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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2 to
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission file number 0-15960
U.S. TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 73-1284747
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3901 Roswell Road, Suite 300, Marietta, Georgia 30062
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 565-4311
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Securities registered pursuant to Section 12(b) of the Act: None
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<S> <C>
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.02 par value
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(Title of class)
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company (including the notes thereto)
included under ITEM 8.
General. Effective January 1, 1997, the Company entered into an
agreement under which a majority of the Company's stock was acquired by Mr.
Kenneth H. Smith and Mr. James V. Warren. As a condition of the acquisition, all
of the Company's prior members of the Board of Directors and management
resigned. Mr. Smith and Mr. Warren assumed control of the Board of Directors and
Mr. Smith assumed control of operations of the Company. During 1997, a new
management team has been assembled and the Company's operations have been
restructured.
Overview of 1995 through 1997. The Company reported losses in each of
the last three years for a variety of reasons. During 1995, the Company
attempted, with little success, to rebuild its customer base, most of which had
been lost in 1994 due to poor production and quality at the Company's PIE
operation at LTI. In response to this, the Company began a search to find and
acquire products or technologies which could be produced with the Company's PIE
labor force. Unfortunately, the plan to acquire companies and products did not
succeed and the Company did not begin to take steps to control costs or reduce
the size of its workforce. In 1996, these same problems persisted as revenues
declined below 1995 levels while staffing and expenses continued to increase
unabated.
In January 1997, as part of the transaction through which control of
the Company passed to the new management team, the Company received a
significant infusion of equity capital of approximately $356,000. This capital
infusion was used to finance the significant expansion of the Company's EM
operations. The new management team took immediate steps to cut costs and
improve production management, product quality and customer service. All these
steps resulted in an immediate increase in revenues with existing customers and
opportunities to serve new customers. These steps also resulted in the
recognition of a restructuring charge to recognize the cost of severance and
lay-off of excess personnel of approximately $197,000.
The new management team also made a thorough evaluation of the value of
the assets acquired by prior management and took appropriate steps to write off
the value of assets which would not be realized, totaling approximately
$1,409,000, and obsolete inventory, in the amount of approximately $307,000. The
new management team also acted to resolve most of the outstanding litigation,
inherited from prior management, recognizing a charge of approximately $252,000.
The Company's new management also converted approximately $119,000 of the
Company's long term debt, plus $27,000 of accrued interest into equity.
After recognizing, during the second quarter of 1997, the effect of the
adjustments described above, the Company's net income for the final six months
of 1997 was approximately
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$22,000. As discussed under "Liquidity and Capital Resources," preliminary data
for the first quarter of 1998 suggests that this trend is continuing.
The relationship with WCC has improved to the point, that in August
1997, the Company and WCC executed an agreement under which the Company serves
as WCC's "industry partner," and WCC agreed to identify and purchase, to the
extent possible, products from the Company. This revitalized relationship has
also led the Company into numerous opportunities with several state prison
systems, whereby the Company is exploring opportunities to manage prison
industries owned by those various states.
Results of Operations. The following table sets forth the Company's
results of operations expressed as a percentage of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 1995
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<S> <C> <C> <C>
Net sales 100 % 100 % 100 %
Operating costs and expenses:
Cost of Sales 82 % 178 % 90 %
Selling expenses 1 % 18 % 14 %
General and administrative expense 27 % 68 % 91 %
Impairment of long lived assets 34 % 0 % 0 %
Restructuring charge 5 % 0 % 0 %
Other - litigation 6 % 0 % 0 %
---- ---- ----
Total operating costs and expenses 155 % 264 % 195 %
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Loss of operations (55)% (164)% (95)%
---- ---- ----
Other income (expense)
Interest (1)% (1)% (6)%
Gain on disposal 0 % 0 % 0 %
of subsidiary 0 % 0 % 0 %
Other 2% (18)% 6 %
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Total other 1 % (19)% 0 %
---- ---- ----
Net loss (54)% (183)% (95)%
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Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
During the year ended December 31, 1997, the Company had a net loss of
$2,242,745 or $0.08 per weighted-average share, on net sales of $4,166,626, as
compared to a net loss of $2,583,012 or $0.14 per weighted-average share on net
sales of $1,410,498 for the year ended December 31, 1996. The net sales increase
of 195% was a result of improvements instituted by the Company's new management
which included: converting all sales employees to commission-only sales agents,
improved bidding techniques, improved product quality and faster service.
