-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bz5zfLBPgmlii/qLmgx+8m2TJQeLIHlXM24URXvYU6N6up6WXk0beetLndORuKQ9 Oj/zXwOSFASv6Qg4f6PDeg== 0000950144-00-004757.txt : 20000411 0000950144-00-004757.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950144-00-004757 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S TECHNOLOGIES INC CENTRAL INDEX KEY: 0000810130 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 731284747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15960 FILM NUMBER: 596641 BUSINESS ADDRESS: STREET 1: 2001 PENNSYLVANIA AVE NW STE 675 STREET 2: SUITE 300 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 7705654311 MAIL ADDRESS: STREET 1: 3901 ROSWELL ROAD STREET 2: SUITE 300 CITY: MARIETTA STATE: GA ZIP: 30062 FORMER COMPANY: FORMER CONFORMED NAME: CAREAMERICA INC DATE OF NAME CHANGE: 19890720 10-K 1 U.S. TECHNOLOGIES, INC. 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, 1999 [ ] 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) 2001 Pennsylvania Avenue, Suite 675 Washington, DC 20006 (Address of principal executive offices.) Registrant's telephone number, including area code: (202) 466-2100 ----------------------- 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 March 20, 2000 was approximately $ 72,582,000. The number of shares outstanding of the Registrant's Common Stock, par value $0.02 per share, at March 20, 2000 was 29,444,278 shares. 2 Table of Contents PART I Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 47 PART III Item 10. Directors and Executive Officers of the Registrant 48 Item 11. Executive Compensation 50 Item 12. Security Ownership of Certain Beneficial Owners and Management 51 Item 13. Certain Relationships and Related Transactions 53 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 55 Signatures 56
i 3 PART I ITEM 1. BUSINESS OVERVIEW U.S. Technologies Inc. (the "Company"), is engaged directly and indirectly through its wholly owned subsidiary, Labor-to-Industry Inc. ("LTI"), in the operation of industrial facilities located within both private and state prisons, which are staffed principally with inmate labor. These prison-based operations are conducted under the guidelines of the 1979 Prison Industry Enhancement (PIE) program. On February 22, 2000, the Company announced that it reached a definitive agreement to acquire E2Enet, Inc. ("E2E"), a privately held Internet incubator company, and on April 5, 2000, this agreement was amended so the acquisition could qualify as a tax-free transaction. E2E has made early stage investments in several development stage business-to-business (B2B) and business-to-consumer (B2C) e-commerce businesses. The Company's acquisition of E2E is expected to close in April once all closing conditions have been satisfied. The Company believes that its acquisition of E2E will provide the Company with a platform to establish a position in the growing e-commerce industry. The Company believes that the completion of the E2E Acquisition will enhance the Company's opportunities for both investment in and creative development of promising early stage B2B and B2C e-commerce ventures. Further investments in this industry are intended primarily to comprise controlled subsidiaries engaged in the development or operation of B2B business. The Company also is in the process of expanding its management team to include technology and e-commerce expertise. E2E ACQUISITION The terms and conditions for the Company's acquisition of E2E (the "E2E Acquisition") are contained in the Stock Exchange Agreement, dated as of February 21, 2000, entered into by the Company, E2E and certain stockholders of E2E, as amended (the "E2E Acquisition Agreement"). The Company initially agreed to acquire E2E by purchasing all of E2E's outstanding stock in exchange for shares of a Series B Mandatorily Convertible Preferred Stock, par value $0.02 per share ("Series B Preferred Stock"), to be newly created by the Company. However, in late March 2000, it became clear that if the E2E Acquisition remained structured as a share exchange, the transaction would not qualify for treatment as a tax-free exchange because certain stockholders of E2E would receive consideration other than voting stock of the Company. To preserve the tax-free nature of the E2E Acquisition, the Company, E2E and certain stockholders of E2E agreed on April 5, 2000 to change the structure of the E2E Acquisition from a share exchange to a merger between E2E and a wholly-owned subsidiary of the Company, U.S. Technologies Acquisition Sub, Inc. ("U.S. Technologies Acquisition"). Accordingly, the Company proposes to acquire E2E by causing U.S. Technologies Acquisition to merge with and into E2E. U.S. Technologies Acquisition will be the surviving corporation of this merger, and upon the consummation of this merger, U.S. Technologies Acquisition will change its name to E2E Net, Inc. As a result, upon the completion of the E2E Acquisition, E2E will become a wholly owned subsidiary of the Company. When the E2E Acquisition closes, E2E's stockholders will be issued shares of Series B Preferred Stock, which will have a stated liquidation preference aggregating approximately $11,200,000, and certain minority stockholders of E2E will also receive options to purchase shares of the Company's common stock, par value $0.02 ("Common Stock"). Upon their mandatory conversion as described below, these shares of Series B Preferred Stock will be converted into approximately 56,000,000 shares of Common Stock. The Company agreed, under the E2E Acquisition Agreement, to raise at least $6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing of the E2E Acquisition. To raise these funds, the Company recently commenced the private placement sale of $1,250,000 of additional shares of its Series A Convertible Preferred Stock, par value $0.02 (the "Series A Preferred Stock"), to USV Partners, LLC ("USV"), a limited liability company controlled by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer, which is the Company's largest shareholder, and at least $5,000,000 and up to $8,750,000 of its newly created Series C Mandatorily Convertible Preferred Stock, par value $0.02 ("Series C Preferred Stock"), to accredited investors. The Company has thus far received subscriptions or indications of interest for the purchase of approximately $5,200,000 1 4 of its Series C Preferred Stock, of which approximately $3,000,000 consists of subscriptions by USV. In connection with the private placements of the Series A Preferred Stock and the Series C Preferred Stock, the Company has received to date subscriptions for a total of approximately $6,450,000. The Series C Preferred Stock would be convertible into shares of Common Stock at a conversion price per share ranging from $0.90 to $2.00, which will be determined based on the closing sale price for a share of Common Stock on the closing date of the E2E Acquisition, as quoted on the OTC Bulletin Board. The proceeds of these offerings will be used primarily to finance additional investments in new and existing Internet businesses that focus on B2B and B2C e-commerce, the payment of costs incurred and liabilities assumed in connection with the E2E Acquisition and related business transactions and ongoing working capital needs. The Company intends, and is required by the E2E Acquisition Agreement to call a meeting of its stockholders for the purpose of amending the Company's Restated Certificate of Incorporation. The proposed amendment (the "Charter Amendment") will increase the number of shares of Common Stock the Company is authorized to issue to an amount sufficient to permit the conversion to Common Stock of all of the Company's then-outstanding shares of all of its authorized and designated series of convertible preferred stock, including the Company's Series A Preferred Stock, the Series B Preferred Stock to be issued to E2E's stockholders, and the Series C Preferred Stock. In addition to authorizing a sufficient number of shares of Common Stock to permit conversion to Common Stock of all of the Company's outstanding shares of convertible preferred stock, the Charter Amendment's proposed increase to the number of shares the Company is authorized to issue will also include an amount sufficient to permit the conversion to Common Stock of any other then-outstanding securities or options, which are convertible into or otherwise permit the holder thereof to purchase or otherwise receive shares of Common Stock. Upon the acceptance of the Charter Amendment by the Secretary of State of the State of Delaware, the Series B Preferred Stock and the Series C Preferred Stock will automatically be converted into shares of Common Stock. USV has also indicated its intention to convert all of its shares of Series A Preferred Stock to Common Stock at that time. The Company also announced that it will expand its Board of Directors in connection with the completion of the E2E Acquisition. The new directors will also stand for election at the Company's next annual meeting, which also is when the Company expects to present the Charter Amendment for Stockholder approval. These new directors will be: - General Alexander M. Haig, Jr., former Secretary of State and White House Chief of Staff; - The Honorable George J. Mitchell, former Senator from Maine and Senate Majority Leader; - The Honorable William H. Webster, former Director of both the FBI and CIA; - Rick Rickersten, partner at Thayer Capital, a leading investment management firm headquartered in Washington, D.C.; - Hal Wilson and Peter Schiff, Managing Directors of Northwood Ventures LLC and Northwood Capital Partners LLC, venture capital investment firms headquartered in New York; and - Arthur Maxwell, President of Affordable Interior Systems, Inc., one of the 25 largest commercial furniture manufacturers in the United States. E2E has various interests in several development stage Internet e-commerce companies. These portfolio companies principally include: - Buyline.net, Inc. ("Buyline"). Buyline is a developer of B2B e-commerce applications, and is developing a proprietary Internet software program designed to be a universal platform for entry-level B2B e-commerce, linking buyers and sellers. Buyline's application for RFP/RFQ technology (Request for Proposal/Request for Quotation) will be used in a full range of on-line advertising, on Internet based directories, and in commercial web sites. - VIPRO Corporation ("Vipro"). Vipro is an Internet surety company, which provides repair guarantees against viruses that harm computers. The Company has e-commerce relationships with 2 5 a leading Internet utility company, a credit card association, one of the largest warranty claims administrators in the world and over 170 Internet service providers. - Urban Box Office Network, Inc. ("UBO"). UBO is a developer of networked multi-media web sites that will provide e-commerce services to participants interested in urban culture, information, entertainment and products. - OneMade, Inc. ("OneMade"). OneMade is a developer of an e-commerce community that will serve participants in the arts, crafts, and hobby industries. OneMade intends to connect wholesalers, retailers, consumers and artists in these fields. - bluemercury, Inc. ("bluemercury"). bluemercury operates an e-commerce site for upscale cosmetic products and accessories. It intends to pursue a "clicks and bricks" strategy by also acquiring high-end cosmetic specialty retailers. - MEI Software Systems, Inc. ("MEI"). MEI provides customized software systems to manage the databases of trade associations, professional associations, fund-raising organizations and chambers of commerce. The Company intends to restructure some of E2E's investments in its portfolio companies and provide these entities with additional working capital to stimulate their further growth and expansion. E2E's initial investment in Buyline will be restructured and increased so that Buyline becomes a controlled operating subsidiary. On February 28, 2000, Buyline and the Company entered into an Agreement in Principle (the "Buyline Agreement"), which provides that E2E will invest $3,000,000 in Buyline and will receive in exchange shares of Buyline's common stock. This investment will consist of (1) the conversion of E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment of in kind services already rendered, and (3) an additional $1,000,000 cash investment. In addition, the two principal stockholders and creditors of E2E will each invest $250,000 in Buyline. Simultaneous with entering into the Buyline Agreement, the Company hired a technology executive who will become Buyline's President and Chief Executive Officer. The Company presently expects to complete definitive documentation for, and to complete, the Buyline restructuring shortly after closing the E2E Acquisition. Upon the consummation of the transactions contemplated by the Buyline Agreement, the Company, through E2E, will be the controlling shareholder of Buyline, and will designate and supervise the Buyline management team. Also, on March 13, 2000, the Company reached an agreement with Vipro to invest directly or indirectly through E2E an additional $1,000,000 in Vipro, on or before April 12, 2000, in exchange for additional equity in the form of shares of Vipro's Series B Convertible Preferred Stock. On the same day, one of the principal creditors and stockholders of E2E that will become a stockholder of the Company upon the completion of the E2E Acquisition invested $1,000,000 in Vipro on terms identical to the Company's pending investment. E2E has not been actively involved in the development of its portfolio companies' business strategies, operations and management teams. Many of these portfolio companies are now largely supported by later stage investors and managed by executive groups independent of E2E. With the exception of Buyline, it is anticipated that E2E will retain its minority equity position in these original portfolio companies. It is anticipated that in the future the Company principally will follow the investment precedent established by its proposed restructuring of Buyline by seeking ownership positions, voting interests and management roles in new portfolio companies that provide the Company, through E2E, operating control of such portfolio company. Further information about E2E, its investments in the existing portfolio companies and the restructuring of Buyline will be included in future reports by the Company after these transactions are complete. The proxy materials for the Company's meeting of stockholders at which the Charter Amendment will be presented for approval by holders of the Company's Common Stock and Series A Preferred Stock (the terms of the Series B and Series C Preferred Stock do not permit them to vote on this proposal, but otherwise permit them to vote as if already converted to Common Stock) will provide both explanatory and financial information. 