<PAGE> 1
Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to
Commission file number 0-15960
U.S. TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter.)
State of Delaware 73-1284747
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3901 Roswell Road, Suite 300
Marietta, Georgia 30062
(Address of principal executive offices.) (Zip Code)
Registrant's telephone number, including area code: (770) 565-4311
-----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant at April 8, 1998 was approximately $10,413,014.
The number of shares outstanding of the Registrant's Common Stock, par value
$0.02 per share, at April 8, 1998 was 29,195,278 shares.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1. Business [2]
Item 2. Properties [5]
Item 3. Legal Proceedings [5]
Item 4. Submission of Matters to a Vote of Security Holders [5]
PART II
Item 5 Market for Registrant's Common Equity and related
Stockholders matters [6]
Item 6. Selected Financial Data [7]
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations [8]
Item 8. Financial Statements and Supplementary Data [14]
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure [32]
PART III.
Item 10. Directors and Executive Officers of the Registrant [33]
Item 11. Executive Compensation [35]
Item 12. Security Ownership of Certain Beneficial Owners
and Management [37]
Item 13. Certain Relationships and Related Transactions [37]
PART IV.
Item 14. Exhibits, Financial Statement Schedules and reports on
Form 8-K [38]
Schedule II Valuation and Qualifying Accounts [40]
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL. U.S. Technologies Inc. (the "Company") is an "outsourcing company"
soliciting manufacturing, assembly, repair, kitting and customer call center
services from Fortune 1000 businesses. The Company performs its services
utilizing prison labor under the Prison Industry Enhancement Program ("PIE").
The PIE program was created by Congress in 1979 to encourage States and local
units of government to establish employment opportunities for prisoners that
approximate private sector work opportunities. The program is designed to place
inmates in a realistic working environment, pay them the local prevailing wage
for similar work, and enable them to acquire marketable skills to increase their
potential for successful rehabilitation and meaningful employment upon release.
The PIE Program has two primary objectives:
To generate products and services that enable prisoners to make a contribution
to society, help offset the cost of their incarceration, compensate
crime victims, and provide inmate family support.
To provide a means of reducing prison idleness, increasing inmate job skills,
and improving the prospects for successful inmate transition to the community
upon release.
To serve its clients the Company has established U.S. Technologies Inc. as the
parent organization to provide management and financial resources to its
wholly-owned operating subsidiaries. The operating subsidiaries are
Labor-to-Industry Inc. ("LTI"), which operates the Company's manufacturing
outsourcing operations, and Service-to-Industry Inc. ("STI"), formed in March
1998, which will operate the Company's service outsourcing operations. Each
subsidiary negotiates an agreement with a prison under which facilities and
participants are available to the Company.
The Company employs a portion of the inmates at each prison facility through a
competitive process and designs the work environment to motivate and train each
participant in the specific job skills of the contracted work and the general
skills required to obtain and hold long-term employment as well as how to
advance in employment in a competitive work environment. This training is
crucial for many prisoners, who may have never held a job before their
conviction. The PIE program allows for up to 80% of the prisoners' wages to be
withheld for the purpose of paying restitution to victims, fines, reimbursing
the cost of incarceration, alimony and child support and a restricted savings
account. In this way, the PIE program aids in reducing costs to taxpayers and is
a savings vehicle to assist the former inmate's transition back into society.
The program has been successful in reducing recidivism by approximately 20%
according to the Federal Bureau of Justice and Assistance.
The Company announced in August 1997 that it had entered into an agreement with
Wackenhut Corrections Corporation ("WCC") whereby WCC will allow the Company to
operate as its "industry partner" in any correctional facility managed by WCC.
WCC also agreed to determine the products it purchases from third parties, and
to the extent possible, purchase such products from the Company. WCC operates 47
corrections facilities in the United States, Australia, England and Canada and
is the second largest manager of privatized correctional facilities in the
United States. The Company announced in February 1998 that it had reached an
agreement with the states of California and Florida to expand its operations
into corrections facilities managed by those states.
Currently, the Company operates an electronics manufacturing plant at WCC's
Lockhart, Texas corrections facility. The Company is actively pursuing
opportunities at additional WCC facilities in other states for cut-and-sew
operations to manufacture non-garment products and customer call center
operations. The Company's principal executive offices are located in the Atlanta
suburb of Marietta, Georgia.
INDUSTRY OVERVIEW. The Company's current operations have been focused on one
industry, electronics manufacturing ("EM"). The EM industry has been
characterized by rapid growth and aggressive competition based on improving
technology and decreasing cost. The Company also plans to enter the garment and
non-garment cut and sew industry and the customer call center industry.
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ELECTRONICS MANUFACTURING. Today's electronics manufacturing provider ("EMP")
industry is still relatively young. The industry has changed significantly
since the 1980s when small "mom and pop" companies handled a small market for
contract manufacturing services. By 1996, this small market had become a
large international business with approximately 1,000 companies of which the
top 50 companies' sales ranged from $100.7 million to $5.4 billion, according
to the March 1997 issue of Manufacturing Market Insider. From 1990 through
1996, the industry's sales grew from approximately $4.4 billion to
approximately $14.5 billion, according to The Institute for Interconnecting
and Packaging Electronic Circuits, representing a 22% compounded annual
growth rate. The Company provides several services including contract
manufacturing, cable and wire harness assembly and printed circuit board
fabrication. Given the emergence of new technologies and the proliferation of
electronics into virtually all segments of the world economy, management
believes the Company is poised for significant continued growth in the years
ahead.
Original equipment manufacturers ("OEM") such as Cisco, Hewlett-Packard, IBM,
Lucent, Texas Instruments and many others are increasingly relying on EMPs
for assembly and other value added services. Many OEMs have begun to view
outsourcing as a strategic tool which allows them to focus their efforts on
resources and core competencies resulting in improved flexibility and
responsiveness in all segments of their business. The benefits of outsourcing
by the OEM include: improved time to market since new products can be turned
on quickly by an EMP without the cost and time required for the OEM to
re-tool, access to state of the art manufacturing facilities and technologies
without the need for the OEM to invest in facilities capital equipment, and
lower production and procurement costs, since EM's can efficiently purchase
many generic components. Finally, EM's typically do not bear the same
overhead and benefit burdens typically incurred by OEMs.
NON-GARMENT CUT-AND-SEW. Market studies have shown that the sewing industry
is growing at a rapid rate primarily as a result of the strong demand by
consumers and the retail industry for more sophisticated products.
Notwithstanding the demand in the private sector for higher-end products, the
prison industry nationwide has been a large customer for all types of garment
and non-garment items such as prison and guard uniforms, laundry bags, pillow
cases, sheets, towels, etc. The Company believes that with their access to
the WCC facilities worldwide, there is a tremendous opportunity to gainfully
employ inmates in various cut-and-sew operations just to meet the needs of
the WCC facilities, not to mention other privatized and state-run
correctional institutions. Apart from the prison industry, much private
sector work is also available as many U. S. companies are seeking to
repatriate their overseas operations.
CUSTOMER CALL CENTER. The Company has been approached by several state
correctional facilities interested in maintaining and/or establishing new
call centers. To meet this need the Company formed STI in March 1998. In
these operations, STI will provide live operators dialing outbound and
receiving inbound calls for appointment setting, surveys and data collection,
and lead generation using inmate labor. Calls are to be monitored and/or
taped by the Company to insure the quality of the work being performed by the
operators.
Clients requiring such services, but lacking the management expertise or the
desire to run an in-house call center, outsource these "campaigns" to the
Company, usually on an hourly basis. The Company is also creating in-house
campaigns in order to consistently provide work for the inmates, given the
seasonal or sporadic nature of some client contracts.
Recognizing that the collection of personal data may be involved in some job
requests, the Company will also create a call center in the free-world, to be
run by STI. This service would allow an inmate operator to qualify a customer
for the purchase of a service or product, then transfer the call to a
free-world operator who would handle the billing arrangements. The Company's
operations also provide an additional benefit for the inmates. Those inmates
who have served their sentences and who performed well in the inmate call
center will be provided with an advantage for an immediate job opportunity
upon their release, subject to state laws governing this industry.
