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,
1997
[ ] 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.)
1402 Industrial Boulevard
Lockhart, Texas 78644
(Address of principal executive offices.)
Registrant's telephone number,
including area code: (512) 376-1049
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 at $0.02 November 11, 1997,
was 27,921,063.
U.S. TECHNOLOGIES INC.
Form 10-Q-For the Quarter Ended September 30, 1997
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Operations
Nine months Ended September 30, 1997 and 1996 5
Consolidated Statements of Operations
Three months Ended September 30, 1997 and 1996 6
Consolidated Statements of Changes in Stockholders'
Equity 7
Consolidated Statements of Cash Flows
Nine months Ended September 30, 1997 and 1996 8
Notes to Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and results of Operations 16-17
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 19-20
Item 2. Changes in the Rights of the Company's Security
Holders 20
Item 4. Submission of Matters to a Vote of Security
Holders 20
Item 6.
Exhibits and Reports on Form 8-K 20
2
PART I.
Item 1. Financial Statements.
3
U.S. Technologies Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
1997 December 31,
Unaudited 1996
Current assets:
Cash in bank $ 117,944$ 1,548
Accounts receivable - trade 590,165 238,647
Accounts receivable - related party 270,000 270,000
Inventories 171,400 472,227
Prepaid expenses 17,899 273
Total current assets 1,167,408 982,695
Property and equipment - net (note 4) 213,370 146,118
Other assets:
Investment - technologies and goodwill - net (note 5)1,183,6821,519,917
Other assets 8,170 3,952
Total other assets 1,191,852 1,523,869
Total assets $ 2,572,630 $ 2,652,682
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 932,761 $ 806,204
Accounts payable - related party 37,981
- -
Accrued expenses 570,713 613,958
Obligations under capital leases 12,488 -
Notes payable (note 6) 12,000 -
Total current liabilities 1,565,943 1,420,162
Long-term liabilities:
Notes payable - net (note 6) 164,569 144,000
Obligation under capital leases 49,761 -
Total long-term liabilities 214,330 144,000
Commitments and contingencies: (Note 3)
Stockholders' equity:
Preferred stock - $.02 par value; 10,000,000 shares authorized;
no shares issued - -
Common stock - $.02 par value; 40,000,000 shares
authorized; 27,907,263 and 21,857,263 shares
issued and outstanding at September 30, 1997,
and December 31, 1996, respectively 558,146 437,146
Additional paid-in capital 12,225,311 11,729,811
Accumulated deficit (11,777,508) (10,928,232)
Stock receivable ( 213,592) ( 150,205)
Total stockholders' equity 792,357 1,088,520
Total liabilities and stockholders' equity$ 2,572,630 $
2,652,682
The accompanying notes are an integral part
4
of the consolidated financial statements.
5
U.S. Technologies Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months Ended September 30,
1997 1996
Net Sales $ 2,964,764$ 707,713
Operating costs and expenses:
Cost of sales 2,403,526 1,345,878
Loss on write-down of inventory 306,888 -
Selling expense 76,456 128,614
General and administrative expense 1,083,264 501,988
Allowance for doubtful accounts 6,268 15,932
Total operating costs and expenses 3,876,402 1,992,412
(Loss) from operations ( 911,638)( 1,284,699)
Other income (expense)
Other income 81,316 6,965
Interest expense ( 18,953)( 52,639)
Other expense - ( 3,532)
Total other income 62,363( 49,206)
Net loss $( 849,275)$( 1,333,905)
Loss per common share
$( 0.03) $( 0.08)
Cash dividends per common share
$ 0.00 $ 0.00
Weighted-average common shares outstanding 25,098,069 17,118,508
5
The accompanying notes are an integral part
of the consolidated financial statements.
6
U.S. Technologies Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Ended September 30,
1997 1996
Net Sales $ 1,230,964$ 296,004
Operating costs and expenses:
Cost of sales 891,210 497,576
Selling expense 23,829 18,863
General and administrative expense 417,571 195,078
Allowance for doubtful accounts 6,268 15,932
Total operating costs and expenses 1,338,878 727,449
(Loss) from operations ( 107,914)( 431,445)
Other income (expense)
Other income 384 1,840
Interest expense ( 7,005)( 5,595)
Other expense - ( 1,478)
Total other income (expense) ( 6,621)( 5,233)
Net income (loss) $( 114,535)$( 436,678)
Earnings (loss) per common share$( 0.01)$( 0.02)
Net income (loss)
Cash dividends per common share
$ 0.00 $ 0.00
Weighted-average common shares outstanding 27,907,263 17,647,181
7
The accompanying notes are an integral part
of the consolidated financial statements.