3 6 OUTSOURCING OPERATIONS The Company is an "outsourcing company" soliciting manufacturing, assembly, repair, kitting and fulfillment services from Fortune 1000 and other select businesses. The Company performs its services utilizing prison labor under the Prison Industry Enhancement Program ("PIE"). Congress created the PIE program 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. The Company, directly or indirectly through its wholly-owned operating subsidiary LTI, 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, child support, taxes 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. Further, the program has been very successful in reducing the rate of recidivism, within the participating inmate population, according to the Federal Bureau of Justice and Assistance. In August 1997, the Company entered into an agreement with Wackenhut Corrections Corporation ("WCC") whereby WCC agreed to 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. In February 1998, the Company reached an agreement with the states of California and Florida to expand its operations into corrections facilities managed by those states. LTI operates an electronics manufacturing plant at WCC's Lockhart, Texas corrections facility. The Company currently operates a furniture manufacturing plant in a California Department of Corrections facility located in Blythe, California. The Company's customer call center operation, which had been located in a Utah Department of Corrections facility located in Draper, Utah, ceased operations during the first quarter of 1999 and has not reopened. The Company is currently awaiting the completion of the construction of a motorcycle parts operation, which is located in a WCC facility in South Bay, Florida. The Company was incorporated on September 9, 1986. The Company's principal executive offices are located at 2001 Pennsylvania Avenue, NW, Suite 675 in Washington, DC 20006, and its phone number is (202) 466-2100. BUSINESS STRATEGY. The Company's strategy is to establish itself as a national leader in the employment of prison labor in a variety of business sectors. To that end, the Company utilizes the PIE program to perform its services by using a low-cost, but highly-motivated labor pool, in modern, clean and efficient facilities. The Company intends to operate the business in a simple and straight-forward manner by maintaining corporate overhead at its present level during the Company's expansion. The Company's strategy also includes the following: Utilize existing expertise in electronics manufacturing to seek new business opportunities and to fully utilize all of LTI's electronic assembly facility in Lockhart, Texas; Provide ancillary services such as the assembly of kits (kitting) and installation of parts associated with the primary electronics manufacturing process; Expand the Company's furniture manufacturing operations by increasing its modular furniture production capabilities and introducing other furniture products; and Evaluate the Company's ability to provide fulfillment services. Management believes that additional capacity can be added, beyond the existing facilities, without significant additional corporate overhead. GROWTH STRATEGY. The Company has established a sound working relationship with WCC and seeks to expand that relationship by going into additional WCC facilities with available industry workspace to establish successful 4 7 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 LTI's successful electronics manufacturing facility in Lockhart, Texas, the Company will open a motorcycle parts manufacturing and assembly facility in a WCC facility located in South Bay, Florida during the second quarter of 2000 and continue to seek additional customers for its furniture manufacturing facility located in Blythe, California. The Company is evaluating several options regarding its opportunities for entry into the fulfillment industry. 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. SALE OF GWP, INC. On October 5, 1998, the Company's wholly-owned subsidiary, GWP, Inc. ("GWP"), purchased 51% of the outstanding voting capital stock of Technology Manufacturing and Design, Inc. ("TMD"), an EMP located in Austin, Texas. GWP paid cash of $730,000 for this equity interest in TMD, an amount that was loaned by the Company to GWP for the express purpose consummating this acquisition. Between the date of the purchase of TMD's shares and February 11, 1999, the Company contributed, through GWP, an approximately additional $1,206,000 to TMD for working capital purposes. On February 15 1999, as part of a severance agreement, the Company sold GWP to Kenneth H. Smith, the former President and Chief Executive Officer of the Company, for approximately the total amount invested by the Company in GWP and TMD. See "Certain Relationships and Related Transactions." PRODUCTS AND SERVICES Through LTI, the Company's operations have been primarily focused in two industries, electronics manufacturing (EM) and furniture manufacturing. The EM industry has been characterized by rapid growth and aggressive competition based on improving technology and decreasing cost. In 1998, the Company entered the furniture manufacturing and the customer call center industries. The Company ceased its call center operations during the first quarter of 1999. During 2000, the Company is scheduled to open a facility, which will provide parts manufacture and assembly services to a motorcycle manufacturer. Electronics Manufacturing. As a member of the electronics manufacturing provider ("EMP") industry the Company, through LTI, provides several services including contract manufacturing, cable and wire harness assembly and printed circuit board assembly. Given the emergence of new technologies and the proliferation of electronics into virtually all segments of the world economy, management believes the Company is poised for significant sustainable 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 EMP's can efficiently purchase many generic components. Finally, EMP's typically do not bear the same overhead and benefit burdens typically incurred by OEMs. Furniture Manufacturing. Through its furniture manufacturing facility, the Company manufactures panels and associated parts for use in the office workstation industry. The Company's automated facility is capable of producing a high quality panel comparable to those produced and sold by Herman Miller and Steelcase. The Company's product is designed to be interchangeable with several manufacturers of office furniture. Motorcycle Manufacturing. The Company's motorcycle parts manufacturing and assembly facility, which will be located in a WCC facility in South Bay, Florida, is scheduled to begin operations in the second quarter of 2000. Initially, the facility will be manufacturing, painting and polishing various motorcycle body parts with the intention of eventually accomplishing complete parts manufacture and assembly of motorcycles. CUSTOMERS AND MARKETS Within the EMP industry the Company promotes its services primarily in the Southwest region of the United States. The market for its EM services is the multi-billion dollar electronics industry. LTI specializes in production of circuit boards which are ordered in shorter production runs and therefore do not have to compete with the larger companies in the industry who have invested millions of dollars in high speed production equipment capable of continuous production runs creating hundreds of thousands of boards. LTI's customer base consists of over 200 customers, none of whom accounted for more than 15% of the Company's 1999 sales volume. The major market served by the Company's furniture manufacturing facility is the replacement workstation market. This market is dominated by a few large companies who offer alternatives to purchasing the higher priced products of Herman Miller and Steelcase. These companies offer finished products which are interchangeable with the more 5 8 expensive products, but at a considerably lower price. In November 1999, the Company's contract with Affordable Interior Systems, the only customer of Blythe, was cancelled. The Company has since contracted with another manufacturer and started producing their panels in January 2000. This manufacturer requires approximately one-shift of the operating capabilities of the Blythe facility. The Company is actively seeking other customers to increase the plant's output. The Company's motorcycle assembly plant will, initially, have only one customer, American Quantum Motorcycles ("American Quantum"). However, the Company will explore other customer opportunities in conjunction with American Quantum. The contract with American Quantum involves marking up the Company's labor component of the facility while passing through and being reimbursed in full for all other costs incurred to operate the facility. The Company is dependent upon certain customers for a major portion of its sales. High End (a customer of the LTI segment) accounted for 15% of sales for the years ended December 31, 1999. The sales of services to IBM represented approximately 43% and 66% for the years ended December 31, 1998 and 1997, respectively. Texas Instruments accounted for approximately 7% and 19% of total sales for the years ended December 31, 1998 and 1997, respectively. Amounts due from three customers, Dell, Vektronix (customers of the LTI segment) and AIS (a customer of the LTI - Blythe segment), constituted 87% of the Company's accounts receivable at December 31, 1999. IBM and Texas Instruments, along with other customers, High End Systems and Wyle EMG, comprised approximately 16% of net accounts receivable at December 31, 1998. The Company generally does not require collateral on its trade accounts receivable. SUPPLIERS AND RAW MATERIALS The raw materials used in each of the Company's industry segments are widely available from numerous suppliers. The Company does not anticipate any difficulty in obtaining sufficient quantity and quality of raw materials to satisfy the requirements of its customers. COMPETITION The competition in the Company's EM and furniture manufacturing segments consists of numerous small, regional companies and a significantly smaller group of large national companies. The Company competes directly with the smaller regional companies and avoids the markets dominated by the national companies. When competing with smaller regional companies, the Company has a distinct cost advantage created through the use of provided manufacturing facilities and not having to provide the same benefits, (medical, dental, etc.) to prison inmates as companies that rely exclusively on free-world employees. In the case of the motorcycle parts facility, the Company has no direct competition, as the Company has a contract to produce the manufacturing requirements of American Quantum. However, the Company's revenues will be directly effected by the competitive market conditions in the road bike industry where American Quantum competes in an industry dominated by Harley Davidson, Honda and to a lesser extent, BMW. REGULATION OF THE PIE PROGRAM Congress created the PIE Program in 1979 to encourage state and local governments to establish employment opportunities for prisoners that approximate private sector work opportunities and conditions. The program is designed to place inmates in a realistic working environment, pay them the state or Federal minimum or prevailing 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) participating companies must have written assurances from the appropriate state agency that the new PIE industry will not result in the displacement of workers employed prior to the program's implementation, does not occur in occupations in which there is a surplus of labor in the locality, and does not impair existing contracts for services; (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, each prison is also subject to laws and regulations concerning the operation, management and supervision of prisoner employees, which affects the operation of each of the Company's facilities. The Company's PIE operations are also subject to all governmental workplace regulations commonly associated with a service or manufacturing enterprise. EMPLOYEES. The Company employs approximately 100 persons, 88 of whom are inmates, nine (9) of whom are production, clerical and bookkeeping staff who support manufacturing operations and three (3) of whom are members of executive management. None of the Company's employees are represented by a union. The Company believes that its relationship with its employees is good. 