and 614,617 warrants owned directly by TPG
Partners III, L.P., 728.61 shares of Series F preferred stock and
79,851 warrants owned directly by TPG Parallel III, L.P., 146.66 shares
of Series F preferred stock and 16,072 warrants owned directly by TPG
Dutch Parallel III, C.V., 338.14 shares of Series F preferred stock and
37,058 warrants owned directly by TPG Investor III, L.P., 2,599.83
shares of Series F preferred stock and 284,923 warrants owned directly
by T2 Partners, L.P., 196.38 shares of Series F preferred stock and
21,522 warrants owned directly by T3 Parallel, L.P., 151.07 shares of
Series F preferred stock and 16,556 warrants owned directly by T3 Dutch
Parallel, C.V., 145.58 shares of Series F preferred stock and 15,955
warrants owned directly by T3 Investors, L.P., 8.84 shares of Series F
preferred stock and 969 warrants owned directly by FOF Partners III,
L.P., and 196.48 shares of Series F preferred stock and 21,532 warrants
owned directly by FOF Partners III-B, L.P.
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51
(14) This amount represents warrants to purchase shares of Common Stock.
(15) The Carlyle Group holds these shares through CIPE Investment I, L.P.
and its address is 57 Berkeley Square, London, W1X5DA, United Kingdom.
(16) Mr. Warren is a director of the Company.
(17) This amount includes: (i) 6,318,652 shares of Common Stock that are
owned directly by Mr. Warren and may be voted by Mr. Earls in favor of
the Charter Amendment as discussed in footnote five above; (ii)
1,500,000 shares of Common Stock issuable upon the exercise of
presently exercisable stock options issued to Mr. Warren under the 1999
Plan; and (iii) 38,500 shares of Common stock owned directly by Mr.
Warren's wife, which Mr. Warren may be deemed to beneficially own.
(18) Such shares of Series A Preferred Stock are convertible into 409,836
shares of Common Stock after the Charter Amendment becomes effective.
Mr. Warren invested $50,000 in USV in April 2000 and acquired a
membership interest in USV. Based on Mr. Warren's investment in USV,
Mr. Warren may be deemed to have a beneficial interest in shares of
Series A Preferred Stock held by USV in an amount so disclosed in this
column.
(19) Northwood Capital Partners LLC's address is 485 Underhill Boulevard,
#205, Syosset, NY 11791-3491. See Note 12.
(20) Microdent Ltd.'s address is Technology Park, Manhat, 91487, Jerusalem,
Israel.
(21) China Development Industrial Bank Inc.'s address is 9 F 125 Nanking
East Road, Section 5, Taipei 105, Taiwan.
(22) Mr. Schiff is a director of the Company. Mr. Schiff is the president of
both Northwood Ventures LLC and Northwood Capital Partners LLC. For
purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr.
Schiff may be deemed to be the beneficial owner of these shares.
(23) This amount includes: (i) 83,333 shares of Common Stock issuable upon
the exercise of presently exercisable vested options; (ii) an
additional 50,000 shares of Common Stock issuable upon the exercise of
options which will vest on June 6, 2001 but may not be exercised until
after the Charter Amendment; (iii) an additional 100,000 shares of
Common Stock issuable pursuant to options which have not vested and are
subject to the Charter Amendment; and (iv) 166,666 shares of Common
Stock issuable upon the exercise of options which have not vested and
are not subject to the Charter Amendment. Such options were received as
compensation for service on the Company's board of directors.
(24) Mr. Rickertsen is a director of the Company.
(25) This amount includes: (i) 83,333 shares of Common Stock issuable upon
the exercise of presently exercisable vested options; (ii) an
additional 55,000 shares of Common Stock issuable upon the exercise of
options which will vest on June 6, 2001 but may not be exercised until
after the Charter Amendment; (iii) an additional 110,000 shares of
Common Stock issuable pursuant to options which have not vested and are
subject to the Charter Amendment; and (iv) 166,666 shares of Common
Stock issuable upon the exercise of options which have not vested and
are not subject to the Charter Amendment. Such options were received as
compensation for service on the Company's board of directors.
(26) Senator Mitchell is a director of the Company.
(27) This amount includes: (i) 83,333 shares of Common Stock issuable upon
the exercise of presently exercisable vested options; (ii) an
additional 41,600 shares of Common Stock issuable upon the exercise of
options which will vest on June 6, 2001 but may not be exercised until
after the Charter Amendment; (iii) an additional 83,400 shares of
Common Stock issuable pursuant to options which have not vested and are
subject to the Charter Amendment; and (iv) 166,666 shares of Common
Stock issuable upon the exercise of options which have not vested and
are not subject to the Charter Amendment. Such options were received as
compensation for service on the Company's board of directors.
(28) Such shares of Series B Preferred Stock are mandatorily convertible
into 34,893 shares of Common Stock after the Charter Amendment.
(29) Judge Webster is a director of the Company.
(30) This amount includes: (i) 83,333 shares of Common Stock issuable upon
the exercise of presently exercisable vested options; (ii) an
additional 46,667 shares of Common Stock issuable upon the exercise of
options which will vest on June 6, 2001 but may not be exercised until
after the Charter Amendment; (iii) an additional 93,333 shares of
Common Stock issuable pursuant to options which have not vested and are
subject to the Charter Amendment; and (iv) 166,666 shares of Common
Stock issuable upon the exercise of options which have not vested and
are not subject to the Charter Amendment. Such options were received as
compensation for service on the Company's board of directors.
(31) Such shares of Series C Preferred Stock are mandatorily convertible
into 103,448 shares of Common Stock after the Charter Amendment.
(32) Mr. Wilson is a director of the Company. Mr. Wilson is a managing
director of both Northwood Ventures LLC and Northwood Capital Partners
LLC. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934,
Mr. Wilson may be deemed to be the beneficial owner of shares held by
Northwood.
(33) This amount includes: (i) 83,333 shares of Common Stock issuable upon
the exercise of presently exercisable vested options; (ii) an
additional 41,600 shares of Common Stock issuable upon the exercise of
options which will vest on June 6, 2001 but may not be exercised until
after the Charter Amendment; (iii) an additional 83,400 shares of
Common Stock issuable pursuant to
-48-
52
options which have not vested and are subject to the Charter Amendment;
and (iv) 166,666 shares of Common Stock issuable upon the exercise of
options which have not vested and are not subject to the Charter
Amendment. Such options were received as compensation for service on
the Company's board of directors.
(34) Mr. Maxwell is a director of the Company.
(35) This amount includes: (i) 83,333 shares of Common Stock issuable upon
the exercise of presently exercisable vested options; (ii) an
additional 41,600 shares of Common Stock issuable upon the exercise of
options which will vest on June 6, 2001 but may not be exercised until
after the Charter Amendment; (iii) an additional 83,400 shares of
Common Stock issuable pursuant to options which have not vested and are
subject to the Charter Amendment; and (iv) 166,666 shares of Common
Stock issuable upon the exercise of options which have not vested and
are not subject to the Charter Amendment. Such options were received as
compensation for service on the Company's board of directors.
(36) Such shares are convertible into 344,828 shares of Common Stock. Such
shares are held directly by Affordable Interior Systems. Mr. Maxwell is
the President and Chief Executive Officer of Affordable Interior
Systems. For purposes of Rule 13d-3 of the Securities Exchange Act of
1934, Mr. Maxwell may be deemed to be the beneficial owner of these
shares. However, Mr. Maxwell disclaims beneficial ownership of any of
the shares owned by Affordable Interior Systems.
(37) Ms. Dozoretz is a director of the Company.
(38) This amount includes: (i) 87,500 shares of Common Stock issuable upon
the exercise of options which will vest in the first week of June 2001
but may not be exercised until after the Charter Amendment and (ii) an
additional 262,500 shares of Common Stock issuable pursuant to options
which have not vested and are subject to the Charter Amendment. Such
options were received as compensation for service on the Company's
board of directors.
(39) Mr. Moore resigned from the Company in March 2001.
(40) All of Mr. Moore's options are currently vested and exercisable.
(41) Mr. Ledecky resigned from the Company in December 2000.
(42) Upon Mr. Ledecky's resignation from the Company, Mr. Ledecky's options
became fully vested, but 300,000 of such options are not exercisable
until after the Charter Amendment.
(43) Such shares are mandatorily convertible into 87,131 shares of Common
Stock after the Charter Amendment
(44) Accenture LLP's address is 100 South Wacker Drive, Chicago Illinois
60606.
(45) Includes the shares described in all footnotes above relating to
directors and executive officers. There were no other executive
officers of the Company as of December 31, 2000.
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53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company issued 500,000 shares of its Series A Stock to USV in a
subscription offering that closed May 15, 1999. The Company also issued to USV
warrants to purchase 500,000 shares of the Company's Common Stock. For the
Series A Stock and the warrants, USV paid an aggregate of $5,000,000. USV
transferred the warrants to the Earls Family Limited Partnership shortly after
their issuance in consideration for approximately $400,000 in cash contributed
by the Earls Family Limited Partnership to USV. Gregory Earls controls both USV
and the Earls Family Limited Partnership. The terms of the Series A Stock were
amended on November 29, 1999 to cancel the right of the Series A stockholders to
receive an annual dividend and in consideration thereof to change the conversion
price for the Series A Stock to $0.122. On April 12, 2000, USV purchased an
additional 125,000 shares of Series A Stock at $10.00 per share. On April 12,
2000, USV also purchased 2,120 shares of Series C Preferred Stock, which shares
are convertible into 1,461,069 shares of Common Stock.
As of March 1, 2000 the amount of shares of Common Stock derived from
conversion of the Company's Convertible Preferred Stock would have exceeded the
number of shares of Common Stock authorized by the Company's Restated
Certificate of Incorporation. Therefore, USV and the Company entered into a
March 1, 2000 waiver agreement pursuant to which USV waived its right of
conversion until an appropriate amendment to the Company's Restated Certificate
of Incorporation is filed with the Delaware Secretary of State. On September 20,
2000, this waiver was extended to cover all convertible securities beneficially
owned by Mr. Earls.
Under the terms of a November 29, 1999 Management Agreement with both
James V. Warren and J.L. (Skip) Moore, Mr. Warren was elected Director,
Co-Chairman, and Co-Chief Executive Officer of the Company. As Co-Chairman and
Co-Chief Executive Officers, Mr. Warren shared responsibilities for those
positions with Gregory Earls. Mr. Moore was elected Executive Vice President and
Chief Operating Officer of the Company. The Management Agreement also provided
that:
- the conversion price for the Series A Stock was changed to
$0.122 per share;
- Mr. Warren was granted options under the Company's 1999 Plan
to purchase 1,500,000 shares of Common Stock; and
- Mr. Moore was granted options under the Company's 1999 Plan to
purchase 400,000 shares of Common Stock.
In connection with the E2Enet acquisition, the Company committed to
raise capital for general corporate purposes. To fulfill this commitment, the
Company sold Series C stock. On April 12, 2000, the Company's offering of 5,184
shares of Series C Stock for an aggregate of
-50-
54
$5,184,000 was fully subscribed. Ultimately, the Company received funds for
4,534 shares of Series C Stock for an aggregate of $4,534,000 or $4,337,914 net
of issuance costs. Several directors of the Company took part in that offering.
William Webster purchased 150 shares. Affordable Interior Systems, an entity
controlled by Arthur Maxwell, purchased 500 shares through Affordable Interior
Systems, and USV, which is controlled by Gregory Earls, purchased 2,120 shares.
In connection with the Company's offering of Series A Preferred Stock
in April 2000, Mr. Warren invested $50,000 in USV. Therefore, Mr. Warren was an
indirect beneficial interest in 5,000 shares of Series A Stock that are owned
directly by Mr. Warren.
As of December 31, 2000, the Company's operations and accounting center
was located in the offices of The Spear Group in Norcross, Georgia. James V.
Warren, the former Co-Chairman of the Company's Board of Directors and former
Co-Chief Executive Officer, is the co-founder and president of The Spear Group.
The Company had a management services arrangement with The Spear Group to
provide operating, accounting, and administrative services for the Company's
prison facilities. In March 2001, the operating services were moved to DeBary,
Florida and accounting and administrative services were consolidated in the
Company's executive officers in Washington, D.C. The Company's management
services arrangement with The Spear Group also terminated. However, during 2000,
the Company paid approximately $97,000 to The Spear Group pursuant to this
arrangement.
On December 27, 2000, the Company purchased 3,450,000 shares of
Buyline common stock for $345 from Northwood Ventures L.L.C. and Northwood
Capital Partners L.L.C., entities controlled by Peter G. Schiff and Henry T.
Wilson, members of the Company's Board of Directors.
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. 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. Such
transaction was approved by at least a majority of the disinterested directors
of 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 (or $0.15 per share of common 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 on the transaction the week of
August 6, 2001. See, "BUSINESS - Series F Stock Waiver and Replacement
Agreement."
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55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) List of financial statements, financial statement schedules and
exhibits.
Report of Independent Certified Public Accountants
(1) Schedule II - Valuation and Qualifying Accounts, Years Ended
December 31, 2000, 1999, and 1998
(b) Reports on Form 8-K filed during the last quarter of the year ended
December 31, 2000.
On October 4, 2000, the Company filed a Current Report on Form 8-K
describing the terms of a Definitive Merger Agreement to acquire
On-Site Sourcing, Inc.
(c) Exhibits:
The exhibits required by Item 601 of Regulation S-K are filed herewith.
(See Index of Exhibits)
(d) Financial Statement Schedules:
The Financial Statement Schedules required by Regulation S-X are filed
herewith.
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56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, U.S. Technologies Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
Seventh day of August, 2001.
U.S. TECHNOLOGIES INC.
By: /s/ Gregory Earls
-------------------------------------
Gregory Earls
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of U.S.
Technologies Inc. and in the capacities indicated, as of August 7, 2001
Signature Title Date
Director, Chief Executive Officer and August 7, 2001
/s/ Gregory Earls Chief Financial Officer
- ------------------------------------
Gregory Earls
Director August 7, 2001
/s/ Beth Dozoretz *
- ------------------------------------
Beth Dozoretz
Director August 7, 2001
/s/ Arthur J. Maxwell *
- ------------------------------------
Arthur J. Maxwell
Director August 7, 2001
/s/ George J. Mitchell *
- ------------------------------------
George J. Mitchell
Director August 7, 2001
/s/ Carl J. Rickertsen *
- ------------------------------------
Carl J. Rickertsen
-53-
57
Director August 7, 2001
/s/ Peter G. Schiff *
- ------------------------------------
Peter G. Schiff
Director August 7, 2001
/s/ James V. Warren *
- ------------------------------------
James V. Warren
Director August 7, 2001
/s/ William H. Webster *
- ------------------------------------
William H. Webster
Director August 7, 2001
/s/ Henry T. Wilson *
- ------------------------------------
Henry T. Wilson
Vice President and August 7, 2001
Allyson Holland Corporate Controller/
- ------------------------------------ Principal Accounting Officer
Allyson Holland
*By: /s/ Gregory Earls
------------------------
Gregory Earls
Attorney-in-fact
-54-
58
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
U.S. Technologies Inc.