8
U.S. Technologies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
$0.02 Par Value
Common Stock Additional
Number of Par Paid-In Accumulated
Shares Value Capital Deficit Total
Balance,
December 31, 199515,875,963$317,520$ 9,887,485$(8,345,221)$1,859,785
Stock options exercised3,536,00070,720481,780 - 552,500
Rule 144 stock issued1,845,30036,906534,331 - 571,237
Stock exchanged for services - - (150,205) -(150,205)
Stock issued - gems600,000 12,000 78,000 - 90,000
Debt contributed to capital - - 748,215 -748,215
Net (loss) -_______ -(2,583,012)(2,583,012)
Balance, December 31, 199621,857,263437,14611,579,606(10,928,233) 1,088,520
Stock issued 6,050,000121,000 495,499 - 616,499
Stock subscribed - -( 63,388) -( 63,388)
Net loss - - -( 849,275) (
734,740)
Balance,
September 30, 199727,907,263$558,146$12,011,717$(11,777,508)$ 906,891
9
The accompanying notes are an integral part
of the consolidated financial statements.
10
U.S. Technologies Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended September 30,
1997 1996
Cash flows from operating activities:
(Loss) from continuing operations$( 849,275)$( 1,333,905)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 390,815 322,999
Changes in certain assets and liabilities:
Accounts receivable ( 351,518)( 48,847)
Inventories 300,827( 78,932)
Prepaid expense ( 17,626)( 9,802)
Accounts payable 126,556 457,083
Accounts payable - other 37,981 -
Accrued expenses ( 43,245) 355,489
________ _______
Net cash provided (used) by
operating activities ( 405,485) ( 335,915)
Cash flows from investing activities:
Equipment purchases ( 2,964) -
Increase in other assets ( 4,218) ( 740)
Net cash provided by (used in)
investing activities ( 7,182) ( 740)
Cash flows from financing activities:
Proceeds from issuance of common stock553,111 -
Increase (decrease) in obligations under capital
leases and notes payable ( 24,048) 326,200
Net cash provided (used) by financing
activities 529,063 326,200
Increase in cash 116,396( 10,455)
Cash, beginning of period 1,548 25,860
Cash, end of period $ 117,944$ 15,405
Supplemental schedule of noncash investing and financing activities:
1997: Acquired equipment in the amount of $118,866 financed
through capital leases and unsecured note
payable amounting to $118,866.
Common stock in the amount of 633,870 shares was
acquired through a stock subscription receivable
in the amount of $63,387.
8
The accompanying notes are an integral part
of the consolidated financial statements.
9
U.S. Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
U.S. Technologies Inc. furnishes administrative and
management services to its wholly owned subsidiaries.
Lockhart Technologies, Inc.("LTI") and Newdat, Inc. LTI
operations consist of contract manufacturing, prototyping
and repair of printed circuit boards using surface mount,
through-hole and mixed technology. Newdat, Inc. and its
80% owned subsidiary SensonCorp, Limited were acquired on
January 23, 1995. U.S. Technologies Inc., together with its
subsidiaries, are hereinafter referred to collectively as
"the Company."
Principles of Consolidation
The consolidated balance sheets at December 31, 1996,
and September 30, 1997, include the accounts of U.S.
Technologies Inc., and its subsidiaries. The consolidated
statements of operations, changes in stockholders' equity
and cash flows include the accounts of U.S. Technologies
Inc., and its subsidiaries for the nine months ended
September 30, 1997, and 1996.
Presentation Basis
The Company's consolidated financial statements have
been presented on the basis that the Company is a going
concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. The Company has incurred significant losses
during each of the three years in the period ended December
31, 1996, and had working capital deficiencies at December
31, 1996.
The Company's continued existence is dependent upon its
ability to resolve its liquidity problems. While there is
no assurance that such problems can be resolved, the Company
believes there is a reasonable expectation of achieving that
goal through the cash generated from future operations, the
introduction of new products into the market and the sale of
additional common stock.
The interim financial statements are unaudited, but in
the opinion of management, all adjustments necessary for a
fair presentation of such financial statements have been
included. Interim results are not necessarily indicative of
results for a full year.
Inventories
Inventories are stated at the lower of cost or market
utilizing the average cost method for raw materials and
10
work-in-progress, and the first-in, first-out method for
finished goods.