BUSINESS STRATEGY. The Company's strategy is to establish itself as a national
leader in the outsourcing business, soliciting a variety of labor intensive,
repetitive work from Fortune 1000 companies. To that end, the Company utilizes
the PIE program to perform its services by using a low-cost, but highly
motivated, labor pool, in modern, clean and efficient facilities. The Company
intends to operate the business in a simple and straight-forward manner by
maintaining corporate overhead at its present level during the Company's
expansion from one to seven facilities. The Company's strategy also includes the
following:
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- - Utilize existing expertise in electronics manufacturing to establish
additional facilities performing similar functions;
- - Provide ancillary services such as the assembly of kits (kitting) and
installation of parts associated with the primary electronics
manufacturing process;
- - Utilize its expertise in garment and non-garment cut-and-sew operations
to establish operations which, combined with the Company's cost
advantages, allow it to successfully compete with foreign garment
manufacturing operations;
- - Operate and expand call center locations utilizing state of the art
phone and computer systems, by providing live operators dialing
outbound and receiving inbound calls for a variety of purposes.
Management believes that significant additional capacity can be added, beyond
the first seven facilities, without significant additional corporate overhead.
GROWTH STRATEGY. The Company has established a sound working relationship with
WCC and seeks to expand that relationship by going into additional WCC
facilities with available industry workspace to establish successful PIE
programs. The Company is also working with state-run (non-privatized)
correctional facilities where industry work space is available to establish PIE
work programs. In addition to its successful electronics manufacturing facility
in Lockhart, Texas, the Company intends to rapidly expand into cut-and-sew
operations and customer call centers. The Company is also evaluating the
strategic acquisition of successfully run companies whose services and products
would be suitable for expansion into a prison industry work program.
STRATEGIC ACQUISITIONS. Due to the numerous state and privatized prison
locations now available to the Company, the Company believes it is of the utmost
importance that it make strategic acquisitions of successfully run companies to
expand those products and services in prison industry work programs. These
acquisitions will help the Company fill vacant prison industry space with
private sector industry, enabling the Company to employ hundreds of inmates. In
effecting these acquisitions, the Company does NOT expect to take jobs away from
working Americans. Rather, it expects to build on the success of the acquisition
by expanding the acquired operation into the prison and utilizing inmate labor,
while allowing the acquired original operations to remain intact. The Company
also believes that strategic acquisitions will allow it to offer paroled and
released inmates employment opportunities in the private sector (the strategic
acquisition) once they have completed their prison term. These released inmates
would already have been pre-trained and would be able to integrate more readily
into the private sector. Further, since many states will not allow inmates to
leave the state upon release, these acquisitions would allow for immediate
employment opportunities for the ex-offender notwithstanding the normal
obstacles he would face for employment as a result of being an ex-offender. The
opportunity to create a new division within the Company for post-release
employment in the private sector would also be made available through strategic
acquisitions.
EMPLOYEES. The Company employs approximately 111 persons, 100 of whom are
inmates at the WCC facility in Lockhart, Texas under the PIE program, four of
whom are clerical and bookkeeping staff who support the manufacturing operation
in Lockhart and seven of whom are members of executive management. The number of
employed inmates will increase as the customer call center and cut-and-sew
businesses become fully operational. None of the Company's employees are
represented by a union. The Company believes that its relationship with its
employees is good.
GOVERNMENTAL REGULATION. The PIE Program was created by Congress in 1979 to
encourage state and local government to establish employment opportunities for
prisoners that approximate private sector work opportunities and conditions. The
program is designed to place inmates in a realistic working environment, pay
them the state or Federal minimum or prevailing wage for similar work (whichever
is greater), and enable them to acquire marketable skills and work habits to
increase their potential for successful rehabilitation and meaningful employment
upon release. The U. S. Department of Justice's Bureau of Justice Assistance
administers the PIE Program through its Corrections Branch. Each certified PIE
Program must be determined to meet certain statutory and guideline requirements
so as to safeguard free world labor and industry and to protect free enterprise.
Mandatory criteria for participation in the PIE Program are as follows: (a)
inmates must be paid the prevailing local wage or state or Federal minimum wage,
whichever is greater, to protect private business from unfair competition that
would otherwise stem from the flow of low-cost, prison made goods into the
marketplace; (b) workers compensation and unemployment compensation benefits
must be provided; (c) inmate participation in the program must be voluntary and
in writing; (d) organized labor and local private industry must be consulted
prior to the initiation of a new PIE industry; (e) the Company must have written
assurances from the appropriate state agency that the new PIE industry will not
result in the displacement of workers employed prior to the program's
implementation, does not occur in occupations in which there is a
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surplus of labor in the locality, and does not impair existing contracts for
services; (f) deductions (not to exceed 80%) must be made from the inmates pay
for taxes, reasonable charges for room and board, family support, victims
compensation fund, and a mandatory savings account for the inmate, the proceeds
of which are available upon release. In addition to the above, each prison is
also subject to laws and regulations concerning the operation, management and
supervision of prisoner employees, which affects the operation of each of the
Company's facilities. The Company's operations are also subject to all
governmental workplace regulations commonly associated with a service or
manufacturing enterprise.
ITEM 2. PROPERTIES
LEASES AND FACILITIES
The Company's wholly owned subsidiary, LTI operates in a minimum security prison
under an agreement with WCC, the Texas Department of Criminal Justice ("TDCJ"),
the Division of Pardons and Parole (the "Division") and the City of Lockhart,
Texas. A new operating lease, which has been executed by WCC and the Company and
is in the process of being executed by the TDJC and the City of Lockhart. The
lease provides approximately 27,800 square feet of manufacturing and office
space through January 21, 2001, and provides an automatic three year extension
unless notification is given by either party at least 6 months prior to the
expiration date of the current term not to renew. The amount of square footage
may be increased or decreased depending upon the number of prisoners employed.
The lease also provides for annual rental rates of $1 per year for the primary
term and the first renewal term thereafter. Occupancy fees for successive
renewal terms shall be negotiated by written agreement of the parties. It is
expected that similar operating leases will be executed at other WCC facilities.
The Company leases approximately 3,000 Square feet for its executive offices, in
Marietta, Georgia, under a three year operating lease expiring September 30,
2000.
ITEM 3. LEGAL PROCEEDINGS.
Since taking over the Company, management has successfully resolved most of the
outstanding litigation and claims in existence as of January 1, 1997. Currently
there are four lawsuits against the Company.
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. Alleging 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 damages totaling
approximately $54,000.
On March 7, 1997, a case was filed in the name of RTLS, Inc. v. U.S.
Technologies Inc., in the District Court 274 Judicial Circuit of Caldwell
County, Texas. This matter also alleges that the Company is liable for certain
debts of a former subsidiary, AMI, on the theory that the Company was doing
business as AMI. The petition seeks damages totaling approximately $42,000.
On October 31, 1996, a consent order was signed by Mr. William Meehan, the
Company's former president, in the case of Environmental Protection Agency v.
SensonCorp, LTD., Docket No. TSCA-09-96-0002, agreeing among other things to pay
a civil penalty. The penalty was never paid and is estimated to be approximately
$7,000.
On May 6, 1997, Mr. Meehan filed a lawsuit in the 98th Judicial District Court
for Travis County, Texas, seeking payment of certain wages and other benefits
totaling approximately $330,000.
The Company believes that all the above claims are without merit and intends to
defend its position vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31, 1997, to a
vote of security holders of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's stock is traded on the OTC Bulletin Board under the symbol "USXX".
The following table sets forth the high and low bid prices of the Common Stock
in the over-the-counter market for the years ended December 31, 1997 and 1996.
Prices for the year ended December 31, 1997 and for the quarter ended December
31, 1996, are as quoted on the OTC Bulletin Board System. Prior to the fourth
quarter of 1996, the Common Stock was quoted on the NASDAQ Small Cap Market.
Quotations reflect inter-dealer prices without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid
High Low
------------------------
<S> <C> <C>
1997
4th Quarter $.5200 $.2400
3rd Quarter $.4200 $.1900
2nd Quarter $.4000 $.3000
1st Quarter $.5700 $.0850
1996
4th Quarter $.2200 $.0750
3rd Quarter $.2812 $.1250
2nd Quarter $.4400 $.2200
1st Quarter $.5300 $.2800
</TABLE>
On April 8, 1998, the closing bid price of the Common Stock, as quoted on the
OTC Bulletin Board system, was $0.7500
HOLDERS OF COMMON STOCK
As of April 8, 1998, there were 438 holders of record of the Company's Common
Stock. This number is exclusive of beneficial owners whose securities are held
in street name.
