-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OVpE91+vr6qwpk5dQ3IkYO1WC6kk3Ydh1IZyh8ZbRYvnkrHRsFjzq9LBGbFARAnX bBnyn/q2hqE3t8Fe9HROMA== 0000928385-01-502442.txt : 20020410 0000928385-01-502442.hdr.sgml : 20020410 ACCESSION NUMBER: 0000928385-01-502442 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S TECHNOLOGIES INC CENTRAL INDEX KEY: 0000810130 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 731284747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15960 FILM NUMBER: 1785672 BUSINESS ADDRESS: STREET 1: 1130 CONNECTICUT AVE NW STREET 2: SUITE 700 CITY: WASHINGTON STATE: DC ZIP: 20036 BUSINESS PHONE: 7705654311 MAIL ADDRESS: STREET 1: 3901 ROSWELL ROAD STREET 2: SUITE 300 CITY: MARIETTA STATE: GA ZIP: 30062 FORMER COMPANY: FORMER CONFORMED NAME: CAREAMERICA INC DATE OF NAME CHANGE: 19890720 10-Q 1 d10q.txt FORM 10-Q Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ______________ [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-15960 U.S. Technologies Inc. (Exact name of Registrant as specified in its charter.) State of Delaware 73-1284747 ------------------------ --------------- (State of Incorporation) (I. R. S. Employer Identification No.) 1130 Connecticut Avenue, NW, Suite 700 Washington, DC 20036 ----------------------------------------- (Address of principal executive offices.) Registrant's telephone number, including area code: (202) 466-3100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [..] The number of shares outstanding of the Registrant's common stock, par value $0.02, as of October 31, 2001 was 104,643,061 shares. PART I. Financial Information Item 1. Financial Statements: 2 U.S. TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
September 30, December 31, 2001 2000 ---- ---- (Unaudited) Current assets: Cash and cash equivalents $ 2,596,505 $ 6,110 Trade accounts receivable, net of reserves of $75,700 at September 30, 2001 and $158,000 at December 31, 2000 872,133 401,253 Inventories, net of reserves of $0 at September 30, 2001 and $80,000 at December 31, 2000 138,590 169,834 Prepaid expenses 97,701 81,848 ------------- ------------ Total current assets 3,704,929 659,045 Property and equipment, net of accumulated depreciation of $1,657,792 and $1,473,512 at September 30, 2001 and December 31, 2000, respectively 514,105 656,820 Investments in affiliates 3,299,193 3,434,217 Other assets: Notes receivable 298,526 90,000 Goodwill 889,720 - Other assets 341,772 450 ------------- -------------- Total other assets 1,530,018 90,450 ------------- -------------- Total assets $ 9,048,245 $ 4,840,532 ============= ==============
The accompanying notes are an integral part of the consolidated financial statements. 3 U.S. TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31, 2001 2000 ---- ---- (Unaudited) Current liabilities: Accounts payable $2,747,584 $ 1,715,586 Accrued expenses 387,066 290,985 Obligation under put option - E2E acquisition - 2,000,010 Due to Yazam shareholders 1,236,345 - Due to investors 2,438,324 - Line of credit - 197,392 Notes payable 948,181 685,861 ---------- ----------- Total current liabilities 7,757,500 4,889,834 ---------- ----------- Series F convertible preferred stock: $0.02 par value, votes as if converted to common stock on certain issues, 27,374 shares authorized, issued and outstanding 6,326,494 - Shareholders' equity: Common stock; $.02 par value; 500,000,000 shares authorized; 93,493,440 and 29,086,786 issued and outstanding at September 30, 2001 and December 31, 2000, respectively 1,869,869 592,216 Series A convertible preferred stock: $0.02 par value, votes as if converted to common stock, 10,000,000 shares authorized; 615,000 and 625,000 issued and outstanding at September 30, 2001 and December 31, 2000, respectively 6,150,000 6,250,000 Series B mandatorily convertible preferred stock: $0.02 par value, votes as if converted to common stock on certain issues, 0 and 112,000 shares authorized, issued and outstanding at September 30, 2001 and December 31, 2000, respectively - 11,200,000 Series C mandatorily convertible preferred stock: $0.02 par value, votes as if converted to common stock on certain issues, 8,750 shares authorized; 0 and 4,534 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively - 4,337,914 Series D mandatorily convertible preferred stock: $0.02 par value, votes as if converted to common stock on certain issues, 2,000 shares authorized; 0 and 1,552.5 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively - 170,775 Series E Convertible Preferred Stock: issuable 2,102,900 1,199,200
4 U.S. TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31, 2001 2000 ---- ---- (Unaudited) Convertible Preferred Stock: $0.02 par value, votes as if converted to common stock on certain issues, 27,374 shares authorized, issued and outstanding 1,387,296 - Additional paid-in capital 47,623,922 27,601,507 Accumulated deficit (64,169,736) (51,400,914) ------------ ------------ Total shareholders' equity (5,035,749) (49,302) ------------ ------------ Total liabilities and shareholders' equity $ 9,048,245 $ 4,840,532 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 5 U.S. TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months Ended September 30, Nine months ended September 30, ---------------------------------- -------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net Sales $ 1,307,524 $ 918,870 $ 2,949,993 $ 2,109,141 Operating costs and expenses: Cost of sales 758,979 896,282 1,852,035 2,199,499 Selling expense 21,260 16,995 51,148 47,303 General and administrative expense 2,798,019 1,729,401 6,853,881 2,851,187 Impairment of long-lived assets 1,719,950 - 2,050,862 - ------------ ------------ ------------ ------------ Total operating costs and expenses 4,298,208 2,642,678 10,807,926 5,097,989 ------------ ------------ ------------ ------------ Income (loss) from operations (3,990,684) (1,723,808) (7,857,933) (2,988,848) Other income (expense) Interest, net 15,899 (3,344) (70,666) (5,783) Other, net 1,733 8,442 9,152 71,143 Equity in loss of investees (250,000) (149,684) (894,558) (154,121) Gain (loss) on sale of subsidiary (100,000) - 640,696 - ------------ ------------ ------------ ------------ Total other income (expense) (332,368) (144,586) (315,376) (88,761) ------------ ------------ ------------ ------------ Net loss before minority interest $ (4,323,052) $ (1,868,394) $ (8,173,709) $ (3,077,609) Minority interest in loss of subsidiary 236,643 - 236,643 - ------------ ------------ ------------ ------------ Net loss $ (4,086,409) $ (1,868,394) $ (7,936,666) $ (3,077,609) Deemed dividend - - (4,595,510) (14,757,650) ------------ ------------ ------------ ------------ Net loss applicable to common shareholders $ (4,086,409) $ (1,868,394) $(12,532,176) $(17,835,259) ============ ============ ============ ============ Net loss per share: Basic $ (0.08) $ (0.06) $ (0.34) $ (0.61) ============ ============ ============ ============ Diluted $ (0.08) $ (0.06) $ (0.34) $ (0.61) ============ ============ ============ ============ Shares used in per share calculation: Basic 51,091,950 29,569,308 36,502,446 29,331,374 ============ ============ ============ ============ Diluted 51,091,950 29,569,308 36,502,446 29,331,374 ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 6 U.S. TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months Ended September 30, ---------------------------------- 2001 2000 ------------ ----------- Cash flows from operating activities: Net loss $ (7,936,666) $ (3,077,609) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 198,891 628,506 Equity in losses of investees 894,558 154,121 Impairment of long-lived assets 2,050,862 - Gain on sale of subsidiary (640,696) - Stock option compensation expense 15,864 - Minority interest in loss of subsidiary (236,643) - Changes in assets and liabilities, net of effect of acquisitions and divestitures: Accounts receivable 257,061 (404,719) Inventories 31,244 (74,661) Prepaid expense 438,585 38,426 Other assets 429,563 6,058 Accounts payable (444,604) (169,987) Accrued expenses (2,933,470) (97,380) Due to Yazam shareholders 1,236,345 - ------------ ----------- Net cash used in operating activities (6,639,106) (2,997,248) ------------ ----------- Cash flows from investing activities: Net cash acquired in acquisitions 6,134,031 - Investments in affiliates (1,527,752) (3,163,937) Proceeds from affiliate liquidations 282,936 - Proceeds received for affiliates 2,423,721 - Decrease (increase) in notes receivable 402,921 (68,932) Equipment purchases (42,055) (72,717) ------------ ----------- Net cash provided by (used in) investing activities 7,673,802 (3,305,586) ------------ ----------- Financing activities: Proceeds from the issuance of notes payable 23,249,097 175,000 Payments of notes payable (22,399,706) (16,877) Net payments under line of credit (197,392) - Proceeds from convertible preferred stock subscriptions 903,700 6,211,911 Proceeds from exercise of stock options and warrants - 209,188 ------------ ----------- Net cash provided by financing activities 1,555,699 6,579,222 ------------ ----------- Net cash provided 2,590,395 276,391 Cash and cash equivalents, beginning of period 6,110 9,451 ------------ ----------- Cash and cash equivalents, end of period $ 2,596,505 $ 285,842 ============ ===========
7 U.S. TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Supplemental disclosures of cash flow information: Supplemental schedule of non-cash investing activities: There were no non-cash investing activities. On March 27, 2001, the Company paid approximately $22,000,000, exchanged 27,374 shares of Series F Mandatorily Convertible Preferred Stock and granted approximately 8,000,000 warrants for all of the outstanding shares of Yazam.net, as described more fully in Note 3. In conjunction with the acquisition, net cash was acquired as follows as follows: Fair value of assets acquired $ 33,008,049 Cash paid (21,163,539) Non-cash net assets acquired (4,495,000) Due to Yazam shareholders (1,236,345) ------------ Net cash acquired in acquisition $ 6,113,165 ============ The fair values of assets acquired and liabilities assumed are tentative. The accompanying notes are an integral part of the consolidated financial statements. 8 U.S. TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. This information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the statement of the financial position of the Company as of September 30, 2001 and the results of operations and cash flows for the three and nine months ended September 30, 2001. All adjustments made have been of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that these disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements are read in conjunction with the financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. The basis for presentation for investments the Company acquires is accounted for under one of three methods: consolidation, equity method or cost method. The applicable accounting method is determined based on the Company's voting interest in an investment, degree of influence over the operations and controlling positions. 2. GOING CONCERN The Company's consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred significant losses during each of the three years in the period ended December 31, 2000, and had working capital deficiencies at December 31, 2000 and December 31, 1999. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. On March 27, 2001, the Company acquired Yazam.com Inc. ("Yazam"). As a result of the acquisition of Yazam, the Company obtained approximately $6,900,000 in cash, incurred approximately $800,000 in closing costs and assumed liabilities of approximately $2,800,000, which will be used to support the Company's working capital and investing requirements during 2001. In addition to the acquisition cost for Yazam, the Company plans to selectively invest additional funds in those acquired companies of Yazam which are deemed to have the most potential to achieve their strategic business objectives. Any return may be realized through future cash flows from the acquired companies or through the sale of the acquired companies, once their business operations are properly developed. If prior to September 1, 2001, the Company had been unable to issue sufficient shares of its common stock to allow the conversion of the Series F Preferred Stock and the exercise of the warrants issued to the former Yazam shareholders, these former Yazam shareholders would have had the right to require the Company to repurchase their Series F Preferred Stock for a price equal to the greater of $250 per share or the average price of USXX's common stock for 20 days prior to the required repurchase multiplied by 1,000. The minimum amount that the Company would have needed to pay to the former Yazam stockholders had this repurchase been required was approximately $6,844,000. However, prior to September 1, 2001, the Company did increase the authorized common shares to a sufficient number to allow the conversion of the Series F Preferred Stock and the exercise of the warrants issued to the former Yazam shareholders. In order to mitigate the potential impact of these repurchase requirements, the Company, prior to September 1, 2001, entered into transactions with certain holders of the Series F 9 Preferred Stock modifying their respective rights. The Company's sources of funds to pursue acquisition opportunities and provide working capital will come from equity transactions involving the sale of the Company's capital. The Company's ability to attract investors to its equity offerings and to support its business objectives is dependent upon its ability to generate positive earnings (through increasing revenues and controlling costs at its LTI operations and generating revenues as a result of providing services to the Associated Companies) and cash flow from operations, complete the development of its capital raising operations and attract investors to its equity offerings. Should the Company be unable to raise sufficient capital to meet its cash flow needs, the Company may be required to significantly curtail its operations and investing activities. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 3. NATURE OF OPERATIONS OVERVIEW U.S. Technologies Inc. ("U.S. Technologies," "USXX" or the "Company") develops and operates a network of technology and related companies. The Company builds and develops associated companies by providing them with operational assistance, capital support, industry expertise, other venture business services and access to a strategic network of business relationships. The Company's associated companies include technology and emerging growth companies. It is our strategy to actively manage, develop, operate and promote collaboration among our network of associated companies. The Company also performs labor and service intensive "outsourcing" work for Fortune 1000 and other select companies. Currently, the work is performed by inmates in detention facilities located in Texas and California under the guidelines of a 1979 Federal Government Program known as the Prison Industry Enhancement program ("PIE"). The Company performs electronic and furniture assembly, manufacturing, enhancement, rework, packaging and sorting of products. On April 12, 2000, the Company completed its acquisition of E2Enet, Inc ("E2Enet"). E2Enet was a privately held company that had made investments in several development stage businesses. The acquisition of E2Enet provided the Company with a platform to participate in the growing technology industry. The completion of the E2Enet acquisition enhanced our opportunities for both investment in, and creative development of early stage businesses. In mid-March 2001, the Company concluded its management arrangement with The Spear Group, which had been providing accounting and administrative support to the Company and operating the Company's PIE businesses from Atlanta, Georgia. These operating services for the PIE businesses are now being handled from the Company's office in Orlando, Florida. The accounting and administrative support functions were consolidated in the Company's executive offices in Washington, DC. In connection with these changes, Jim Warren, while retaining his position as a Director, stepped down as Co-Chairman and Co-Chief Executive Officer of the Company and Skip Moore resigned as an officer with the Company. On March 27, 2001, the Company consummated its acquisition of Yazam.com, Inc ("Yazam"). Yazam, a privately held company, had been engaged in seed-stage funding and business development services to emerging Internet and technology related start-ups. Due to the fact that the acquisition of Yazam occurred on March 27, 2001, just prior to the end of the quarter on March 31, 2001, the acquisition, for accounting purposes, was recorded as if it occurred on March 31, 2001. Therefore, results of operations for the quarter ended March 31, 2001 do not include the operating results of Yazam. These four days of operations were not 10 material to the consolidated financial statements of the Company. The results of operations for the quarter and nine months ended September 30, 2001, include the operating results of Yazam for the six months ended September 30, 2001. (See "Yazam Acquisition" below) Historically, the Company has been engaged, through its wholly owned-subsidiary, Labor-to-Industry Inc. ("LTI"), in the operation of industrial facilities located within both private and state prisons, which are staffed principally with inmate labor. LTI's prison-based operations are conducted under the guidelines of the 1979 Prison Industry Enhancement ("PIE") program. 4. YAZAM ACQUISITION On March 27, 2001, the Company acquired Yazam, which made early stage investments in several development stage technology businesses. The details of the purchase of Yazam have been reported by the Company in its Forms 8-K filed on March 1, 2001, as amended April 11, 2001 and May 25, 2001. Financial information for the Yazam acquisition has been presented in a Form 8-K/A, which was filed on August 7, 2001. At the date of closing the assets of Yazam totaled approximately $33.0 million. Yazam assets included approximately $28.5 million of cash, a public and investor relations services company called Gregory Communications FCA ("Gregory FCA"), a $0.5 million asset representing a business held and under contract for sale that has since closed, a $1.7 million investment in 26 associated companies, plus office equipment and other assets. In consideration for the purchase of Yazam the Company paid $22,000,000 in cash plus 27,374 shares of the Company's Series F Convertible Preferred Stock, which may be convertible into 27,374,000 shares of common stock of the Company, and warrants to purchase an aggregate of approximately 8,000,000 shares of the Company's common stock at $0.34 per share. As of September 30, 2001, approximately $20.8 million of the cash portion of the purchase price had been paid to Yazam shareholders, with the balance (or approximately $1.2 million) of the cash portion to be paid during the quarter ended December 31, 2001. The Company obtained a loan from Safra National Bank of New York for the entire cash portion of the Yazam purchase price. The loan carried an interest rate of 1.0% over the three-month LIBOR rate and was secured by a portion of the cash held by Yazam as of the closing date and was repaid in full during April 2001. The issuance of shares of the Company's common stock upon the exercise of such warrants or the conversion of the Series F Convertible Preferred Stock into common stock required the amendment of the Company's charter to increase the number of authorized common shares of the Company. The Company's shareholders, at their annual meeting in August 2001, voted to increase the aggregate number of authorized shares of common stock of the Company from 40 million to 500 million shares. In mid-July, 2001, the Company began negotiations with certain significant holders of the Series F Stock to obtain waivers of their put. Because of both the redemption rights, the Series F Convertible Preferred Stock will not be included in the Company's stockholders' equity as reported on March 31, 2001. On July 18 and 20, 2001 the Company entered into Waiver and Replacement Agreements with respect to the Series F Stock held by the two largest holders of that class. The Waiver and Replacement Agreements provide for a waiver of their right to redeem their shares after March 27, 2003 that is set forth in the Series F Certificate of Designations. In return, the holders of those shares of Series F Stock received the right to require the Company to purchase their shares at a purchase price of $300.00 per share (or $0.30 per share of Common Stock) during a ninety-day period beginning September 30, 2002. 11 On July 18, 2001, the Carlyle Group entered into a Waiver and Replacement Agreement with the Company. On July 20, 2001, various affiliates of the Texas Pacific Group ("TPG") entered into an agreement to sell their shares of Series F Stock to USV Partners at $150.00 per share of Series F stock by August 3, 2001 and USV entered into a Waiver and Replacement Agreement with respect to those shares. USV and its assignees expect to close the transaction soon. The above acquisition was accounted for using the purchase method. The operations of Yazam have been included in the accompanying statements of operations since April 1, 2001. The unaudited results of operations, as if Yazam had been acquired at the beginning of periods ended December 31, 2000 and September 30, 2001, are as follows:
December 31, September 30 2000 2001 --------------- -------------- Net revenues $4,826,576 $3,820,724 Net loss $(78,563,099) $(18,828,859) Net loss per share $(2.67) $(0.52) Weighted average shares outstanding 29,408,063 36,502,446
5. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. For the nine months ended September 30, 2001, the Company's equity in losses of investees acquired as part of the Yazam acquisition and being accounted for by the equity method has been estimated at a loss of $500,000, based on the results of the quarter ended March 31, 2001. Such amount has been included in "Equity in loss of investees". 6. INVENTORIES At September 30, 2001 and December 31, 2000, inventories consisted of the following: 2001 2000 -------- -------- Raw materials $110,310 $231,177 Work in progress 18,052 18,272 Finished Goods 10,228 385 Reserve for Obsolescence - (80,000) -------- -------- $138,590 $169,834 ======== ======== 7. NOTES RECEIVABLE During the nine months ended September 30, 2001, the Company advanced to Portris, Inc, ("Portris"), a U.S. Technologies associated company, approximately $471,000 for working capital purposes, in exchange for promissory notes equal to such amount. Portris is a software company that is developing an information management system that facilitates performance of interactive team oriented projects over the Internet. During May 2001, $385,000 of these promissory notes were cancelled and exchanged for equity of Portris, thereby increasing the Company's ownership interest in Portris from 30.4% to 42.2%. As of June 30, 2001, 12 Portris owed the Company approximately $176,000 under promissory notes. During July 2001 the $176,000 of promissory notes outstanding as of June 30, 2001 were cancelled and exchanged for equity of Portris, thereby increasing the Company's ownership interest in Portris from 42.2% to 50.3%. During the six months ended September 30, 2001, the Company advanced to Selis, Inc, ("Selis"), a U.S. Technologies associated company, approximately $297,000 for working capital purposes, in exchange for promissory notes equal to such amount. Selis is a software company that is developing web-based network management systems. As of September 30, 2001, Selis owed the Company approximately $297,000 under promissory notes. Effective as of June 30, 2001, the Company sold all of its shares of Buyline.net, Incorporated to an entity wholly owned by Gregory Earls, the CEO of the Company. As consideration for such shares, the purchaser delivered to the Company a promissory note in the principal amount of $100,000. The promissory note, plus accrued interest, will become due and payable only upon the earlier of, and only to the extent of: (i) any distributions by Buyline or (ii) the sale by such purchaser of its shares of Buyline. The Company has the right to repurchase for $250,000 such Buyline shares at any time prior to June 30, 2004. Due to neither of these conditions being met, the Company recorded a reserve of $100,000 against the collectability of this note during the quarter ended September 30, 2001. Such transaction was approved by at least a majority of the disinterested directors of the Company. The gain the Company recorded on the sale of Buyline of approximately $741,000 during the quarter ended June 30, 2001 was reduced to $641,000 during the quarter ended September 30, 2001. 8. CONVERTIBLE PREFERRED STOCK During the nine months ended September 30, 2001, the Company raised, through subscriptions for convertible preferred stock, approximately $904,000. This brings the total raised through the convertible preferred stock offering to approximately $2,103,000. As of the date of this report, the offering of the convertible preferred stock has not closed. The proceeds from the convertible preferred stock offering will be used primarily to finance additional investments in new and existing technology companies and ongoing working capital needs. On the closing date of the Yazam acquisition, the Company issued 27,374 shares of the Company's Series F Convertible Preferred Stock, which may be convertible into 27,374,000 shares of common stock of the Company, and warrants to purchase an aggregate of approximately 8,000,000 shares of the Company's common stock at $0.34 per share. (See "Yazam Acquisition" above) The following table presents the dilution of the Company's common stock, which can result since the Company's Charter Amendment increasing the number of authorized common shares from 30 million to 500 million shares was approved in August 2001 now allows the conversion of the Company's convertible preferred shares. Common stock outstanding at September 30, 2001 93,493,440 Conversion of Series A Convertible Preferred Stock 50,409,836 (a) Conversion of Series B Mandatorily Convertible Preferred Stock - (b) Conversion of Series C Mandatorily Convertible Preferred Stock - (b) Conversion of Series D Mandatorily Convertible Preferred Stock - (b) Conversion of Series F Convertible Preferred Stock 27,374,000 ----------- 171,277,276 (c) ===========
13 (a) A total of 10,000 shares of Series A Preferred Stock were converted to 819,672 common shares in July 2001. An additional 228,587 shares of series A Preferred Stock were converted to 18,736,603 shares of common stock in October 2001. (b) All of the Series B, C and D Mandatorily Convertible Preferred Stock were converted to common shares on August 30, 2001, resulting in the issuance of 63,586,982 shares of the Company's common stock.. (c) Does not include conversion of subscribed but unissued preferred stock, which has not been established at the date of this report. Also does not include shares, which would be issuable upon exercise of stock options and warrants. Including the above described conversions of the Company's preferred stock the total of the Company's common shares outstanding as of October 31, 2001 was 104,643,061 shares. The terms of the Series A Preferred Stock permits them to vote as if the Series A Preferred Stock was already converted to Common Stock. The terms of the Series C Preferred Stock, the Series D Preferred Stock and the Series F Preferred Stock did not permit the holders thereof to vote on the Charter Amendment, but otherwise permitted them to vote as if the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series F Preferred Stock were already converted to Common Stock. On August 30, 2001, all of the Series B, C and D Preferred Stock were converted to common. The Company and certain holders of the Company's Series A, B and C Preferred Stock entered into a registration rights agreement for the registration of the shares of common stock into which the Series A, Series B, and Series C Preferred Stock are convertible. Collectively, the stockholders party to the agreement have the right to compel the Company to register their respective shares at the expense of the Company at certain times (no earlier than six months subsequent to conversion of such shares to Common Stock) and rights on other occasions to have such registration effected at the expense of the holders. This request must be made by one third of the shares covered by this agreement. These stockholders also have unlimited registration rights to be combined, at the Company's expense, with certain registrations of any equity securities by the Company (Piggyback Rights), subject to restrictions which might be imposed by an underwriter for the sale of such shares. On March 27, 2001, the Company and certain holders of the Company's Series F Preferred Stock entered into a registration rights agreement as part of the merger agreement. Under the Series F registration rights agreement, the holders have the right to compel the Company to register their respective shares at the Company's expense. The holders also have Piggyback Rights, subject to restrictions, which an underwriter might impose for the sale of the shares. This Series F registration rights agreement expires by its terms on March 27, 2007. Based on the conversion terms of the Series F Convertible Preferred Stock, and the market price of the Company's common stock on the date of issuance of the Series F Convertible Preferred Stock, the Company recognized the existence of a beneficial conversion feature in the amount of $4,595,510, as adjusted in the quarter ended September 30, 2001. This amount was recorded as a non-cash deemed dividend in the quarter ended March 31, 2001, resulting in an increase in the net loss applicable to common shareholders. 