Property and Depreciation
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 Improvementsterm of building lease
Earnings per Share
Net loss per common share is based on the weighted
average number of common shares and common share equivalents
outstanding in each period. The shares reserved for stock
options and warrants are anti-dilutive for the purpose of
determining net income or loss per share.
11
Risks and Uncertainties
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. Actual results could
differ from those estimates.
Revenue Recognition
Revenue is recognized from sales of products when the
product is shipped.
Technologies and Goodwill
Acquired technologies and goodwill are being amortized
over a 60 month period.
2. ACCOUNTS RECEIVABLE
Accounts receivable - trade at September 30, 1997, and
December 31, 1996, is net of an allowance for doubtful
accounts in the amount of $6,268 and $90,953, respectively.
3. INVENTORIES
At September 30, 1997, and December 31, 1996,
inventories consist of the following:
1997
1996
Raw materials $ 957,142
$ 984,811
Work in progress 106,146 72,416
1,063,288 1,057,227
Valuation allowance ( 891,888)
( 585,000)
$ 171,400$ 472,227
During the nine months ended September 30, 1997, raw
materials inventory was written-down to its estimated fair
market value by increasing the valuation allowance and loss
due to write-off of inventory in the amount of $306,888.
4. PROPERTY AND EQUIPMENT
At September 30, 1997, and December 31, 1996, property
and equipment consist of the following:
1997
1996
Equipment $ 1,058,716
$ 936,559
12
Furniture and fixtures 164,056
164,056
Leasehold improvements 123,520
123,520
1,346,292 1,224,135
Less accumulated depreciation (1,132,922)
(1,078,017)
$ 213,370$ 146,118
5. TECHNOLOGIES AND GOODWILL
Technologies and goodwill at September 30, 1997, and
December 31, 1996, consist of the following:
1997
1996
Technologies $ 1,692,500
$ 1,692,500
Goodwill 849,065
849,065
2,541,565 2,541,565
Accumulated amortization
(1,357,883) (1,021,648)
$ 1,183,682$ 1,519,917
6. NOTES PAYABLE
Notes payable at September 30, 1997, and December 31,
1996, consist of the following:
1997
1996
Notes payable to
individuals and a
trust at rates from
12% to 14%,
unsecured, due July
1, 1998, and
January 1, 1999 $144,000 $ 144,000
Note payable to National
Asset Placement Corporation
at a rate of 5%, unsecured,
due July 27, 2,000 32,569
- -
176,569 144,000
Current portion 12,000
- -
Long-term debt $ 164,569
$ 144,000
13
Following are the long-term debt maturities for the above
notes payable for each of the next five years:
1997 1996
1998 $ 12,000 $ -
1999 156,000 144,000
2000 8,569 -
2001 -
- -
2002 -
- -
Total $ 176,569 $ 144,000
7. OBLIGATIONS UNDER CAPITAL LEASES
On May 2, 1997, Kenneth Smith entered into a capital
lease with payments totalling $26,161 to be paid in 24
monthly installments of $342.93 with a balloon payment due
June 2, 1999, in the amount of $17,931 at an annual
percentage rate of 4.513%. The capital lease is financing
the acquisition of a 1997 Rodeo to be used as a delivery
vehicle by Lockhart Technologies, Inc. The lease was
assigned to LTI on May 23, 1997. The current maturity of
this lease obligation totals $4,115 at September 30, 1997.
On March 29, 1997, Kenneth Smith entered into a capital
lease with payments totalling $64,205 to be in 35 monthly
installments of 698.78 with a balloon payment due February
29, 2000, in the amount of $26,703 at an annual percentage
rate of 9.313%. The capital lease is financing a 1997
Mercedes supplied to Mr. Smith under the terms of his
employment agreement. The lease was assigned to U.S.
Technologies Inc. on May 23, 1997. The current maturity of
this lease obligation totals $8,373 at September 30, 1997.