DIVIDENDS
The Company has not declared or paid any cash dividend on its Common Stock. The
policy of the Board of Directors of the Company is to retain earnings for the
expansion and development of the Company's business. Future dividend policy and
the payment of dividends, if any, will be determined by the Board of Directors
in light of circumstances then existing, including the Company's earnings,
financial condition and other factors deemed relevant by the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
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 was 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.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December 31,
1997, 1996, 1995, 1994 and 1993 is derived from the Company's audited financial
statements. This information should be read in conjunction with the financial
statements for 1997, 1996 and 1995 and notes thereto included elsewhere herein
and "Management's Discussion and Analyses of Financial Condition and Results of
Operations" included at ITEM 7. which are incorporated herein by reference.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 4,166,626 $ 1,410,498 $ 1,951,487 $ 1,668,865 $ 6,655,573
------------ ------------ ------------ ----------- -----------
Operating costs and expenses:
Cost of Sales 3,424,313 2,513,672 1,764,121 2,032,521 6,938,400
Selling expenses 70,869 245,232 270,906 368,018 423,109
General and administrative expense 1,118,310 961,195 1,777,934 1,499,036 1,742,160
Impairment of long lived assets 1,408,839 -- -- -- --
Restructuring charge 196,903 -- -- -- --
Other - litigation 252,256 -- -- -- --
------------ ------------ ------------ ----------- -----------
Total operating costs and expenses 6,471,490 3,720,099 3,812,961 3,899,575 9,103,669
------------ ------------ ------------ ----------- -----------
Loss from operations (2,304,864) (2,309,601) (1,861,474) (2,230,710) (2,448,096)
------------ ------------ ------------ ----------- -----------
Other income (expense):
Interest (25,191) (20,277) (112,387) (20,016) (60,438)
Gain on disposal
of subsidiary -- -- -- 1,376,959 --
Other 87,310 (253,134) 112,773 26,751 155,962
------------ ------------ ------------ ----------- -----------
Total other 62,119 (273,411) 386 1,383,694 95,524
------------ ------------ ------------ ----------- -----------
Net loss $ (2,242,745) $ (2,583,012) $ (1,861,088) $ (847,016) $(2,352,572)
============ ============ ============ =========== ===========
Basic and diluted loss per common share $ (0.08) $ (0.14) $ (0.12) $ (0.16) $ (0.62)
============ ============ ============ =========== ===========
Weighted average shares outstanding 26,793,999 18,555,439 14,997,532 5,302,147 3,794,631
============ ============ ============ =========== ===========
BALANCE SHEET DATA:
Working capital $ (849,592) $ (707,467) $ 574,146 $ 779,566 $ (304,190)
Total assets 869,742 2,652,682 3,326,537 2,120,340 2,685,325
Total debt (1) 54,821 144,000 840,435 50,000 207,734
Stockholders' equity (capital deficit) (419,911) 1,088,520 1,859,785 1,633,082 760,297
</TABLE>
(1) Includes long-term debt, current maturity of long-term debt, capital
lease obligations and notes payable.
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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 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 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 $536,000. 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 $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,
----------------------------
1997 1996 1995
---- ---- ----
<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%
---- ---- ----
Loss from 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%
---- ---- ----
Total other 1% (19%) 0%
---- ---- ----
Net loss (54%) (183%) (95%)
==== ==== ====
</TABLE>
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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 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 opinion 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.
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 a direct
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%.
9
<PAGE> 11
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 sales 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
improvements in general and administrative expenses are attributable to the
changes described above, new management's efforts 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 transactions 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 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)$1,408,839 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
relations with its suppliers.
10
<PAGE> 12
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 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 investor 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 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 will contribute approximately $8,000,000.
Net income from all operations is anticipated to be approximately $700,000.
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-sew
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.
11
<PAGE> 13
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,
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. In
addition, the potential investor would provide an additional $5,000,000 to be
used for strategic acquisitions. 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
12
<PAGE> 14
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 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.
13
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 15
Report of Independent Accounts 16
Consolidated Balance Sheets, December 31, 1997 and 1996 17
Consolidated Statements of Operations, Years Ended December 31, 1997, 1996 and 1995 18
Consolidated Statements of Stockholders' Equity (Capital Deficit), Years Ended 19
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, Years Ended December 31, 1997, 1996 and 1995 20
Notes to Consolidated Financial Statements 21
</TABLE>
14
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
U.S. Technologies Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of U.S. Technologies
Inc. and its subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity (capital deficit) and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U.S.
Technologies Inc. and its subsidiaries at December 31, 1997 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 13, 1998, except for Note 15
which is as of March 5, 1998
15
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
U.S. Technologies Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of U.S.
Technologies Inc. and Subsidiaries "the Company" as of December 31, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of U.S. Technologies
Inc. and Subsidiaries as of December 31, 1996, and the results of their
operations and cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company suffered significant losses from operations during each
of the two years ended December 31, 1996 and 1995, and had a working capital
deficiency at December 31, 1996, that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from this uncertainty.
BROWN, GRAHAM AND COMPANY P.C.
Georgetown, Texas
April 8, 1997
16
<PAGE> 18
U.S. Technologies Inc.
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 489 $ 1,548
Trade accounts receivable, net of reserves
of $18,000 and $90,953 341,327 238,647
Inventory, net 74,933 472,227
Prepaid expenses 4,244 273
------------ ------------
Total current assets 420,993 712,695
------------ ------------
Property and equipment, net 137,024 146,118
------------ ------------
Other assets:
Goodwill and investment in technologies, net of
accumulated amortization of $1,021,648 in 1996 -- 1,519,917
Note receivable, stockholder 296,305 270,000
Other assets 15,420 3,952
------------ ------------
Total other assets 311,725 1,793,869
------------ ------------
Total assets $ 869,742 $ 2,652,682
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current liabilities:
Accounts payable $ 567,841 $ 806,204
Accrued expenses 666,991 613,958
Current portion of long term debt 35,753 --
------------ ------------
Total current liabilities 1,270,585 1,420,162
------------ ------------
Long term debt 19,068 144,000
------------ ------------
Total liabilities 1,289,653 1,564,162
------------ ------------
Stockholders' equity (capital deficit):
Preferred stock; $0.02 par value; 10,000,000 shares
authorized; no shares issued -- --
Common stock; $0.02 par value; 40,000,000 shares
authorized; 28,632,063 and 21,857,263 shares
issued and outstanding 572,642 437,146
Additional paid-in capital 12,392,016 11,729,811
Accumulated deficit (13,170,977) (10,928,232)
Stock receivable (213,592) (150,205)
------------ ------------
Total stockholders' equity (capital deficit) (419,911) 1,088,520
------------ ------------
Total liabilities and stockholders' equity (capital deficit) $ 869,742 $ 2,652,682
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE> 19
U.S. Technologies Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales $ 4,166,626 $ 1,410,498 $ 1,951,487
------------ ------------ ------------
Operating costs and expenses:
Cost of sales 3,424,313 2,513,672 1,764,121
Selling expense 70,869 245,232 270,906
General and administrative expense 1,118,310 961,195 1,777,934
Impairment of long lived assets 1,408,839 -- --
Restructuring charge 196,903 -- --
Other - litigation 252,256 -- --
------------ ------------ ------------
Total operating costs and expenses 6,471,490 3,720,099 3,812,961
------------ ------------ ------------
Loss from operations (2,304,864) (2,309,601) (1,861,474)
------------ ------------ ------------
Other income (expense):
Interest, net (25,191) (20,277) (112,387)
Other, net 87,310 (253,134) 112,773
------------ ------------ ------------
Total other income (expense) 62,119 (273,411) 386
------------ ------------ ------------
Net loss $ (2,242,745) $ (2,583,012) $ (1,861,088)
============ ============ ============
Basic and diluted loss per common share $ (0.08) $ (0.14) $ (0.12)
============ ============ ============
Weighted average common shares outstanding 26,793,999 18,555,439 14,997,532
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 20
U.S. Technologies Inc.
Consolidated Statements of Stockholders' Equity (Capital Deficit)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated Stock
Shares Par Value Capital Deficit Receivable Total
--------- --------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 6,969,635 $139,393 $ 7,977,821 $ (6,484,132) $ -- $ 1,633,082
Stock exchanged for services 372,000 7,440 198,083 -- -- 205,523
Stock issued for new product 750,000 15,000 181,793 -- -- 196,793
Stock options exercised 730,600 14,612 260,113 -- -- 274,725
Stock issued for Newdat, Inc.
acquisition 7,053,728 141,075 1,269,675 -- -- 1,410,750
Net loss -- -- -- (1,861,088) -- (1,861,088)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31, 1995 15,875,963 317,520 9,887,485 (8,345,220) -- 1,859,785
---------- -------- ----------- ------------ --------- -----------
Stock issued for new product 3,536,000 70,720 481,780 -- -- 552,500
Stock issued to retire debt 1,360,079 27,202 534,331 -- -- 561,533
Stock receivable 485,221 9,704 -- -- (150,205) (140,501)
Stock options exercised 600,000 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, 1996 21,857,263 437,146 11,729,811 (10,928,232) (150,205) 1,088,520
---------- -------- ----------- ------------ --------- -----------
Stock issued, change in control 5,507,130 110,143 516,431 -- -- 626,574
Stock options exercised 50,000 1,000 11,500 -- -- 12,500
Stock issued to retire debt 583,800 11,676 134,274 -- -- 145,950
Stock receivable 633,870 12,677 -- -- (63,387) (50,710)
Net loss -- -- -- (2,242,745) -- (2,242,745)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31, 1997 28,632,063 $572,642 $12,392,016 $(13,170,977) $(213,592) $ (419,911)
---------- -------- ----------- ------------ --------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE> 21
U.S. Technologies Inc.