On April 1, 1997, the Company recognized a $1,408,839 non-cash charge
for the impairment of long-lived assets to write off all remaining assets
described as goodwill and investments in technologies. These included the
remaining unamortized cost of acquired
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technologies and goodwill of acquired companies. The assets and technologies,
which had been inactive during 1997 and 1996, were thoroughly evaluated by the
Company's new management and found to have no value. During the first quarter of
1997, amortization of these assets totaled $111,078.
Also on April 1, 1997, the Company recognized a charge to restructure
the Company's operations. The charge, in the amount of $196,903, represents the
costs of severance to terminate thirteen management, sales and administrative
positions and lay-off 50 inmates at LTI. The Company also recognized a charge,
in the amount of $252,256 to accrue for losses, which management considers to be
"probable," for lawsuits with third parties and the Company's former management.
Finally, on April 1, 1997, the Company recognized a non-cash charge to
adjust its inventory valuation allowance to write off all remaining obsolete
inventory in the amount of $306,888.
The net loss recognized in the years ended December 31, 1997 and 1996,
includes certain charges and accruals which, in the option of management, are
nonrecurring. Excluding the impairment charge of $1,408,839, the related first
quarter amortization of $111,078, the restructuring charge of $196,903, the
charge to accrue for litigation losses of $252,256, and the write off of
obsolete inventory of $306,888, the Company's pretax profit for the year ended
December 31, 1997, would have likely been $33,219. For the year ended December
31, 1996, the net loss, before write off of obsolete inventory of $290,000 and a
charge to write off of the value of the Company's National Cycle League
franchise in the amount of $265,000 was $2,028,012. Excluding nonrecurring
charges, the pretax profit for 1997 improved by $2,061,231.
EBITDA is defined as income before income taxes plus interest expense
and depreciation and amortization. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principals, it is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital requirements. In
addition, the Company believes that certain investors find EBITDA to be a useful
tool for measuring the ability of the Company to fund its cash needs.
Furthermore, in the opinion of management, "normalized EBITDA," which excludes
the nonrecurring charges incurred in 1997, of the impairment charge of
$1,408,839, the restructuring charge of $196,903, the charge to accrue for
litigation losses, of $252,256, and the write off of obsolete inventory of
$306,888, provides certain investors with a more relevant comparison of the
Company's progress. On that basis, the Company's normalized EBITDA in 1997
totaled $126,526, compared to a normalized EBITDA of negative $1,533,808 in
1996, which excluded a charge to write off obsolete inventory of $290,000 and a
charge to write off the value of the Company's National Cycle League franchise
in the amount of $265,000. The improvement in normalized EBITDA in 1997,
compared to 1996, totaled $1,660,334.
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Cost of goods sold, in the amount of $3,424,313, decreased as a
percentage of net sales to 82% for the year ended December 31, 1997 from
$2,513,672, which represented 178% of net sales, for the year ended December 31,
1996. These amounts include charges to write off obsolete inventory in the
amount of $306,888 in 1997, and $290,000 in 1996. Excluding the write offs of
obsolete inventory, cost of goods sold would have represented approximately 75%
and 158% of net sales for the years ended December 31, 1997 and 1996,
respectively. The improvement in the Company's cost of goods sold is primarily
as a result of changes instituted by the Company's new management, the
recognition of the charges described above, improved production management,
improved purchasing procedures, improved bidding procedures and improved
quality. As a result of the improvement in cost of sales throughout 1997,
management believes that cost of goods sold for the EMP operations will improve
in 1998 by approximately 5%.
Selling expenses in the amount of $70,869 represented 1% of net sales
during the year ended December 31, 1997 compared to $245,232 representing 18% of
net sales for the year ended December 31, 1996. These expenses decreased
primarily due to the termination of the Company's full time sales employees and
replacing their efforts with independent sales agents, compensated on a
commission-only basis. The improvement in performance on a percentage basis was
also affected by increased volume in 1997.