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. The lease on the Lockhart facility provides approximately 27,800 square feet of manufacturing and office space through January 21, 2001, and provides an automatic three year extension unless 6 9 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. LTI also operates in a minimum-security prison at Chuckawalla Valley State Prison located in Blythe, California. The lease on the Blythe facility provides approximately 36,300 square feet of manufacturing and office space through August 31, 2003. The lease also provides for monthly payments of $726. The facility, which the Company's motorcycle parts operation will occupy, is located in a WCC minimum security prison located in South Bay, Florida. The lease on the South Bay facility provides approximately 20,500 square feet of manufacturing and office space through October of 2006. The lease provides for annual rental payments of $1.00. The Company's executive office is currently co-located in the offices of USV in Washington, DC. The Company does not have a lease on the space it occupies and does not pay rent to USV. The Company is in the process of locating approximately 5-7,000 square feet of office space in Washington, DC, to serve as its executive offices. As of the date of this report, suitable space has not been located and leased. The Company's operations and accounting center is currently co-located in the offices of The Spear Group in Norcross, Georgia. James V. Warren, the Co-Chairman of the Company's Board of Directors and the Co-Chief Executive Officer, is the co-founder and President of The Spear Group. The Company is negotiating a management services agreement with The Spear Group to provide operating, accounting and administrative services to the Company's prison facilities. The Company does not currently have a lease on the space it occupies at The Spear Group and does not pay rent to The Spear Group. The management agreement with The Spear Group, when executed, will include occupancy costs. See "Certain Relationships and Related Transactions". ITEM 3. LEGAL PROCEEDINGS. On July 16, 1995 the Company was served with a citation in Texas Industrial Services vs. U.S. Technologies Inc., County Court at Law No. 2 of Travis County, Texas. The suit alleges that the Company is liable for certain debts of a former subsidiary, American Microelectronics, Inc., ("AMI") on the theory that the Company was doing business as AMI. The petition seeks damages totaling approximately $54,000. The Company has asserted a defense and no activity has taken place on the suit since September 1995. On October 31, 1996 a consent order was signed by Mr. William Meehan, the Company's former president, in the case of Environmental Protection Agency v. Senson Corp, LTD., Docket No. TSCA-09-96-0002, agreeing among other things to pay a civil penalty. The penalty was never paid and is estimated to be approximately $7,000. On May 6, 1997 Mr. Meehan filed a lawsuit in the 98th Judicial District Court for Travis County, Texas seeking payment of certain wages and other benefits totaling approximately $330,000. The Company believes the claim is without merit and intends to defend its position vigorously. On July 14, 1997, Ryan Corley sued the Company, in the case styled Ryan Corley vs. U.S. Technologies, case No. 97-08065, in the 250th Judicial District of Travis County, Texas, alleging that he is entitled to four months severance pay in the approximate amount of $30,000. This case is being vigorously defended by the Company. On January 13, 1999, in the case styled St. John vs. Labor-To-Industry, Inc., et al, (U.S. District Court, Western District of Texas, Austin Division), Dale St. John sued LTI, WCC and others. Mr. St. John alleges that he was denied continued employment because he missed work as a result of being subpoenaed to court. He sued for back wages in an unspecified amount. On May 17, 1999, the Court dismissed this lawsuit in its entirety without prejudice. On February 16, 1999, in the case styled Fidelity Funding vs. Ken Smith, et al, in the 14th Judicial District of Dallas County, Texas, Fidelity Funding, Inc. (Fidelity) sued Mr. Smith and the Company in the amount of $839,449, the amount allegedly owed by Technology Manufacturing and Design, Inc., ("TMD") to Fidelity under a secured credit facility extended by Fidelity to TMD in November of 1998. The suit resulted after the Company sold its wholly owned subsidiary, GWP, which owned a 51% interest in TMD to Mr. Smith and after TMD filed bankruptcy. The suit sought to enforce a payment guaranty of the Company with respect to the balance of principal and accrued interest owed by TMD to Fidelity under this secured credit facility. The bankruptcy court for the Western District of Texas permitted Fidelity to collect the remaining principal and interest due under this credit facility from the accounts receivable securing this credit facility. As a result, Fidelity decided not to pursue its action against the Company and on June 17, 1999, filed a nonsuit, dismissing this lawsuit. On December 15, 1999, in the case styled Affordable Interior Systems, Inc. ("AIS") vs. U. S. Technologies, Inc., et al, (U.S. District Court, District of Massachusetts), AIS sued the Company alleging breach of contract, breach of covenant of good faith and fair dealing and a violation of the Massachusetts unfair trade practices statute. AIS claimed that the Company violated its exclusive supplier agreement with AIS by raising the price of panel blanks the Company had agreed to manufacture for and sell to AIS in connection with AIS's office furniture systems business. As a result, AIS alleged that it had to pay the increased amounts while it established an alternative source, and that it was entitled to a refund of those additional payments and the cost of establishing its own source. AIS also claimed that it was entitled to be reimbursed for certain expenses and fees incurred during the time period that the Company was considering purchasing AIS from its corporate owner, U.S. Office Products, which purchase did not occur. AIS sought in excess of approximately $1,400,000 in compensatory damages. AIS also sought treble damages under the Massachusetts unfair trade practices statute. The Company generally denied the claims asserted by AIS and raised certain affirmative defenses. The Company also asserted a counterclaim against AIS in the amount of approximately $200,467 plus interest for AIS' failure to pay for panel blanks the Company manufactured for AIS and delivered to it. On or about March 6, 2000, the Company and AIS reached an oral agreement under which both the claims and counterclaims asserted in this case would be dismissed and that mutual releases would be executed. On March 30, 2000, AIS and the Company executed and filed a Joint Stipulation of Dismissal Without Prejudice. During the second quarter 2000, the Company anticipates that it and AIS will execute mutual written releases relinquishing their respective claims against each other. 7 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter ended December 31, 1999 to a vote of security holders of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's Common 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 Company's Common Stock in the over-the-counter market for the years ended December 31, 1999 and 1998. Prices are as quoted on the OTC Bulletin Board System. Quotations reflect inter-dealer prices without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.
Bid High Low ----------------------- 1999 4th Quarter $.2500 $.1000 3rd Quarter $.4000 $.2100 2nd Quarter $.4700 $.2800 1st Quarter $.5900 $.3400 1998 4th Quarter $.6300 $.3800 3rd Quarter $.7100 $.4200 2nd Quarter $.9000 $.6400 1st Quarter $.9200 $.4400
On March 20, 2000, the closing bid price of the Company's Common Stock, as quoted on the OTC Bulletin Board system, was $4.2500. HOLDERS OF COMMON STOCK As of March 20, 2000, there were 447 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 The Company agreed, under the E2E Acquisition Agreement, to raise at least $6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing of the E2E Acquisition. To raise these funds, the Company recently commenced the private placement sale of $1,250,000 of additional shares of its Series A Preferred Stock to USV, a limited liability company controlled by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer, which is the Company's largest shareholder, and at least $5,000,000 and up to $8,750,000 of its newly created Series C Preferred Stock, to accredited investors. The Company has thus far received subscriptions or indications of interest for the purchase of approximately $5,200,000 of its Series C Preferred Stock, of which approximately $3,000,000 consists of subscriptions by USV. The Series C Preferred Stock would be convertible into shares of Common Stock at a conversion price per share ranging from $0.90 to $2.00, which will be determined based on the closing sale price for a share of Common Stock on the closing date of the E2E Acquisition as quoted on the OTC Bulletin Board. In connection with the private placement of the Series A Preferred Stock and the Series C Preferred Stock, the Company has received to date subscriptions for a total of approximately $6,450,000. The proceeds of these offerings will be used primarily to finance additional investments in new and existing Internet businesses that focus on B2B and B2C e-commerce, the payment of costs incurred and 8 11 liabilities assumed in connection with the E2E Acquisition and related business transactions and ongoing working capital needs. Upon the acceptance of the Charter Amendment by the Secretary of State of the State of Delaware, the Series B Preferred Stock and the Series C Preferred Stock will be automatically converted into shares of Common Stock. USV has also indicated its intention to convert all of its shares of Series A Preferred Stock to Common Stock at that time. See "Business - E2E Acquisition." When the E2E Acquisition closes, E2E's stockholders will be issued shares of Series B Preferred Stock, which will have a total liquidation preference aggregating approximately $11,200,000. Upon their mandatory conversion, these shares of Series B Preferred Stock will be converted into approximately 56,000,000 shares of Common Stock. See "Business -- E2E Acquisition." Commencing on July 9, 1998 and continuing through May 11, 1999, the Company received $5,000,000 of a total commitment of $5,000,000 under an agreement with USV which provided that the Company would issue to USV warrants to purchase 500,000 shares of Common Stock (the "Warrants") and shares of its Series A Preferred Stock pursuant to Regulation "D" promulgated under the Securities Act of 1933. Of the $5,000,000, amounts received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The shares of Series A Preferred Stock and the Warrants were issued to USV on May 11, 1999. The net proceeds to the Company of approximately $4,850,000, after legal and other costs, were used to provide working capital to support the Company's 1999 and 1998 operations and fund the 1998 purchase of a controlling interest in TMD by the Company's wholly owned subsidiary, GWP. The Earls Family Limited Partnership made a contribution of approximately $400,000 to USV, which allowed USV to complete the payment of the $5,000,000 purchase price for the Warrants and the Series A Preferred Stock to the Company. The Earls Family Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of the Company's Board of Directors and the Co-Chief Executive Officer of the Company, controls both USV and the Earls Family Limited Partnership. Promptly after USV was issued the Warrants, USV transferred the Warrants to the Earls Family Limited Partnership. On November 29, 1999, the terms of the Series A Preferred Stock were amended to cancel the right of the holders of the Series A Preferred Stock to receive an annual dividend and to change the conversion price for the Series A Preferred Stock to $0.122. The amended Certificate of Designations, Preferences and Rights of the Series A Preferred Stock setting forth these changes was filed with the Delaware Secretary of State on December 31, 1999. USV has the right to convert its shares of Series A Preferred Stock to Common Stock at any time. Likewise, the Earls Family Limited Partnership has the right to exercise its Warrants to purchase Common Stock at any time. If all of the outstanding shares of the Series A Preferred Stock were converted and the Warrants were exercised in full, the holders of such securities would be entitled to receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one share of Common Stock at a price of $1.00 per share. If all of USV's shares of Series A Preferred Stock were converted, USV would be entitled to receive 47,649,758 shares of Common Stock. Because that amount exceeds the number of shares of Common Stock available for issuance under the Company's Restated Certificate of Incorporation, USV and the Company entered into an agreement, dated March 1, 2000, whereby USV waived its right to convert its shares of Series A Preferred Stock until an appropriate amendment to the Company's Restated Certificate of Incorporation is filed with the Delaware Secretary of State. See "Business - E2E Acquisition." On January 12, 1998, the Company issued 4% convertible subordinated debentures and common stock purchase warrants to purchase 275,000 shares of Common Stock 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, after legal and other costs, were $247,500, which was used to liquidate certain 1996 liabilities and provide working capital to support the Company's operations. On March 16, 2000, a holder of the common stock purchase warrants exercised its right to purchase 137,500 shares of Common Stock. As of March 20, 2000, the holders of these common stock purchase warrants have the right to purchase a total of 138,000 shares of Common Stock. ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 is derived from the Company's audited financial statements. This information should be read in conjunction with the financial statements for 1999, 1998 and 1997 and notes thereto included elsewhere herein and "Management's Discussion and Analyses of Financial Condition and Results of Operations" included in ITEM 7., which are incorporated herein by reference. 9 12
DECEMBER 31 ----------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales $ 3,764,785 $ 6,107,244 $ 4,166,626 $ 1,410,498 $ 1,951,487 Operating costs and expenses: Cost of sales 4,458,881 5,349,459 3,424,313 2,513,672 1,764,121 Selling expenses 43,658 313,283 70,869 245,232 270,906 General and administrative expenses 1,988,113 2,788,104 1,118,310 961,195 1,777,934 Impairment of long-lived assets -- -- 1,408,839 -- -- Restructuring charge -- 90,000 196,903 -- -- Other - litigation -- -- 252,256 -- -- ------------ ------------ ------------ ------------ ------------ Total operating costs and expenses 6,490,652 8,540,846 6,471,490 3,720,099 3,812,961 ------------ ------------ ------------ ------------ ------------ Loss from operations (2,725,867) (2,433,602) (2,304,864) (2,309,601) (1,861,474) Other expense (income) Gain on sale of asset (642,764) -- -- -- -- Interest (28,893) 112,325 25,191 20,277 112,387 Other 202,271 18,782 (87,310) 253,134 (112,773) ------------ ------------ ------------ ------------ ------------ Total other (469,386) 131,107 (62,119) 273,411 (386) ------------ ------------ ------------ ------------ ------------ Net loss $ (2,256,481) $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088) Preferred stock dividend 525,114 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net loss available to common shareholders $ (2,781,595) $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088) ------------ ------------ ------------ ------------ ------------ Basic and diluted loss per common share $ (0.10) $ (0.09) $ (0.08) $ (0.14) $ (0.12) Weighted average shares outstanding 28,795,278 28,996,607 26,793,999 18,555,439 14,997,532 BALANCE SHEET DATA: Working capital $ (794,439) $ (312,828) $ (849,592) $ (707,467) $ 574,146 Total assets 1,092,096 2,367,533 869,742 2,652,682 3,326,537 Total debt(1) 41,064 47,912 54,821 144,000 840,435 Stockholders' equity (capital deficit) (220,792) 724,042 (419,911) 1,088,520 1,859,785
(1) Includes long-term debt, current maturity of long-term debt, capital lease obligations and notes payable. 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. RESIGNATION OF KENNETH H. SMITH; SALE OF GWP On February 11, 1999, Kenneth H. Smith resigned as President and Chief Executive Officer of and as a director of the Company. Subsequent to Mr. Smith's resignation, the Board of Directors of the Company appointed Gregory Earls, a director of the Company since April 1998, as the Chief Executive Officer of the Company. Since November 29, 1999, Mr. Earls has served as the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of the Company with James V. Warren. See "Appointment of New Management Team". Pursuant to the severance agreement entered into between the Company and Mr. Smith, the Company sold its wholly owned subsidiary, GWP, to Mr. Smith. The sole asset of GWP was an ownership interest in an amount of capital stock of TMD, which represented a controlling interest in TMD. This majority interest in TMD was acquired by GWP in early October 1998 for $730,000, which was contributed by the Company to GWP for the express purpose of purchasing TMD stock. In addition to contributing to GWP the funds necessary to complete the purchase of a controlling interest in TMD, from early October 1998 through February 11, 1999, the Company, through GWP, also contributed approximately $1,337,000 in working capital funds to TMD. The Company also guaranteed certain existing obligations of TMD, including the repayment of TMD's Fidelity Funding Inc. loan, 10 13 pursuant to the Loan and Security Agreement between TMD and Fidelity Funding, Inc., dated as of November 30, 1998. The sale of GWP was concluded on February 15, 1999. The total purchase price for GWP was approximately $2,451,000. This amount represented the Company's estimate of its investment in TMD through February 11, 1999 and certain legal and other transactional costs Mr. Smith agreed to assume. A portion of the purchase price for GWP was paid in the form of a promissory note executed by Mr. Smith in the principal amount of $1,234,832 bearing interest annually at the Wall Street Journal's prime rate of interest plus two percent (2%). The principal amount of Mr. Smith's promissory note and any accrued unpaid interest were due and payable in three (3) equal annual payments commencing February 15, 2000 and ending on February 15, 2002. Mr. Smith and TMD also agreed to guarantee any of TMD's obligations for which the Company was a guarantor. Repayment of the promissory note and the performance of Mr. Smith's guaranty obligations to the Company were secured by Mr. Smith's pledge to the Company of his 3,000,000 shares of the Company's Common Stock. The performance of GWP's guaranty obligations to the Company was secured by GWP's pledge to the Company of all of its stock holdings in TMD. The remaining balance of the purchase price for GWP was paid through Mr. Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability company controlled by Gregory Earls, the Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer of the Company. The aggregate purchase price of these shares was approximately $1,076,000. USV paid this purchase price directly to the Company, which applied such funds toward the amount payable by Mr. Smith to the Company in connection with his purchase of GWP. On April 1, 1999, following a default under Mr. Smith's promissory note, the Company exercised its rights under the pledge agreement with Mr. Smith and sold the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing sale price on April 1, 1999 was $0.35 per share, for a total sale price of $1,050,000. The aggregate sale price of $1,050,000, less the expenses associated with the sale, was applied in reduction of Mr. Smith's indebtedness to the Company. The 3,000,000 shares of Common Stock were sold to USV. In payment of the $1,050,000 sale price, USV executed a promissory note in favor of the Company. This promissory note was secured by USV's pledge of the 3,000,000 shares of Common Stock it purchased on April 1, 1999. On April 15, 1999, the Company entered into a forbearance agreement with Mr. Smith pursuant to which the parties agreed the amount outstanding under the promissory note Mr. Smith executed in connection with the sale of GWP was equal to $525,000. In addition, the Company agreed to refrain from taking any further action with respect to a default under Mr. Smith's promissory note until the earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse judgment is rendered against the Company by any court of competent jurisdiction in connection with its guaranty obligations of TMD, or (iii) any new default under Mr. Smith's promissory note. See "Certain Relationships and Related Transactions." APPOINTMENT OF NEW MANAGEMENT TEAM On November 29, 1999, the Company, James V. Warren and J.L. (Skip) Moore entered into a Management Agreement (the "Management Agreement"). Under the terms of the Management Agreement, Mr. Warren was elected a Director, Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman and Chief Executive Officer of the Company were modified to include Mr. Warren. Also, under the terms of the Management Agreement, Mr. Moore was elected to serve as the Company's Executive Vice-President and Chief Operating Officer. The accounting functions of the Company have also been moved from the Company's manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance with the terms of the Management Agreement. See "Certain Relationships and Related Transactions." RESIGNATION AND TERMINATION OF EXECUTIVE OFFICERS On February 15, 1999, James C. Melton resigned as Executive Vice President of and as a director of the Company. Effective January 31, 2000, the Company terminated the employment of John P. Brocard. Mr. Brocard was the Senior Vice President and General Counsel of the Company. 11 14 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:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 1996 ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales 100% 100% 100% 100% Operating costs and expenses: Cost of sales 118% 88% 82% 178% Selling expenses 1% 5% 2% 17% General and administrative expenses 53% 46% 27% 68% Impairment of long-lived assets -- -- 34% -- Restructuring charge -- 1% 5% -- Other - litigation -- -- 6% -- ------ ------ ------ ------ Total operating costs and expenses 172% 140% 155% 264% ------ ------ ------ ------ Loss from operations (72)% (40)% (55)% (164)% Gain on sale of asset (17)% -- -- -- Interest (1)% 2% 1% 1% Other 5% 0% (2)% 18% ------ ------ ------ ------ Total other (13)% 2% (1)% 19% ------ ------ ------ ------ Net loss (59)% (42)% (54)% (183)% ====== ====== ====== ======
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998. During the year ended December 31, 1999 the Company had net loss of $2,781,595 or $0.10 per weighted-average share, on net sales of $3,764,785 as compared to a net loss of $2,564,709 or $0.09 per weighted-average share on net sales of $6,107,244 for the year ended December 31, 1998. The net sales decrease of 38% was primarily the result of an approximate $2,000,000 sales decline at the Company's Lockhart facility due to management changes and a reorganization of the facility. Additionally, 1999 included approximately six weeks of sales for TMD ($948,000) while 1998 included thirteen weeks sales for TMD ($2,119,000). The Company's ownership interest in TMD was purchased in October 1998 and sold in mid-February 1999. Cost of sales, in the amount of $4,458,881, increased as a percentage of net sales to 118% for the year ended December 31, 1999 from $5,349,459, which represented 88% of net sales, for the year ended December 31, 1998. The increase in the cost of sales percentage is primarily due to; Lockhart's cost of sales exceeding its sales as a result of uneconomical material purchases and inefficient use of labor, start up costs at other locations, during the period of management change and reorganization. Selling expenses in the amount of $43,658 represented 1% of net sales during the year ended December 31, 1999 compared to $313,283 representing 5% of net sales for the year ended December 31, 1998. The decrease in the selling expenses percentage is primarily due the sale of TMD which accounted for approximately $186,000 in selling expense in 1998, but only $8,000 in 1999. The balance of the change was attributable to sales at Lockhart being produced from in-house operations personnel rather than outside commission sales people. General and administrative expenses totaled $1,988,113 for the year ended December 31, 1999 which represented 53% of net sales, compared to $2,788,104 which represented 46% of net sales for the year ended December 31, 1998. Included in general and administrative expense for the year ended December 31, 1999 were; severance expenses of approximately $228,000, related to the former President and former Senior Vice President of the Company, approximately $196,000 of compensation expense recorded as the result of the grant of stock options, approximately $178,000 of operating expenses related to a temporary manufacturing facility used by the Company until the Company's Blythe, California, facility was fully operational, bad debt expense of $140,000 and $116,000 in legal and accounting costs related to the attempted acquisition of AIS. These expenses equaled 23% of net sales. 