Consolidated Statements of Cash flows
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,242,745) $(2,583,012) $(1,861,088)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 179,194 473,927 852,297
(Gain) loss on disposal of asset -- 265,000 (126,436)
Impairment of long lived assets 1,408,839 -- --
Inventory valuation allowance 306,888 290,000 262,000
Provision for bad debts 18,000 90,953 43,872
Compensation - non qualified options and rule 144 stock -- -- 147,181
Changes in assets and liabilities, net of effects of acquisition:
Receivables, net (120,680) (70,963) (72,342)
Inventory 90,406 157,743 26,317
Prepaid expenses (3,971) 5,749 25,090
Other assets (10,903) (340) (1,482)
Accounts payable (238,363) 551,546 91,890
Accrued expenses 53,033 341,043 63,441
----------- ----------- -----------
Net cash used in operating activities (560,302) (478,354) (549,260)
----------- ----------- -----------
Cash used in investing activities:
Purchase of equipment (58,942) -- (3,294)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 588,364 90,000 45,000
Principal payments on notes payable (6,179) (15,000) (50,000)
Issuance of long term debt 36,000 379,042 580,835
----------- ----------- -----------
Net cash provided by financing activities 618,185 454,042 575,835
----------- ----------- -----------
Increase (decrease) in cash (1,059) (24,312) 23,281
Cash, beginning of period 1,548 25,860 2,579
----------- ----------- -----------
Cash, end of period $ 489 $ 1,548 $ 25,860
=========== =========== ===========
Supplemental disclosure of cash flow information:
cash paid for interest $ 821 $ 19,333 $ 12,411
=========== =========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
Stock issued for acquisitions and products
Shares issued -- 3,536,000 7,803,728
=========== =========== ===========
Value of acquisitions and products $ -- $ 552,500 $ 1,607,543
=========== =========== ===========
Stock issued to retired debt
Shares issued 583,800 1,845,300 --
=========== =========== ===========
Debt retired $ 145,950 $ 571,237 $ --
=========== =========== ===========
Stock issued in exchange for note receivable
Shares issued 633,870 485,221 --
=========== =========== ===========
Note received $ 63,387 $ 150,205 $ --
=========== =========== ===========
Sale of asset in exchange for a note receivable $ -- $ 270,000 $ --
=========== =========== ===========
Debt, accrued expenses and accounts receivable
contributed to capital $ -- $ 748,215 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE> 22
U.S. Technologies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
U.S. Technologies Inc. (the "Company") performs labor intensive
"outsourcing" work for Fortune 1000 companies. The work is performed by inmates
in a detention facility located in Lockhart, Texas, under the guidelines of a
1979 Federal Government Program known as the Prison Industry Enhancement program
("PIE"). The Company performs assembly, manufacturing, enhancement, rework,
packaging and sorting of products.
The Company operates under an exclusive agreement with Wackenhut
Corrections Corporation ("WCC"), a leading developer and manager of privatized
correctional and detention facilities in the United States, Canada, the United
Kingdom and Australia. WCC is the second largest manager of privatized
correctional facilities in the United States. Under this agreement the Company's
operations in privatized prisons are devoted to those managed by WCC. Currently
WCC manages 47 detention facilities in the United States and has committed to
begin construction on new industry buildings at several of its sites for use by
the Company. WCC does not have an ownership interest in the Company.
Principles of Consolidation
The consolidated financial statements at December 31, 1997 and 1996 and
for the years ended December 31, 1997, 1996 and 1995, include the accounts of
U.S. Technologies Inc., and its wholly owned subsidiaries, Labor-to-Industry
Inc. ("LTI"), Newdat, Inc., (Newdat) and Newdat's 80% owned subsidiary
SensonCorp, Limited (Senson). Newdat and Senson were inactive in 1997 and 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates for many reasons
including risks and uncertainties. Potential risks and uncertainties include
such factors as the financial strength of the electronics manufacturing
industry, sales in the electronics manufacturing industry, competition and the
success of the Company's planned expansion into the call center and cut-and-sew
manufacturing industries.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturity dates of three months or less from the date of purchase to be cash
equivalents.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets are not materially different from their
fair values as of December 31, 1997 and 1996.
21
<PAGE> 23
Income Taxes
The Company accounts for income taxes under the asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates. The Company
provides a valuation allowance against its deferred tax assets to the extent
that management estimates that it is not "more likely than not" that such
deferred tax assets will be realized.
Restructuring Costs
The Company records the costs of severance and lay-offs related to the
Company's employees in accordance with Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring)."
Inventories
Inventories are stated at the lower of cost, determined by the average
cost method, or market.
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:
<TABLE>
<CAPTION>
Estimated Lives
---------------
<S> <C>
Equipment 5-7 years
Furniture and fixtures 7 years
Vehicles 3 years
Leasehold Improvements 6 years
</TABLE>
Earnings per Share
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share", which is effective
for fiscal years ending after December 15, 1997. Basic earnings per common share
is based on the weighted average number of common shares outstanding during the
period. Diluted earnings per share includes the dilutive effect of common stock
equivalents. For all periods presented diluted earnings per share have not been
presented because stock options and warrants which comprised common stock
equivalents would have been anti-dilutive.
Revenue Recognition and Accounts receivable
Revenue is recognized when the product is shipped. An allowance for
doubtful accounts is provided based on periodic reviews of the accounts.
Stock Option Plans
Effective in 1997, the Company adopted the disclosure option of SFAS
No. 123, "Accounting for Stock Based Compensation." SFAS No. 123 requires that
companies that do not choose to account for stock based compensation as
prescribed by the statement shall disclose the pro forma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted. Additionally, certain
other disclosures are required with respect to stock compensation and the
assumptions used to determine the effects of SFAS No. 123.
22
<PAGE> 24
Long Lived Assets
Effective for years beginning after December 15, 1995, SFAS No. 121,
"Accounting for the Impairment of Long Lived Assets to be Disposed of," requires
that long-lived assets and certain identifiable intangibles to be held and used
by a company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
New Accounting Pronouncements
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.
2. FUTURE OPERATIONS
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, 1997, and has a working capital deficiency at December 31,
1997 and 1996.
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 $536,000. This capital
infusion was used to finance the significant expansion of the Company's
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 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 and $27,000 of accrued interest into equity.
23
<PAGE> 25
After recognizing, during the second quarter, the effect of the
adjustments described above, the Company's net income for the final six months
of 1997 was approximately $22,000. Preliminary data for the first quarter of
1998 suggests that this trend is continuing.
The Company plans to expand its operations into six new facilities in
1998. Most of these expansions will not require significant up-front capital
investments. For example, as the Company is preparing 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 also adequate to enable the Company to
continue to expand its Lockhart, Texas operations.
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,
management could reduce certain fixed costs by reducing personnel at its
Lockhart, Texas location and its corporate headquarters in Atlanta, Georgia.
Management estimates that the cost savings from these reduction measures could
total approximately $200,000.
The Company's continued existence is dependent upon its ability to
continue 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 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.
3. IMPAIRMENT AND RESTRUCTURING CHARGE
As a result of changes in the Company's management in 1997, a thorough
evaluation of the Company's operations was undertaken, including, among other
things, the carrying value of long-lived assets in light of the recurring
operating losses and uncertainty regarding the recoverability of such assets.
Effective April 1, 1997, management determined that based on the current market
conditions and an analysis of the projected undiscounted future cash flows
calculated in accordance with the provisions of SFAS No. 121, the carrying
amount of its goodwill and investments in technology may not be recoverable. The
resultant impairment of these long-lived assets necessitated a write-down of
$1,408,839, comprised of unamortized goodwill and investments in technologies of
Newdat and Senson, acquired in January 1995.