9. STOCK OPTIONS On April 27, 2001 the Company granted 2,870,000 stock options to employees, 5,900,000 stock options to directors and 1,645,000 stock options to consultants, both exercisable at market value or $.28 per share. The options vest over a three or four year period and expire on April 27, 2011. The Company has recorded the 14 options granted to employees and directors at their intrinsic value in accordance with APB 25, Accounting for Stock Issued to Employees, consequently there was no impact on the Company's financial statements as a result of this grant. The Company has recorded the options granted to consultants at fair value on the grant date in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, using the Black Scholes option pricing model. During the quarter ended June 30, 2001, the Company recorded an expense of approximately $16,000 as a result of the stock options granted to consultants. 10. ADDITIONAL PAID-IN CAPITAL During the nine months ended September 30, 2001, the Company increased additional paid in capital by approximately $20,022,000. The components of this increase were; $14,437,000 conversion of the Series B, C and D Convertible Preferred Stock to common, a $4,595,000 deemed dividend created by beneficial conversion features of the Series F mandatorily convertible preferred stock, $880,000 value of warrants issued in the Yazam acquisition, $94,000 resulting from the conversion of preferred shares to common shares and $16,000 expense recorded associated with the grant of stock options to consultants. 11. SEGMENT INFORMATION During 1998, the Company adopted SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing the performance. The Company's chief operating decision makers aggregate operating segments based on the location of the segment and whether it is prison-based or free-world. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has four reportable segments for the three and nine months periods ended September 30, 2001 and September 30, 2000. The four reportable segments are USXX (Washington, DC), LTI (Lockhart, Texas and Blythe, California) ("LTI"), the Company's technology investments ("TECHNOLOGY") and Gregory FCA (Philadelphia, Pennsylvania). USXX is the corporate office, LTI is a prison-based manufacturer of computer circuit boards and modular office furniture components. The Company's technology investments consist of ownership interests in approximately 34 technology companies, which were primarily acquired through the acquisition of E2E and Yazam. Gregory FCA is a wholly owned subsidiary of Yazam, which provides public and investor relations services (see Note 4). 15 Summary information by segment as of and for the three and nine months ended September 30, 2001 and 2000 follow (in thousands):
(a) (c) USXX LTI GREGORY TECHNOLOGY Other Total ------- ------- ------- ------- ----- -------- Nine months ended September 30 2001 Net sales $ -- $ 1,883 $ 1,067 $ -- $ -- $ 2,950 Operating loss (2,832) (500) (52) (4,474) -- (7,858) Total Assets (b) 2,687 946 854 4,561 -- 9,048 2000 Net sales $ -- $ 2,025 $ -- $ -- $ 84 $ 2,109 Operating profit (loss) (1,810) (213) -- (946) (20) (2,989) Total Assets (b) 3,885 1,541 -- 14,351 -- 19,777 Three months ended September 30 2001 Net sales $ -- $ 828 $ 480 $ -- $ -- $ 1,308 Operating loss (990) (77) (46) (2,878) -- (3,991) Total Assets (b) 2,687 946 854 4,561 -- 9,048 2000 Net sales $ -- $ 889 $ -- $ -- $ 30 $ 919 Operating profit (loss) (932) 10 -- (768) (34) (1,724) Total Assets (b) 3,885 1,541 -- 14,351 -- 19,777
(a) Amounts shown in the "LTI" column were previously shown separately as "LTI" and "LTI - Blythe". (b) Represents net book value of assets. (c) Gregory FCA is a wholly owned subsidiary of Yazam. See Yazam acquisition disclosure in Note 4. 12. LOSS PER SHARE The Company presents basic and diluted earnings per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings per common share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share does not include the dilutive effect of common stock equivalents for the nine months and three months ended September 30, 2001 and 2000 because stock options and warrants which comprised common stock equivalents would have been anti-dilutive. 16
Per (Loss) Shares share (Numerator) (Denominator) amount -------------- ------------- --------- Nine months ended September 30, 2001: Net loss available to common shareholders $(12,532,176) 36,502,446 $(0.34) Effect of dilutive potential common shares: Stock options - - Warrants - - ------------ ---------- Diluted net loss $(12,532,176) 36,502,446 $(0.34) ============ ========== ====== Nine months ended September 30, 2000: Net loss available to common shareholders $(17,835,259) 29,331,374 $(0.61) Effect of dilutive potential common shares: Stock options - - Warrants - - ------------ ---------- Diluted net loss $(17,835,259) 29,331,374 $(0.61) ============ ========== ====== Three months ended September 30, 2001: Net loss available to common shareholders $ (4,086,409) 51,091,950 $(0.08) Effect of dilutive potential common shares: Stock options - - Warrants - - ------------ ---------- Diluted net loss $ (4,086,409) 51,091,950 $(0.08) ============ ========== ====== Three months ended September 30, 2000: Net loss available to common shareholders $ (1,868,394) 29,569,308 $(0.06) Effect of dilutive potential common shares: Stock options - - Warrants - - ------------ ---------- Diluted net loss $ (1,868,394) 29,569,308 $(0.06) ============ ========== ======
13. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of 17 when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The adoption of SFAS No. 141 and SFAS No. 142 is not expected to have a material effect on the Company's financial position, results of operations and cash flows in 2002 and subsequent years. Effective January 1, 2001, the Company adopted SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-- a replacement of SFAS No. 125. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and revises the accounting standards for securitizations and transfers of financial assets and collateral. The adoption of this standard on January 1, 2001 did not have a material effect on the Company's results of operations and financial position. This standard also required new disclosures in 2000. Such requirements were not applicable to the Company. In 2000, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of Accounting Principles Board Opinion No. 25. Interpretation No. 44 clarifies the application of APB No. 25 to the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. The Company's policies have been amended for the adoption of FIN No. 44. Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, the Company has reviewed its accounting policies for the recognition of revenue. SAB No. 101 was required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The company's policies for revenue recognition are consistent with the views expressed within SAB No. 101. See note 1, "Summary of Significant Accounting Policies," for a description of the Company's policies for revenue recognition. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS 138 Accounting For Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS No. 133, liberalized the application of SFAS 133 in a number of areas. The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001, to affect its financial statements. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the notes thereto) included in the Company's form 10-K for the year ended December 31, 2000. Results of Operations - --------------------- The following analysis compares the results of operations for the three-month and nine-month periods ended September 30, 2001 to the comparable periods ended September 30, 2000. Net sales during the three months ended September 30, 2001 were $1,307,524 compared to $918,870, during the three months ended September 30, 2000. The increase in net sales in the amount of $388,654, was primarily due to sales by Gregory FCA, which was acquired in the purchase of Yazam on March 27, 2001, of approximately $480,000. Sales for LTI increased by approximately $90,000 for the quarter due to increased sales at LTI's Texas electronics manufacturing facility resulting from increased demand for technology products. Net sales during the nine months ended September 30, 2001 were $2,949,993, compared to $2,109,141 during the nine months ended September 30, 2000. The increase in net sales in the amount of $840,852, was primarily due to sales of Gregory FCA, which was acquired in the purchase of Yazam on March 27, 2001, of approximately $1,067,000. Sales for LTI decreased by approximately $226,000 for the nine-month period due to decreased sales at LTI's California furniture manufacturing facility resulting from decreased demand from the sole customer that serves the facility. In the three months ended September 30, 2001, cost of goods sold was $ 786,979, which represented 95% of the net sales of LTI. The net sales of Gregory FCA are not used in the calculation since Gregory FCA is a service company and therefore does not have cost of sales. During the three months ended September 30, 2000, cost of goods sold was $896,282, which represented 98% of net sales. The decrease in cost of sales percentage is a result of increased sales in the LTI's Texas electronics manufacturing facility, resulting in a decrease in fixed costs as a percentage of increased sales. In the nine months ended September 30, 2001, cost of goods sold was $1,852,035, which represented 98% of the net sales of LTI. The net sales of Gregory FCA are not used in the calculation since Gregory FCA is a service company and therefore does not have cost of sales. During the nine months ended September 30, 2000, cost of goods sold was $2,199,499, which represented 104% of net sales. The decrease in cost of sales percentage is a result of increased sales in the LTI's Texas electronics manufacturing facility, resulting in a decrease in fixed costs as a percentage of increased sales. Selling expenses during the three months ended September 30, 2001 were $21,260, representing 3% of the net sales of LTI. During the three months ended September 30, 2000, selling expenses in the amount of $16,995 represented 2% of net sales. The increase in selling expenses percentage was the result of more sales generated from outside sales personnel, rather than internally generated. Selling expenses during the nine months ended September 30, 2001 were $51,148, representing 3% of net sales. During the nine months ended September 30, 2000, selling expenses in the amount of $47,303 represented 2% of net sales. The percentage increase in selling expenses was the result of an increase in sales generated from outside sales personnel, rather than internally generated sales. 19 General and administrative expenses during the three months ended September 30, 2001 were $2,798,019, which represented 214% of net sales and an increase of approximately $1,069,000 over the prior year. During the three months ended September 30, 2000, general and administrative expenses were $1,729,401, which represented 188% of net sales. The increase in general and administrative expenses is primarily due to the acquisition of Yazam on March 27, 2001 which accounted for approximately $1,206,000 of the increase over prior year. The increase in general and administrative expenses is also due to the fact that effective July 1, 2001, Portris became a wholly consolidated subsidiary of the Company, due to the Company's ownership interest in Portris exceeding 50% as of that date. General and administrative expenses of Portris during the quarter ended September 30, 2001 were approximately $476,000. General and administrative expenses otherwise declined approximately $613,000 from the prior year. General and administrative expenses during the nine months ended September 30, 2001 were $6,853,881, which represented 232% of net sales and an increase of approximately $4,003,000 over the prior year. The increase in general and administrative expenses is primarily due to the acquisition of Yazam on March 27, 2001 which accounted for approximately $3,141,000 or 78% of the $4,003,000 increase over the prior year. The increase in general and administrative expenses is also due to the fact that effective July 1, 2001, Portris became a wholly consolidated subsidiary of the Company, due to the Company's ownership interest in Portris exceeding 50% as of that date. General and administrative expenses of Portris during the quarter ended September 30, 2001 were approximately $476,000, or 12% of the $4,003,000 increase over the prior year. The balance of the increase for 2001 was the result of additional accounting and legal costs associated with the acquisition of Yazam and current and amended SEC document filings. During the nine months ended September 30, 2000, general and administrative expenses were $2,851,187, which represented 135% of net sales. During the three months ended September 30, 2001, the Company had a net loss available to common shareholders of $4,086,409 or $ (0.08) per weighted-average share. The loss for the three months ended September 30, 2001, includes a loss of $250,000, which represents the Company's estimated share of losses from associated companies accounted for under the equity method, an asset impairment charge of approximately $1,720,000 resulting from a $338,000 write-off of investments in four (4) associated companies which ceased operations during the quarter, the $1,010,000 write-down of investments in six (6) other associated companies based on comparisons of current valuations for each respective company to the carrying value of the respective company and a reduction of approximately 744,000 in the value of certain operating assets acquired in the Yazam acquisition. During the three months ended September 30, 2000 the company reported a net loss available to common shareholders of $1,868,394 or $(0.06) per weighted-average share. The loss for the three months ended September 30, 2000, included a loss of $149,684, which represents the Company's share of losses from associated companies accounted for under the equity method. During the nine months ended September 30, 2001 the Company had net loss available to common shareholders of $12,532,176or $(0.34) per weighted-average share. The loss for the nine months ended September 30, 2001, includes a non- cash deemed dividend of $4,595,510 resulting from beneficial conversion features associated with the Company's Series F Convertible Preferred Stock and a loss of $894,558, which represents the Company's share of losses from associated companies accounted for under the equity method. Additionally an asset impairment charge of approximately $2,051,000 resulting from a $588,000 