12 15 During the year ended December 31, 1998 the Company recorded restructuring charges of $90,000 to account for primarily payroll cost associated with reorganizations of the Company's management staff. During the year ended December 31, 1999, the Company recorded a gain on the sale GWP and its 51% interest in TMD in the amount of $642,764. This gain was net of the write off of approximately $526,000, which represented the full value of the note receivable resulting from the sale of GWP. There were no comparable gain recorded during the year ended December 31, 1998. During the year ended December 31, 1999, the Company recorded other expense of $202,271. A significant part of this was $154,641, which represented legal and accounting expenses incurred to secure the $5,000,000 subscription for the Company's convertible preferred stock. There was no comparable expense during the year ended December 31, 1998. During the year ended December 31, 1999, the Company recorded a charge of $525,114, for dividends paid on the Company's convertible preferred stock. Under an agreement reached with the preferred stock holder in November 1999, no further dividends will be paid on the preferred stock in exchange for the Company's reducing the conversion price for each share of the Company's common stock from $0.410 per share to $0.122 per share. There was no comparable expense during the year ended December 31, 1998. Due to the continuing losses by the Company, the 100% reserve against the Company's $5,452,000 net deferred tax asset continues to be recognized at December 31, 1999. Additionally, as a result of the series of transactions through which the Company's new management gained control, in 1999, the Company is limited in the utilization of prior accumulated net operating losses and anticipates that approximately $574,000 per year of net operating losses are available to offset future annual taxable income. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997. During the year ended December 31, 1998 the Company had net loss of $2,564,709 or $0.09 per weighted-average share, on net sales of $6,107,244 as compared to a net loss of $2,242,745 or $0.08 per weighted-average share on net sales of $4,166,626 for the year ended December 31, 1997. The net sales increase of 47% was primarily the result of additional sales associated with TMD. Cost of sales, in the amount of $5,349,459, increased as a percentage of net sales to 88% for the year ended December 31, 1998 from $3,424,313, which represented 82% of net sales, for the year ended December 31, 1997. These amounts include charges to write-off obsolete inventory in the amount of $0 in 1998, and $306,888 in 1997. Excluding the write-off of obsolete inventory, cost of sales would have represented approximately 88% and 75% of net sales for the years ended December 31, 1998 and 1997 respectively. The increase in the cost of sales percentage is primarily due to TMD's cost of sales exceeding its sales as a result of uneconomical material purchases and inefficient use of labor. Excluding the operating results of TMD, cost of sales is approximately 78% of net sales for the year ended December 31, 1998. Selling expenses in the amount of $313,283 represented 5% of net sales during the year ended December 31, 1998 compared to $70,869 representing 2% of net sales for the year ended December 31, 1997. The increase in the selling expenses percentage is primarily due to the cost of TMD's sales staff. Excluding the operating results of TMD, selling expenses are approximately 3% of net sales. General and administrative expenses totaled $2,788,104 for the year ended December 31, 1998 which represented 46% of net sales, compared to $1,118,310 which represented 27% of net sales for the year ended December 31, 1997. The increase in general and administrative expenses is attributable to the increased costs of management staffing, start-up expenses, travel and legal costs associated with opening new locations and acquiring TMD. During the year ended December 31, 1998 and 1997, the company recorded restructuring charges of $90,000 and $196,903, respectively, to account for primarily payroll cost associated with reorganizations of the Company's management staff. Due to the continuing losses by the Company, the 100% reserve against the Company's $4,408,000 net deferred tax asset continues to be recognized at December 31, 1998. Additionally, 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 approximately $574,000 per year of net operating losses are available to offset future annual taxable income. The Company expects to pay taxes for 1999 in accordance with the provisions of the alternative minimum tax and various state income taxes. Liquidity and Capital Resources. During the three years ended December 31, 1999, 1998, and 1997 the Company experienced negative operating cash flows of $2,660,402, $2,870,611 and $560,302, respectively. Negative cash flows from operations resulted principally from operating losses incurred during these years. The primary operating uses of cash during 1999 were 13 16 to fund net losses of $2,256,481, net of a gain on the sale of TMD of $642,764. Net cash used in 1999 operating activities was favorably impacted by depreciation of $178,230 and decreases in inventories and accounts receivable of $325,280 and $311,612, respectively, reduced by declines in accrued expenses of $203,965. The primary operating uses of cash during 1998 were to fund operating losses of $2,564,709, which included a $972,892 loss from the operations of TMD. The 1998 net cash used in operating activities was adversely effected by increases in accounts receivable and inventories of $510,922 and $353,648, respectively and a decrease in accrued expenses of $501,951, while being favorably impacted by a $747,196 increase in accounts payable. The $2,242,745 operating losses in 1997 were largely offset by non-cash reductions of (1) $1,408,839 for impairment of long-lived assets (2) $306,888 for an increase in inventory valuation allowance and (3) $179,194 for depreciation and amortization. The primary uses of operating cash during 1997 were to fund the reduction of accounts payable of $238,363 and the increase in accounts receivable of $120,680 due to increased sales volume. During the year ended December 31, 1999, investing activities provided a net amount of $400,653. This amount was negatively impacted by equipment purchases of $475,347. The sale of TMD in 1999 resulted in the collection of $1,076,000 proceeds from the sale. During the year ended December 31, 1998, investing activities used $658,104. The 1998 activity was unfavorably impacted by the purchase of GWP and its interest in TMD for $730,000, and equipment purchases of $431,298. The 1998 activity was favorably impacted by collections on notes receivable of $385,194 and proceeds from the sale of assets of $118,000. Net cash used for investing activities of $58,942 during the year ended December 31, 1997 was for the purchase of equipment. Cash provided by financing activities of $2,159,060, $3,638,366 and $618,185 during 1999, 1998 and 1997, respectively, were primarily the net proceeds of preferred stock, common stock and debt issuances. Commencing on July 9, 1998 and continuing through May 11, 1999, the Company received $5,000,000 of a total commitment of $5,000,000 under an agreement with USV which provided that the Company would issue to USV Warrants to purchase 500,000 shares of Common Stock and shares of its Series A Preferred Stock pursuant to Regulation "D" promulgated under the Securities Act of 1933. Of the $5,000,000, amounts received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The shares of Series A Preferred Stock and the Warrants were issued to USV on May 11, 1999. The net proceeds to the Company of approximately $4,850,000, after legal and other costs, were used to provide working capital to support the Company's 1999 and 1998 operations and fund the 1998 purchase of a controlling interest in TMD by the Company's wholly owned subsidiary, GWP. The Earls Family Limited Partnership made a contribution of approximately $400,000 to USV, which allowed USV to complete the payment of the $5,000,000 purchase price for the Warrants and the Series A Preferred Stock to the Company. The Earls Family Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of the Company's Board of Directors and the Co-Chief Executive Officer of the Company, controls both USV and the Earls Family Limited Partnership. Promptly after USV was issued the Warrants, USV transferred the Warrants to the Earls Family Limited Partnership. On November 29, 1999, the terms of the Series A Preferred Stock were amended to cancel the right of the holders of the Series A Preferred Stock to receive an annual dividend and to change the conversion price for the Series A Preferred Stock to $0.122. The amended Certificate of Designations, Preferences and Rights of the Series A Preferred Stock setting forth these changes was filed with the Delaware Secretary of State on December 31, 1999. USV has the right to convert its shares of Series A Preferred Stock to Common Stock at any time. Likewise, the Earls Family Limited Partnership has the right to exercise its Warrants to purchase Common Stock at any time. If all of the outstanding shares of Series A Preferred Stock were converted and the Warrants were exercised in full, the holders of such securities would be entitled to receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one share of Common Stock at a price of $1.00 per share. If all of USV's shares of Series A Preferred Stock were converted, USV would be entitled to receive 47,649,758 shares of Common Stock. Because that amount exceeds the number of shares of Common Stock available for issuance under the Company's Restated Certificate of Incorporation, USV and the Company entered into an agreement, dated March 1, 2000, whereby USV waived its right to convert its shares of Series A Preferred Stock until an appropriate amendment to the Company's Restated Certificate of Incorporation is filed with the Delaware Secretary of State. See "Business - E2E Acquisition." 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 14 17 capital. This contribution significantly improved the Company's financial condition thus improving the Company's relationships with vendors and allowing the Company to finance significant increases in sales volume. Working capital decreased by $481,611 from a negative $312,828 as of December 31, 1998, to a negative $794,439 as of December 31, 1999. Gross accounts receivable decreased by $311,612 to $401,353, representing approximately 51 days sales, at December 31, 1999, from $712,975, representing approximately 52 days sales as of December 31, 1998. Inventory decreased by $325,280 to $260,575 at December 31, 1999 from $585,855 at December 31, 1998 primarily as a result of decreased sales at the LTI facility in Lockhart, Texas. During the year ended December 31, 1999, accounts payable increased by $160,064 to $1,004,237, including $318,490 resulting from manufacturing activities which represented 47 days cost of sales, from $844,173, including $577,359 resulting from manufacturing activities which represented 89 days cost of sales in the year ended December 31, 1998. Working capital increased by $536,764 from a negative $849,592 as of December 31, 1997, to a negative $312,828 as of December 31, 1998. Accounts receivable increased by $353,648 to $712,975, representing approximately 52 days sales, at December 31, 1998, from $341,327, representing approximately 30 days sales as of December 31, 1997. Inventory increased by $510,922 to $585,855 at December 31, 1998 from $74,933 at December 31, 1997 primarily as a result of a change in the customer mix at the LTI facility in Lockhart, Texas which resulted in the use of more purchased inventory instead of customer supplied inventory. For the year ended December 31, 1998, accounts payable increased by $467,342 to $844,173, representing approximately 89 days cost of sales, from $376,831, representing approximately 66 days cost of sales for the year ended December 31, 1997. This increase was the result of increased working capital needs to fund inventory, accounts receivable and operating losses. The company took several steps, during 1999, to improve the performance of its operating facilities: - The Spear Group, a company experienced in the management of manufacturing facilities and labor intensive businesses, was employed to provide operational, accounting and administrative support to the Company's operating facilities. - The Company engaged additional contract sales personnel to increase sales at the Company's Lockhart, Texas, electronics manufacturing facility. - An experienced plant manager was hired to operate the Company's Lockhart, Texas, electronics manufacturing facility. - The Company purchased approximately $400,000 of equipment to improve operating efficiencies at its manufacturing facilities. The Company's growth plans for 2000 include maximization of revenue potential at the two existing facilities, Lockhart and Blythe, the opening of a motorcycle parts manufacturing facility at a WCC facility located in South Bay, Florida and possible acquisitions. Capital required to improve the South Bay facility is being provided by WCC. The Company agreed, under the E2E Acquisition Agreement, to raise at least $6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing of the E2E Acquisition. To raise these funds, the Company recently commenced the private placement sale of $1,250,000 of additional shares of its Series A Preferred Stock, to USV, a limited liability company controlled by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer, which is the Company's largest shareholder, and at least $5,000,000 and up to $8,750,000 of its newly created Series C Preferred Stock, to accredited investors. The Company has thus far received subscriptions or indications of interest for the purchase of approximately $5,200,000 of its Series C Preferred Stock, of which approximately $3,000,000 consists of subscriptions by USV. The Series C Preferred Stock would be convertible into shares of the Company's Common Stock at a conversion price per share ranging from $0.90 to $2.00, which will be determined based on the closing sale price for a share of Common Stock on the closing date of the E2E Acquisition, as quoted on the OTC Bulletin Board. In connection with the private placements of the Series A Preferred Stock and the Series C Preferred Stock, the Company has received to date subscriptions for a total of approximately $6,450,000. The proceeds of these offerings will be used primarily to finance additional investments in new and existing Internet businesses that focus on B2B and B2C e-commerce, the payment of costs incurred and liabilities assumed in connection with the E2E Acquisition and related business transactions and ongoing working capital needs. See "Business - E2E Acquisition." 