Management also evaluated personnel requirements in light of the
current level and mix of operating revenues. The evaluation resulted in
management, sales and administrative personnel being reduced from 16 to three,
and the number of inmate employees being reduced from approximately 125 to
approximately 75. Effective April 1, 1997, the Company accrued a restructuring
charge in the amount of $196,903 to record the costs of severance and lay-off of
excess personnel. The restructuring was completed as of June 30, 1997, with none
of the amounts accrued remaining outstanding as of December 31, 1997.
24
<PAGE> 26
4. INVENTORIES
At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw Materials $ 893,848 $ 984,811
Work in progress 15,085 72,416
---------- ----------
908,933 1,057,227
Reserve for obsolescence 834,000 585,000
---------- ----------
$ 74,933 $ 472,227
========== ==========
</TABLE>
The Company provided a reserve for obsolete raw materials of $306,888,
$290,000 and $262,000, during the years ended December 31, 1997, 1996 and 1995,
respectively.
5. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equipment $ 983,099 $ 936,559
Furniture and fixtures 170,823 164,056
Leasehold improvements 123,520 123,520
---------- ----------
1,277,442 1,224,135
Less accumulated depreciation 1,140,418 1,078,017
---------- ----------
$ 137,024 $ 146,118
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was $67,116, $90,072 and $197,920, respectively.
6. NOTES PAYABLE
Notes payable and long-term debt at December 31, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
5% unsecured note payable; due July 27, 2000 $29,821 $ --
12% unsecured note payable to a profit sharing
plan; due on July 1, 1998 25,000 50,000
12% to 14% unsecured notes, paid in 1997 -- 94,000
------- --------
Total $54,821 $144,000
======= ========
</TABLE>
Current maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C>
1998 $35,753
1999 11,303
2000 7,765
-------
$54,821
=======
</TABLE>
25
<PAGE> 27
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets
Current assets and liabilities $ 246,000 $ 244,000
Long-lived assets -- 71,000
Net operating loss carryforwards 3,474,000 2,991,000
----------- -----------
3,720,000 3,306,000
----------- -----------
Valuation allowance (3,720,000) (3,306,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $9,633,000 for federal income tax purposes that expire in years
2004 through 2012. The Company's utilization of losses prior to 1997 to offset
future taxable income is limited to approximately $574,000 per year as a result
of a change in control of the Company, in accordance with Internal Revenue Code
section 382. Utilization of the losses and other deferred tax assets may be
further limited by alternative minimum tax provisions.
The reconciliation of income tax computed at the United States federal statutory
tax rate (34 percent) to income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Benefit at United States
statutory rate $(763,000) $(878,000) $(633,000)
Non-deductible
expenses 349,000 99,000 6,000
Change in deferred tax
asset valuation
allowance 414,000 779,000 627,000
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
8. LEASES
Effective October 15, 1996, and during all of 1997, the Company
operated under a verbal lease and work program agreement with WCC, The Texas
Department of Criminal Justice, Division of Pardons and Paroles ("TDCJ") and the
City of Lockhart, Texas, for its LTI operations to lease approximately 27,800
square feet of manufacturing and office space. Subsequent to December 31, 1997,
WCC and the Company executed a written agreement effective through January
31, 2001, which will include an automatic three year extension. The agreement
provides for annual rental rates of $1 per year for the primary term and the
three year extension. The lease agreement includes a commitment by the Company
to employ a minimum of 125 residents within 90 days of execution and allows
WCC to reduce the Company's space if it is not being used by LTI. The TDCJ and
26
<PAGE> 28
the City of Lockhart, Texas, are expected to execute the agreement, without any
material change, in the near future.
The Company leases approximately 3,000 Square feet for its executive
offices in Marietta, Georgia, under a three year operating lease expiring
September 30, 2000. Monthly rentals under this lease are $4,287. The Company is
obligated under several operating leases for vehicles and office equipment.
Future minimum rentals due under operating leases are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998 $ 87,808
1999 79,360
2000 53,699
--------
Total $220,867
========
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995,
was $62,308, $27,648 and $22,870, respectively.
9. CONTINGENCIES
The Company is involved in several lawsuits related to prior management
and claims against companies acquired or controlled by prior management. Several
of these suits claim that the Company is liable as a successor-in-interest for
amounts owed by entities whose assets were acquired by the Company. The
aggregate amount claimed under these lawsuits, including interest and attorney
fees, is approximately $103,000. Management believes these claims are without
merit, and accordingly is vigorously defending these lawsuits.
The Company is involved in a lawsuit brought by a former management
official who claims to be entitled to certain severance benefits and back pay.
The aggregate amount claimed under this lawsuit, including interest and attorney
fees, is approximately $330,000. Management is vigorously defending this
lawsuit.
Effective April 1, 1997 the Company accrued a charge in the amount of
$252,256 to recognize the costs which were deemed to be "probable" under SFAS
No. 5, "Accounting for Contingencies," to resolve outstanding litigation. As of
December 31, 1997, the remaining balance of this accrual to resolve outstanding
litigation was $126,342
10. BUSINESS AND CREDIT CONCENTRATION
The Company is dependent upon certain customers for a major portion of
its sales. The sales of services to IBM represented approximately 66%, 55%, and
11% for the years ended December 31, 1997, 1996 and 1995, respectively. Texas
Instruments accounted for approximately 19%, 8% and 15% of total sales during
the years ended December 31, 1997, 1996 and 1995, respectively. IBM and Texas
Instruments, along with two other customers, High End Systems and Wyle EMG,
comprised approximately 87% of net accounts receivable at December 31, 1997.
During 1997, the Company's outsourcing operations were limited to
electronics manufacturing. Until such time as the Company successfully expands
into the call center and cut-and-sew manufacturing industries, the Company will
be economically dependent on the health of the electronics manufacturing
industry and the niche in which it provides products and services.
The Company is also dependent on WCC since the operations of its sole
operating facility are subject to the work program agreement described in note
8. above.
27
<PAGE> 29
11. STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
COMMON STOCK AND EARNINGS PER SHARE
The Company had 40,000,000 shares of $0.02 par value common stock and
10,000,000 shares of $0.02 par value preferred stock at December 31, 1997.
Shares of common stock issued and outstanding were 28,632,063 and 21,857,263,
respectively, at December 31, 1997. The following table reconciles the number of
shares shown as outstanding on the balance sheets with the weighted-average
shares used for computing earnings per share (EPS) for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Common shares outstanding at December 31 28,632,063 21,857,263 15,875,963
Effect of using weighted-average common
shares outstanding (1,838,064) (3,301,824) (878,431)
---------- ---------- ----------
Shares used in computing earnings
per share 26,793,999 18,555,439 14,997,532
========== ========== ==========
</TABLE>
Diluted EPS have not been presented due to stock options and warrants
which comprised common stock equivalents totaling 112,500, 0 and 0 for the
years 1997, 1996 and 1995, respectively, being anti-dilutive.
During 1995, the Company issued 7,053,728 shares of its common stock
for all of the outstanding capital stock of Newdat. See note 14.
During 1996, the Company issued 3,536,000 shares of its common stock,
representing $552,500 for a new technology. As described in note 3, the
unamortized balance of this technology has been written-off through an
impairment charge in 1997.
During 1996, the Company issued 1,845,300 shares of common stock to
retire outstanding notes payable of $571,237 to Carlton Technologies Ltd. At the
time the stock was issued to Carlton Technologies Ltd., only $421,032 of notes
payable was due; therefore a receivable of $150,205 has been recorded as a
reduction to stockholders' equity.
Effective January 1, 1997, a group of individuals entered into an
agreement with the then majority owners of the Company to acquire control of the
Company. The individuals were principally Mr. Kenneth H. Smith and Mr. James V.
Warren. Currently Mr. Smith serves as the Company's Chairman of the Board of
Directors, President and Chief Executive Officer (CEO). As a part of the
agreement, certain accounts receivable, accrued expenses and notes payable
arising from companies controlled by former majority owners, Tintagel, Ltd.,
Laura Investments, Ltd., and Laura Technologies, Ltd., in the amount of $748,215
were contributed to additional paid-in capital effective December 31, 1996. In
1997, in connection with the foregoing acquisition, the Company issued 6,000,000
shares of the Company's common stock in exchange for $536,613 and a note in the
principal amount of $63,387 from Mr. Smith. The note receivable from Mr. Smith
has been recorded as a reduction in stockholders' equity. In addition the
investor group led by Mr. Smith and Mr. Warren acquired an additional 9,169,000
shares of the Company's common stock from companies owned or controlled by
Tintagel, Ltd., and Komen Holdings Pty, Ltd., another affiliate of the former
majority owners.