Following are the long-term debt maturities for the above
obligations under capital leases for each of the next five
years:
1997
1998 $ 12,488
1999 27,466
2000 22,295
2001 -
2002 -
Total $ 62,249
14
8. INCOME TAXES
Deferred income tax at September 30, 1997, and December
31, 1996, follows:
1997
1996
Deferred income tax asset $ 3,031,568
$ 2,820,409
Valuation allowance 3,031,568
2,820,409
Total deferred tax asset
$ - $ -
At December 31, 1996, the Company has available for
federal income tax purposes unused operating losses which
may provide future tax benefits expiring as follows:
Year of Expiration Net Operating Loss
2003 $ 1,383,000
2005 379,903
2006 65,727
2007 363,554
2008 2,183,089
2009 894,689
2010 1,323,470
2011 1,703,884
$ 8,297,316
9. COMMITMENTS AND CONTINGENCIES
LTI has an operating lease agreement with Wackenhut
Corrections Corporation, The Texas Department of Criminal
Justice, Division of Pardons and Paroles and the City of
Lockhart, Texas, to lease approximately 27,800 square feet
of manufacturing and office space commencing February 1,
1997 through January 31, 2000 and provides for an automatic
three year extension unless notification is given by either
party at least six months prior to the expiration of each
term. The lease provides for annual rental rates of $1 per
year for the primary term and the automatic three year
extension. The amount of space under the lease is subject
to be increased or decreased depending upon the number of
residents employed by LTI on August 31, 1997.
On March 22, 1995, the Company was served with a
citation in TTI Testron, Inc. vs. American Microelectronics,
Inc. and Lockhart Technologies, Inc., County Court at Law
No. 1, Travis County, Texas, Cause No. 221,094. The
15
petition alleges that Lockhart Technologies, Inc. received
the assets of American Microelectronics Inc. without
consideration. The action seeks damages of $11,527. The
Company believes the claim is without merit.
On January 24, 1995, an action styled SensonCorp
Systems, Inc., SensonCorp Pacific, SensonCorp Southeast,
SensonCorp West, Creative Media Resources vs. SensonCorp
Limited, William Meehan, Dugal Allen, John Allen, DOES 1
through 50, in the United States District Court Northern
District of California, Cause No. C-95-00282. The action
seeks equitable relief and damages for breach of contract,
breach of implied warranty of good faith and fair dealing,
common law fraud, negligent misrepresentation, unfair
competition, interference with contract, accounting,
receiver/attachment, and theft of trade secrets. The causes
of action are related to a marketing agreement between
Senson and the plaintiffs. The suit does not specify the
dollar amount of damages sought. The plaintiff's were
denied most of the equitable relief they sought, but
obtained a temporary injunction requiring Senson to continue
selling them certain products on Senson's usual and
customary terms. This ceased when Senson subsequently
canceled the agreement on "Without Cause" grounds in May
1995. The company was notified that the plaintiff has
dismissed all proceedings as of January 1997.
On July 16, 1995, the Company was served with a
citation in Elpac Electronics vs. U.S. Technologies Inc., in
the 53rd District Court of Travis County, Texas. The
petition alleges that the Company is liable for certain
debts of a former subsidiary, American Microelectronics,
Inc. ("AMI") on the basis of fraudulent transfer of assets
from AMI to the Company. The petition seeks $101,461 in
damages plus $35,000 in attorney's fees, interest and costs.
The Company believes the complaint is without merit.
On July 16, 1995, the Company was served with a
citation in Evins Personnel Consultants vs. U.S.
Technologies Inc., County Court at Law No. 1 of Travis
County, Texas. The petition alleges that the Company is
liable for certain debts of a former subsidiary, American
Microelectronics, Inc. ("AMI") on the theory that the
Company was doing business as AMI. The petition seeks
$56,246 in damages plus $18,747 in attorney's fees, interest
and costs. The Company believes that the complaint is
without merit.
On July 16, 1995, the Company was served with a
citation in Texas Industrial Svcs. vs. U.S. Technologies
Inc., in County Court at Law No. 2 Travis County, Texas.
The petition alleges that the Company is liable for certain
debts of a former subsidiary, American Microelectronics,
Inc. ("AMI") on the theory the Company is doing business as
16
AMI. The petition seeks $24,482 in damages plus $8,000 in
attorney's fees, interest and costs. The Company believes
that the complaint is without merit.
As a part of the agreement with GWP, Inc., William
Meehan resigned his position as president and CEO of the
Company effective January 6, 1997. Subsequent to his
resignation, Mr. Meehan retained counsel in an effort to
recover amounts he asserts are due him under certain
provisions of his employment contract with the Company. The
Company believes that the claims are without merit and
intends to defend its position.