General and administrative expenses totaled $1,118,310 for the year
ended December 31, 1997 which represented 27% of net sales, compared to $961,195
which represented 68% of net sales for the year ended December 31, 1996. The
improvement in general and administrative expenses are attributable to the
changes described above, new management's effort to control costs and increased
sales in 1997. In the opinion of management, these expenses are expected to
decline as a percentage of net sales due to the fixed nature of corporate
overhead, which is not expected to increase significantly in 1998.
The 100% valuation allowance against the Company's $3,720,000 net
deferred tax asset continues to be recognized at December 31, 1997. As a result
of the series of transaction through which the Company's new management gained
control in 1997, the Company is limited in the utilization of prior accumulated
net operating losses and anticipates that $573,561 per year of net operating
losses are available to offset future annual taxable income. The Company expects
to pay taxes in 1998 in accordance with the provisions of the alternative
minimum tax and various state income tax laws as the Company's operations are
anticipated to expand into several new states.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
The Company incurred net losses of $2,583,012 and $1,861,088, respectively,
during the years ended December 31, 1996 and 1995, representing losses of $0.14
and $0.12 per weighted-average share, respectively. Net sales totaled $1,410,498
and $1,951,487 during the years ended December 31, 1996 and 1995, respectively.
During 1994, the Company initiated its EM operations at the WCC correctional
facility in Lockhart, Texas and experienced significant operations and quality
problems which were not resolved in 1995 or 1996. Customer dissatisfaction
resulted in severe financial difficulties. This impaired the Company's ability
to meet its payroll and raw materials purchasing obligations, thwarting efforts
to increase production and sales volume. The Company
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did not correct its manufacturing problems or reduce its staffing levels
sufficiently to curtail or minimize the financial hardship.
As a result of the operating difficulties described above, the
Company's cost of goods sold, in the amount of $2,513,672, represented 178% of
net sales for the year ended December 31, 1996. During the year ended December
31, 1995, cost of goods sold was $1,764,121, which represented 90% of net sales.
During the years ended December 31, 1996 and 1995, cost of goods sold
included charges of $290,000 and $262,000 respectively, for adjustments to
reduce the value of inventory to the lower of cost or market as a result of
obsolescence. New management was instrumental in the decision, at the end of
1996, to recognize the addition to the inventory valuation reserve recognized in
1996. A significant portion of these items had been acquired in 1994 through the
transfer of inventory from a predecessor company.
Selling expenses totaling $245,232 and $270,906 represented 18% and 14%
of net sales in the years ended December 31, 1996 and 1995 respectively. General
and administrative expenses totaling $961,195 and $1,777,934 represented 68% and
91% of net sales for the years ended December 31, 1996 and 1995, respectively.
During the year ended December 31, 1995, the Company included in its general and
administrative expenses operating costs for offices in Vancouver, British
Columbia and Phoenix, Arizona; a charge of $300,000 to write off the value of an
acquired technology; and recognized a charge of $147,181 as compensation expense
related to the Company's stock option plans.
Liquidity and Capital Resources. During the three years ended December
31, 1997, 1996 and 1995 the Company experienced negative operating cash flows of
$560,302, $478,354 and $549,260 respectively. Negative cash flows from
operations resulted principally from the operating losses incurred during these
years which, during 1997, were largely offset by non-cash reductions of (1)
$179,194 for depreciation and amortization, (2) $1,408,830 of charges for
impairment of long lived assets and (3) $306,888 for inventory valuation
allowance. The primary uses of cash during 1997 were to fund the reduction of
accounts payable and the increase in accounts receivable attributable to
increased sales volume. During 1995 and 1996, the Company increased its accounts
payable and accrued expenses by $155,331 and $892,589, respectively, which
contributed to the funding of negative cash flow from operations, but severely
impaired the Company's relation with its suppliers.
Cash used in investing activities of $58,942 and $3,294 during 1997 and
1995, respectively, were for the purchase of equipment.