During 1997, the Company converted $119,000 in aggregate principal of
certain notes payable plus accrued interest of $26,950 into 583,800 shares of
the Company's common stock. Also during 1997, the Company issued 87,000 shares
of the Company's common stock to James C. Melton, Sr., a director and officer of
the Company and 54,000 shares of the Company's common stock to C. Ray Brumbeloe,
an officer of the Company, at the current market price.
STOCK COMPENSATION PLANS
Prior to 1997, the Company created three qualified and four nonqualified
stock option plans that provide for the granting of incentive and nonqualified
options to purchase the Company's Common Stock to selected officers, other key
employees, directors and consultants. The qualified and nonqualified option
plans have 531,600 and 290,000 shares, respectively, available for grant.
Management however does not plan to utilize these plans to grant future options.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock Based Compensation," effective for the Company
beginning January 1, 1996. SFAS No. 123 defines a "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. If a company elects to use the intrinsic
value method, then pro forma disclosures of earnings and earnings per share are
required as if the fair value method of accounting was applied. The effects of
applying SFAS No. 123 in the pro forma disclosures are not necessarily
indicative of future amounts because the pro forma disclosures do not take into
account the amortization of the fair value of awards prior to 1995.
Additionally, the Company is expected to grant additional awards in future
years.
The Company has elected to account for its stock options under the intrinsic
value method outlined in APB No. 25. The fair value method requires use of
option valuation models, such as The Black-Scholes option valuation model, to
value employee stock options, upon which a compensation expense is based. The
Black-Scholes option valuation model was not developed for use in valuing
employee stock options. Instead, this model was developed for use in
28
<PAGE> 30
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, it
is management's opinion that the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options. Under the
intrinsic value method, compensation expense is only recognized if the exercise
price of the employee stock option is less than the market price of the
underlying stock on the date of grant.
In accordance with SFAS No. 123, the fair value for the Company's employee
stock options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the year ended
1996 (no options were granted during 1997)
<TABLE>
<S> <C>
Risk-free interest rate 6.32%
Dividend yield 0%
Volatility factor 67%
Weighted-average expected life (in years) 4.14
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net loss
As reported $(2,242,745) $(2,583,012)
Pro forma (2,242,745) (2,657,418)
Earnings per share
As reported (0.08) (0.14)
Pro forma (0.08) (0.14)
</TABLE>
A summary of stock option activity, and related information for the years
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Qualified plans Nonqualified plans
---------------------- ----------------------
Weighted- Weighted-
average average
exercise exercise
Options price Options price
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995 182,580 $3.41 272,000 $0.05
Granted 3,000 0.63 - -
Exercised (3,000) 0.63 272,000 0.05
Forfeited or canceled (45,000) 6.68 - -
------- ----- ------- -----
Outstanding at December 31, 1995 137,580 2.34 - -
Granted - - 600,000 0.15
Exercised - - 600,000 0.15
Forfeited or canceled (24,000) 1.57 - -
------- ----- ------- -----
Outstanding at December 31, 1996 113,580 2.50 - -
Granted - - - -
Exercised (50,000) 0.25 - -
Forfeited or canceled (57,580) 4.27 - -
------- ----- ------- -----
Outstanding at December 31, 1997 6,000 4.24 - -
======= ===== ======= =====
Options exercisable at:
December 31, 1995 137,580 2.34 - -
December 31, 1996 113,580 2.50 - -
December 31, 1997 6,000 4.24 - -
</TABLE>
29
<PAGE> 31
The weighted average fair value of options granted during the years 1997,
1996 and 1995 were $0, $0.15 and $0.63, respectively.
Some of the options granted during 1995 were granted at less than market
value at the date of the grant. The excess of the market value over the option
price, in the amount of $147,181, has been included as compensation in general
and administrative expense in the accompanying financial statements for the year
ended December 31, 1995.
During 1996, the Company granted options, outside the option plans described
above, to four other parties to purchase 200,000 shares of the Company's Rule
144 stock at $0.50 per share exercisable at various times through May 17, 2001.
The Company also granted to a former board member the option to purchase 150,000
shares at $0.125 per share through May 25, 1999. As of December 31, 1997,
100,000 of the $0.50 options and all of the $0.125 options remain outstanding.
12. FOURTH QUARTER ADJUSTMENTS
Significant adjustments increasing the fourth quarter loss in 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Increase of allowance for doubtful accounts $ 21,700 $ 55,268
Write-down of inventory for obsolete raw materials 339,372 60,703
Increase in goodwill in acquisition of Newdat -- 500,000
Amortization of goodwill 40,042 100,000
Accrued expenses 130,911 84,519
-------- --------
Aggregate adjustment $532,025 $800,490
======== ========
Aggregate adjustment per common share $ 0.03 $ 0.05
======== ========
</TABLE>
30
<PAGE> 32
13. RELATED PARTIES
Ms. Carolyn Meehan, wife of Mr. William Meehan, president and CEO of
the Company until his resignation in January 1997, is president of Carlton
Technologies Limited ("Carlton") with whom the Company had various loans during
1995 and 1996. 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. This amount was reclassified as a reduction in stockholders' equity as
of December 31, 1996.
As of December 31, 1997, Mr. Smith has a note receivable from the
Company in the amount of $270,000 which represents his assumption of an amount
due to the Company associated with the sale of an asset in connection with the
January 1997 acquisition. In effect Mr. Smith acquired the Company's rights to
the asset underlying the note receivable. This note bears interest at 8% and is
due December 31, 1998. The total due from Mr. Smith under this note, including
accrued interest is $291,304 as of December 31, 1997. Mr. Smith has also
executed a note receivable from the Company in the amount of $63,387 related to
the acquisition of his interest in the Company which is recognized as a
reduction in stockholders' equity. The note bears interest at 8% and is due
December 31, 1998. Accrued interest receivable in the amount of $5,002 is
recognized as a component of other current assets.
14. ACQUISITION OF SUBSIDIARY
On January 23, 1995, the Company acquired all of the outstanding
capital stock of Newdat in exchange for 7,053,728 shares of the Company's common
stock. As a result of the acquisition, the Company acquired Newdat's 80%
interest in Senson.
The acquisition was accounted for by the purchase method of accounting,
and accordingly, the purchase price was allocated to assets acquired and
liabilities assumed based on their fair market value at the date of acquisition.
The excess of the $1,410,750 purchase price over the fair values of net assets
acquired was recorded as goodwill and investment in technologies. Net assets
acquired included $1,140,000 of purchased technologies and other assets of
$184,648, less assumed liabilities of $762,963. The resulting goodwill was
$849,065. As described more fully in Note 3, all assets, representing the
unamortized balances of goodwill and technologies, have been written-off in 1997
through a charge for the impairment of long lived assets.
15. SUBSEQUENT EVENTS
On January 12, 1998, the Company issued $275,000 in 4% convertible
subordinated debentures (the "Debentures") through a private placement, pursuant
to the safe harbor provision under Regulation S of the Securities Act of 1933,
to persons outside the United States. The net proceeds to the Company from the
issuance of the debentures, before legal and other expenses, was $247,500 after
a commission of $27,500 paid to GEM Management Limited ("GEM"). In addition the
Company issued 275,000 warrants, each to acquire one share of the Company's
common stock, exercisable at $1.00 per share through January 12, 2003, to GEM
and an individual associated with GEM. All of the warrants are currently
outstanding and unexercised.
On February 25, 1998, the Company received notification that the
holders of $175,000 of the Debentures elected to convert to 354,564 shares of
the Company's common stock. On March 5, 1998, the Company received notification
that the holder of the remaining $100,000 Debentures elected to convert to
208,651 shares of the Company's common stock.
31
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On November 20, 1997, the Company dismissed its independent auditors,
Brown Graham & Company, P.C. ("Brown, Graham & Company"), and on the same date
engaged the firm of BDO Seidman, LLP ("BDO Seidman") as its independent auditors
for the fiscal year ending December 31, 1997. Each of these actions was approved
by the Board of Directors of the Company.
The report of Brown, Graham & Company on the financial statements of
the Company for the years ended December 31, 1996 and 1995 did not contain any
adverse opinion or a disclaimer of opinion, nor was it qualified as to audit
scope or accounting principles. Brown, Graham & Company did conclude that a
going concern uncertainty did exist and included an explanatory paragraph in
their report stating that there was "substantial doubt about the Company's
ability to continue as a going concern."