Washington, D.C.
We have audited the accompanying consolidated balance sheets of U.S.
Technologies Inc. as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity (capital deficit), and cash flows
for each of the three years in the period ended December 31, 2000. We have also
audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Technologies
Inc. at December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying consolidated financial statements and schedule have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a working capital and net
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Atlanta, Georgia
May 9, 2001, except for Note 19(c), which is as
of June 30, 2001, and Note 19(d),
which is as of July 20, 2001
F-1
59
U.S. TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
----------- -----------
ASSETS
CURRENT
Cash $ 6,110 $ 9,451
Trade accounts receivable, net of reserves of $158,000 and $206,000
(Notes 9, 15 and 20) 401,253 195,289
Inventory, net (Notes 5, 9 and 20) 169,834 260,575
Prepaid expenses 81,848 39,340
----------- -----------
Total current assets 659,045 504,655
PROPERTY AND EQUIPMENT, net of accumulated depreciation (Notes 6 and 9) 656,820 571,383
INVESTMENTS IN ASSOCIATED COMPANIES (Notes 3, 4 and 20) 3,434,217 --
NOTE RECEIVABLE (Note 7) 90,000 --
OTHER 450 16,058
----------- -----------
Total assets $ 4,840,532 $ 1,092,096
=========== ===========
CURRENT LIABILITIES
Accounts payable $ 1,715,586 $ 1,004,237
Accrued expenses (Notes 8 and 20) 290,985 267,587
Obligation under put option assumed in conjunction with E2E acquisition
(Note 3) 2,000,010 --
Line of credit (Note 9) 197,392 --
Notes payable (Note 10) 685,861 27,270
----------- -----------
Total current liabilities 4,889,834 1,299,094
NOTES PAYABLE AND CAPITAL LEASE OBLIGATION, less current portion (Note 10) -- 13,794
----------- -----------
Total liabilities 4,889,834 1,312,888
----------- -----------
MINORITY INTERESTS (Note 3) -- --
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 9, 10, 12, 14, 15, 18 and 19)
CAPITAL DEFICIT (Note 12)
Series A convertible preferred stock; votes as if converted to common stock;
$0.02 par value; 1,000,000 shares authorized; 625,000 and
500,000 issued and outstanding 6,250,000 5,000,000
Series B mandatorily convertible preferred stock; votes as if converted to
common stock on certain issues; $0.02 par value; 112,000 shares
authorized, issued and outstanding 11,200,000 --
Series C mandatorily convertible preferred stock; votes as if converted to
common stock on certain issues; $0.02 par value; 8,750 shares authorized;
4,534 shares issued and outstanding 4,337,914 --
Series D mandatorily convertible preferred stock; votes as if converted to
common stock on certain issues; $0.02 par value; 2,000 shares
authorized; 1,552.5 shares issued and outstanding 170,775 --
Series A convertible preferred stock issuable -- 289,703
Series E mandatorily convertible preferred stock issuable; will vote as if converted
to common stock on certain issues upon issuance; 10,000 shares authorized; none
issued and outstanding 1,199,200 --
Common stock; $.02 par value; 40,000,000 shares
authorized; 29,610,786 and 29,195,278 shares issued and outstanding 592,216 583,906
Additional paid-in capital 27,601,507 12,125,450
Accumulated deficit (51,400,914) (17,992,167)
Treasury stock, at cost -- (227,684)
----------- -----------
Total capital deficit (49,302) (220,792)
----------- -----------
Total liabilities and capital deficit $ 4,840,532 $ 1,092,096
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
60
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000 1999 1998
------------ ------------ ------------
REVENUES
Product sales (Note 15) $ 2,671,378 $ 3,764,785 $ 6,107,244
Consulting revenues (Note 16) 21,000 -- --
------------ ------------ ------------
Total revenues 2,692,378 3,764,785 6,107,244
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 2,902,444 4,458,881 5,349,459
Selling expense 66,354 43,658 313,283
General and administrative expense, including
non-cash compensation expense of $746,614,
$195,740 and $0 (Notes 6 and 12) 6,242,513 1,988,113 2,788,104
Impairment of long-lived assets (Notes 3, 4 and 20) 12,304,800 -- --
Restructuring charge (Note 13) -- -- 90,000
------------ ------------ ------------
Total operating costs and expenses 21,516,111 6,490,652 8,540,846
------------ ------------ ------------
Loss from operations (18,823,733) (2,725,867) (2,433,602)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest, net 34,383 28,893 (112,325)
Equity in loss of associated companies (Note 4) (640,350) -- --
Other, net 70,863 (202,271) (18,782)
Gain on sale of subsidiary -- 642,764 --
------------ ------------ ------------
Total other income (expense) (535,104) 469,386 (131,107)
------------ ------------ ------------
Net loss before share of minority interest in
loss of subsidiary (19,358,837) (2,256,481) (2,564,709)
Minority interest in loss of subsidiary (Note 3) 707,740 -- --
------------ ------------ ------------
NET LOSS (18,651,097) (2,256,481) (2,564,709)
Deemed dividends (Note 12) (14,757,650) -- --
Preferred stock dividends (Note 12) -- (525,114) --
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(33,408,747) $ (2,781,595) $ (2,564,709)
============ ============ ============
Basic and diluted loss per common share $ (1.14) $ (0.10) $ (0.09)
============ ============ ============
Weighted average common shares outstanding 29,408,063 28,795,278 28,996,607
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
61
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series B
Shares Series A Mandatorily
------------------------------- Convertible Convertible
Common Treasury Preferred Preferred
Stock Stock Stock Stock
---------- ------------ ------------ ------------
BALANCE, JANUARY 1, 1998 28,632,063 -- $ -- $ --
Stock issued to retire debt 563,215 -- -- --
Purchase of treasury shares -- (400,000) -- --
Proceeds from convertible preferred -- -- -- --
stock issuable
Advance to stockholder -- -- -- --
Accrued interest on note
receivable - stockholder -- -- -- --
Transfer to subsidiary to be sold -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 29,195,278 (400,000) -- --
Redemption of shares -- (3,000,000) -- --
Sale of treasury stock -- 3,000,000 -- --
Proceeds from convertible preferred -- -- -- --
stock issuable
Issuance of preferred stock -- -- 5,000,000 --
Compensatory stock option grants -- -- -- --
Net loss -- -- -- --
Cash dividends on
Series A Convertible Preferred Stock -- -- -- --
---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 29,195,278 (400,000) 5,000,000 --
Stock issuances related to exercise of
options and warrants and stock issued in
connection with the Buyline acquisition 815,508 -- -- --
Retirement of treasury stock (400,000) 400,000 -- --
Issuance of Series A and C Preferred Stock
for cash Series B Preferred Stock in
connection with the E2E acquisition
and related deemed dividends -- -- 1,250,000 11,200,000
Issuance of Series D preferred stock to settle
liability of a subsidiary -- -- -- --
Proceeds from convertible preferred stock
issuable -- -- -- --
Compensatory stock option grants -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 29,610,786 $ -- $ 6,250,000 $ 11,200,000
========== ============ ============ ============
Series E
Series C Series D Series A Mandatorily
Mandatorily Mandatorily Convertible Convertible
Convertible Convertible Preferred Preferred
Preferred Preferred Stock Stock
Stock Stock Issuable Issuable
------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 1998 $ -- $ -- $ -- $ --
Stock issued to retire debt -- -- -- --
Purchase of treasury shares -- -- -- --
Proceeds from convertible preferred -- -- 3,648,682 --
stock issuable
Advance to stockholder -- -- -- --
Accrued interest on note
receivable - stockholder -- -- -- --
Transfer to subsidiary to be sold -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 -- -- 3,648,682 --
Redemption of shares -- -- -- --
Sale of treasury stock -- -- -- --
Proceeds from convertible preferred -- -- 1,641,021 --
stock issuable
Issuance of preferred stock -- -- (5,000,000) --
Compensatory stock option grants -- -- -- --
Net loss -- -- -- --
Cash dividends on
Series A Convertible Preferred Stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 -- -- 289,703 --
Stock issuances related to exercise of
options and warrants and stock issued in
connection with the Buyline acquisition -- -- -- --
Retirement of treasury stock -- -- -- --
Issuance of Series A and C Preferred Stock
for cash Series B Preferred Stock in
connection with the E2E acquisition
and related deemed dividends 4,337,914 -- (289,703) --
Issuance of Series D preferred stock to settle
liability of a subsidiary -- 170,775 -- --
Proceeds from convertible preferred stock
issuable -- -- -- 1,199,200
Compensatory stock option grants -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 $ 4,337,914 $ 170,775 $ -- $ 1,199,200
============ ============ ============ ============
Common Treasury Paid-in Accumulated
Stock Stock Capital Deficit
------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 1998 $ 572,642 $ -- $ 12,241,811 $(13,170,977)
Stock issued to retire debt 11,264 -- 213,013 --
Purchase of treasury shares -- (227,684) -- --
Proceeds from convertible preferred -- -- -- --
stock issuable
Advance to stockholder -- -- -- --
Accrued interest on note
receivable - stockholder -- -- -- --
Transfer to subsidiary to be sold -- -- -- --
Net loss -- -- -- (2,564,709)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 583,906 (227,684) 12,454,824 (15,735,686)
Redemption of shares -- (1,050,000) -- --
Sale of treasury stock -- 1,050,000 -- --
Proceeds from convertible preferred -- -- -- --
stock issuable
Issuance of preferred stock -- -- -- --
Compensatory stock option grants -- -- 195,740 --
Net loss -- -- -- (2,256,481)
Cash dividends on
Series A Convertible Preferred Stock -- -- (525,114) --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 583,906 (227,684) 12,125,450 (17,992,167)
Stock issuances related to exercise of
options and warrants and stock issued in
connection with the Buyline acquisition 16,310 -- 191,477 --
Retirement of treasury stock (8,000) 227,684 (219,684) --
Issuance of Series A and C Preferred Stock
for cash Series B Preferred Stock in
connection with the E2E acquisition
and related deemed dividends -- -- 14,757,650 (14,757,650)
Issuance of Series D preferred stock to settle
liability of a subsidiary -- -- -- --
Proceeds from convertible preferred stock
issuable -- -- -- --
Compensatory stock option grants -- -- 746,614 --
Net loss -- -- -- (18,651,097)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 $ 592,216 $ -- $ 27,601,507 $(51,400,914)
============ ============ ============ ============
Note
Receivable
Stockholder Total
------------ ------------
BALANCE, JANUARY 1, 1998 $ (359,692) $ (716,216)
Stock issued to retire debt -- 224,277
Purchase of treasury shares -- (227,684)
Proceeds from convertible preferred -- 3,648,682
stock issuable
Advance to stockholder (151,212) (151,212)
Accrued interest on note
receivable - stockholder (25,502) (25,502)
Transfer to subsidiary to be sold 536,406 536,406
Net loss -- (2,564,709)
------------ ------------
BALANCE, DECEMBER 31, 1998 -- 724,042
Redemption of shares -- (1,050,000)
Sale of treasury stock -- 1,050,000
Proceeds from convertible preferred -- 1,641,021
stock issuable
Issuance of preferred stock -- --
Compensatory stock option grants -- 195,740
Net loss -- (2,256,481)
Cash dividends on
Series A Convertible Preferred Stock -- (525,114)
------------ ------------
BALANCE, DECEMBER 31, 1999 -- (220,792)
Stock issuances related to exercise of
options and warrants and stock issued in
connection with the Buyline acquisition -- 207,787
Retirement of treasury stock -- --
Issuance of Series A and C Preferred Stock
for cash Series B Preferred Stock in
connection with the E2E acquisition
and related deemed dividends -- 16,498,211
Issuance of Series D preferred stock to settle
liability of a subsidiary -- 170,775
Proceeds from convertible preferred stock
issuable -- 1,199,200
Compensatory stock option grants -- 746,614
Net loss -- (18,651,097)
------------ ------------
BALANCE, DECEMBER 31, 2000 $ -- $ (49,302)
============ ============
See accompanying notes to consolidated financial statements.