write-off of investments in five (5) associated companies which ceased operations during the six-months ended September 30, 2001, the $1,010,000 write-down of investments in six (6) other associated companies based on comparisons of current valuations for each respective company to the carrying value of the respective company and a reduction of approximately $744,000 in the value of certain operating assets acquired in the Yazam acquisition. Also write-offs of certain fixed assets associated with the Company's call center operations, which were discontinued in a prior period, were recorded during the 20 period. During the nine months ended September 30, 2000, the Company reported a net loss available to common shareholders of $ $17,835,259 or $(0.61) per weighted-average share. . The loss for the nine months ended September 30, 2000, includes a non-cash deemed dividend of $14,757,650 resulting from beneficial conversion features associated with the Company's Series A, B and C Convertible Preferred Stock and a loss of $154,121, which represents the Company's share of losses from internet businesses accounted for under the equity method. Effective as of June 30, 2001, and included in the Company's operating results for the nine months ended September 30, 2001, the Company sold all of its shares of Buyline.net, Incorporated to an entity wholly owned by Gregory Earls, the CEO of the Company. As consideration for such shares, the purchaser delivered to the Company a promissory note in the principal amount of $100,000. The promissory note, plus accrued interest, will become due and payable only upon the earlier of, and only to the extent of: (i) any distributions by Buyline or (ii) the sale by such purchaser of its shares of Buyline. Due to further analysis of the probability either of these conditions occurring the Company recorded, during the quarter ended September 30, 2000, a $100,000 reserve against the value of the note receivable The Company has the right to repurchase for $250,000 such Buyline shares at any time prior to June 30, 2004. Such transaction was approved by at least a majority of the disinterested directors of the Company. As a result the Company recorded a net gain on the sale of Buyline of approximately $641,000. Liquidity and Capital Resources - ------------------------------- During the nine months ended September 30, 2001 and 2000, the Company experienced negative operating cash flows of $6,639,106 and $2,997,248 respectively. Negative operating cash flows in the nine months ended September 30, 2001 resulted principally from the $(7,936,666) net loss incurred during that period, a decrease of $2,933,470 in accrued liabilities, which included a payment of approximately $2,000,000 for the put obligation assumed by the Company in the E2E acquisition and a decrease of approximately $445,000 in accounts payable. These negative effects were mitigated by approximately $3,144,000 in non-cash expenses, including asset impairments, equity in investee losses and depreciation, recorded during the period. Negative operating cash flow in the nine months ended September 30, 2000 resulted principally from the $(3,077,609) net loss incurred during that period, an increase in accounts receivable of $404,719 and a decrease in accounts payable of $169,987, offset by depreciation and amortization of $628,506. The depreciation and amortization of $628,506 is primarily the result of the amortization of goodwill and legal expenses associated with the Company's acquisition activities. Net cash provided by investing activities of $7,673,802 during the nine months ended September 30, 2001 consisted primarily of $6,113,165 net cash acquired in the Yazam acquisition after legal and accounting fees related to the acquisition, approximately $2,424,000 collected and temporarily held for the benefit of affiliated companies, which was subsequently paid to the respective affiliated company during October 2001 and $500,000 collected as a result of the sale of certain assets of Yazam. Net cash provided by investing activities during the quarter ended September 30, 2001 was reduced by approximately $1,528,000 invested in affiliates. Net cash used in investing activities of $3,305,586 during the nine months ended September 30, 2000 was primarily the result of the acquisition of E2E by the Company and cash advances to affiliated companies. Net cash provided by financing activities of $1,555,699 during the nine months ended September 30, 2001 was primarily due the receipt of net proceeds from the subscription of preferred stock of $903,700 and approximately $650,000 in temporary loans from USV Partners, a company managed by the Company's CEO, Gregory Earls. The $22,000,000 Yazam acquisition note, which was obtained during March 2001 to fund the cash portion of the Yazam acquisition, was paid in full during April 2001. Net cash provided by financing activities of $6,579,222 during the nine months ended September 30, 2000 was primarily due to the 21 receipt of net proceeds from the subscription of preferred stock of $6,211,911 and proceeds from the exercise of common stock options and warrants of $209,188. As identified by the above discussion and analysis, the Company did not produce a profit from operations in the nine months ended September 30, 2001. Management has initiated steps to increase sales and reduce unnecessary costs. However, completing the Company's business plans will require additional investment and working capital. To provide for this investment and working capital, the Company raised, during the nine months ended September 30, 2001, approximately $7,500,000 through the Yazam purchase and the subscription of its unissued convertible preferred stock. Under the terms of the Yazam Acquisition Agreement, the 27,374 shares of the Company's Series F Preferred Stock are convertible into 27,374,000 shares of Company common stock. Holders of Series F Preferred Stock would receive preferential treatment in a liquidation of the Company over all existing holders of Company common stock and Preferred Stock ("Existing Preferred Stock"). Pursuant to the Registration Rights Agreement, the Series F holders have demand and piggyback registration rights. By the Company's 2001 Proxy Statement, which was approved by a majority of the Company's shareholders in August 2001, the Company amended its Charter to increase the number of authorized shares of Company's common stock in order to authorize and reserve a sufficient number of shares of common stock for issuance in connection with the conversion of the Series F Stock and the exercise of the associated warrants. Had the Company not authorized such additional number of shares of common stock as necessary for the conversion of the Series F Stock and the exercise of the warrants prior to September 1, 2001, the Yazam stockholders who received shares of Series F Stock could have required the Company after such date to repurchase their shares of Series F Stock for a price per share equal to the average price of Company common stock as reported on the OTC BB (or other applicable nationally recognized market quotation system) for the 20 trading days prior to the date of the request multiplied by 1,000, but not less than $250 per share of Series F stock(or a total of $6,843,500). Due to the potential repurchase obligation, in mid-July, 2001, the Company began negotiations with certain significant holders of the Series F Stock to obtain waivers of their put. On July 