In connection with the audit of the years ended December 31, 1996 and
1995 and for the unaudited interim period through November 20, 1997, there were
no disagreements with Brown, Graham & Company on any matter of accounting
principle or practice, financial statement disclosure, or audit procedure or
scope which disagreement, if not resolved to the satisfaction of Brown, Graham &
Company, would have caused it to make reference to the subject matter of the
disagreement in its report. Further, during the years ended December 31, 1996
and 1995, neither the Company nor any of its representatives sought the advice
of BDO Seidman, LLP regarding the application of accounting principles to a
specific completed or contemplated transaction or the type of audit opinion that
might be rendered on the Company's financial statements, which advice was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue.
In connection with the audit of the years ended December 31, 1996 and
1995 and the unaudited interim period through November 20, 1997, Brown, Graham &
Company did not advise the Company that (i) the internal controls necessary for
the Company to develop reliable financial statements did not exist; (ii) that
information had come to its attention that led it to no longer be able to rely
on management's representations, or that made it unwilling to be associated with
the financial statements prepared by management; (iii) that there existed a need
to expand significantly the scope of its audit, or that information had come to
Brown, Graham & Company's attention during the periods that if further
investigated may (a) materially impact the fairness or reliability of either: a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the period subsequent to
the date of the most recent financial statements covered by an audit report
(including information that may prevent it from rendering an unqualified audit
report on those financial statements), or (b) cause Brown, Graham & Company to
be unwilling to rely on management's representations or be associated with the
Company's financial statements, and due to Brown, Graham & Company's dismissal
did not so expand the scope of its audit or conduct such further investigation;
or (iv) that information had come to Brown, Graham & Company's attention that it
concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report on the underlying financial statements , or (b)
the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to Brown, Graham &
Company's satisfaction, would prevent it from rendering an unqualified audit
report on those financial statements), and due to Brown, Graham & Company's
dismissal, the issue has not been resolved to Brown, Graham & Company's
satisfaction prior to its dismissal.
32
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Kenneth H. Smith 51 Chairman of the Board of Directors,
President and Chief Executive Officer
James C. Melton, Sr. 53 Director and Executive Vice President
John P. Brocard 44 Senior Vice President/General Counsel
C. Ray Brumbeloe 55 Vice President Sales & Marketing
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
The Company's By-Laws provide that the Board of Directors shall consist of not
less than one nor more than 15 members. Each member of the Board of Directors is
elected for a one year term and until their successors are elected and
qualified.
Kenneth H. Smith has served as Director, President and Chief Executive Officer
of the Company since January 1997. On February 19, 1998, Mr. Smith was elected
to the position of Chairman of the Board. Mr. Smith also serves as a Director of
LTI and the sole Director of STI. Mr. Smith's career involves more than 23 years
in banking, finance, management consulting and business turnarounds. From 1985
to 1987, he served as President of First Union Commercial Corporation. From 1990
to 1996 Mr. Smith worked as a consultant for his own company, GWP Consulting
Company, managing the turnarounds of companies such as Capital South Financial
Corporation and Atlanta Technologies, Inc. As a consultant Mr. Smith also
created an asset based lending subsidiary for Cobb American Bank. Mr. Smith
holds a BS degree from the Georgia Institute of Technology and an MBA from
Auburn University
James C. Melton, Sr. joined the Company in March 1996 as Director and Executive
Vice President. Mr. Melton also serves as a Director and President of LTI. Mr.
Melton was formerly President of Family Safety Products, Inc., a consumer goods
manufacturer from August 1993 through February 1997. Prior to 1993, Mr. Melton
served as National Sales Manger of Plus III Software, Inc., a firm specializing
in civil engineering application software. Mr. Melton holds a BS degree in
Physics from North Georgia College and an MS degree in Industrial Management
from the Georgia Institute of Technology.
John P. Brocard joined the Company in September 1997 as Senior Vice President
and General Counsel. Prior to joining the Company, Mr. Brocard practiced law for
17 years with the firm of Brocard & Brocard, P.A. in Washington, D. C., a law
firm specializing in civil and criminal litigation. Mr. Brocard holds a BA
degree from Furman University and a JD degree from the Potomac School of Law.
C. Ray Brumbeloe joined the Company in September 1997 as Vice President of Sales
& Marketing. Mr. Brumbeloe also serves as President of STI. Prior to joining the
Company Mr. Brumbeloe served as Publisher from 1993 to 1997, for Jeremiad, Inc.
which produced a periodical entitled "The Church and Christian Support Guide".
From 1991 to 1993, Mr. Brumbeloe has also served as President and Announcer of
Outdoor Journal, a broadcast radio program. Mr. Brumbeloe has served in several
promotion and sales management positions for Baltic International, Inc. and
Kawasaki Motors Corp. Mr. Brumbeloe holds an AA degree from Baltimore Community
College.
33
<PAGE> 35
KEY EMPLOYEES AND CONSULTANTS
Donald R. (Rusty) Whitlow joined the Company in December 1997 as Production
Manager of LTI. Prior to joining the Company, Mr. Whitlow served in a variety of
engineering and plant management positions in the apparel industry. From 1987
through 1997, Mr. Whitlow served at the Russell Corporation where he was Plant
Manager for more than eight years. Mr. Whitlow received his BS degree in
industrial management from the University of Alabama in 1982.
Richard Harris joined the Company in January 1998 as production manager of STI.
Prior to joining the Company he worked as Customer Relations Analyst and
Telemarketing Operations Consultant for Special Data Processing Corporation. Mr.
Harris has in-depth experience in marketing strategies, telecom representative
training and management, financial analyses, list management, project
coordination and implementation. Mr. Harris has developed numerous call center
campaigns, including magazine subscription services, travel packages, real
estate services and residential long distance sales.
Michael W. Zima has served as a consultant to the Company since December 1997.
Mr. Zima served as Vice President - Finance, Treasurer and Corporate Controller
for Image Industries, Inc. from 1991 to 1997. Prior to his service with Image
Industries, Inc., Mr. Zima served as Audit Senior and Audit Manager at Ross Lane
and Company, certified public accountants, from 1984 to 1991. Mr. Zima received
his BBA from Emory University in 1980 and has been a CPA in the state of Georgia
since 1982.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain officers and persons who own more than 10% of the outstanding
Common Stock of the Company, to file with the Securities and Exchange Commission
reports of changes in ownership of the Common Stock of the Company held by such
persons. Officers, directors and greater than 10% shareholders are also required
to furnish the Company with copies of all forms they file under this regulation.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during 1997, the Company has complied with all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
shareholders, except as follows: the Initial Statement of Beneficial Ownership
of Securities (Form 3s) were inadvertently filed late for each of Messrs.
Kenneth H. Smith, James C. Melton, Sr., James V. Warren, John P. Brocard and C.
Ray Brumbeloe.
34
<PAGE> 36
ITEM 11. EXECUTIVE COMPENSATION.
The table below sets forth all cash and cash equivalent remuneration
paid by the Company and its subsidiaries during the year ended December 31,
1997, to each of the Company's executive officers whose compensation for 1997,
exceeded $100,000 (the "Named Executive Officers") and to the group consisting
of all executive officers of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name
and
Principal
Position Year Salary($) Bonus ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kenneth H. Smith
Chairman of the Board
President and
Chief Executive Officer 1997 180,000 35,074
James C. Melton, Sr.
Director and
Executive Vice President 1997 100,000 12,421
</TABLE>
Total compensation of all executive officers (4 persons) in 1997 was $403,504
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for travel expenses incurred in
serving on the Board of Directors. Directors do not receive any compensation for
attendance at meetings of the Board of Directors.
STOCK OPTION PLANS
The Company's Employee Incentive Stock Option Plan of 1988, 1990, and
1996 (the "Plans") were adopted by the Board of Directors and approved by the
Company's stockholders on March 16, 1989, June 8, 1990, and July 25, 1996,
respectively. The purpose of the Plans is to attract and retain qualified
personnel. The Plans provide that the aggregate fair market value of the shares
of common stock for which any participant may be granted incentive stock options
in any calendar year shall not exceed $100,000 plus any "unused limited
carryover" as determined under Section 422A(c) of the Internal Revenue Code of
1954, as amended. No options may be granted under the Plans after August 1,
1998, October 5, 1999, and April 29, 2006, respectively.
The Plans are administered by the Board of Directors of the Company who
determine, subject to the provisions of the Plans, to whom options are granted
and the number of shares of the common stock subject to option. The exercise
price of such options granted under the Plans must equal at least 100% of the
fair market value of the common stock on the date the option is granted.