15 18 Effect of Inflation. Inflation has not had a material impact on the Company's 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 1999 and beyond to differ materially from those expressed or implied in such forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. This Form 10-K also contains forward-looking statements concerning prospective future acquisitions and investments, and prospects for such acquisitions and investments. The Company cautions that the actual developments and results of the Company's prospective future acquisitions and investments may differ from its expectations for such prospective future events. There can be no assurance that the conditions necessary to completing any prospective acquisition, investment or related financing transaction will be satisfied, or that any such prospective event will occur. Additional investments by the Company or an unrelated person in any entity that is a part of E2E's investment portfolio or E2E provide no assurance that such portfolio company of E2E or E2E will succeed or that the Company's or E2E's investments will be recovered or profitable. The Company's assets and operations, including results of operations, would be affected materially by the extent to which the Company, E2E and E2E's portfolio companies continue to have access to financing sources on reasonable terms in order to pursue its and their business plans, by the success or failure of the business plans of the Company, E2E and E2E's portfolio companies, by economic conditions generally and particularly in the developing e-commerce market, by competition and technological changes in the Company's, E2E's and E2E's portfolio companies industries and businesses, and by the results of the Company's, E2E's and E2E's portfolio companies' operations if and when operating. In addition, the occurrence of any of the foregoing events or the failure of any of the foregoing events to occur would materially affect the Company's assets, operations and results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 16 19 U.S. TECHNOLOGIES INC. CONTENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets 20 Statements of operations 21 Statements of changes in stockholders' equity (capital deficit) 22 Statements of cash flows 23 Notes to financial statements 24-45
18 20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of U.S. Technologies Inc. Marietta, Georgia We have audited the accompanying consolidated balance sheets of U.S. Technologies Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity (capital deficit) and cash flows for each of the three years in the period ended December 31, 1999. 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Technologies Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. BDO Seidman, LLP Atlanta, Georgia March 17, 2000, except for Note 18, which is as of April 5, 2000 19 21 U.S. Technologies Inc. Consolidated Balance Sheets
December 31, 1999 1998 - ---------------------------------------------------------------- ------------ ------------ ASSETS CURRENT Cash $ 9,451 $ 110,140 Trade accounts receivable, net of reserves of $206,000 and $140,000 195,289 572,975 Inventory, net 260,575 585,855 Prepaid expenses 39,340 29,831 ------------ ------------ Total current assets 504,655 1,298,801 ------------ ------------ PROPERTY AND EQUIPMENT, net of accumulated depreciation 571,383 499,749 ------------ ------------ OTHER ASSETS Net investment in and advances to subsidiary held for sale -- 524,558 Other assets 16,058 44,425 ------------ ------------ Total other assets 16,058 568,983 ------------ ------------ Total assets $ 1,092,096 $ 2,367,533 ============ ============ Current liabilities Accounts payable $ 1,004,237 $ 1,124,027 Accrued expenses 267,587 471,552 Current portion of long-term debt and capital lease obligation 27,270 16,050 ------------ ------------ Total current liabilities 1,299,094 1,611,629 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION, less current portion 13,794 31,862 ------------ ------------ Total liabilities 1,312,888 1,643,491 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) Series A convertible preferred stock; $0.02 par value; 10,000,000 shares authorized; 500,000 issued and outstanding at December 31, 1999 5,000,000 -- Series A convertible preferred stock subscribed but unissued 289,703 3,648,682 Common stock; $0.02 par value; 40,000,000 shares authorized; 29,195,278 shares issued and outstanding 583,906 583,906 Additional paid-in capital 12,275,655 12,605,029 Accumulated deficit (17,992,167) (15,735,686) Stock receivable (150,205) (150,205) Treasury stock, at cost (227,684) (227,684) ------------ ------------ Total stockholders' equity (capital deficit) (220,792) 724,042 ------------ ------------ Total liabilities and capital deficit $ 1,092,096 $ 2,367,533 ============ ============
See accompanying notes to consolidated financial statements. 20 22 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 1998 1997 - ---------------------------------------------------------------- ------------ ------------ ------------ NET SALES $ 3,764,785 $ 6,107,244 $ 4,166,626 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Cost of sales 4,458,881 5,349,459 3,424,313 Selling expense 43,658 313,283 70,869 General and administrative expense 1,988,113 2,788,104 1,118,310 Impairment of long-lived assets -- -- 1,408,839 Restructuring charge -- 90,000 196,903 Other - litigation -- -- 252,256 ------------ ------------ ------------ Total operating costs and expenses 6,490,652 8,540,846 6,471,490 ------------ ------------ ------------ Loss from operations (2,725,867) (2,433,602) (2,304,864) ------------ ------------ ------------ OTHER EXPENSE (INCOME) Interest, net (28,893) 112,325 25,191 Other, net 202,271 18,782 (87,310) Gain on sale of subsidiary (642,764) -- -- ------------ ------------ ------------ Total other expense (income) (469,386) 131,107 (62,119) ------------ ------------ ------------ NET LOSS (2,256,481) (2,564,709) (2,242,745) Preferred stock dividends 525,114 -- -- ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,781,595) $ (2,564,709) $ (2,242,745) ============ ============ ============ Basic and diluted loss per common share $ (0.10) $ (0.09) $ (0.08) ============ ============ ============ Weighted average common shares outstanding 28,795,278 28,996,607 26,793,999 ============ ============ ============
See accompanying notes to consolidated financial statements. 21 23 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
SERIES A PREFERRED COMMON TREASURY CONVERTIBLE COMMON TREASURY STOCK STOCK STOCK PREFERRED STOCK STOCK STOCK SUBSCRIBED ---------- ---------- --------------- -------- ----------- ----------- BALANCE, January 1, 1997 21,857,263 -- $ -- $437,146 $ -- $ -- Stock issued, change in control 5,507,130 -- -- 110,143 -- -- Note receivable - stockholder -- -- -- -- -- -- Stock options exercised 50,000 -- -- 1,000 -- -- Stock issued to retire debt 583,800 -- -- 11,676 -- -- Stock receivable 633,870 -- -- 12,677 -- -- Accrued interest on note receivable - stockholder -- -- -- -- -- -- Net loss -- -- -- -- -- -- ---------- ---------- ---------- -------- ----------- ----------- BALANCE, December 31, 1997 28,632,063 -- -- 572,642 -- -- Stock issued to retire debt 563,215 -- -- 11,264 -- -- Purchase of treasury shares -- (400,000) -- -- (227,684) -- Proceeds from convertible preferred stock issuable -- -- -- -- -- 3,648,682 Advance to stockholder -- -- -- -- -- -- Accrued interest on note receivable - stockholder -- -- -- -- -- -- Transfer to subsidiary to be sold -- -- -- -- -- -- Net loss -- -- -- -- -- -- ---------- ---------- ---------- -------- ---------- ----------- BALANCE, December 31, 1998 29,195,278 (400,000) -- 583,906 (227,684) 3,648,682 Redemption of shares -- (3,000,000) -- -- (1,050,000) -- Sale of treasury stock -- 3,000,000 -- -- 1,050,000 -- Proceeds from convertible preferred stock issuable -- -- -- -- -- 1,641,021 Issuance of preferred stock -- -- 5,000,000 -- -- (5,000,000) Compensatory stock option grants -- -- -- -- -- -- Net loss -- -- -- -- -- -- Cash dividends on Series A preferred stock -- -- -- -- -- -- ---------- -------- ---------- -------- ---------- ----------- BALANCE, December 31, 1999 29,195,278 (400,000) $5,000,000 $583,906 $ (227,684) $ 289,703 ========== ======== ========== ======== ========== =========== ADDITIONAL NOTE PAID-IN ACCUMULATED RECEIVABLE- STOCK CAPITAL DEFICIT STOCKHOLDER RECEIVABLE TOTAL ------------ ------------ ------------ ----------- ----------- BALANCE, January 1, 1997 $ 11,729,811 $(10,928,232) $ -- $(150,205) $ 1,088,520 Stock issued, change in control 516,431 -- -- -- 626,574 Note receivable - stockholder -- -- (270,000) -- (270,000) Stock options exercised 11,500 -- -- -- 12,500 Stock issued to retire debt 134,274 -- -- -- 145,950 Stock receivable -- -- (63,387) -- (50,710) Accrued interest on note receivable - stockholder -- -- (26,305) -- (26,305) Net loss -- (2,242,745) -- -- (2,242,745) ------------ ------------ --------- --------- ----------- BALANCE, December 31, 1997 12,392,016 (13,170,977) (359,692) (150,205) (716,216) Stock issued to retire debt 213,013 -- -- -- 224,277 Purchase of treasury shares -- -- -- -- (227,684) Proceeds from convertible preferred stock issuable -- -- -- -- 3,648,682 Advance to stockholder -- -- (151,212) -- (151,212) Accrued interest on note receivable - stockholder -- -- (25,502) -- (25,502) Transfer to subsidiary to be sold -- -- 536,406 -- 536,406 Net loss -- (2,564,709) -- -- (2,564,709) ------------ ------------ --------- --------- ----------- BALANCE, December 31, 1998 12,605,029 (15,735,686) -- (150,205) 724,042 Redemption of shares -- -- -- -- (1,050,000) Sale of treasury stock -- -- -- -- 1,050,000 Proceeds from convertible preferred stock issuable -- -- -- -- 1,641,021 Issuance of preferred stock -- -- -- -- -- Compensatory stock option grants 195,740 -- -- -- 195,740 Net loss -- (2,256,481) -- -- (2,256,481) Cash dividends on Series A preferred stock (525,114) -- -- -- (525,114) ------------ ------------ --------- --------- ----------- BALANCE, December 31, 1999 $ 12,275,655 $(17,992,167) $ -- $(150,205) $ (220,792) ============ ============ ========= ========= ===========
See accompanying notes to consolidated financial statements. 22 24 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997 - ----------------------------------------------------------- ------------ ------------- ------------ OPERATING ACTIVITIES Net loss $(2,256,481) $(2,564,709) $(2,242,745) Adjustments to reconcile net loss to net cash used in operating activities: Net loss from activities of subsidiary held for sale -- 972,892 -- Gain on sale of subsidiary (642,764) -- -- Depreciation and amortization 178,230 68,573 179,194 Loss (gain) on disposal of assets 178,496 (118,000) -- Advances, net of deficit in operating results, to subsidiary held for sale (711,682) (767,450) -- Impairment of long-lived assets -- -- 1,408,839 Restructuring costs -- 90,000 -- Inventory valuation allowance -- -- 306,888 Provision for bad debts 66,064 122,000 18,000 Compensatory stock option grants 195,740 -- -- Changes in assets and liabilities, net of effects of acquisition Receivables 311,612 (353,648) (120,680) Inventory 325,280 (510,922) 90,406 Prepaid expenses (9,509) (25,587) (3,971) Other assets 28,367 (29,005) (10,903) Accounts payable (119,790) 747,196 (238,363) Accrued expenses (203,965) (501,951) 53,033 ----------- ----------- ----------- Net cash used in operating activities (2,660,402) (2,870,611) (560,302) ----------- ----------- ----------- INVESTING ACTIVITIES Net proceeds from disposal of assets 1,076,000 118,000 -- Proceeds from collection of notes and other receivables -- 385,194 -- Advances to former shareholder (200,000) -- -- Purchase of equipment (475,347) (431,298) (58,942) Net cash paid for acquisition -- (730,000) -- ----------- ----------- ----------- Net cash provided by (used in) investing activities 400,653 (658,104) (58,942) ----------- ----------- ----------- FINANCING ACTIVITIES Proceeds from convertible preferred stock issuable 1,641,021 3,648,682 -- Sale of treasury stock 1,050,000 -- -- Proceeds from issuance of long-term debt 11,760 -- 36,000 Principal payments on notes payable (18,607) (6,909) (6,179) Preferred stock dividends paid (525,114) -- -- Proceeds from issuance of convertible debentures -- 224,277 -- Purchase of treasury stock -- (227,684) -- Issuance of common stock -- -- 588,364 ----------- ----------- ----------- Net cash provided by financing activities 2,159,060 3,638,366 618,185 ----------- ----------- ----------- Increase (decrease) in cash (100,689) 109,651 (1,059) CASH, beginning of period 110,140 489 1,548 ----------- ----------- ----------- CASH, end of period $ 9,451 $ 110,140 $ 489 =========== =========== ===========