18, 2001, the Carlyle Group entered into a Waiver and Replacement Agreement with the Company. On July 20, 2001, various affiliates of the Texas Pacific Group ("TPG") entered into an agreement to sell their shares of Series F Stock to USV Partners at $150.00 per share of Series F stock by August 3, 2001 and USV entered into a Waiver and Replacement Agreement with respect to those shares. This agreement is expected to close in during the fourth quarter of 2001. The Waiver and Replacement Agreements provide for a waiver of their put as well as their right to redeem their shares after March 27, 2003 that is set forth in the Series F Certificate of Designations. In return, the holders of those shares of Series F Stock received the right to require the Company to purchase their shares at a purchase price of $300.00 per share of Series F stock during a ninety-day period beginning September 30, 2002. Further, for a ninety-day period beginning March 27, 2003, holders of the Series F Preferred Stock will have the right to require the Company to redeem the Series F Preferred Stock at a price of $100 per share, or a total of $2,734,400. The Series F Stock has voting rights on an as-converted basis with Company common stock and not as a separate class, except that the Series F holders are not entitled to vote on the Charter Amendment. A vote of the holders of two- thirds of the Series F Stock is required to approve any diminution in the rights of the Series F Stock, and a vote of a majority of the Series F stock is required before the Company may issue any securities with the same preference or priority as, or with a preference or priority senior to, the Series F Stock. No dividends will accrue or be payable at any time with respect to the Series F Stock. Due to the potential 2002 and 2003 repurchase requirements, the Company has chosen to classify $6,326,494 of the carrying value of the Series F Convertible Preferred Stock as a liability, rather than a part of shareholder's equity. 22 Historically, the capital the Company needed, both for working capital and to pursue acquisition opportunities, has exceeded the Company's cash flows from operations. These shortfalls have been met by the Company's ability to raise capital through equity transactions involving the Company's convertible preferred stock. The Company's independent certified public accountant's report on the consolidated financial statements of the Company dated May 9, 2001 contained an explanatory paragraph regarding uncertainty about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern depends on its ability to raise capital in the next twelve months. Current economic and business conditions have created a difficult environment in which to raise capital. The Company's ability to execute its business plan is, and its ability to continue as a going concern may be, dependant on its ability to raise capital and attain profitable operations. While there is no assurance that these objectives can be attained, the Company believes there is a reasonable expectation of achieving these goals. Should the Company be unable to achieve its objectives and successfully execute its business plan, the Company may be required to significantly curtail its acquisition and investment activities. The Company's sources of funds to pursue acquisition opportunities and provide working capital during 2001 will come from a combination of cash flows from existing operations and if required, equity transactions involving the Company's capital stock. Management projects approximately $1,800,000 will be invested in new and existing associated companies during 2001. In addition, approximately another $230,000 will be invested in capital expenditures. The sources of funds to cover these investments and to provide the Company's working capital will come from operations, sales of the Company's preferred stock and possible sale of investments in associated companies. Management projects that approximately $1,000,000-2,000,000 will have to be raised during 2001, through preferred stock sales to accomplish the Company's goals. However, there can be no assurance that the Company can raise such amounts or if such amounts can be raised can be raised on terms beneficial to the Company. FORWARD-LOOKING INFORMATION - --------------------------- Certain statements in this quarterly report on form 10-Q contain "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, concerning prospective future events and results. Such prospective events include the Company's ability to continue as a going concern, acquisitions and investments and prospects for such acquisitions and investments. U. S. Technologies cautions that actual developments and results may differ materially from its prospective future events. There can be no assurance that the conditions necessary to completing any prospective event will occur. Additional investments in the Company or by the Company or an unrelated person in any of the Company's associated companies provide no assurance that the Company or such associated company will succeed or that the Company's investments will be recovered or that the Company or any of its associated companies will be profitable. The Company's assets and operations, including results of operations, would be affected materially by either by occurrence of any such event or the failure of any such event to occur, by the extent to which it and its associated companies continue to have access to financing sources on reasonable terms in order to pursue its and their business plans, by the success or failure of the business plans of its associated companies, by economic conditions generally and particularly in the developing e-commerce market, by competition and technology changes in its and its associated companies industries and businesses, and by the results of its and its associated companies operations if and when operating. The Company's assembly and other outsourcing business activities involve a limited number of facilities serving a limited number of companies, all of which are subject to material changes outside the Company's control. 23 PART II. OTHER INFORMATION Item 1. through Item 5. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits A list of exhibits included as part of this report is set forth in the Exhibit Index appearing elsewhere in this report, and is incorporated by reference. (b) Reports on form 8-K During the quarter for which this report is filed, Registrant filed a Current Report on form 8-K/A dated August 7, 2001, providing financial disclosure information on the acquisition Yazam.com, Inc, which occurred on March 27, 2001. During the quarter for which this report is filed, Registrant filed a Current Report on form 8-K dated August 22, 2001, reporting changes to the Company's Certifying Accountant. During the quarter for which this report is filed, Registrant filed a Current Report on form 8-K/A dated September 6, 2001, providing additional disclosure regarding changes to the Company's Certifying Accountant. 24 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 25 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized officers. U.S. TECHNOLOGIES INC. (Registrant) Date: November 14, 2001 /s/ Gregory Earls ----------------- Gregory Earls Chairman of the Board, Chief Executive Officer and President Date: November 14, 2001 /s/ Allyson Holland ------------------- Allyson Holland Vice President Finance and Controller 26 -----END PRIVACY-ENHANCED MESSAGE-----