F-4
62
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 1999 1998
------------ ----------- -----------
OPERATING ACTIVITIES
Net loss $(18,651,097) $(2,256,481) $(2,564,709)
Adjustments to reconcile net loss to net cash used in
operating activities:
Net loss from activities of subsidiary held for sale -- -- 972,892
Gain on sale of subsidiary -- (642,764) --
Depreciation and amortization 1,750,927 178,230 68,573
Equity in losses of associated companies 640,350 -- --
Loss (gain) on disposal of assets 42,706 178,496 (118,000)
Advances, net of deficit in operating results, to subsidiary -- (711,682) (767,450)
held for sale
Loss on settlement of note receivable 76,726 -- --
Impairment of long-lived assets 12,304,800 -- --
Minority interest in loss of subsidiary (707,740) -- --
Restructuring costs -- -- 90,000
Inventory valuation allowance 80,000 -- --
Provision for bad debts 158,000 66,000 136,000
Issuance of stock options 746,614 195,740 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables (363,964) 311,548 (367,648)
Inventory 10,741 325,280 (510,922)
Prepaid expenses 40,796 (9,509) (25,587)
Other assets 25 28,367 (29,005)
Accounts payable (703,979) (119,790) 747,196
Accrued expenses (3,057,671) (203,837) (501,951)
Obligation under put option assumed in conjunction
with E2E acquisition 2,000,010 -- --
------------ ----------- -----------
Net cash used in operating activities (5,632,756) (2,660,402) (2,870,611)
------------ ----------- -----------
INVESTING ACTIVITIES
Net proceeds from disposal of assets -- 1,076,000 118,000
Investments in affiliates (972,339) -- --
Cash advances on notes receivable (938,364) -- --
Capital expenditures (210,861) (475,347) (431,298)
Net cash acquired in (paid for) acquisitions 77,814 -- (730,000)
Proceeds from collection of notes and other receivables -- -- 385,194
Advances to former shareholder -- (200,000) --
------------ ----------- -----------
Net cash used in investing activities (2,043,750) 400,653 (658,104)
------------ ----------- -----------
FINANCING ACTIVITIES
Proceeds from convertible preferred stock issued or issuable 6,497,411 1,641,021 3,648,682
Investments by minority interests 707,740 -- --
Issuance of common stock 167,523 -- --
Net borrowings under line of credit 197,392 -- --
Proceeds from issuance of notes payable 151,673 11,760 --
Principal payments on notes payable (48,574) (18,607) (6,909)
Sale of treasury stock -- 1,050,000 --
Preferred stock dividends paid -- (525,114) --
Proceeds from issuance of convertible debentures -- -- 224,277
Purchase of treasury stock -- -- (227,684)
------------ ----------- -----------
Net cash (used in) provided by financing activities 7,673,165 2,159,060 3,638,366
------------ ----------- -----------
Increase (decrease) in cash (3,341) (100,689) 109,651
CASH, beginning of period 9,451 110,140 489
------------ ----------- -----------
CASH, end of period $ 6,110 $ 9,451 $ 110,140
============ =========== ===========
F-5
63
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 1999 1998
------------ ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 17,000 $ 38,000 $ 11,000
Supplemental schedule of non-cash investing and financing
activities:
Conversion of debentures and accrued interest into common -- -- 275,000
stock
Conversion of notes receivable into investments in
Associated Companies 771,638 -- --
Conversion of note receivable acquired in E2E acquisition to 747,500 -- --
investment in Associated Companies
Note payable issued for payment of the premium of an
insurance policy 85,000 -- --
Common stock issued in conjunction with Buyline acquisition 40,264 -- --
Series B mandatorily convertible preferred stock issued in 11,200,000 -- --
conjunction with E2E acquisition
Series D mandatorily convertible preferred stock issued to 170,775 -- --
settle the liability of a subsidiary
Deemed dividends relative to Series A, B and C
preferred stock 14,757,650 -- --
On April 12, 2000, the Company exchanged 112,000 shares of Series B mandatorily
convertible preferred stock for all of the outstanding shares of E2E (See Note
3). In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 15,180,000
Value of Series B mandatorily convertible preferred shares issued (11,200,000)
------------
Liabilities assumed $ 3,980,000
============
On April 26, 2000, the Company acquired a controlling interest (20,700,005
shares) in Buyline in exchange for conversion of existing notes and additional
cash investment. Additionally, the Company acquired 634,699 shares of Buyline
from its founder in exchange for 23,008 shares of Company common stock. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of net assets acquired, including net cash acquired
of $77,814 $ 2,400,000
Notes receivable converted into Buyline equity (1,131,000)
Value of Company common shares issued (40,000)
------------
Liabilities assumed $ 1,229,000
============
See accompanying notes to consolidated financial statements.
F-6
64
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
U.S. Technologies Inc. (the "Company" or "USXX") is a service firm that funds,
operates and develops technology and emerging growth companies. USXX identifies
companies with high growth potential to optimize their performance by deploying
operational assistance, capital support, industry expertise, and access to a
strategic network of business relationships. 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.
The Company operates in privatized prisons under an agreement with Wackenhut
Corrections Corporation ("WCC"), a leading developer and manager of privatized
correctional and detention facilities in the United States, Canada, the United
Kingdom and Australia. The agreement with WCC also permits the Company to
contract with state and federally operated facilities. WCC does not have an
ownership interest in the Company.
The Company's wholly-owned subsidiaries include E2Enet, Inc. ("E2E"),
Labor-to-Industry Inc. ("LTI"), Service-to-Industry Inc. ("STI") and through
February 12, 1999, GWP, Inc. ("GWP"). The Company also owned a majority interest
in Buyline.net, Inc. ("Buyline"), which was sold on June 30, 2001 (see Note 19).
E2E has made early stage investments in several development stage technology
businesses ("Associated Companies"). LTI produces labor intensive tangible
products and STI was a service provider operating an inbound/outbound call
center. GWP was a holding company for a 51% interest in Technology Manufacturing
and Design, Inc. ("TMD"). TMD was a "free-world" (i.e., non-prison) contract
manufacturer of electronic circuit boards. Buyline was a developer of business
to business e-commerce applications.
LTI operations included electronics-related assembly for all years presented,
furniture-related assembly commencing September 1998, and cut-and-sew operations
commencing May 1998. The cut-and-sew operations were discontinued in February
1999. STI operated the call center from June 1998 and suspended operations in
January 1999. GWP and the 51% interest in TMD were acquired effective October 5,
1998. On February 12, 1999, GWP and its interest in TMD were sold to the former
president of the Company, Mr. Kenneth H. Smith, as part of a severance agreement
(Notes 3 and 20).
On July 31, 2000, the Company announced that it has decided to initiate efforts
to divest its current prison-based outsourcing services business so that it may
focus exclusively on its transformation into a distributive Internet operating
company. The Company has no current plan to move forward to divest these
operations.
On April 12, 2000, the Company acquired E2E, formerly a privately held
technology services company. Subsequent to the acquisition, 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, other business
services and access to a strategic network of business relationships. USXX
Associated Companies primarily include technology and emerging companies with
perceived growth potential.
F-7
65
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated statements of operations, cash flows and changes in
stockholders' equity include the accounts of the Company and its subsidiaries.
All material intercompany accounts and transactions are eliminated.
Accounting for Investments
The various investments that the Company acquires are accounted for under three
broad methods: the consolidation, equity and cost methods. The accounting method
applied is generally determined based on the Company's voting interest in the
investee, the degree of influence exercised over the investee's operations, and
the level of control over key management decisions.
Consolidation
Entities in which the Company owns more than 50% of the outstanding voting
securities are accounted for under the consolidation method of accounting. Under
this method, the subsidiary company's results are reflected within the Company's
financial statements. All significant intercompany accounts and transactions are
eliminated. Participation of other stockholders in the earnings or losses of the
consolidated subsidiary is reflected as minority interest such that the
Company's results of operations reflect only the Company's share of such
earnings or losses.
Equity Method
Investee companies over which the Company exercises significant influence are
accounted for under the equity method of accounting. Whether or not the Company
exercises significant influence with respect to the investee company depends on
several factors, including but not limited to: an ownership interest level of
20% to 50% in the voting securities of the investee, active participation on the
investee's board of directors, approval of the investee's operating and
budgetary decisions, and other ownership rights which allow the Company to
exercise significant control over the investee. Under the equity method of
accounting, an investee's results of operations are not reflected within the
Company's consolidated accounts, however, the Company's share of the earnings or
losses of the investee is reflected in the caption "equity in loss of investees"
in the statement of operations.
The amount by which the Company's carrying value at the time of the initial
purchase of the investment exceeds its share of the underlying net assets of
investments accounted for under the equity method of accounting is amortized on
a straight-line basis over the estimated useful life of the underlying assets or
investments, generally three years. Amortization is reflected as an adjustment
of the Company's share of the investee's earnings or losses.
Cost Method
Investments not accounted for under the consolidation or equity methods of
accounting are accounted for under the cost method of accounting. Under this
method, the Company's share of the earnings or losses of the investee is not
included in the statement of operations. However, cost method impairment charges
are recognized in the statement of operations if circumstances indicate a
permanent impairment.
F-8
66
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company records its ownership interest in equity securities of investments
accounted for under the cost method at cost, unless these securities have
readily determinable fair values based on quoted market prices, in which case
these interests would be classified as available-for-sale securities or some
other classification in accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company used the cost method for certain of its investments and
had no available-for-sale investments at December 31, 2000 and 1999. All
investments are stated at the lower of cost or net realizable value.
Goodwill
Goodwill is the excess of the purchase price over the fair value of net assets
acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the periods benefited, principally three
years. Accumulated amortization amounted to approximately $1,607,000 at December
31, 2000.
Asset Impairment
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flow is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
On a continuous basis, but no less frequently than at the end of each quarterly
reporting period, the Company evaluates the carrying value for financial
statement purposes of its interests in, and advances to, each of its associated
companies for impairment. These evaluations of impairment are based on
achievement of business plan objectives and milestones of each associated
company, the fair value of each ownership interest and advance relative to its
carrying value, the financial condition and prospects of the associated company,
and other relevant factors. The business plan objectives and milestones that are
considered include, among others, those related to financial performance, such
as achievement of planned financial results and completion of capital raising
activities, and those that are not primarily financial in nature, such as the
launching of a web site, the hiring of key employees, the number of people who
have registered to be part of the associated company's web community, and the
number of visitors to the associated company's web site per month. For financial
statement purposes, the fair value of the Company's ownership interests in, and
advances to, privately held associated companies is generally determined based
on the prices paid by third parties for ownership interests in the associated
companies, to the extent third party ownership interests exist, or based on the
achievement of business plan objectives and the milestones described above. As
discussed in Notes 3 and 4, during 2000 the Company recognized losses of
$12,304,800 related to the impairment of its investments in Associated Companies
and goodwill.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity dates
of three months or less from the date of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined by the average cost
method, or market.
F-9
67
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, renewals and improvements of property and equipment
are capitalized. Expenditures for repairs, maintenance and gains or losses on
disposals are included in operations. Depreciation is computed using the
straight-line method over the following estimated lives:
ESTIMATED LIVES
----------------------------------
Equipment 5-7 years
Furniture and fixtures 7 years
Vehicles 3 years
Leasehold Improvements Lesser of 6 years or term of lease
Revenue Recognition and Accounts Receivable
Revenue is recognized on the sale of products or services when the products are
shipped or the services are performed, all significant contractual obligations
have been satisfied, and the collection of the resulting receivable is
reasonably assured. Shipping, handling and warehousing costs are included in
costs of sales in the statement of operations.
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.
An allowance for doubtful accounts is provided based on periodic review of the
accounts.
Restructuring Charges
The Company records the costs of severance and lay-offs related to the Company's
employees in accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in Restructuring).
Income Taxes
The Company accounts for income taxes under the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates. The Company
provides a valuation allowance against its deferred tax assets to the extent
that management estimates that it is "more likely than not" that such deferred
tax assets will not realized. The Company's net operating loss carryforwards are
subject to limitation based upon transactions occurring that resulted in a
change in control as defined in the Internal Revenue Code (see Note 11).
F-10
68
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Share
The Company presents basic and diluted earnings per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Basic earnings per common share
are based on the weighted average number of common shares outstanding during the
period. Diluted earnings per share include the dilutive effect of convertible
preferred stock, stock options and warrants. For all periods presented diluted
earnings per share have not been presented because the impact of the assumed
exercise of convertible preferred stock, stock options and warrants would have
been anti-dilutive. The impact of the assumed exercise may have a dilutive
effect in the future.
Stock Option Plans
The Company accounts for its stock compensation plans under SFAS No. 123,
Accounting for Stock Based Compensation. SFAS No. 123 defines a "fair value
method" of accounting for employee stock options. It also allows accounting for
such options under the "intrinsic value method" in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. If a company elects to use the intrinsic
value method, then pro forma disclosures of earnings and earnings per share are
required as if the fair value method of accounting was applied. The effects of
applying SFAS No. 123 in the pro forma disclosures are not necessarily
indicative of future amounts because the pro forma disclosures do not take into
account the amortization of the fair value of awards prior to 1995.
Additionally, the Company is expected to grant additional awards in future
years.
The Company has elected to account for its stock options issued to employees
under the intrinsic value method outlined in APB No. 25. The fair value method
requires use of option valuation models, such as The Black-Scholes option
valuation model, to value employee stock options, upon which a compensation
expense is based. The Black-Scholes option valuation model was not developed for
use in valuing employee stock options. Instead, this model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, it
is management's opinion that the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options. Under the
intrinsic value method, compensation expense is only recognized if the exercise
price of the employee stock option is less than the market price of the
underlying stock on the date of grant.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Examples include the availability of funding for technology companies, valuation
of technology companies, bad debts and fixed asset lives. Actual results could
vary from these estimates.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets are not materially different from their
fair values.
F-11
69
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New 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 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 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
F-12
70
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. GOING CONCERN
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred significant losses during each of the three years in the period ended
December 31, 2000, and had working capital deficiencies at December 31, 2000 and
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") (see Note 19
"Subsequent Events"). As a result of the acquisition of Yazam, the Company
obtained approximately $6,900,000 in cash (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 selectively to 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 is 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 have the right to put their shares of Series F
Preferred Stock to the Company for a price equal to the greater of $250 per
share or the average price of USXX's common stock for the 20 days prior to the
exercise date multiplied by 1,000. The minimum amount that the Company would
need to pay to the former Yazam stockholders should this repurchase be required
is approximately $6,844,000. The Company has subsequently entered into
transactions with respect to certain shares of the Series F Preferred Stock
modifying their respective rights (see Note 19(d)).
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 (subsequent to the passing of the proposed charter amendment
discussed in Note 12). The Company's continued ability to access the capital
markets may be dependant on its ability to generate cash flow from operations
(through increasing revenues and controlling costs at its LTI operations and
generating revenues as a result of providing services to the Associated
Companies), positive earnings or realizing a return from the cash flow of, or
sale of its interests in, one or more of its Associated Companies. Should the
Company be unable to raise sufficient capital to meet its cash flow needs, the
Company may be required to significantly curtail its operations and investing
activities. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. See Note 18 for
Commitments and Contingencies.
F-13
71
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS COMBINATIONS AND IMPAIRMENT OF LONG-LIVED ASSETS
E2Enet, Inc. and Associated Companies
On April 12, 2000, the Company acquired all of the outstanding stock of E2E by
merging E2E into a wholly owned subsidiary of the Company, U.S. Technologies
Acquisition Sub, Inc., which subsequently changed its name to E2E net, Inc. As a
result, upon the completion of the E2E acquisition, E2E became a wholly owned
subsidiary of the Company. This transaction was accounted for as a purchase. The
results of operations of E2E subsequent to April 12, 2000 are included in the
Company's consolidated financial statements.
In consideration for the exchange of their E2E shares, E2E's stockholders were
issued 112,000 shares of Series B Mandatorily Convertible Preferred Stock, which
have a stated liquidation preference aggregating approximately $11,200,000. The
Company also assumed liabilities in the aggregate amount of approximately
$3,980,000 in conjunction with the acquisition. The Company agreed, under the
E2E Acquisition Agreement, to raise new capital funds at or prior to the closing
of the E2E Acquisition. To raise these funds, the Company completed the private
placement sale of $1,250,000 of additional shares of its Series A Convertible
Preferred Stock (the "Series A Preferred Stock"), to USV, and $4,337,914 of its
Series C Mandatorily Convertible Preferred Stock ("Series C Preferred Stock"),
to various accredited investors. The proceeds of these offerings has been used
primarily to finance additional investments in new and existing technology
businesses, the payment of costs incurred and liabilities assumed in connection
with the E2E Acquisition and related business transactions and ongoing working
capital needs.