Cash provided by financing activities of $618,185, $454,042 and
$575,835 during 1997, 1996 and 1995, respectively, were primarily the net
proceeds of common stock and debt issuances. During 1995 and 1996, the Company
funded its operations through borrowings totaling approximately $571,000, from
companies controlled by prior management, later repaid through the issuance of
1,845,000 shares of restricted stock. In 1996, the Company completed a private
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placement of debt, of approximately $144,000, of which all but $25,000, has been
converted to equity by the Company's new management in 1997.
As a result of the acquisition of the Company by the investors group
led by Mr. Smith and Mr. Warren, and the resulting issuance of 6,000,000 shares
of the Company's common stock, $536,613 was contributed to working capital in
1997. This contribution significantly improved the Company's financial condition
thus strengthening the Company's relationships with vendors and allowing the
Company to finance significant increases in sales volume.
While the Company was able to increase its sales volume in 1997 by
approximately 195%, and substantial progress was made by improving all aspects
of operating costs, net working capital declined by $142,125 from a negative
$707,467 as of December 31, 1996, to a negative $849,592 as of December 31,
1997, resulting principally from a $306,888 write off of inventory made as part
of management's evaluation of the carrying value of its assets on an ongoing
basis. Accounts receivable increased by $102,680 to $341,327, representing
approximately 30 days' sales, at December 31, 1997, from $238,647, representing
approximately 62 days' sales as of December 31, 1996. This improvement was the
result of new management's efforts to improve quality and customer service.
Inventory declined by $397,294 to $74,933 at December 31, 1997 from $472,227 at
December 31, 1996, primarily as a result of the $306,888 write down of obsolete
inventory during the second quarter of 1997. Accounts payable declined by
$238,363 to $567,841, representing approximately 66 days' cost of sales
(excluding changes in the reserve for inventory obsolescence), at December 31,
1997, from $806,204, representing approximately 132 days' cost of sales, at
December 31, 1996, (excluding changes in the reserve for inventory
obsolescence).
The improvements described above were primarily the result of new
management's efforts to improve relations with its suppliers described above. In
an effort to improve cash flow from operations, during 1997, management also
reached an agreement with its largest customer by which this customer pays for
products produced by the Company on the 15th and 30th of each month. The Company
has also negotiated favorable terms for payment with several key suppliers and
one former supplier.
On January 12, 1998, the Company issued 4% convertible subordinated
debentures and 275,000 common stock purchase warrants exercisable at $1.00 per
share, through a private placement to certain foreign investors pursuant to a
claim of exemption under Regulation "S" promulgated by the Securities and
Exchange Commission under the Securities Act of 1933. The net proceeds to the
Company, before legal and other costs, were $247,500, which were used to
liquidate certain 1996 liabilities at a substantial discount and provide working
capital to support the Company's operations. On February 25, 1998 and March 5,
1998, the holders of the debentures converted the amounts outstanding into
563,215 shares of the Company's common stock. All of the warrants remain
outstanding.
The Company's operating budgets for 1998 call for total revenues of
approximately $10,000,000 from a total of seven operating facilities, of which
the LTI facility in Lockhart, Texas
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will contribute approximately $8,000,000. Net income from all operations is
anticipated to be approximately $700,000. Management believes that preliminary
data for the first quarter of 1998 indicates that the Company will meet or
exceed its first quarter goals toward achieving the 1998 budget.
The Company's growth plans include the entry into non-garment
cut-and-saw operations and a customer call center. The Company is currently
involved in substantial discussions with several states in which the Company has
been asked to take over existing state-run call center operations. The Company
has also entered into substantial discussions with a furniture manufacturer who
plans to repatriate a furniture assembly operation currently performed outside
the United States.
Most of these expansions will not require significant up-front capital
investments. As the Company prepares to enter its first cut-and-sew operation,
at a WCC correctional facility in McFarland, CA, its initial start-up investment
will be approximately $10,000. This operation is the first to take advantage of
WCC's effort to identify products which it currently buys from outside
suppliers, which will now be made by inmates at a WCC facility in which the
Company is operating a PIE business. Management believes that the cash flow
generated from operations is adequate to enable the Company to continue to
expand its Lockhart, Texas operations and expand into the six new facilities
planned for 1998.