The Plans also provide that no option shall be executable more than
three months after termination of an option holder's employment with the
Company, unless such termination of employment occurs by reason of death or
permanent and total disability. In the event of the death or disability of an
option holder while an employee of the Company, the options which were otherwise
executable by the option holder or his legal representative or beneficiary of
his estate, may at any time within one year from the date of the option holder's
death or disability be
35
<PAGE> 37
exercised. In no event, however, shall an option be exercisable after 10 years
from the date it was granted.
During the years ended December 31, 1997 and 1996, no options were
issued under these qualified plans.
On May 4, 1993 and September 3, 1993, the Company adopted the 1993 and
1993A Nonqualified Stock Option Plans, respectively. These plans reserved
500,000 and 800,000 shares respectively, of the company's common stock to be
granted to non-employees, directors, and/or other persons associated with the
Company whose services have benefited the Company.
On April 14, 1994, the Company adopted the 1994 Nonqualified Stock
Option Plan. This plan reserved 800,000 shares of the Company's Common Stock to
be granted and issued to its officers, directors, employees and/or consultants
whose services have benefited the Company.
During November 1996, the Company adopted the 1996 Nonqualified Stock
Option Plan. The plan reserved 800,000 shares of the Company's Common Stock to
be granted and issued to its officers, directors, employees and/or consultants
whose services have benefited the Company.
During 1996, the Company's prior management granted options, outside
the option plans described above, to four other parties to purchase 200,000
shares of the Company's Rule 144 stock at $0.50 per share exercisable at various
times through May 17, 2001. The Company's prior management also granted to a
former board member the option to purchase 150,000 shares at $0.125 per share
through May 25, 1999. The validity of the options granted to the former board
member, which remain outstanding, has been questioned by the Company based on
several factors. The Company is evaluating the status of these options and will
take appropriate actions based on that determination.
BONUS PLAN
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 maintains a
pre-tax income of 10%, 15%, and 20% of sales, respectively. The performance
standards will be based on quarterly operating periods. Bonuses are accrued
quarterly and allocated as of the end of each calendar year. No employees have
vested rights in the bonus plan. The Board of Directors of the Company acts as a
committee to determine who participates and the actual amount of the individual
bonuses. No bonuses were paid during 1997, 1996, or 1995 under this plan.
36
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding ownership
of common stock of the Company as of the date of this report by (i) each officer
and director, (ii) all officers and directors as a group and (iii) each
beneficial owner of more than 5% of the outstanding shares of common stock,
including outstanding options and warrants, of the Company.
<TABLE>
<CAPTION>
Number of Shares of Percentage of
Name and Address of Common Stock of Beneficial
of Beneficial Owner Beneficially Owned Ownership
- ------------------- ------------------ -------------
<S> <C> <C>
Kenneth H. Smith (1) (3) 7,584,500 25.51%
James C. Melton, Sr. (1) (3) 87,000 *
C. Ray Brumbeloe (1) 54,000 *
John P. Brocard (1) 1,260 *
James. V. Warren (2) 7,584,500 25.51%
All Officers and Directors as a
Group (4 individuals) 7,726,760 25.99%
</TABLE>
* Less than 1%
(1) These individuals are officers of the Company. Their address is c/o
U.S. Technologies Inc., 3901 Roswell Road, Suite 300, Marietta,
Georgia, 30062.
(2) Mr. Warren's Address is c/o The Spear Group, 6525 The Corners Parkway,
Suite 300, Atlanta, Georgia, 30092. Effective on March 30, 1998, Mr.
Warren resigned from the Company's Board of Directors.
(3) These individuals are directors of the Company
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Ms. Carolyn Meehan, wife of Mr. William Meehan, president and CEO of
the Company until his resignation in January 1997, is president of Carlton
Technologies Limited ("Carlton") with whom the Company had various loans during
1995 and 1996. 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. This amount was reclassified as a reduction in stockholders' equity as
of December 31, 1996.
Mr. Kenneth H. Smith, Chairman, President and CEO of the Company, has a
note receivable from the Company in the amount of $270,000 as of December 31,
1997. This noted bears interest at 8% and is due December 31, 1998. The total
due from Mr. Smith under this note, including accrued interest is $291,304 as of
December 31, 1997. Mr. Smith has also executed a note receivable from the
Company in the amount of $63,387 related to the acquisition of his interest in
the Company which is recognized as a reduction in stockholders' equity. The note
bears interest at 8% and is due December 31, 1998.
37
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
REPORTS ON FORM 8-K
The following reports on form 8-K have been filed during the period
from October 1, 1997 to date:
On November 25, 1997, the Company filed a report on form 8-K describing
the adoption, on November 14, 1997, of a plan under which certain anti-takeover
measures would become effective should a hostile acquisition of 15% or more of
the Company's common stock occur.
On November 26, 1997, the Company filed a report on form 8-K describing
the dismissal of its independent auditors, Brown, Graham & Company, P.C. and the
appointment of BDO Seidman, LLP, as its new independent auditors.
This report was amended on form 8-K/A in December 3, 1997.
On January 27, 1998, the Company filed a report on form 8-K describing
the issuance on January 12, 1998, of $275,000 of 4% convertible debentures and
275,000 in $1.00 warrants in a private placement to certain non U.S.
investors, exempt from registration under "Regulation S".
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, U.S. Technologies Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 14th
day of April, 1998.
U.S. TECHNOLOGIES INC.
By:/s/ K. H. Smith
------------------------------
K. H. Smith
President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ K. H. Smith President & CEO April 14, 1998
- ------------------ Chairman of the Board of Directors --------------
K. H. Smith Acting Principal Accounting Officer
/s/James C. Melton, Sr. Director April 14, 1998
- ------------------------ --------------
James C. Melton, Sr.
</TABLE>
39
<PAGE> 41
U.S. Technologies Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------
Additions
---------
(1) (2)
Balance at Charged to Charged to Balance at
beginning cost and other end of
Classification of period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997:
Accounts receivable -
bad debt reserve $ 90,953 $ 18,000 $90,953 $ 18,000
Inventory
Obsolescence $585,000 $306,888 $57,888 $834,000
1996:
Accounts receivable -
bad debt reserve $ 68,434 $ 90,953 $68,434 $ 90,953
Inventory
Obsolescence $295,000 $290,000 $ -- $585,000
1995:
Accounts receivable -
bad debt reserve $ 49,830 $ 43,872 $25,268 $ 68,434
Inventory
Obsolescence $ 33,000 $262,000 $ -- $295,000
</TABLE>
NOTE: These valuation and qualifying accounts were deducted
from the assets to which they apply.
40
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
5.1 Opinion of BDO Seidman, LLP
5.2 Opinion of Brown Graham and Company P.C.
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 5.1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
U.S. Technologies Inc.
Atlanta, Georgia
The audit referred to in our report dated February 13, 1998,
except for Note 15 which is as of March 5, 1998, relating to the consolidated
financial statements of U.S. Technologies Inc. and subsidiaries, which is
contained in Item 8 of this Form 10-K, included the audit of the financial
statement schedule listed in the accompanying index. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our audit.
In our opinion, such financial statement schedule presents
fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP
Atlanta, Georgia
February 13, 1998, except for Note 15
which is as of March 5, 1998
<PAGE> 1
EXHIBIT 5.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
U.S. Technologies Inc. and Subsidiaries
Our report on the consolidated financial statements of U.S. Technologies Inc.
and subsidiaries is included in Item 8 of this Form 10-K. In connection with
our audit of such financial statements, we have also audited the related
financial statement schedule listed on the index of this Form 10-K.
In our opinion the 1996 financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be in
them.
BROWN GRAHAM AND COMPANY P.C.
Georgetown, Texas
April 8, 1997
<PAGE> 1
EXHIBIT NUMBER 21.1
SUBSIDIARIES OF THE REGISTRANT
Labor-to-Industry Inc., a Texas corporation
Service-to-Industry Inc., a Delaware Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 489
<SECURITIES> 0
<RECEIVABLES> 341,327
<ALLOWANCES> 18,000
<INVENTORY> 74,933
<CURRENT-ASSETS> 420,933
<PP&E> 1,277,442
<DEPRECIATION> 1,140,418
<TOTAL-ASSETS> 869,742
<CURRENT-LIABILITIES> 1,270,585
<BONDS> 0
0
0
<COMMON> 572,642
<OTHER-SE> (992,553)
<TOTAL-LIABILITY-AND-EQUITY> 869,742
<SALES> 4,166,626
<TOTAL-REVENUES> 4,166,626
<CGS> 3,424,313
<TOTAL-COSTS> 6,471,490
<OTHER-EXPENSES> (62,119)
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 25,191
<INCOME-PRETAX> (2,242,745)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,242,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,242,745)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