E2E had interests in several development stage technology companies at the time
of the acquisition as follows:
- - Buyline was a developer of B2B e-commerce applications, and was developing
a proprietary Internet software program designed to be a universal platform
for entry-level B2B e-commerce, linking buyers and sellers. Buyline's
application for RFP/RFQ technology (Request for Proposal/Request for
Quotation) was to be used in a full range of on-line advertising, on
Internet based directories, and in commercial web sites. As of the date of
the E2E acquisition, the Company had a $747,500 note receivable from
Buyline.
- - Promisemark Corporation ("Promisemark"). Promisemark (formerly known as
Vipro Corporation) is an Internet surety company, which provides repair
guarantees against viruses that harm computers. Promisemark has e-commerce
relationships with one of the leading Internet utility companies, a credit
card association, one of the largest warranty claims administrators in the
world and over 170 Internet service providers. As of the date of the E2E
acquisition, the Company owned 10.38% of Promisemark.
- - Urban Box Office Network, Inc. ("UBO"). UBO was a developer of networked
multi-media web sites that were to provide e-commerce services to
participants interested in urban culture, information, entertainment and
products. As of the date of the E2E acquisition, the Company owned 8.03% of
UBO.
- - OneMade, Inc. ("OneMade"). OneMade is a developer of an e-commerce
community that will serve participants in the arts, crafts, and hobby
industries. OneMade intends to connect wholesalers, retailers, consumers
and artists in these fields. As of the date of the E2E acquisition, the
Company owned 16.16% of OneMade.
F-14
72
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - Bluemercury, Inc. ("Bluemercury"). Bluemercury operates an e-commerce site
for upscale cosmetic products and accessories. It intends to pursue a
"clicks and bricks" strategy by also acquiring high-end cosmetic specialty
retailers. As of the date of the E2E acquisition, the Company owned 29.05%
of Bluemercury.
- - MEI Software Systems, Inc. ("MEI"). MEI provides customized software
systems to manage the databases of trade associations, professional
associations, fund-raising organizations and chambers of commerce. As of
the date of the E2E acquisition, the Company owned 5.65% of MEI.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed in connection with the acquisition:
Investments in associated companies:
OneMade $ 3,073,000
UBO 3,014,000
Promisemark 1,820,000
MEI 546,000
Bluemercury 500,000
Note receivable - Buyline 748,000
Goodwill 4,989,000
Other assets 490,000
Accounts payable (1,370,000)
Accrued expenses (610,000)
Accrued put obligation (2,000,000)
------------
$ 11,200,000
------------
In connection with the E2E acquisition, the Company agreed to assume the
obligation of a former E2E shareholder under a put agreement with the
shareholders of a former E2E Associated Company. This put option was exercised
following the closing of the E2E acquisition, and the Company recorded a
liability in the amount of $2,000,010, equal to the number of shares covered by
the put option multiplied by the option's strike price. This obligation was
settled in cash during April 2001.
The following unaudited pro-forma condensed consolidated financial data assume
that the acquisition of E2E, as described above, occurred at the beginning of
each fiscal year presented. This data has been prepared for comparative purposes
only and does not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated,
or which may result in the future.
2000 1999
------------- -------------
Revenues $ 2,671,378 $ 3,764,785
Net loss applicable to common shareholders (34,443,024) (43,060,833)
Basic and diluted net loss per common share (1.17) (1.50)
F-15
73
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has restructured some of E2E's Associated Companies and provided
these entities with additional working capital. E2E's initial investment in
Buyline was increased so that Buyline became a controlled operating subsidiary
on April 26, 2000, as a result of the Company acquiring 20,700,005 shares of
Buyline's common stock. The Buyline shares were issued to the Company in
exchange for (1) the conversion to Buyline's common stock of USXX's and E2E's
existing loans to Buyline (including accrued interest), (2) acknowledgment of
in-kind services already rendered by E2E, and (3) approximately $1,000,000 cash
invested by the Company. On April 26, 2000, the Company issued 23,008 shares of
its common stock to Buyline's founder in exchange for 634,699 shares of
Buyline's common stock. As a result of these transactions, the Company became
the controlling shareholder of Buyline.
On September 8, 2000, Buyline entered into a Portal Development and Joint
Marketing Agreement ("PDJMA") with the Museum Store Association (MSA). The PDJMA
provided a plan for the development of B2B e-commerce applications designed to
provide a universal platform for entry-level B2B e-commerce, linking buyers and
sellers through Internet trading zones. This plan was expected to assist Buyline
in becoming fully operational and in developing a viable revenue stream using
certain proprietary Internet software specifically developed for B2B
applications. Effective October 1, 2000, the staff and CEO of Buyline resigned
and went to work for a competitor. Following these resignations, Buyline was
unable to hire sufficient personnel to carry out the terms of the PDJMA, and on
December 1, 2000, MSA withdrew from the agreement with Buyline. At that time,
Buyline abandoned its software, ceased operations and stopped pursuing the
project further.
On December 28, 2000, the Company and Buyline settled a liability of Buyline's
through the issuance of equity securities. In settlement of a payable to a
vendor for software consulting and other services, the Company issued 1,552.5
shares of Series D Mandatorily Convertible Preferred Stock ("Series D Preferred
Stock") and Buyline issued 2,589,794 shares of common stock to the vendor. The
Company received from Buyline in consideration for their role in this
transaction 5,025,819 additional shares of Buyline common stock. As of December
31, 2000, the Company's ownership percentage of Buyline was approximately 64%.
During the year ended December 31, 2000, losses in the amount of $707,740 were
allocated to Buyline's minority shareholders.
In connection with the Company's ongoing evaluation of its operations,
management determined during the fourth quarter of 2000 that future expected
undiscounted cash flows from the E2E operations were not sufficient to support
the recorded amount of goodwill. This evaluation included changes in the
conditions of the market for technology company funding during 2000 and the fact
that all of the former employees of E2E had left the Company prior to December
31, 2000. Accordingly, the Company recorded a loss on impairment in the amount
of approximately $3,866,000, which was included in the E2E segment during 2000.
As a result of the events discussed above, management determined during the
fourth quarter of 2000 that the recorded goodwill and certain other long-lived
assets related to the Buyline operation was permanently impaired. The Company
realized an impairment loss of approximately $1,817,000 which is included in the
E2E segment during 2000.
On June 30, 2001, the Company sold its investment in Buyline to a Company
controlled by the Chairman of USXX (see Note 19).
F-16
74
GWP, Inc.
As described in Note 1, the Company acquired GWP and its 51% interest in TMD
from Mr. Smith for $730,000 in October 1998 and subsequently sold GWP and its
51% interest in TMD back to Mr. Smith in February 1999.
The following table summarizes the fair values of the assets acquired and
liabilities assumed in connection with the acquisition:
Accounts receivable $ 718,215
Inventory 519,097
Property and equipment 2,096,196
Net assets held for sale 275,000
Goodwill 2,312,863
Other assets 169,603
Accounts payable (1,782,548)
Accrued expenses (926,600)
Notes payable (2,011,450)
Other liabilities (640,376)
------------
$ 730,000
============
Net assets held for sale represent a circuit board design operation of TMD, sold
in December 1998. Net operating results of the circuit board design operation
were not significant.
The accompanying statement of operations include net sales of approximately
$948,000 and $2,119,000, respectively, net loss of approximately $124,000 and
$973,000, respectively, and net loss per share of less than $0.01 and $0.03,
respectively, attributed to TMD for the years ended December 31, 1999 and 1998.
However, because of the sale of TMD during 1999, unaudited pro forma results of
operations are not considered meaningful and have not been presented.
On February 11, 1999, Kenneth H. Smith resigned as President and Chief Executive
Officer of and as a director of the Company. Pursuant to the severance agreement
entered into between the Company and Mr. Smith, the Company sold its wholly
owned subsidiary, GWP to Mr. Smith. The sole asset of GWP was an ownership
interest in an amount of capital stock of TMD, which represented a controlling
interest in TMD. This majority interest in TMD was acquired by GWP in early
October 1998 for $730,000, which was contributed by the Company to GWP for the
express purpose of purchasing TMD stock. In addition to contributing to GWP the
funds necessary to complete the purchase of a controlling interest in TMD, from
early October, 1998 through February 11, 1999, the Company through GWP also
contributed approximately $1,337,000 in working capital funds to TMD. The
Company also guaranteed certain existing obligations of TMD, including the
repayment of TMD's Fidelity Funding Inc. loan, pursuant to the Loan and Security
Agreement between TMD and Fidelity Funding, Inc., dated as of November 30, 1998.
On February 12, 1999, TMD filed for bankruptcy protection. The sale of GWP was
concluded on February 15, 1999. The total purchase price for GWP was
approximately $2,451,000. This amount represented the Company's estimate of its
investment in TMD through February 11, 1999 and certain legal and other
transactional costs Mr. Smith agreed to assume. A portion of the purchase price
for GWP was paid in the form of a promissory note executed by Mr. Smith in the
principal amount of $1,234,832 bearing interest annually at the Wall Street
Journal's prime rate of interest plus two percent (2%). The principal amount of
Mr. Smith's promissory note and any accrued unpaid interest were initially due
and payable in full on February 15, 2002. Mr. Smith and TMD also agreed to
guarantee any of TMD's obligations for which the
F-17
75
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company was a guarantor. Repayment of the promissory note and the performance of
Mr. Smith's guaranty obligations to the Company were secured by Mr. Smith's
pledge to the Company of his 3,000,000 shares of the Company's Common Stock. The
performance of GWP's guaranty obligations to the Company was secured by GWP's
pledge to the Company of all of its stock holdings in GWP.
A portion of the purchase price was paid through Mr. Smith's sale of 3,366,152
shares of Common Stock to USV, a limited liability company controlled by Gregory
Earls, the Chairman of the Company's Board of Directors and Chief Executive
Officer of the Company. The aggregate purchase price of these shares was
approximately $1,076,000. USV paid this purchase price directly to the Company,
which applied such funds toward the amount payable by Mr. Smith to the Company
in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date
for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing
sale price on April 1, 1999 was $0.35 per share, for a total sale price of
$1,050,000. The aggregate sale price of $1,050,000, less the expenses associated
with the sale, was applied in reduction of Mr. Smith's indebtedness to the
Company. The 3,000,000 shares were sold to USV. In payment of the $1,050,000
sale price, USV executed a 30-day promissory note in favor of the Company. This
promissory note was secured by USV's pledge of the 3,000,000 shares and was paid
in full by October 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse judgment
is rendered against the Company by any court of competent jurisdiction in
connection with its guaranty obligations of TMD, or (iii) any new default under
Mr. Smith's promissory note. The promissory note has not been repaid. As of
December 31, 2000 and 1999, the Company has recorded a valuation allowance equal
to the amount outstanding.
In conjunction with the acquisition, the Company guaranteed the future purchase
of the 49% minority interest of TMD. The purchase price of the minority interest
is based on a multiple of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), to be completed between October 2000 and October 2001.
The Company continues to be subject to the guarantee of the future purchase of
the 49% minority interest in TMD. However, in conjunction with the sale, the
Company obtained a pledge from GWP of its 51% interest in TMD and Mr. Smith's
personal guarantee. Management believes that the amount needed to satisfy the
guarantee of the future purchase of the 49% minority interest in TMD, if any,
would be insignificant due to the apparent ceasing of operations of TMD
subsequent to their bankruptcy filing.
F-18
76
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS IN ASSOCIATED COMPANIES AND IMPAIRMENT OF LONG-LIVED
ASSETS
The following summarizes the Company's ownership interests in Associated
Companies accounted for under the equity method or cost method of accounting.
The ownership interests are classified according to applicable accounting
methods at December 31, 2000.
Cost method (prior to impairment losses):
OneMade $ 3,072,500
UBO 3,014,000
Promisemark 2,770,000
Gomembers 545,500
Final Arrangements 156,957
-----------
9,558,957
Impairment losses (6,319,500)
-----------
Total cost method $ 3,239,457
===========
Equity method (prior to impairment losses):
Bluemercury $ 301,911
Portris 194,760
-----------
496,671
Impairment losses (301,911)
-----------
Total equity method $ 194,760
===========
On April 12, 2000, the Company closed an agreement with Promisemark to invest
an additional $1,000,000 in Promisemark, another E2E Associated Company, for
additional equity in the form of shares of Promisemark Series B Convertible
Preferred Stock.
On July 5, 2000, the Company completed the acquisition of approximately a 37%
interest in WebMilestones.com, LLC ("WebMilestones"), an Internet services
company that provided a site for publishing obituary notices that can be
accessed through the Internet's World Wide Web. The Company invested $400,000
in WebMilestones, of which $100,000 was in the form of equity and $300,000 in a
note. On December 27, 2000, all of the membership interests of WebMilestones
were exchanged for membership interests in Final Arrangements, LLC ("Final
Arrangements"), the largest publisher of online obituaries and a provider of
software to manage funeral homes. The Company received a .1267% ownership
interest in Final Arrangements in connection with this transaction.
On October 16, 2000, the Company completed the acquisition of a 30.4% equity
interest in Portris, Inc. ("Portris"). Portris is a software company that is
developing an information management system that facilitates performance of
interactive team oriented projects over the internet. Under the terms of the
agreement, the Company received a 30.4% equity interest in Portris for an
aggregate of $380,000, by canceling $250,000 of debt and providing additional
cash to Portris.
On November 3, 2000, all of the common and preferred shares of MEI were
exchanged for common stock of gomembers.com, Inc. ("gomembers"), a provider of
software solutions for member-based organizations. The Company received a .47%
ownership interest in gomembers in connection with this transaction.
F-19
77
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 3, 2000, UBO filed for bankruptcy protection.
The Company recorded approximately $794,000 in excess investment over its share
of the underlying equity in the net assets of companies acquired during the
year ended December 31, 2000, accounted for under the equity method of
accounting. Amortization expense of approximately $259,000 is included in
"equity in losses of associated companies" in the accompanying consolidated
statement of operations for the year ended December 31, 2000. This excess was
being amortized over a three-year period.
In connection with the Company's ongoing evaluation of its Associated
Companies, management determined that during the fourth quarter of 2000 several
of the Company's Associated Companies had suffered permanent declines in value
and, accordingly, recorded a loss on impairment of approximately $6,622,000.
Management has determined that the Company's investment in two Associated
Companies, UBO and Bluemercury, had no value at December 31, 2000. As discussed
above, UBO filed for bankruptcy protection on November 3, 2000.
Based on financial information received, management also believes that the
value of its investment in Bluemercury is nominal. During the fourth quarter of
2000, management determined that its investment in Bluemercury would most
likely not return any cash, and at that time the impairment loss was
recognized. On February 10, 2001, the assets of Bluemercury were contributed to
29th Street Partners, Inc. ("29th Street Partners"), a cosmetic specialty
retailer. The Company received a 9.12% ownership interest in 29th Street
Partners in connection with this transaction.