See accompanying notes to consolidated financial statements. 23 25 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation U.S. Technologies Inc. (the "Company") performs labor and service intensive "outsourcing" work for Fortune 1000 and other select companies. Currently, the work is performed by inmates in detention facilities located in Texas and California under the guidelines of a 1979 Federal Government Program known as the Prison Industry Enhancement program ("PIE"). The Company performs electronic and furniture assembly, manufacturing, enhancement, rework, packaging and sorting of products. The Company operates in privatized prisons under an 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. The agreement with the WCC also permits the Company to contract with state and federally operated facilities. WCC is the second largest manager of privatized correctional facilities in the United States. Currently WCC manages 35 detention facilities in the United States and has begun construction on new industry buildings at certain of its sites for use by the Company. WCC does not have an ownership interest in the Company. The Company's wholly-owned subsidiaries include Labor-to-Industry Inc. ("LTI"), Service-to-Industry Inc. ("STI") and through February 12, 1999, GWP, Inc. ("GWP"). LTI produces labor intensive tangible products and STI is a service provider operating an inbound/outbound call center. GWP is a holding company for a 51% interest in Technology Manufacturing and Design, Inc. ("TMD"). TMD is a "free-world" (i.e., non-prison) contract manufacturer of electronic circuit boards. LTI operations included electronics-related assembly for all years presented, furniture-related assembly commencing September 1998, and cut-and-sew operations commencing May 1998. The cut-and-sew operations were discontinued in February 1999. STI operated the call center from June 1998 and temporarily suspended operations in January 1999. The 51% interest in TMD was acquired effective October 5, 1998. On February 15, 1999, GWP including its interest in TMD were sold to Mr. Kenneth H. Smith, the former president of the Company as part of a severance agreement (Notes 2 and 3). The consolidated statements of operations, cash flows and changes in stockholders' equity include the accounts of the Company and its subsidiaries, including GWP and TMD, subsidiaries held for sale at December 31, 1998. Since GWP and TMD were sold during 1999, the net assets as of December 31, 1998 are recorded in the accompanying balance sheet as "Net investment in and advances to subsidiary held for sale." All material intercompany accounts and transactions are eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturity dates of three months or less from the date of purchase to be cash equivalents. Inventories Inventories are stated at the lower of cost, determined by the average cost method, or market. 24 26 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Asset Impairment Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, requires that long-lived assets and certain intangibles to be held and used by the Company be reviewed for impairment. The Company periodically assesses whether there has been a permanent impairment of its long-lived assets, in accordance with SFAS No. 121. A write-down of assets due to impairment was required for the year-ended December 31, 1997, in the amount of approximately $1.4 million (Note 4). Property and Depreciation Property and equipment are stated at cost less accumulated depreciation. Expenditures for additions, renewals and improvements of property and equipment are capitalized. Expenditures for repairs, maintenance and gains or losses on disposals are included in operations. Depreciation is computed using the straight-line method over the following estimated lives:
ESTIMATED LIVES --------------- Equipment 5-7 years Furniture and fixtures 7 years Leasehold Improvements 6 years
Revenue Recognition and Accounts Receivable Revenue is recognized when the product is shipped. An allowance for doubtful accounts is provided based on periodic review of the accounts. 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). Income Taxes The Company accounts for income taxes under the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than possible enactments of changes in the tax laws or rates. The Company provides a valuation allowance against its deferred tax assets to the extent that management estimates that it is "more likely than not" that such deferred tax assets will not realized. 25 27 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings per Share The Company has adopted the provisions of SFAS No. 128, Earnings Per Share, which is effective for fiscal years ending after December 15, 1997. Basic earnings per common share are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share include the dilutive effect of convertible preferred stock, stock options and warrants. For all periods presented diluted earnings per share have not been presented because the impact of the assumed exercise of convertible preferred stock, stock options and warrants would have been anti-dilutive. The impact of the assumed exercise may have a dilutive effect in the future. Stock Option Plans Effective in 1997, the Company adopted the disclosure - only 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 the expense recognition provisions of 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. Compensation expense is computed for options granted to non-employees using the Black-Scholes option pricing model. 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 and competition. Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of the Company's financial instruments included in the accompanying consolidated balance sheets are not materially different from their fair values. 26 28 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 137 delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001, to affect its financial statements. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. 2. RESTRUCTURINGS AND 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, 1999, and had working capital deficiencies at December 31, 1999 and 1998. 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 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 the 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. In 1998, further steps were taken to turn around the negative financial results of the Company. These steps included raising capital from an issuance of convertible debentures, entering into a $5 million preferred stock investment agreement with USV Partners, LLC ("USV") and cost reductions from termination of certain executive, management and inmate personnel. 27 29 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional steps taken in 1999 included closing one unprofitable division temporarily (the call center operators of STI) and another unprofitable division indefinitely (the cut and sew operations of LTI), and obtaining the resignations of Mr. Kenneth H. Smith, chairman of the board of directors, president and chief executive officer, and Mr. James C. Melton, Sr., member of the board of directors and executive vice president. GWP acquired its interest in TMD during 1998. TMD was initially expected to complement the Company's existing business operations. However, TMD continued to generate significant operating losses and was sold subsequent to year-end to Mr. Smith in conjunction with his severance agreement (see Note 3). The Company has filled the vacancies left by Mr. Smith's resignation with Mr. C. Gregory Earls. Mr. Earls is a substantial investor in the Company and a member of the board of directors. Mr. Earls is also the sole member of USV Management, LLC, the manager of USV. Through USVC, Mr. Earls has successfully assisted the Company gain access to investment capital and has committed to generate additional capital for the Company as necessary. On November 29, 1999, the Company, James V. Warren and J.L. (Skip) Moore entered into a Management Agreement (the "Management Agreement"). Under the terms of the Management Agreement, Mr. Warren was elected a Director, Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman and Chief Executive Officer of the Company were modified to include Mr. Warren. Also, under the terms of the Management Agreement, Mr. Moore was elected to serve as the Company's Executive Vice-President and Chief Operating Officer. The accounting functions of the Company have also been moved from the Company's manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance with the terms of the Management Agreement. In connection with the Management Agreement, the Company issued stock options for 1,500,000 shares to Mr. Warren and 400,000 shares to Mr. Moore. These options have a fair market value in the aggregate of $195,740, which has been included within general and administrative expense in the accompanying 1999 statement of operations. Finally, as further discussed in Note 18, subsequent to December 31, 1999, the Company has commenced private placements to raise between $6,250,000 and $10,000,000. The Company's continued existence is dependent upon its ability to continue to resolve its liquidity problems and begin to generate positive earnings and cash flow from operations. 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 (as a result of new management of the company by individuals with significant industry experience), 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. BUSINESS COMBINATION As described in Note 1, GWP acquired a 51% interest in TMD for $730,000 in October 1998 and subsequently sold GWP including its 51% interest in TMD to Mr. Smith in February 1999. 28 30 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarize the fair values of the assets acquired and liabilities assumed in connection with the acquisition: Current assets $ 1,237,312 Property and equipment 2,096,196 Net assets held for sale 275,000 Other assets, including goodwill 2,482,466 Current liabilities (2,709,148) Other liabilities (2,651,826) ----------- $ 730,000 ===========
Net assets held for sale represent a circuit board design operation of TMD, sold in December 1998. Net operating results of the circuit board design operation were not significant. In conjunction with the acquisition, the Company guaranteed the future purchase of the 49% minority interest of TMD. The purchase price of the minority interest is based on a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"), to be completed between October 2000 and October 2001. The accompanying statement of operations include net sales of approximately $948,000 and $2,119,000, respectively, net loss of approximately $124,000 and $973,000, respectively, and net loss per share of less than $0.01 and $0.03, respectively, attributed to TMD for the years ended December 31, 1999 and 1998. However, because of the sale of TMD subsequent to year-end, unaudited pro forma results of operations for the years ended 1999, 1998 and 1997 are not considered meaningful and have not been presented. On February 11, 1999, Kenneth H. Smith resigned as President and Chief Executive Officer of and as a director of the Company. Pursuant to the severance agreement entered into between the Company and Mr. Smith, the Company sold its wholly owned subsidiary, GWP to Mr. Smith. The sole asset of GWP was an ownership interest in an amount of capital stock of TMD, which represented a controlling interest in TMD. This majority interest in TMD was acquired by GWP in early October 1998 for $730,000, which was contributed by the Company to GWP for the express purpose of purchasing TMD stock. In addition to contributing to GWP the funds necessary to complete the purchase of a controlling interest in TMD, from early October, 1998 through February 11, 1999, the Company through GWP also contributed 29 31 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS approximately $1,337,000 in working capital funds to TMD. The Company also guaranteed certain existing obligations of TMD, including the repayment of TMD's Fidelity Funding Inc. loan, pursuant to the Loan and Security Agreement between TMD and Fidelity Funding, Inc., dated as of November 30, 1998. The net liabilities of GWP and its interest in TMD, and the Company's net investment in and advances to GWP, TMD and Mr. Smith at December 31, 1998, are summarized as follows: Current assets $ 1,572,243 Property and equipment 1,848,503 Other assets, including goodwill 2,734,750 Current liabilities (4,357,782) Notes payable (2,770,626) ----------- Net liabilities (972,912) Investments and advances 1,497,470 ----------- Net investments and advances $ 524,558 ===========