During March 1997, LTI was notified that it, AMI and
certain of AMI's former officers and directors are subject
to litigation brought by the State of Texas over alleged
sales tax underpayments by AMI. The alleged tax liabilities
occurred prior to the Company's foreclosure of its security
interest in AMI and the sale of AMI on June 30, 1994. All
assertions brought by the State are denied and will be
contested by the Company. Certain former officers and
directors who were made a party to the State's legal action
assert indemnification on the part of the Company in the
event they are held personally liable for such
underpayments. At this time the Company is not aware of any
contingent liability relating to indemnification obligations
on the part of the Company, but will address such claims if
they arise.
AMI, Republic and certain of its former officers and
directors are subject to a federal tax claim relating to
alleged unpaid payroll taxes. The alleged tax liabilities
occurred prior to the Company's foreclosure of its security
interest in AMI and the sale of AMI and Republic on June 30,
1994, and the ninety days following the sale of these former
subsidiaries. Certain former officers and directors who are
subject to the government's claim assert entitlement to
indemnification on the part of the Company in the event they
are held personally liable. At this time, the Company is
not aware of any contingent liability relating to
indemnification obligations on the part of the Company, but
will address such claims if they arise.
There were several lawsuits outstanding against AMI and
Republic at the time they were sold. AMI and Republic are
separate corporations, incorporated under the laws of the
State of Texas. Therefore, the Company believes it has no
liability arising out of, or in connection with, any
lawsuits against AMI or Republic.
On July 14, 1989, the Company's Board of Directors
adopted a bonus plan that sets aside 1%, 2% and 3% of sales
as long as the Company has maintained pretax income of 10%,
15% and 20% of sales, respectively. The performance
17
standards will be based on a three month period of time.
Bonuses will be accrued quarterly and determined as of the
end of each calendar year. No employees will have vested
rights in the bonus plan. The Board of Directors will act
as a committee to determine who participates and the actual
amount, if any, of the individual bonuses. No bonuses were
declared during the three years ended December 31, 1996.
The Company's Board of Directors, during the year ended
December 31, 1994, guaranteed severance pay to four
individuals, including themselves, in the event of any
merger or acquisition by the Company. In such event the
company guaranteed severance pay of four months each to the
then Chairman Ryan Corley and the then Director Jack Bryant;
and two months each for Leonard Hilt and Neil Ginther, if
their employment with the Company or any subsidiary was
terminated voluntarily or involuntarily for any reason (with
or without cause) within six months following the closing of
any acquisition or merger. The same conditions applied if
any of the parties resigned before the designated date. Mr.
Ginther resigned from the Company during February 1995 and
Mr. Corley and Mr. Bryant resigned from the Company during
July 1995. Mr. Ginther has stated that he did not wish to
claim the severance, while Messieurs Corley and Bryant have
requested payment. During 1995, the new Board of Directors
questioned the legality of this form of compensation. The
severance pay of $46,000 has not been recorded in the
accompanying financial statements due to the uncertainty.
On July 25, 1997, Brian J. McCluskey filed a complaint
in the Supreme Court of the State of New York, county of
Nassau, claiming breach of an alleged employment contract
supposedly entered into on September 3, 1996. Management
does not believe that an employment contract existed between
the Company and Mr. McCluskey, an investment banker in New
York City, or that Mr. McCluskey was, otherwise, an employee
of the Company. Management intends to vigorously defend
this case.
On July 14, 1997, Ryan Corley filed a petition in the
District Court of Travis County, Texas, claiming breach of a
contract established by a Board resolution adopted by the
Board of Directors of U.S. Technologies Inc. on October 27,
1994, wherein, the Board allegedly guaranteed Ryan Corley
four (4) months severance pay in the event of a voluntary
termination of his employment within six (6) months
following the close of any merger or acquisition by the
Company. Management does not believe that this Board
resolution created an employment contract nor that, in fact,
any merger or acquisition by the Company, in fact, occurred
which would, in any event, give rise to a severance pay
obligation of the Company. Management intends to vigorously
defend this case.
18
Included in accrued liabilities of the Company is
$215,000 representing accrued but unpaid compensation to Mr.
William Meehan, the former president and CEO of the Company.
The Company accrued the compensation on a monthly basis
under the terms of an employment contract between the
Company and Mr. Meehan. In 1997, Mr. Meehan initiated an
administrative proceeding before the Texas Workforce
Commission which ordered the payment of approximately
$56,000 to Mr. Meehan. The Company believes that it has no
liability to Mr. Meehan because of, among other things, the
breach of his employment contract. The Company intends to
vigorously contest this ruling by way of an appeal of the
ruling of the Texas Workforce Commission to a Texas state
court of competent jurisdiction and shall assert against Mr.