Management has determined that the Company's investment in three additional
Associated Companies, Gomembers, OneMade and Promisemark, were impaired as of
December 31, 2000. This evaluation was based upon management's knowledge of
financing or merger transactions entered into by each of these Associated
Companies either during the fourth quarter of 2000 or shortly thereafter, and
financial and other operational information received regarding each Associated
Company.
The following summarized unaudited financial information for Portris which is
accounted for under the equity method of accounting at December 31, 2000 has
been compiled from Portris' financial statements. Information regarding the
balance sheet of Portris is presented as of December 31, 2000. Information
regarding the results of operations of Portris is included from the acquisition
date on October 16, 2000.
Balance sheet
Current assets $ 2,089
Non-current assets 55,349
------------
Total assets $ 57,438
============
Current liabilities $ 442,003
Stockholders' deficit (384,565)
------------
Total liabilities and stockholders' deficit $ 57,438
============
Results of operations:
Revenue $ --
============
Net loss $ (628,785)
============
F-20
78
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarized financial information for OneMade and Promisemark,
which are accounted for under the cost method, at December 31, 2000 have been
derived from the unaudited financial statements of OneMade and the financial
statements of Promisemark. Information regarding each balance sheet is presented
as of December 31, 2000. Information regarding the results of operations are for
the year ended December 31, 2000.
OneMade Promisemark
----------- -----------
Balance sheets
Current assets $ 2,651,894 $ 1,299,370
Non-current assets 1,812,297 301,546
----------- -----------
Total assets $ 4,464,191 $ 1,600,916
=========== ===========
Current liabilities $ 473,643 $ 495,679
Non-current liabilities -- 14,100
Stockholders' equity 3,990,548 1,091,137
----------- -----------
Total liabilities and stockholders' equity $ 4,464,191 $ 1,600,916
=========== ===========
Results of operations
Revenue $ 8,888 $ 114,425
=========== ===========
Net loss $(2,422,605) $(2,607,696)
=========== ===========
5. INVENTORIES
At December 31, inventories consisted of the following:
2000 1999
--------- --------
Raw material $ 231,177 $217,348
Work in progress 18,272 42,180
Finished goods 385 1,047
--------- --------
249,834 260,575
Reserve for obsolescence (80,000) --
--------- --------
$ 169,834 $260,575
========= ========
The Company provided a reserve for obsolete raw materials which was charged to
operations of $80,000, $0, and $0, during the years ended December 31, 2000,
1999 and 1998, respectively.
F-21
79
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
2000 1999
----------- -----------
Equipment $ 1,414,387 $ 1,419,825
Furniture and fixtures 502,614 315,465
Leasehold improvements 213,331 166,081
----------- -----------
2,130,332 1,901,371
Less accumulated depreciation (1,473,512) (1,329,988)
----------- -----------
$ 656,820 $ 571,383
=========== ===========
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$142,697, $178,230 and $68,573, respectively.
7. NOTE RECEIVABLE
The Company has an unsecured $90,000 note receivable from Portris which bears
interest at the Prime Rate (9.0% at December 31, 2000). The note was converted
into Portris common equity during May 2001.
8. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
2000 1999
-------- --------
Compensation and benefits $118,879 $200,873
Property taxes 43,726 24,793
Other 128,380 41,921
-------- --------
$290,985 $267,587
======== ========
F-22
80
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LINE OF CREDIT
LTI has a $250,000 revolving line of credit with a financial institution payable
on demand. Interest is payable semi-monthly at the Prime Rate plus 3%, plus a
monthly service charge of 1.75% of the average daily outstanding loan balance.
The line of credit is collateralized by accounts receivable, inventory and
equipment of LTI, and is guaranteed by USXX. In January 2001 the line of credit
was increased to the lesser of $350,000 or 80% of the company's eligible
accounts receivable as defined. Net borrowings on the line of credit were
$197,392 during the year ended December 31, 2000. During June 2001 this line
was repaid, and subsequently the line expired.
10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
Notes payable and capital lease obligation consisted of the following at
December 31:
2000 1999
---------- ----------
Buyline.net, Inc. note payable, original principal $650,000
payable $18,000 per month, accelerated under certain
conditions; interest accrues at Prime Rate; in payment
default at December 31, 2000. Collateralized by the
Company's investment in Buyline $ 587,071 $ --
Unsecured note payable to an insurance company payable
in monthly installments of $7,793 plus interest at 7.49%
maturing in July 2001 52,889 --
Unsecured, non interest-bearing notes payable to related
parties upon demand 21,300 --
5% unsecured note payable; in default at December 31,
2000; requiring an 18% default interest rate 8,745 7,764
Capital lease obligation, with monthly payments of
$778 and imputed interest of 9% 15,856 21,540
9% unsecured note payable; repaid during 2000 -- 11,760
---------- ----------
685,861 41,064
Less current maturities (685,861) (27,270)
---------- ----------
$ -- $ 13,794
========== ==========
The Buyline note is secured by a stock pledge agreement between E2E and
LightMedia Interactive Corporation. The capital lease obligation is secured by
certain equipment.
F-23
81
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Annual maturities of notes payable and capital lease obligation are as follows:
Notes Capital
December 31, Payable Lease Total
--------- -------- ---------
2001 $ 670,005 $ 11,670 $ 681,675
2002 - 5,446 5,446
--------- -------- ---------
Subtotal 670,005 17,116 687,121
Less amounts representing interest - (1,260) (1,260)
--------- -------- ---------
$ 670,005 $ 15,856 $ 685,861
========= ========= =========
During 1998, the holders converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,000 shares of the Company's stock.
11. INCOME TAXES
Provisions for federal and state income taxes consist of the following:
Years ending December 31, 2000 1999 1998
----------- ----------- -----------
Deferred
Federal $(6,040,000) $ (887,000) $ (585,000)
State (1,066,000) (157,000) (103,000)
----------- ----------- -----------
(7,106,000) (1,044,000) (688,000)
Change in deferred tax asset valuation
allowance, net of change due to acquisition
of net operating loss carryforwards in E2E
acquisition 7,106,000 1,044,000 688,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
The Company incurred taxable losses for each of the three years ended December
31, 2000. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at December 31, 2000
and 1999 are as follows:
2000 1999
------------- ------------
Deferred tax assets
Current assets and liabilities $ 295,000 $ 283,000
Impairment losses 4,476,000 --
Net operating loss carryforwards (Federal and state) 9,576,000 5,169,000
Valuation allowance (14,347,000) (5,452,000)
------------- ------------
$ -- $ --
============= ============
F-24
82
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2000, the Company acquired net operating losses in the E2E acquisition.
This resulted in an increase of $1,789,000 in both the gross deferred tax asset
and the valuation allowance.
At December 31, 2000, the Company has net operating loss carryforwards of
approximately $26,274,000 for federal income tax purposes that expire in years
2004 through 2015. The Company's utilization of losses prior to December 28,
2000 to offset future taxable income is limited to approximately $176,000 per
year as a result of a change in control of the Company, in accordance with
Internal Revenue Code Section 382. In connection with the Yazam acquisition on
March 27, 2001 (see Note 19), a change in control occurred which will also
result in the limitation of the utilization of losses generated prior to that
date. Utilization of the losses and other deferred tax assets may be further
limited by alternative minimum tax provisions.
The reconciliation of income tax computed at the United States federal statutory
tax rate (34 percent) to income tax benefit is as follows:
2000 1999 1998
----------- ----------- ---------
Benefit at United States statutory rate $(6,341,000) $ (872,000) $(872,000)
State tax benefit (746,000) (154,000) 154,000
Permanent differences (19,000) (18,000) 30,000
Change in deferred tax asset valuation
allowance, net of change due to
acquisition of net operating loss
carryforwards in E2E acquisition 7,106,000 1,044,000 688,000
----------- ----------- ---------
$ -- $ -- $ --
=========== =========== =========
12. STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Common Stock and Earnings Per Share
The Company had 40,000,000 authorized shares of $0.02 par value common stock and
10,000,000 authorized shares of $0.02 par value preferred stock at December 31,
2000. The following table reconciles the number of shares shown as outstanding
on the balance sheets with the weighted-average shares used for computing
earnings per share ("EPS") for the years ended December 31:
2000 1999 1998
---------- ---------- ----------
Common shares outstanding at December 31, 29,610,786 29,195,278 29,195,278
Effect of using weighted-average common
shares outstanding (202,723) (400,000) (198,671)
---------- ---------- ----------
Shares used in computing earnings per share 29,408,063 28,795,278 28,996,607
========== ========== ==========
Diluted EPS have not been presented due to convertible preferred stock, stock
options and warrants which comprised common stock equivalents totalling
122,365,470, 51,887,158 convertible preferred stock, and 267,400 for the years
ended December 31, 2000, 1999 and 1998, respectively, being anti-dilutive.
F-25
83
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the holders issued 1,845,300 shares of common stock to retire
outstanding notes payable of $571,237 to Carlton Technologies Ltd. At the time
the stock was issued to Carlton Technologies Ltd., only $421,032 of notes
payable was due; therefore a receivable of $150,205 has been recorded as a
reduction of stockholders' equity.
During 1998, the holders converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,215 shares of the Company's stock.
Warrants
In conjunction with issuance of $275,000 convertible debentures in January 1998,
the Company granted the placement agent warrants to acquire 275,000 shares of
Common Stock for $1. The warrants are exercisable for five years. During 2000,
warrants to acquire 137,500 shares of Common Stock were exercised. At December
31, 2000, warrants to acquire 137,500 shares of Common Stock remain outstanding.
Series A Convertible Preferred Stock
During 1998 and 1999, the Company received $5,000,000 of a total commitment of
$5,000,000 under an agreement with USV which provided that the Company would
issue to USV warrants to purchase 500,000 shares of Common Stock (the
"Warrants") and shares of its Series A Preferred Stock pursuant to Regulation
"D" promulgated under the Securities Act of 1933. Of the $5,000,000, amounts
received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The
shares of Series A Preferred Stock and the Warrants were issued to USV on May
11, 1999. The net proceeds to the Company of approximately $4,850,000, after
legal and other costs, were used to provide working capital to support the
Company's 1999 and 1998 operations and fund the 1998 purchase of a controlling
interest in TMD by the Company's wholly owned subsidiary, GWP. The Earls Family
Limited Partnership made a contribution of approximately $400,000 to USV, which
allowed USV to complete the payment of the $5,000,000 purchase price for the
warrants and the Series A Preferred Stock to the Company. The Earls Family
Limited Partnership is a member of USV. Gregory Earls, the Chairman of the
Company's Board of Directors and the Chief Executive Officer of the Company,
controls both USV and the Earls Family Limited Partnership. Promptly after USV
was issued the warrants, USV transferred the warrants to the Earls Family
Limited Partnership. On November 29, 1999, the terms of the Series A Preferred
Stock were modified to cancel the right of the holders to receive an annual
dividend and to change the conversion price to $0.122. The amended Certificate
of Designations, Preferences and rights of the Series A Preferred Stock setting
forth this change was filed with the Delaware Secretary of State on December 31,
1999.
The Company may not issue any stock with the same or senior preferences or
priorities to this series without the consent of the majority of this series'
shareholders.
USV had the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership had the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of Series A Preferred Stock were converted and the warrants
were exercised in full, the holders of such securities would be entitled to
receive 51,729,508 shares of Common Stock. Each warrant is exercisable for one
share of Common Stock at a price of $1.00 per share. If all of USV's shares of
Series A Preferred Stock were converted, USV would be entitled to receive
41,568,852 shares of Common Stock. Because that amount exceeds the number of
shares of Common Stock available for issuance under the Company's Restated
Certificate of Incorporation, USV
F-26
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and the Company entered into an agreement, dated March 1, 2000, whereby USV
waived its right to convert its shares of Series A Preferred Stock until an
appropriate amendment to the Company's Restated Certificate of Incorporation is
filed with the Delaware Secretary of State. September 20, 2000 Gregory Earls and
the Earls Family Limited Partnership entered into a similar agreement with the
Company.
On April 12, 2000, the Company sold an additional 125,000 shares of Series A
Preferred Stock to USV for $1,250,000 (see Note 3). Based on the conversion
terms of the Series A Preferred Stock and the market price of the Company's
common stock on the date of issuance of the Series A Preferred Stock, the
Company recognized the existence of a beneficial conversion feature in the
amount of $1,250,000. This amount was recorded as a non-cash deemed dividend
during 2000, resulting in an increase in the net loss applicable to common
shareholders.
Series B Mandatorily Convertible Preferred Stock
In conjunction with the acquisition of E2E, the Company issued 112,000 shares of
$.02 par value Series B Mandatorily Convertible Preferred Stock ("Series B
Preferred Stock") to former E2E stockholders. The Series B Preferred Stock has a
stated liquidation preference upon dissolution aggregating approximately
$11,200,000. Upon their mandatory conversion as described below, these shares of
Series B Preferred Stock will be converted into approximately 56,000,000 shares
of Common Stock. Based on the conversion terms of the Series B Preferred Stock
and the market price of the Company's common stock on the date of issuance of
the Series B Preferred Stock, the Company recognized the existence of a
beneficial conversion feature in the amount of $11,200,000. This amount was
recorded as a non-cash deemed dividend during 2000, resulting in an increase in
the net loss applicable to common shareholders.
The Company may not issue any stock with the same or senior preferences or
priorities to this series without the consent of the majority of this series'
shareholders.
Series C Mandatorily Convertible Preferred Stock
On April 12, 2000, the Company sold 4,534 shares of its Series C Mandatorily
Convertible Preferred Stock ("Series C Preferred Stock"), to accredited
investors for net proceeds of $4,337,914 (see Note 3). The Series C Preferred
Stock will be convertible into 3,126,895 shares of Common Stock at a conversion
price per share of $1.45. Based on the conversion terms of the Series C
Preferred Stock and the market price of the Company's common stock on the date
of issuance of the Series C Preferred Stock, the Company recognized the
existence of a beneficial conversion feature in the amount of $2,307,650. This
amount was recorded as a non-cash deemed dividend during 2000, resulting in an
increase in the net loss applicable to common shareholders.
Series D Mandatorily Convertible Preferred Stock
On December 28, 2000, the Company issued 1,552.5 shares of $.02 par value Series
D Preferred Stock (see Note 3). Upon their mandatory conversion as described
below, the shares of Series D Preferred Stock will be converted into 1,552,500
shares of Common Stock at $1.10 per share.
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series E Mandatorily Convertible Preferred Stock
During 2000, the Company received $1,199,200 of cash for shares of a new class
of preferred stock that will be designated as the Series E Mandatorily
Convertible Preferred Stock ("Series E Preferred Stock") from a limited number
of accredited investors. The terms under which the Series E Preferred Stock will
be converted and other terms will be determined prior to the closing of the sale
of such stock and will be filed in a Certificate of Designations with the
Secretary of State of Delaware. It is currently the intention of the Company to
issue such shares with a conversion price equal to $0.2031 per common share.