If it became necessary for a significant cash infusion to fund its
expansion or operations, the Company could pursue several courses of action. The
Company could factor its accounts receivable which are primarily with Fortune
1000 companies, also, all of the Company's assets, including inventory and fixed
assets, are unencumbered and could be used as collateral, if needed. Management
believes that these cash infusion measures could raise up to $500,000, depending
upon the underlying value of the assets. In addition, if it became necessary,
depending upon the underlying value of the assets. In addition, if it became
necessary, management could reduce certain fixed costs by reducing personnel at
its Lockhart, Texas location and its corporate headquarters in Marietta,
Georgia. Management estimates that the cost savings from these reduction
measures could total approximately $200,000.
The Company's 1998 plans call for expansion into new prison facilities.
The timetable for the expansion could be accelerated with the infusion of
additional capital. The Company is continuing to negotiate with potential
investors for additional capital. In January 1998, the Company obtained $275,000
of new capital. The initial terms of the new funding could have allowed the
Company to access up to $1,000,000 of capital, however, management determined
that its cash needs did not warrant the cost of capital of the additional
funding. Furthermore, management was in negotiations with additional potential
investors with more favorable funding terms. The Company currently has a letter
of intent which is subject to due diligence from a potential investor to provide
$5,000,000 of funding through the issuance of convertible preferred stock and
warrants. In addition, the terms of the proposed agreement provide that if the
Company receives a proposal from a third party to provide additional financing,
the potential investor would have a
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right of first refusal to provide financing on the same terms as offered by the
third party. There is no guarantee that this funding will take place.
The Company's continued existence is dependent upon its ability to
continue to resolve its unfavorable liquidity status. While there is no
assurance that such problems can be resolved, the Company believes there is a
reasonable expectation of achieving that goal through cash generated from
operations, the expansion of operations and the sale of additional stock through
private placements. Should the Company be unable to achieve its financial goals,
the Company may be required to significantly curtail its operations.
Inflation. Inflation has not had a material impact on the Company's
operations.
New Accounting Pronouncements. Statement of Financial Accounting
Standards ("SFAS") No. 128," Earnings per Share," is effective for fiscal years
ending after December 15, 1997. This statement established standards for
computing and presenting earnings per share ("EPS"). The provisions of this
pronouncement have been reflected in the accompanying financial statements.
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company has addressed the
requirements of SFAS No. 130 and no material impact on the financial statements
is expected.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally certain financial information is required to be reported
on the basis that it is used internally for evaluating performance of and
allocation of resources to operating segments. The Company has not yet
determined to what extent the standard will impact its current practice of
reporting operating segment information.
Computer Systems. The Company is currently evaluating its computer
systems to determine whether modifications and expenditures will be necessary to
make its systems and those of its vendors compliant with year 2000 requirements.
These requirements have arisen due to the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. Many of these programs may fail as a result of their inability to
properly interpret date codes beginning January 1, 2000. For example, such
programs may interpret "00" as the year 1900 rather than 2000. In addition, some
equipment, being controlled by microprocessor chips, may not deal appropriately
with the year "00." The Company believes it will timely meet its year 2000
compliance requirements and does not anticipate that the cost of compliance will
have a material adverse effect on its business, financial condition or results
of operations. However, there can be no assurance that all necessary
modifications will be identified
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and corrected or that unforeseen difficulties or costs will not arise. In
addition, there can be no assurance that the systems of other companies on which
the Company's systems rely will be modified on a timely basis, or that the
failure by another company to properly modify its systems will not negatively
impact the Company's systems or operations.
Safe Harbor Statement Under the Private Securities Litigation Reform
Act of 1995. Certain statements in this annual report on form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and are
made on the basis of management's plans and current analyses of the Company, its
business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for 1998 and beyond to differ materially from those expressed or
implied in such forward-looking statements, even if experience or future changes
make it clear that any projected results expressed or implied therein will not
be realized.
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
U.S. TECHNOLOGIES INC.
By: /s/ Kenneth H. Smith
---------------------------------
Kenneth H. Smith
Chairman of the Board, President
and Chief Executive Officer
Dated: July 10, 1998
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