Meehan certain claims, defenses and offsets in excess of the
accrued but unpaid salary recorded on the books of the
Company, including breach of fiduciary duty and illegality.
10. SHAREHOLDERS EQUITY
The following table reconciles the number of commons
shares shown as outstanding on the balance sheet with the
weighted average number of common and common equivalent
shares used in computing earnings per share for the nine
months ended September 30, 1997, and 1996:
1997
1996
Common shares outstanding 27,907,263
21,257,263
Effects of using weighted average
shares outstanding ( 2,809,194)
( 4,138,755)
Shares used in computing earnings
per share 25,098,069
17,118,508
On August 7, 1996, the Company purchased an 85%
interest in the QuakeAlarm technology for $552,500 by an
exchange of 3,536,000 shares of the Company's common stock.
This fully integrated early warning earthquake alarm can
detect first signs of an imminent earthquake by sensing the
quake's "P" (primary) wave. The purchase of the majority
ownership gives the Company the exclusive manufacturing and
marketing rights to the product worldwide. The purchased
technology is being amortized over 5 years on the straight
line method. Amortization in the amount of $46,042 has been
charged to expense during the year ended December 31, 1996.
As a part of the agreement with GWP, Inc. certain
accounts receivables, accrued expenses and notes payable
19
from Tintagel, Ltd., Laura Investments, Ltd., and Laura
Technologies, Ltd. in the amount of $748,215 was contributed
to additional paid in capital effective December 31, 1996.
During the year ended December 31, 1996, the Company
issued 1,845,300 shares of common stock to retire
outstanding notes payable to Carlton Technologies Limited in
the amount of $571,237. At the time the stock was issued to
Carlton Technologies Limited only $421,032 of notes payable
was due; therefore a receivable for $150,205 has been
recorded as a reduction of stockholders equity.
11. RELATED PARTIES
Carolyn Meehan, wife of William Meehan, president and
CEO of the Company until his resignation on January 6, 1997,
is president of Carlton Technologies Limited with whom the
Company had various loans during 1995 and 1996 and had a
loan in the amount of $397,212 as of December 31, 1995.
Many of these loans were retired by the issuance of the
Company's common stock in exchange for the debt. At
December 31, 1996, the Company had a receivable of $150,205
from the issuance of common stock in excess of debt to
Carlton.
Mr. K. H. Smith and Mr. James V. Warren are majority
shareholders in GWP, Inc., ("GWP") from which the Company
has an account receivable in the amount of $270,000 as of
December 31, 1996. Effective January 7, 1997, Mr. Smith
became President, CEO and Director of the Company. Mr.
Warren became a director effective January 7, 1997, and
Chairman of the Board effective January 20, 1997.
12. SUBSEQUENT EVENTS
On October 1, 1997, the Board of Directors voted to
retire notes payable and interest accrued thru October 1,
1997, in exchange for shares of common stock that
transferred on October 29, 1997. The total debt retired
amounts to $122,766.
20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
Working capital, while still negative, improved by
$108,933 at September 30, 1997, ending at $(398,535) as
compared to $(507,468) at December 31, 1996. This
improvement was made possible by an injection of additional
equity from new management. The Company still has not taken
advantage of any bank debt at this time, choosing instead to
fund itself through cash flows from operations and
additional equity. Funds provided under this method funded
the large increases in net sales and accounts receivable
while accounts payable increased only $126,556 or 15.7% for
the nine month period ending September 30, 1997. The
Company's consolidated financial statements have been
presented on the basis that the Company is a going concern
which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. New management believes that the Company's
continued existence will be accomplished by solving its
liquidity problem through profitable operations and with
financing provided by additional equity.
The Company adapted Financial Accounting Standard
("FASB") No. 109, "Accounting for Income Taxes" during the
year ended December 31, 1993, which establishes generally
accepted accounting principles for the financial accounting
measurement and disclosure principles for income taxes. The
change had no effect on any of the financial statements
presented.
Results of Operations - Quarter Ended September 30, 1997
During the three month and nine month periods
ended September 30, 1997, the Company had a net loss of
$114,535 and $849,275 or $(0.004) and $(0.03) per
weighted-average share, on net sales of $1,230,964 and
$2,964,764 as compared to net losses of $436,678 and
$1,333,905 or $(0.02) and $(0.08) per weighted-average
share, on net sales of $296,004 and $707,713 for the
comparable periods in 1996. Net sales for the three
month period and the nine month period ending September
30, 1997 increased 315% and 318%, respectively, over
the comparable periods in 1996. Net sales for the
three month and the nine month periods ending September
30, 1997, were 87.2% and 210%, respectively, of the
total net sales for the entity for all of 1996,
amounting to $707,713.