Based on the conversion terms of the Series E Preferred Stock and the market
price of the Company's common stock on the date of issuance of the Series E
Preferred Stock, the Company may recognize the existence of a beneficial
conversion feature at the time of issuance. The amount of this beneficial
conversion feature and any resultant deemed dividend may be significant, and
will result in an increase in the net loss applicable to common shareholders.
Series F Redeemable Convertible Preferred Stock
In conjunction with the acquisition of Yazam.com Inc. ("Yazam") subsequent to
year end (see Note 19), the Company issued 27,374 shares of $.02 par value
Series F Convertible Preferred Stock ("Series F Preferred Stock") to former
Yazam stockholders. The Series F Redeemable Preferred Stock has a stated
liquidation preference aggregating approximately $6,000,000. Upon their
conversion, these shares of Series F Preferred Stock will be converted into
approximately 27,374,000 shares of Common Stock at $0.22 per share. Based on the
conversion terms of the Series F Preferred Stock and the market price of the
Company's common stock on the date of issuance of the Series F Preferred Stock,
the Company recognized the existence of a beneficial conversion feature in the
amount of $6,022,280. This amount will be recorded as a non-cash deemed dividend
during 2001, resulting in an increase in the net loss applicable to common
shareholders.
Beginning on the second anniversary of the date of the first issuance of shares
of Series F Preferred Stock, and for a period of 90 days thereafter, each holder
of shares of Series F Preferred Stock shall have the right to require the
Company to redeem such holder's shares at a purchase price of $100 per share (as
adjusted for any combinations, consolidations, stock distributions or stock
dividends or similar events with respect to such shares); provided, however,
that the Company shall not be obligated to effect such a redemption unless
certificates evidencing such shares of Series F Preferred Stock being redeemed
are either delivered to the Company or its transfer agent or the holder notifies
the Company or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the Company to indemnify
the Company from any loss incurred by it in connection therewith.
Registration Rights
The Company and certain holders of the Company's Series A, B and C Preferred
Stock entered into an agreement regarding registration rights for the Series A,
Series B, and Series C Preferred Stock and Common Stock into which they are to
be converted. Collectively, the stockholders party to the agreement have the
right 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
F-28
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which might be imposed by an underwriter for the sale of such shares. The
holders of these registration rights must approve prior to the Company granting
registration rights superior to those in place. The holders of the Company's
Series F Preferred Stock have been granted similar registration rights with
respect to their shares.
Preferred Stock Voting Rights
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
B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock,
the Series F Preferred Stock and the Series E Preferred Stock (when issued) do
not permit the holders thereof to vote on the Charter Amendment, but otherwise
permit them to vote as if the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock, the Series F Preferred Stock and the Series
E Preferred Stock (when issued) were already converted to Common Stock.
Accordingly, the Charter Amendment will be presented for approval by the holders
of outstanding shares of Common Stock and Series A Preferred Stock, voting
together as a single class.
Proposed Charter Amendment
The Company intends, and is obligated by the E2E Acquisition Agreement to call a
meeting of its stockholders for the purpose of amending the Company's Restated
Certificate of Incorporation. The proposed amendment (the "Charter Amendment")
will increase the number of shares of Common Stock the Company is authorized to
issue to an amount sufficient to permit the conversion to Common Stock of all of
the Company's then-outstanding shares of all of its authorized and designated
series of convertible preferred stock, including the Company's Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock, the Series E Preferred Stock and the Series F
Preferred Stock. The Charter Amendment's proposed increase of the number of
shares the Company is authorized to issue will also include an amount sufficient
to permit the conversion to Common Stock of any other then-outstanding
securities or options, which are convertible into or otherwise permit the holder
thereof to purchase or otherwise receive shares of Common Stock. Upon the
acceptance of the Charter Amendment by the Secretary of State of the State of
Delaware, the Series B Preferred Stock, the Series C Preferred Stock and the
Series D Preferred Stock will automatically be converted into shares of Common
Stock. USV has also indicated its current intention to convert all shares of
Series A Preferred Stock held by it to Common Stock at that time. Management has
obtained agreements from stockholders representing a majority of shares entitled
to vote on the charter amendment to vote in favor of such amendment.
Stock Compensation Plans
Prior to 1997, the Company created three qualified and four nonqualified stock
options plans that provide for the granting of incentive and nonqualified
options to purchase the Company's Common Stock to selected officers, other key
employees, directors and consultants. General terms provide for three-year
vesting beginning one year from date of grant, with an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after the employee's termination, or ten years from the date of
grant. The qualified and nonqualified option plans have 531,600 and 290,000,
shares, respectively, available for grant.
During 1999, the Company created the U.S. Technologies Inc. 1999 Stock Option
Plan to provide for the granting of incentive and nonqualified options to
purchase the Company's Common Stock to selected
F-29
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
officers, other key employees, directors and consultants. The option plan was
amended in 2000 and 2001. General terms provide for an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after the employees terminations, or ten years from the date of
grant. Subject to stockholder approval, the maximum number of shares that can be
reserved under this plan as amended is 30,000,000, provided, however, that the
options are not exercisable with respect to more than 8,000,000 shares of common
stock unless and until the Company's charter is amended to authorize the
issuance of at least 200,000,000 common shares.
In accordance with SFAS No. 123, the fair value for the Company's employee stock
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 2000 and 1999
(no options were granted during 1998).
2000 1999
---- ----
Risk-free interest rate 6.5% 5.4%
Dividend yield 0.0% 0.0%
Volatility factor 70.0% 75.0%
Weighted-average expected life (in years) 7.0 5.0
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
2000 1999 1998
------------- ------------ ------------
Net loss applicable to common shareholders
As reported $ (33,408,747) $ (2,781,595) $ (2,564,709)
Pro forma (34,487,862) (2,939,384) (2,564,709)
Earnings per share
As reported (1.14) (0.10) (0.09)
Pro forma (1.18) (0.10) (0.09)
The grant date weighted-average fair value of options granted during 2000 was
$7,677,851, of which $6,911,620 related to options issued at exercise prices
equal to the market price of USXX stock on the respective grant dates and
$766,231 related to options issued at an exercise price less than the market
price of USXX stock on the grant date. Compensation expense recognized during
2000 related to the Company's option plans was $746,614 and is included in
general and administrative expense.
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option activity, and related information for the years 2000
and 1999 follows (there was no activity in 1998):
Qualified Plans Nonqualified Plans
------------------------------- -------------------------------
Weighted- Weighted-
average average
Options exercise price Options exercise price
---------- -------------- ---------- --------------
Outstanding at December 31, 1997 and 1998 17,400 $ 0.54 -- $ --
Granted 1,495,000 0.13 1,975,000 0.12
Exercised -- -- -- --
Forfeited or canceled -- -- -- --
---------- ------- ---------- -------
Outstanding at December 31, 1999 1,512,400 0.13 1,975,000 0.12
Granted -- -- 6,861,667 1.17
Exercised (585,000) 0.13 (70,000) 0.13
Forfeited or canceled (17,400) 0.54 (600,000) 1.16
---------- ------- ---------- -------
Outstanding at December 31, 2000 910,000 $ 0.13 8,166,667 $ 0.92
========== ======= ========== =======
Options exercisable at:
December 31, 1998 17,400 0.54 -- --
December 31, 1999 1,512,400 0.14 175,000 0.12
December 31, 2000 910,000 0.13 2,005,000 0.63
The table above includes 3,420,000 non-qualified plan options which were granted
during 2000 that may not be exercised (subject to other vesting and expiration
terms) until the proposed charter amendment is approved.
During 2000, the Company modified options to purchase an aggregate of 750,000
shares held by two employees to accelerate vesting. These options had no
intrinsic value as of the date of the modification, therefore, no expense was
recognized as a result of this modification. Variable accounting will not be
applied prospectively for these options.
During 1996, the Company granted options, outside the option plans described
above, to four other parties to purchase 200,000 shares of the Company's Rule
144 stock at $0.50 per share exercisable at various times through May 17, 2001.
The Company also granted to a former board member the option to purchase 150,000
shares at $0.125 per share through May 25, 1999. The validity of the options
granted to the former board member has been questioned by the Company based on
several factors. Consequently, these options are not included in the above
summary of Stock Option activity. The Company is evaluating the status of these
options and will take appropriate actions based on that determination. As of
December 31, 2000 and 1999, 100,000 of the $0.50 options and all of the $0.125
options remain outstanding; however, the Company has not reflected these options
in the Company's financial statements due to the fact that they are not deemed
valid and have expired.
F-31
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2000 Life Price 2000 Price
- --------------- -------------- ----------- -------- ------------ --------
$0.12 - $0.13 2,805,000 8.89 $ 0.12 2,805,000 $ 0.12
0.50 - 0.56 80,000 3.74 0.52 80,000 0.52
0.76 - 0.98 3,371,667 9.11 0.90 30,000 0.76
1.34 - 1.56 2,820,000 9.42 1.51 -- --
---------- ---- ------ ---------- ------
9,076,667 9.09 $ 0.84 2,915,000 $ 0.14
========== ==== ====== ========= ======
13. RESTRUCTURING CHARGE
During 1998, the Company hired four management-level personnel to generate and
manage anticipated growth. Effective December 28, 1998, in light of actual
operations, three of these management-level personnel were terminated in
addition to one executive level officer. Total severance to be paid to these
individuals was approximately $49,000 plus an additional $41,000 in expenses,
which was recorded and accrued as restructuring charges as of their termination
date.
14. OPERATING LEASES
During 1997, the Company operated under a verbal lease and work program
agreement with WCC, The Texas Department of Criminal Justice, Division of
Pardons and Paroles ("TDCJ") and the City of Lockhart, Texas, for its LTI
operations to lease approximately 27,800 square feet of manufacturing and office
space. In 1998, WCC and the Company executed a written agreement with an
automatic three-year extension clause that was exercised on January 31, 2001.
The Company executed similar agreements with WCC and the California Department
of Corrections for its MacFarland, California facility and the State of Utah,
Department of Corrections, Division of Correctional Industries for its Draper,
Utah facility. The MacFarland agreement commenced on June 1, 1998 and provides
for 600 square feet with annual rentals of $1 per year through March 2001. The
Draper agreement commenced in June 1998 and provides for 5,000 square feet with
annual rentals of $1 per year with renewal options through June 2004.
The Company entered into an agreement with the State of California, acting by
and through its Director of General Services, with the approval of the
Department of Corrections, to lease space in the Chuckawalla Valley State Prison
(CVSP) located in Blythe, California. The lease provides for approximately
20,300 square feet of warehouse space, and approximately 16,000 square feet of
office space for a total of 36,300 square feet, located within the boundaries of
CVSP. The lease commenced on September 1, 1998 and terminates on August 31,
2003, with monthly payments of $726.
The Company leases approximately 8,200 square feet for its executive offices in
Washington, DC, under a fifty-four month operating lease expiring December 31,
2004. Monthly rentals under this lease are approximately $24,000. The Company is
also obligated under several other operating leases for various vehicles and
office equipment.
F-32
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rentals due under non-cancellable operating leases are as
follows:
Year Amount
---- ------------
2001 $ 310,000
2002 318,000
2003 318,000
2004 314,000
------------
$ 1,260,000
============
Rental expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $213,000, $85,000 and $109,000, respectively.
15. BUSINESS AND CREDIT CONCENTRATION
The Company is dependent upon certain customers for a major portion of its
sales. Dell Computer, Uni-Source Office Furniture and Vant Electronix accounted
for approximately 18%, 17% and 14%, respectively, of the Company's sales (LTI
Segment) for the year ended December 31, 2000. High End (a customer of the LTI
segment) accounted for approximately 15% of sales for the year ended December
31, 1999. Sales to IBM represented approximately 43% of revenues for the year
ended December 31, 1998. Texas Instruments accounted for approximately 7% of
total sales for the year ended December 31, 1998. Amounts due from three
customers, HDL Research Lab, Uni-Source Office Furniture and Vant Electronix
(customers of the LTI segment) constituted 67% of the Company's accounts
receivable at December 31, 2000. Amounts due from three customers, Dell,
Vektronix (customers of the LTI segment) and AIS (a customer of the LTI - Blythe
segment), constituted 87% of the Company's accounts receivable at December 31,
1999. The Company generally does not require collateral on its trade accounts
receivable.
During all years presented, the Company's prison-based operations were primarily
in electronics manufacturing. Until such time as the Company successfully
expands into other industries, the Company will be economically dependent on the
health of the electronics manufacturing industry and the niche in which it
provides products and services.
The Company is also dependent on WCC since the operations of its primary
operating facility is subject to the work program agreement described in Note 1,
above.
16. RELATED PARTIES
As of December 31, 1998, the Company had notes and interest receivable from Mr.
Smith aggregating approximately $536,000 in the accompanying balance sheet under
the caption "Net investments in and advances to subsidiary held for sale." In
early 1999, in connection with Mr. Smith's resignation and his purchase of TMD
from the Company, Mr. Smith paid $875,000 to the Company and executed a
three-year note for approximately $1.2 million in connection with the purchase
of TMD (Note 3).
During 2000, the Company paid approximately $97,000 to The Spear Group, a
company controlled by a co-chairman of USXX for certain accounting and
administrative support functions.
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2000, the Company received consulting revenues of approximately $21,000
from two of its Associated Companies for capital raising assistance.
During 2000, the Company received approximately $115,000 from Portris, OneMade
and Webmilestones for management and facilities fees. Such amount has been
included as a reduction of general and administrative expense in the
consolidated statement of operations.
17. 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 five reportable segments. The five reportable segments are USXX
(Washington, D.C.), E2E (includes Buyline), LTI (Lockhart, Texas), TMD
(Georgetown, Texas) and STI (Draper, Utah). USXX is the corporate office, E2E
represents the technology operations of the Company, LTI is a prison-based
manufacturer of computer circuit boards, TMD is a freeworld manufacturer of
computer circuit boards and STI was a prison-based inbound/outbound call center.
Other segments include manufacturing of modular office furniture components and
cut-and-sew operations.
The accounting policies of the operating segments are the same as those
described in Note 1. Segment amounts disclosed are prior to any elimination
entries made in the consolidation. The chief operating decision-makers evaluate
performance of the segments based on operating results.
F-34
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information by segment follows (in thousands):
2000 USXX E2E LTI STI(2) TOTAL
- --------------- --------- ---------- -------- ----- ----------
Revenues $ 21 $ -- $ 2,671 $ -- $ 2,692
Operating loss (3,733) (14,814) (413) -- (18,960)
Depreciation and amortization 430 1,318 2 -- 1,750
Total segment assets $ 2,791 $ 3,434 $ 865 $ -- $ 7,090
========= ========== ======== ===== ==========
1999 USXX LTI(1) TMD STI OTHER TOTAL
- ------------------- --------- --------- ------ ------ ------ ---------
Revenues $ -- $ 2,777 $ 948 $ 22 $ 18 $ 3,765
Operating loss (1,461) (1,080) (66) (67) (52) (2,726)
Depreciation and amortization 8 96 50 22 2 178
Total segment assets $ 2,887 $ 922 $ -- $ 115 $ -- $ 3,924
========= ========= ====== ====== ====== =========
1998 USXX LTI TMD STI OTHER TOTAL
- ------------------- --------- -------- -------- ------- ------- ---------
Revenues $ -- $ 3,918 $ 2,119 $ 13 $ 57 $ 6,107
Operating profit (loss) (1,552) 212 (660) (262) (172) (2,434)
Depreciation and amortization 1 9 33 14 12 69
Total segment assets $ 4,386 $ 1,031 $ 657 $ 337 $ 215 $ 6,626
========= ======== ======== ======= ======= =========
(1) Includes operations previously reported as "LTI" and "LTI-Blythe"
Segments.
(2) Dormant in 2000
F-35
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U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of total segment assets to the Company's consolidated total
assets follows:
December 31,
--------------------------------------------------
2000 1999 1998
--------- --------- ---------
Assets
Total segment assets $ 7,090 $ 3,924 $ 6,626
Intercompany eliminations (2,249) (2,832) (4,258)
--------- --------- ---------
$ 4,841 $ 1,092 $ 2,368
========= ========= =========
18. COMMITMENTS AND CONTINGENCIES
The Company had guaranteed certain liabilities, of up to $2.5 million, and the
purchase of the minority interest in TMD, based on a multiple of earnings before
interest, taxes, depreciation and amortization (Note 3).
On February 16, 1999, in the case styled Fidelity Funding vs. Ken Smith, et al,
in the 14th Judicial District of Dallas County, Texas, Fidelity Funding, Inc.
(Fidelity) sued Mr. Smith and the Company in the amount of $839,449, the amount
allegedly owed by Technology Manufacturing and Design, Inc., ("TMD") to Fidelity
under a secured credit facility extended by Fidelity to TMD in November of 1998.
Prior to the date of these financial statements, this matter was settled
resulting in no payment being made by the Company.
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.
If prior to September 1, 2001, the Company is unable to hold a shareholders
meeting and approve an increase in the Company's number of authorized common
shares adequate 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 have
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 need to pay to the former Yazam
stockholders should this repurchase be required is approximately $6,844,000. The
Company has subsequently entered into transactions with certain holders of
Series F Preferred Stock modifying their respective rights (see Note 19(d)).
F-36
94
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SUBSEQUENT EVENTS
(a) Acquisition of Yazam
On March 27, 2001, the Company acquired Yazam, an international company
previously providing seed-stage funding and business development services to
emerging Internet and technology start-ups, for approximately $22 million in
cash plus 27,374 shares of Series F Preferred Stock (which will convert into
27,374,000 shares of USXX common stock) and warrants to purchase 8,000,000
shares of USXX stock for $0.34 per share. Based on the conversion terms of the
Series F Preferred Stock and the market price of the Company's common stock on
the date of issuance of the Series F Preferred Stock, the Company recognized the
existence of a beneficial conversion feature in the amount of $6,022,280. This
amount will be recorded as a deemed dividend during the first quarter of 2001,
resulting in an increase in the net loss applicable to common shareholders. This
acquisition will be accounted for as a purchase, and the Company will include
the results of operations of Yazam from the date of the acquisition forward.
Since inception and during 2000, based on unaudited internal financial
statements, Yazam suffered significant operating losses.
The following unaudited pro-forma condensed consolidated financial data assume
that the acquisition of Yazam, as described above, occurred at the beginning of
each fiscal year presented. This data has been prepared for comparative purposes
only and does not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated,
or which may result in the future.
2000 1999
-------------- -------------
Revenues $ 6,949,885 $ 3,957,908
Net loss applicable to common shareholders (72,568,320) (8,334,781)
Basic and diluted net loss per common share (2.47) (0.29)
The Company presently has inadequate authorized, unissued shares to convert the
Series F Preferred Stock. If prior to September 1, 2001, the Company is unable
to hold a shareholders meeting and approve an increase in the Company's number
of authorized common shares adequate 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 have 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 need
to pay to the former Yazam stockholders should this repurchase be required is
approximately $6,844,000. The Company will record an accretive dividend over the
period from the date of acquisition to the earliest redemption date which will
increase the net loss applicable to common shareholders in an amount equal to
the difference between the recorded value of the Series F Preferred Stock and
its redemption value. The Company has subsequently entered into transactions
with certain holders of Series F Preferred Stock modifying their respective
rights (see Note 19(d)).
(b) Additional Investments in Associated Companies
During 2001 the Company purchased shares of Portris' Series A-1 convertible
preferred stock. In return for cancellation of $370,000 in promissory notes and
accrued interest, services rendered to Portris and $185,000 in cash the Company
increased its equity interest in Portris to approximately 42%.
F-37
95
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2001 the Company purchased shares of PromiseMark's Series C preferred
stock and warrants to purchase shares of PromiseMark's Series C-1 preferred
stock as part of a financing by which PromiseMark raised an additional $1.5
million to fund continuing operations. As a result of this financing the Company
had an approximately 16% equity interest in PromiseMark.
(c) Sale of Investment in Buyline
On June 30, 2001, the Company sold its investment in Buyline to a company
controlled by the Chairman of USXX. In exchange for the stock of Buyline the
Company received a non-recourse note (except to the extent of the stock pledge)
with a face value of $100,000. The note bears interest at 7% and is payable only
to the extent of dividend distributions paid by Buyline to the buyer or cash
proceeds received by the buyer related to the sale of Buyline stock. The Company
has a right to repurchase the Buyline shares sold under this agreement for
$250,000 on or prior to June 30, 2004. A portion of the Buyline shares continue
to be collateral for a Buyline note payable (See Note 10).
(d) Transactions Involving Holders of Series F Preferred Stock
On July 19, 2001, the Company entered into an agreement with a holder of 7,826
shares of Series F Preferred Stock. Under this agreement the holder waived its
right to require the Company to repurchase its shares on or after September 1,
2001 and their redemption rights as stated in the certificate of designations
(see Note 12). The holder received in consideration the right to require the
Company to repurchase its Series F Preferred Stock for $300 per share for a
ninety-day period beginning on September 30, 2002. The Company also agreed to
not purchase the Series F Preferred Stock held by a certain holder without prior
written consent. The amount of the accretive dividend described in Note 19(a)
above will change to reflect the higher redemption price but it will be recorded
over a longer period reflecting the change in the earliest date before which the
stock may be redeemed.
On July 20, 2001, USV agreed to purchase 10,119.77 shares of Series F Preferred
Stock from a group of current holders of such stock. USV then entered into an
agreement with the Company and waived its right to require the Company to
repurchase its shares on or after September 1, 2001 and their redemption rights
as stated in the certificate of designations (see Note 12). USV received in
consideration the right to require the Company to repurchase its Series F
Preferred Stock for $300 per share for a ninety-day period beginning on
September 30, 2002. The amount of the accretive dividend described in Note 19(a)
above will change to reflect the higher redemption price but it will be recorded
over a longer period reflecting the change in the earliest date before which the
stock may be redeemed.
20. QUARTERLY DATA (UNAUDITED)
The following table sets forth, for the fiscal periods indicated, selected
consolidated financial data and information regarding the market price per share
of the Company's common stock. The prices represent the reported high and low
closing sale prices.
F-38
96
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000
------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- --------------- ------------ --------------
(As amended)(1)
Revenues $ 476,526 $ 713,745 $ 918,870 $ 583,237
Gross profit (loss) (150,751) 37,805 22,588 (119,708)
Net loss applicable to common stockholders (360,676) (15,606,189) (1,868,394) (15,573,488)
Loss per common share
Basic $ (0.01) $ (0.54) $ (0.06) $ (0.53)
1999
--------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------- ----------- -----------
Revenues $ 1,870,284 $ 820,470 $ 600,232 $ 473,799
Gross profit (loss) (166,357) (385,822) (70,678) (71,239)
Net income (loss) applicable to common
stockholders 62,313 (1,562,956) (310,999) (969,953)
Net income (loss) per common share
Basic $ 0.00 $ (0.05) $ (0.01) $ (0.03)
(1) The Company recorded a non-cash adjustment related to the second quarter of
2000 for the beneficial conversion feature of the Series A, B and C preferred
stock (see Note 12). This resulted in an increase of $14,757,650 (or $0.50 per
share) to the net loss applicable to common stockholders. The Company will file
an amended Form 10-Q for each of the quarters ended June 30, 2000 and September
30, 2000 to reflect these changes.
Significant adjustments increasing the fourth quarter loss in 2000, 1999 and
1998 are indicated below.
2000 1999 1998
------------ ---------- ----------
Impairment of long-lived assets $ 12,305,000 $ -- $ --
Increase of allowance on note from former officer -- 288,000 --
Increase of allowance for doubtful accounts -- -- 140,000
Accrued expenses -- -- 90,000
------------ ---------- ----------
Aggregate adjustments $ 12,305,000 $ 288,000 $ 230,000
============ ========== ==========
Aggregate adjustment per common share $ 0.42 $ 0.01 $ 0.01
============ ========== ==========
F-39
97
U.S. TECHNOLOGIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------------------------
(1) (2)
-----------------------------------------
BALANCE AT BEGINNING CHARGED TO COST AND CHARGED TO OTHER BALANCE AT END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------
2000
Accounts receivable - $206,000 $158,000 $206,000 $158,000
bad debt reserve
Inventory Obsolescence $ -- $ 80,000 $ -- $ 80,000
1999
Accounts receivable - $140,000 $ 66,000 $ -- $206,000
bad debt reserve
Inventory Obsolescence $211,000 $ -- $211,000 $ --
Note receivable officer $ -- $526,000 $ -- $526,000
- - uncollectible reserve
1998
Accounts receivable - $ 18,000 $136,000 $ 14,000 $140,000
bad debt reserve
Inventory Obsolescence $834,000 $ -- $623,000 $211,000
NOTE: These valuation and qualifying accounts were deducted from the assets to
which they apply.
F-40
98
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Stock Exchange Agreement among U.S. Technologies Inc., E2Enet,
Inc. and certain stockholders of E2Enet, Inc., dated as of
February 21, 2000. (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed February 26, 2000, and
incorporated herein by reference.)
2.2 Amendment to the Stock Exchange Agreement, dated as of April
5, 2000, by and among the Company, US Technologies Acquisition
Sub, Inc., E2Enet, Inc., Northwood Ventures LLC, Northwood
Capital Partners LLC, Jonathan Ledecky and certain other
stockholders of E2Enet, Inc. (Filed as Exhibit 2.5 to the
Company's Annual Report on Form 10-K filed April 10, 2000, and
incorporated herein by reference.)
2.3 Voting Agreement, dated April 12, 2000, by and among U.S.
Technologies Inc., USV Partners, LLC, James V. Warren,
Northwood Ventures LLC, Northwood Capital Partners LLC and
Jonathan J. Ledecky. (Filed as Exhibit 2.3 to the Company's
Current Report on Form 8-K, filed April 27, 2000, and
incorporated herein by reference.)
2.4 Voting Agreement and Proxy, dated April 12, 2000, by and among
USV Partners, LLC, James V. Warren, and Gregory Earls for the
benefit of the holders of the Registrant's Series B Preferred
Stock. (Filed as Exhibit 2.4 to the Company's Current Report
on Form 8-K, filed April 27, 2000, and incorporated herein by
reference.)
2.5 Amended and Restated Registration Rights Agreement, dated
April 12, 2000, by and among U.S. Technologies Inc., USV
Partners, LLC, Northwood Capital Partners LLC, Northwood
Ventures LLC, Jonathan J. Ledecky and certain other
stockholders of U.S. Technologies Inc. (Filed as Exhibit 2.5
to the Company's Current Report on Form 8-K, filed April 27,
2000, and incorporated herein by reference.)
2.6 Purchase Agreement, dated April 26, 2000, by and among E2Enet,
Inc., Northwood Ventures LLC, Northwood Capital Partners LLC,
Jonathan J. Ledecky and Buyline.net Inc. (Filed as Exhibit 2.1
to the Company's Current Report on Form 8-K, filed May 11,
2000, and incorporated herein by reference.)
2.7 Stock Exchange Agreement, dated April 26, 2000, entered into
by and among U.S. Technologies Inc., E2Enet, Inc., and
Lawrence Silverman. (Filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K, filed May 11, 2000, and
incorporated herein by reference.)
2.8 WebMilestones.com, LLC Purchase Agreement, dated as of July 5,
2000, by and among WebMilestones.com, LLC, and its members as
of that date, including E2Enet, Inc. and Charles D. Weiss.
(Filed as Exhibit 2.1 to the Company's Current Report on Form
8-K, filed July 20, 2000, and incorporated herein by
reference.)
99
EXHIBIT NO. DESCRIPTION
----------- -----------
2.9 Agreement and Plan of Merger, dated September 27, 2000, by and
among U.S. Technologies Inc., USXX Acquisition Corp. and
On-Site Sourcing, Inc. (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed October 4, 2000, and
incorporated herein by reference.)
2.10 Agreement and Plan of Merger, dated February 28, 2001, by and
among U.S. Technologies Inc., U.S. Technologies Acquisition
Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed March 1, 2001, and
incorporated herein by reference.)
2.11 First Amendment to the Agreement and Plan of Merger, dated as
of March 22, 2001, by and among U.S. Technologies Inc., U.S.
Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit
2.1 to the Company's Current Report on Form 8-K, filed April
11, 2001, and incorporated herein by reference.)
*2.12 Registration Rights Agreement, dated as of March 27, 2001, by
and among U.S. Technologies Inc. and Certain Other
Shareholders of U.S. Technologies Inc.
3.1 Restated Certificate of Incorporation of the Company. (Filed
as Exhibit 3.1 to the Company's Annual Report for the year
ended December 31, 1997 and incorporated herein by reference.)
3.2 Restated Bylaws of the Company. (Filed as Exhibit 3.2 to the
Company's Annual Report for the year ended December 31, 1997
and incorporated herein by reference.)
4.1 Form of Certificate evidencing Common Stock of the Company.
(Filed as Exhibit 3.1 to Amendment No. 1 to the Company's
Registration statement on Form S-1 (No. 33-11720) and
incorporated herein by reference.)