Gross margin for the three month and nine month
periods ended September 30, 1997, was a positive 27.6%
21
and 18.9% compared to the negative gross margins of
(168.1%) and (190.2%) for the comparable periods in
1996. This continues to reflect new management's
success in the overall turnaround of the Company.
Selling expenses represented only 2% of sales for
both the three month and nine month periods ended
September 30, 1997, compared to 6.4% and 18.2% for the
comparable periods in 1996. This significant decrease
in sales expense for 1997 was the direct result of
policy changes implemented immediately by new
management. This included sales personnel being placed
on a commission only basis, and being held accountable
for certain minimum sales volumns.
Administrative expenses for the three month and
nine month periods ended September 30, 1997, was only
33.9% and 36.5% of sales as compared to 65.9% and
70.9% for the comparable periods in 1996. The
tremendous percentage decrease is due to new
management's immediate and aggressive cost cutting
measures primarily in the reduction of staff. More
efficient systems were implemented and duties
reassigned so as to handle the increased sales volume
with fewer people.
No expenditures were made during the periods
reported on for research and development in 1997 and
1996.
While the Company anticipates a continued
increase in demand for its products and services, the
capacity to meet these demands are limited by
equipment, personnel and working capital.
The Company does not anticipate that
inflationary trends will have a material impact on its
results of operations because of the short-term nature
of its contracts.
22
PART II.
OTHER INFORMATION
23
Part II
Item 1. Legal Proceedings.
On March 22, 1995, the Company was served with a
citation in TTI Testron, Inc. vs. American Microelectronics,
Inc. and Lockhart Technologies, Inc., County Court at Law
No. 1, Travis County, Texas, Cause No. 221,094. The
petition alleges that Lockhart Technologies, Inc. received
the assets of American Microelectronics Inc. without
consideration. The action seeks damages of $11,527. The
Company believes the claim is without merit.
On January 24, 1995, an action styled SensonCorp
Systems, Inc., SensonCorp Pacific, SensonCorp Southeast,
SensonCorp West, Creative Media Resources vs. SensonCorp
Limited, William Meehan, Dugal Allen, John Allen, DOES 1
through 50, in the United States District Court Northern
District of California, Cause No. C-95-00282. The action
seeks equitable relief and damages for breach of contract,
breach of implied warranty of good faith and fair dealing,
common law fraud, negligent misrepresentation, unfair
competition, interference with contract, accounting,
receiver/attachment, and theft of trade secrets. The causes
of action are related to a marketing agreement between
Senson and the plaintiffs. The suit does not specify the
dollar amount of damages sought. The plaintiff's were
denied most of the equitable relief they sought, but
obtained a temporary injunction requiring Senson to continue
selling them certain products on Senson's usual and
customary terms. This ceased when Senson subsequently
canceled the agreement on "Without Cause" grounds in May
1995. The company was notified that the plaintiff has
dismissed all proceedings as of January 1997.
On July 16, 1995, the Company was served with a
citation in Elpac Electronics vs. U.S. Technologies Inc., in
the 53rd District Court of Travis County, Texas. The
petition alleges that the Company is liable for certain
debts of a former subsidiary, American Microelectronics,
Inc. ("AMI") on the basis of fraudulent transfer of assets
from AMI to the Company. The petition seeks $101,461 in
damages plus $35,000 in attorney's fees, interest and costs.
The Company believes the complaint is without merit.
On July 16, 1995, the Company was served with a
citation in Evins Personnel Consultants vs. U.S.
Technologies Inc., County Court at Law No. 1 of Travis
County, Texas. The petition alleges that the Company is
liable for certain debts of a former subsidiary, American
Microelectronics, Inc. ("AMI") on the theory that the
Company was doing business as AMI. The petition seeks
$56,246 in damages plus $18,747 in attorney's fees, interest
24
and costs. The parties are in the discovery state, but the
Company believes that the complaint is without merit.
On July 16, 1995, the Company was served with a
citation in Texas Industrial Svcs. vs. U.S. Technologies
Inc., in County Court at Law No. 2 Travis County, Texas.
The petition alleges that the Company is liable for certain
debts of a former subsidiary, American Microelectronics,
Inc. ("AMI") on the theory the Company is doing business as
AMI. The petition seeks $24,482 in damages plus $8,000 in
attorney's fees, interest and costs. The Company believes
that the complaint is without merit.
As a part of the agreement with GWP, Inc., William
Meehan resigned his position as president and CEO of the
Company effective January 6, 1997. Subsequent to his
resignation, Mr. Meehan retained counsel in an effort to
recover amounts he asserts are due him under certain
provisions of his employment contract with the Company. The
Company believes that the claims are without merit and
intends to defend its position.
During March 1997, LTI was notified that it, AMI and
certain of AMI's former officers and directors are subject
to litigation brought by the State of Texas over alleged
sales tax underpayments by AMI. The alleged tax liabilities
occurred prior to the Company's foreclosure of its security
interest in AMI and the Sale of AMI on June 30, 1994. All
assertions brought by the State are denied and will be
contested by the Company. Certain of the former officers
and directors made a party to the State's legal action
assert indemnification on the part of the Company in the
event they are held personally liable for such
underpayments. At this time the Company is not aware of any
contingent liability relating to indemnification obligations
on the part of the Company, but will address such claims if
they arise.
AMI, Republic and certain of its former officers and
directors are subject to a federal tax claim relating to
alleged unpaid payroll taxes. The alleged tax liabilities
occurred prior to the Company's foreclosure of its security
interest in AMI and the Sale of AMI and Republic on June 30,
1994, and the ninety days following the sale of these former
subsidiaries. Certain former officers and directors who are
subject to the government's claim assert entitlement to
indemnification on the part of the Company in the event they
are held personally liable. At this time the Company is not
aware of any contingent liability relating to
indemnification obligations on the part of the Company, but
will address such claims if they arise.
There were several lawsuits outstanding against AMI and
Republic at the time they were sold. AMI and Republic are
25
separate corporations, incorporated under the laws of the
State of Texas. Therefore, the Company believes it has no
liability arising out of or in connection with any lawsuits
against AMI or Republic.
On July 25, 1997, Brian J. McCluskey filed a complaint
in the Supreme Court of the State of New York, county of
Nassau, claiming breach of an alleged employment contract
supposedly entered into on September 3, 1996. Management
does not believe that an employment contract existed between
the Company and Mr. McCluskey, an investment banker in New
York City, or that Mr. McCluskey was, otherwise, an employee
of the Company. Management intends to vigorously defend
this case.
On July 14, 1997, Ryan Corley filed a petition in the
District Court of Travis County, Texas, claiming breach of a
contract established by a Board resolution aadopted by the
Board of Directors of U.S. Technologies Inc. on October 27,
1994, wherein, the Board allegedly guaranteed Ryan Corley
four (4) months severance pay in the event of a voluntary
termination of his employment within six (6) months
following the close of any merger or acquisition by the
Company. Management does not believe that this Board
resolution created an employment contract nor that, in fact,
any merger or acquisition by the Company, in fact, occurred
which would, in any event, give rise to a severance pay
obligation of the Company. Management intends to vigorously
defend this case.
Included in accrued liabilities of the Company is
$215,000 representing accrued but unpaid compensation to Mr.
William Meehan, the former president and CEO of the Company.
The Company accrued the compensation on a monthly basis
under the terms of an employment contract between the
Company and Mr. Meehan. In 1997, Mr. Meehan initiated an
administrative proceeding before the Texas Workforce
Commission which ordered the payment of approximately
$56,000 to Mr. Meehan. The Company believes that it has no
liability to Mr. Meehan because of, among other things, the
breach of his employment contract. The Company intends to
vigorously contest this ruling by way of an appeal of the
ruling of the Texas Workforce Commission to a Texas state
court of competent jurisdiction and shall assert against Mr.
Meehan certain claims, defenses and offsets in excess of the
accrued but unpaid salary recorded on the books of the
Company, including breach of fiduciary duty and illegality.
Item 2. Changes in the Rights of the Company's Security
Holders
26
No changes in the rights of the Company's Security
holders occurred during the period covered by this Form 10-
Q.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Security holders
during the period covered by this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
Company filed Form 8-K on September 26, 1997, regarding
a change in control of the Company occurring on April 7,
1997.
27
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
U.S. TECHNOLOGIES INC.
DATE: August 14, 1997 BY: s/K. H. Smith
K. H. Smith
President and CEO
28
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