4.2 Revised form of certificate evidencing Common Stock of the
Company reflecting the change of the name to U.S. Technologies
Inc. (Filed as Exhibit 4.1 to the Company's Current Report on
Form 8-K, dated July 14, 1989, and incorporated herein by
reference.)
4.3 Rights Agreement, dated as of October 31, 1997, between the
Company and American Securities Transfer & Trust, Inc., as
Rights Agent. (Filed as Exhibit 4 to the Company's Current
Report on Form 8-K, dated as of October 31, 1997, and
incorporated herein by reference.)
4.4 Amended Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of U.S. Technologies
Inc., dated February 24, 1999. (Filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K, dated May 26, 1999, and
incorporated herein by reference.)
4.5 Amended Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of U.S. Technologies
Inc., dated November 29, 1999. (Filed as Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.)
4.6 Waiver Agreement between USV Partners, LLC and the Company,
dated March 1, 2000. (Filed as Exhibit 4.6 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, and incorporated herein by reference.)
100
EXHIBIT NO. DESCRIPTION
----------- -----------
*4.6(a) Waiver Agreement between The Earls Family Limited Partnership
and Gregory Earls, dated September 20, 2000.
4.7 Certificate of Designations, Preferences and Rights of Series
B Convertible Preferred Stock of U.S. Technologies Inc., dated
April 7, 2000. (Filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, dated April 27, 2000, and incorporated
herein by reference.)
4.8 Certificate of Designations, Preferences and Rights of Series
C Convertible Preferred Stock of U.S. Technologies Inc., dated
April 7, 2000. (Filed as Exhibit 4.2 to the Company's Current
Report on Form 8-K, dated April 27, 2000, and incorporated
herein by reference.)
4.9 Certificate of Designations, Preferences and Rights of Series
D Convertible Preferred Stock of U.S. Technologies Inc., dated
December 26, 2000. (Filed as Exhibit 4 to the Company's
Current Report on Form 8-K, dated January 22, 2001, and
incorporated herein by reference.)
*4.10 Certificate of Designations, Preferences and Rights of Series
F Convertible Preferred Stock of U.S. Technologies Inc., dated
March 27, 2001.
*4.11 Form of U.S. Technologies Inc. Common Stock Purchase Warrant,
dated as of March 27, 2001.
*10.1 1999 Stock Option Plan, as amended. (Filed as Exhibit 10.8 to
the Company's Annual Report on Form 10-K, for the year ended
December 31, 2000, and incorporated herein by reference.)
*10.2 1999 Stock Option Plan, as further amended, as of April 27,
2001.
10.3 Agreement between the Company and Wackenhut Corrections
Corporation, dated June 30, 1977. (Filed as Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.)
10.4 Amendment to Agreement between the Company and Wackenhut
Corrections Corporation, dated January 28, 1998. (Filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, and incorporated herein
reference.)
10.5 Industry Work Program Agreement between the Wackenhut
Corrections Corporation and Labor-to-Industry Inc., dated as
of April 22, 1998. (Filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999, and incorporated herein by reference.)
10.6 Investment Agreement between the Company and USV Partners,
LLC, dated as of July 16, 1998. (Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated May 26, 1999, and
incorporated herein by reference.)
10.7 Lease Agreement by and between the State of California and
Labor-to-Industry, Inc., dated as of August 1, 1998. (Filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, and incorporated herein by
reference.)
101
EXHIBIT NO. DESCRIPTION
----------- -----------
*10.7A Amendment No. 1 to Lease Agreement by and between the State of
California and Labor-to-Industry, Inc., dated as of March 24,
1999.
*10.7B Amendment No. 2 to Lease Agreement by and between the State of
California and Labor-to-Industry, Inc., dated as of May 7,
2001.
10.8 Industry Work Program Agreement by and between Wackenhut
Corrections Corporation, American Quantum Cycles, Inc. and the
Company, dated as of October 19, 1999. (Filed as Exhibit 10.18
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.)
10.9 Management Agreement by and between the Company, James V.
Warren and J. L. (Skip) Moore. (Filed as Exhibit 5.1 to the
Company's Current Report on Form 8-K, dated December 8, 1999,
and incorporated herein by reference.)
10.10 Stock Purchase Agreement by and among VIPRO Corporation,
Northwood Ventures LLC, Northwood Capital Partners LLC and the
Company, dated March 13, 1999. (Filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.)
10.12 Voting Agreement, dated as of April 26, 2000, by and among
E2Enet, Inc., Northwood Ventures LLC, Northwood Capital
Partners LLC, Jonathan J. Ledecky, Silverman Trust and
Lawrence Silverman. (Filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K, filed May 11, 2000, and
incorporated herein by reference.)
10.13 On-Site Sourcing, Inc. Voting Agreement, dated as of April 26,
2000, by and among On-Site Sourcing, Inc., Gregory Earls,
James V. Warren, Jonathan J. Ledecky, Northwood Ventures LLC,
and Northwood Capital Partners LLC. (Filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K, filed October 4,
2000, and incorporated herein by reference.)
10.14 Side Letter Voting Agreement and Buyline Stock Transfer, dated
as of April 26, 2000, by and among E2Enet, Inc., Northwood
Ventures LLC, Northwood Capital Partners LLC and Jonathan J.
Ledecky. (Filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K, filed May 11, 2000, and incorporated
herein by reference.)
*10.15 Yazam Voting Agreement dated as of February 28, 2001 by and
between Yazam.com Inc. and Gregory Earls
*10.16 Waiver and Replacement Agreement by and between the Company
and CEVP Investment I LP, dated July 19, 2001.
*10.17 Securities Purchase Agreement by and between USV Partners,
L.L.C. and the TPG entities, dated July 20, 2001.
*10.18 Waiver and Replacement Agreement by and between the Company
and USV Partners, L.L.C., dated July 20, 2001.
*21.1 Subsidiaries of the Registrant
*23.1 Consent of BDO Seidman, LLP
* To be provided herewith.
102
INDEX OF EXHIBITS
Exhibit No. Description
2.1 Stock Exchange Agreement among U.S. Technologies Inc., E2Enet, Inc. and certain stockholders of
E2Enet, Inc., dated as of February 21, 2000. (Filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K, filed February 26, 2000, and incorporated herein by reference.)
2.2 Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by and among the Company,
US Technologies Acquisition Sub, Inc., E2Enet, Inc., Northwood Ventures LLC, Northwood Capital
Partners LLC, Jonathan Ledecky and certain other stockholders of E2Enet, Inc. (Filed as Exhibit
2.5 to the Company's Annual Report on Form 10-K filed April 10, 2000, and incorporated herein by
reference.)
2.3 Voting Agreement, dated April 12, 2000, by and among U.S. Technologies Inc., USV Partners, LLC,
James V. Warren, Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J.
Ledecky. (Filed as Exhibit 2.3 to the Company's Current Report on Form 8-K, filed April 27,
2000, and incorporated herein by reference.)
2.4 Voting Agreement and Proxy, dated April 12, 2000, by and among USV Partners, LLC, James V.
Warren, and Gregory Earls for the benefit of the holders of the Registrant's Series B Preferred
Stock. (Filed as Exhibit 2.4 to the Company's Current Report on Form 8-K, filed April 27, 2000,
and incorporated herein by reference.)
2.5 Amended and Restated Registration Rights Agreement, dated April 12, 2000, by and among U.S.
Technologies Inc., USV Partners, LLC, Northwood Capital Partners LLC, Northwood Ventures LLC,
Jonathan J. Ledecky and certain other stockholders of U.S. Technologies Inc. (Filed as Exhibit
2.5 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by
reference.)
2.6 Purchase Agreement, dated April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC,
Northwood Capital Partners LLC, Jonathan J. Ledecky and Buyline.net Inc. (Filed as Exhibit 2.1
to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.)
2.7 Stock Exchange Agreement, dated April 26, 2000, entered into by and among U.S. Technologies
Inc., E2Enet, Inc., and Lawrence Silverman. (Filed as Exhibit 2.2 to the Company's Current
Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.)
2.8 WebMilestones.com, LLC Purchase Agreement, dated as of July 5, 2000, by and among
WebMilestones.com, LLC, and its members as of that date, including E2Enet, Inc. and Charles D.
Weiss. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed July 20, 2000,
and incorporated herein by reference.)
103
2.9 Agreement and Plan of Merger, dated September 27, 2000, by and among U.S. Technologies Inc.,
USXX Acquisition Corp. and On-Site Sourcing, Inc. (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed October 4, 2000, and incorporated herein by reference.)
2.10 Agreement and Plan of Merger, dated February 28, 2001, by and among U.S. Technologies Inc., U.S.
Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K, filed March 1, 2001, and incorporated herein by reference.)
2.11 First Amendment to the Agreement and Plan of Merger, dated as of March 22, 2001, by and among
U.S. Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit 2.1
to the Company's Current Report on Form 8-K, filed April 11, 2001, and incorporated herein by
reference.)
*2.12 Registration Rights Agreement, dated as of March 27, 2001, by and among U.S. Technologies Inc.
and Certain Other Shareholders of U.S. Technologies Inc.
3.1 Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.1 to the Company's
Annual Report for the year ended December 31, 1997 and incorporated herein by reference.)
3.2 Restated Bylaws of the Company. (Filed as Exhibit 3.2 to the Company's Annual Report for the
year ended December 31, 1997 and incorporated herein by reference.)
4.1 Form of Certificate evidencing Common Stock of the Company. (Filed as Exhibit 3.1 to Amendment
No. 1 to the Company's Registration statement on Form S-1 (No. 33-11720) and incorporated herein
by reference.)
4.2 Revised form of certificate evidencing Common Stock of the Company reflecting the change of the
name to U.S. Technologies Inc. (Filed as Exhibit 4.1 to the Company's Current Report on Form
8-K, dated July 14, 1989, and incorporated herein by reference.)
4.3 Rights Agreement, dated as of October 31, 1997, between the Company and American Securities
Transfer & Trust, Inc., as Rights Agent. (Filed as Exhibit 4 to the Company's Current Report on
Form 8-K, dated as of October 31, 1997, and incorporated herein by reference.)
4.4 Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred
Stock of U.S. Technologies Inc., dated February 24, 1999. (Filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K, dated May 26, 1999, and incorporated herein by reference.)
4.5 Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred
Stock of U.S. Technologies Inc., dated November 29, 1999. (Filed as Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated
herein by reference.)
4.6 Waiver Agreement between USV Partners, LLC and the Company, dated March 1, 2000. (Filed as
Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999,
and incorporated herein by reference.)
*4.6(a) Waiver Agreement between The Earls Family Limited Partnership and Gregory Earls, dated September
20, 2000.
104
4.7 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of
U.S. Technologies Inc., dated April 7, 2000. (Filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, dated April 27, 2000, and incorporated herein by reference.)
4.8 Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of
U.S. Technologies Inc., dated April 7, 2000. (Filed as Exhibit 4.2 to the Company's Current
Report on Form 8-K, dated April 27, 2000, and incorporated herein by reference.)
4.9 Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of
U.S. Technologies Inc., dated December 26, 2000. (Filed as Exhibit 4 to the Company's Current
Report on Form 8-K, dated January 22, 2001, and incorporated herein by reference.)
*4.10 Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of
U.S. Technologies Inc., dated March 27, 2001.
*4.11 Form of U.S. Technologies Inc. Common Stock Purchase Warrant, dated as of March 27, 2001.
10.1 1999 Stock Option Plan, as amended. (Filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K, for the year ended December 31, 1999, and incorporated herein by reference.)
*10.2 1999 Stock Option Plan, as further amended, as of April 27, 2001.
10.3 Agreement between the Company and Wackenhut Corrections Corporation, dated June 30, 1977.
(Filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.)
10.4 Amendment to Agreement between the Company and Wackenhut Corrections Corporation, dated January
28, 1998. (Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein reference.)
10.5 Industry Work Program Agreement between the Wackenhut Corrections Corporation and
Labor-to-Industry Inc., dated as of April 22, 1998. (Filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by
reference.)
10.6 Investment Agreement between the Company and USV Partners, LLC, dated as of July 16, 1998.
(Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 26, 1999, and
incorporated herein by reference.)
10.7 Lease Agreement by and between the State of California and Labor-to-Industry, Inc., dated as
of August 1, 1998. (Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, and incorporated herein by reference.)
10.7A Amendment No. 1 to Lease Agreement by and between the State of California and Labor-to-Industry
dated March 24, 1999.
10.7B Amendment No. 2 to Lease Agreement by and between the State of California and Labor-to-Industry,
Inc., dated as of May 7, 2001.
105
10.8 Industry Work Program Agreement by and between Wackenhut Corrections Corporation, American
Quantum Cycles, Inc. and the Company, dated as of October 19, 1999. (Filed as Exhibit 10.18 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated
herein by reference.)
10.9 Management Agreement by and between the Company, James V. Warren and J. L. (Skip) Moore.
(Filed as Exhibit 5.1 to the Company's Current Report on Form 8-K, dated December 8, 1999, and
incorporated herein by reference.)
10.10 Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures LLC, Northwood
Capital Partners LLC and the Company, dated March 13, 1999. (Filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated
herein by reference.)
10.12 Voting Agreement, dated as of April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC,
Northwood Capital Partners LLC, Jonathan J. Ledecky, Silverman Trust and Lawrence Silverman.
(Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed May 11, 2000, and
incorporated herein by reference.)
10.13 On-Site Sourcing, Inc. Voting Agreement, dated as of April 26, 2000, by and among On-Site
Sourcing, Inc., Gregory Earls, James V. Warren, Jonathan J. Ledecky, Northwood Ventures LLC, and
Northwood Capital Partners LLC. (Filed as Exhibit 10.1 to the Company's Current Report on Form
8-K, filed October 4, 2000, and incorporated herein by reference.)
10.14 Side Letter Voting Agreement and Buyline Stock Transfer, dated as of April 26, 2000, by and
among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J.
Ledecky. (Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K, filed May 11,
2000, and incorporated herein by reference.)
*10.15 Yazam Voting Agreement dated as of February 28, 2001 by and between Yazam.com Inc. and Gregory
Earls
*10.16 Sublease Agreement between the Company and the Association for Health Services Research, Inc.
effective June 14, 2000.
*10.17 Waiver and Replacement Agreement by and between the Company and CEVP Investment I LP, dated July
19, 2001.
*10.18 Securities Purchase Agreement by and between USV Partners, L.L.C. and the TPG entities dated July
20, 2001.
*10.19 Waiver and Replacement Agreement by and between the Company and USV Partners, L.L.C., dated
July 20, 2001.
*21.1 Subsidiaries of the Registrant
*23.1 Consent of BDO Seidman, LLP
* To be provided herewith.