The sale of GWP was concluded on February 15, 1999. The total purchase price for GWP was approximately $2,451,000. This amount represented the Company's estimate of its investment in TMD through February 11, 1999 and certain legal and other transactional costs Mr. Smith agreed to assume. A portion of the purchase price for GWP was paid in the form of a promissory note executed by Mr. Smith in the principal amount of $1,234,832 bearing interest annually at the Wall Street Journal's prime rate of interest plus two percent (2%). The principal amount of Mr. Smith's promissory note and any accrued unpaid interest were due and payable in full on February 15, 2002. Mr. Smith and TMD also agreed to guarantee any of TMD's obligations for which the Company was a guarantor. Repayment of the promissory note and the performance of Mr. Smith's guaranty obligations to the Company were secured by Mr. Smith's pledge to the Company of his 3,000,000 shares of the Company's Common Stock. The performance of GWP's guaranty obligations to the Company was secured by GWP's pledge to the Company of all of its stock holdings in TMD. A portion of the purchase price was paid through Mr. Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability company controlled by Gregory Earls, the Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer of the Company. The aggregate purchase price of these shares was approximately $1,076,000. USV paid this purchase price directly to the Company, which applied such funds toward the amount payable by Mr. Smith to the Company in connection with his purchase of GWP. On April 1, 1999, following a default under Mr. Smith's promissory note, the Company exercised its rights under the pledge agreement with Mr. Smith and sold the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing sale price on April 1, 1999 was $0.35 per share, for a total sale price of $1,050,000. The aggregate sale price of $1,050,000, less the expenses associated with the sale, was applied in reduction of Mr. Smith's indebtedness to the Company. The 3,000,000 shares of Common Stock were sold to USV. In payment of the $1,050,000 sale price, USV executed a promissory note in favor of the Company. This promissory note was secured by USV's pledge of the 3,000,000 shares of Common Stock it purchased on April 1, 1999 and was paid in full by October 1999. On April 15, 1999, the Company entered into a forbearance agreement with Mr. Smith pursuant to which the parties agreed the amount outstanding under the promissory note Mr. Smith executed in connection with the sale of GWP was equal to $525,000. In addition, the Company agreed to refrain from taking any further action with respect to a default under Mr. Smith's promissory note until the earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse judgment is rendered against the Company by any court of competent jurisdiction in connection with its guaranty obligations of TMD, or (iii) any new default under Mr. Smith's promissory note. The note amount of $525,000 was outstanding at December 31, 1999. Due to the uncertainty related to the collection of this note, the company fully reserved this amount. 30 32 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company continues to be subject to the guarantee of the future purchase of the 49% minority interest in TMD. Mr. Smith and TMD agreed to guarantee any of TMD's obligations for which the Company was a guarantor. 4. 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, Inc. and SensonCorp Limited, acquired in January 1995, and subsequently administratively dissolved. During 1997, 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 recorded 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. During 1998, the Company hired four management-level personnel to generate and manage anticipated growth. Effective December 28, 1998, in light of actual operations, three of these management-level personnel were terminated in addition to one executive level officer. Total severance to be paid to these individuals was approximately $49,000 plus an additional $41,000 in expenses, which was recorded and accrued as restructuring charges as of their termination date. As described in Note 2, Messrs. Smith and Melton resigned effective February 11, 1999, and February 15, 1999, respectively. Total severance and other costs related to their resignations of approximately $231,000 which was recognized by the Company in the first quarter of 1999. 5. INVENTORIES At December 31, inventories consisted of the following:
1999 1998 -------- -------- Raw material $217,348 $511,766 Work in progress 42,180 239,243 Finished goods 1,047 60,846 -------- -------- 260,575 811,855 Reserve for obsolescence -- 226,000 -------- -------- $260,575 $585,855 ======== ========
The Company provided a reserve for obsolete raw materials which was charged to operations of $0, $0 and 31 33 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $306,888, during the years ended December 31, 1999, 1998 and 1997, respectively. 6. PROPERTY AND EQUIPMENT At December 31, property and equipment consisted of the following:
1999 1998 ---------- ---------- Equipment $1,419,825 $1,211,508 Furniture and fixtures 315,465 335,337 Leasehold improvements 166,081 161,895 ---------- ---------- 1,901,371 1,708,740 Less accumulated depreciation 1,329,988 1,208,991 ---------- ---------- $ 571,383 $ 499,749 ========== ==========
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was $178,230, $68,573, and $90,072, respectively. 7. ACCRUED EXPENSES At December 31, accrued expenses consisted of the following:
1999 1998 ---------- ---------- Compensation $ 200,873 $ 292,905 Property taxes 24,793 17,111 Accrued restructuring cost -- 90,000 Travel -- 63,950 Other 41,921 7,586 ---------- ---------- $ 267,587 $ 471,552 ========== ==========
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION Long-term debt and capital lease obligation consisted of the following at December 31:
1999 1998 ---------- ---------- Capital lease obligation, with monthly payments of $778 through July, 2002 and imputed interest of 9% $ 21,540 $ 28,834 5% unsecured note payable; due July 27, 2000 7,764 19,078 9% unsecured note payable; due October 1, 2000 11,760 -- ---------- ---------- Total $ 41,064 $ 47,912 ========== ==========
32 34 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Annual maturities of long-term debt and capital lease obligation are as follows:
CAPITAL DECEMBER 31, NOTES LEASES TOTAL -------------- ------------ ------------- 2000 $ 19,524 $ 9,336 $ 28,860 2001 - 9,336 9,336 2002 - 5,446 5,446 ------------- ------------ ------------ Subtotal 19,524 24,118 43,642 Less amounts representing interest - 2,578 2,578 ------------- ------------ ------------ $ 19,524 $ 21,540 $ 41,064 ============= ============ ============
During 1998, the Company converted $224,277 in aggregate principal of 4% convertible subordinated debentures into 563,000 shares of the Company's stock. 9. LEASES During 1997, the Company operated under a verbal lease and work program agreement with WCC, The Texas Department of Criminal Justice, Division of Pardons and Paroles ("TDCJ") and the City of Lockhart, Texas, for its LTI operations to lease approximately 27,800 square feet of manufacturing and office space. In 1998, WCC and the Company executed a written agreement effective through January 31, 2001, which will include an automatic three-year extension. The Company executed similar agreements with WCC and the California Department of Corrections for its MacFarland, California facility and the State of Utah, Department of Corrections, Division of Correctional Industries for its Draper, Utah facility. The MacFarland agreement commenced on June 1, 1998 and provides for 600 square feet with annual rentals of $1 per year through March 2001. The Draper agreement commenced in June 1998 and provides for 5,000 square feet with annual rentals of $1 per year with renewal options through June 2004. The Company entered into an agreement with the State of California, acting by and through its Director of General Services, with the approval of the Department of Corrections, to lease space in the Chuckawalla Valley State Prison (CVSP) located in Blythe, California. The lease provides for approximately 20,300 square feet of warehouse space, and approximately 16,000 square feet of office space for a total of 36,300 square feet, located within the boundaries of CVSP. The lease commenced on September 1, 1998 and terminates on August 31, 2003, with monthly payments of $726. The Company leases approximately 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. 33 35 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum rentals due under operating leases are as follows:
YEAR AMOUNT ---- ----------- 2000 $ 82,279 2001 20,701 2002 20,701 2003 16,798 ----------- $ 140,479 ===========
Rental expense for the years ended December 31, 1999 and 1998 and 1996 were $84,994, $109,204, and $62,308, respectively. 10. INCOME TAXES The Company incurred taxable losses for each of the three years ended December 31, 1999. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets at December 31, 1999 and 1998 are as follows:
1999 1998 ------------- ------------- DEFERRED TAX ASSETS Current assets and liabilities $ 283,000 $ 190,000 Net operating loss carryforwards 5,169,000 4,218,000 Valuation allowance (5,452,000) (4,408,000) ------------- ------------- $ -- $ -- ============= =============
At December 31, 1999, the Company has net operating loss carryforwards of approximately $13,602,000 for federal income tax purposes that expire in years 2004 through 2014. 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. 34 36 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of income tax computed at the United States federal statutory tax rate (34 percent) to income tax benefit is as follows:
1999 1998 1997 ---------- ---------- ---------- Benefit at United States statutory rate $ (872,000) $ (872,000) $ (763,000) State tax benefit (154,000) 154,000 135,000 Permanent differences (18,000) 30,000 214,000 Change in deferred tax asset valuation allowance 1,044,000 688,000 414,000 ---------- ---------- ---------- $ -- $ -- $ -- ========== ========== ==========
11. STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) Common Stock and Earnings Per Share The Company had 40,000,000 authorized shares of $0.02 par value common stock and 10,000,000 authorized shares of $0.02 par value preferred stock at December 31, 1999. Shares of common stock issued and outstanding were 29,195,278 at December 31, 1999 and 1998. Diluted EPS have not been presented due to stock options and warrants which comprised common stock equivalents totalling 51,887,158, 267,400 and 267,400 for the years ended December 31, 1999, 1998 and 1997, respectively, being anti-dilutive. 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 of 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. Smith and Mr. James V. Warren. Mr. Smith served 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 35 37 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Mr. Melton, and 54,000 shares of the Company's common stock to Mr. C. Ray Brumbeloe, a former officer of the Company, at the current market price. During 1998, the Company converted $224,277 in aggregate principal of 4% convertible subordinated debentures into 563,215 shares of the Company's stock. During 1999, the Company exercised its rights under the pledge agreement and sold 3,000,000 shares pledged by Mr. Smith (See note 3). Warrants In conjunction with issuance of $275,000 convertible debentures in January 1998, the Company granted the placement agent warrants to acquire 275,000 shares of Common Stock for $1. The warrants are exercisable for five years. All of the warrants remain outstanding at December 31, 1999. Convertible Preferred Stock Issued with Warrants Commencing on July 9, 1998 and continuing through May 11, 1999, the Company received $5,000,000 under an agreement with USV which provided that the Company would issue to USV warrants to purchase 500,000 shares of Common Stock (the "Warrants") and shares of its Series A Preferred Stock pursuant to Regulation "D" promulgated under the Securities Act of 1933. Of the $5,000,000, amounts received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The shares of Series A Preferred Stock and the Warrants were issued to USV on May 11, 1999. The net proceeds to the Company were used to provide working capital to support the Company's 1999 and 1998 operations and fund the 1998 purchase of a controlling interest in TMD by the Company's wholly owned subsidiary, GWP. The Earls Family Limited Partnership made a contribution of approximately $400,000 to USV, which allowed USV to complete the payment of the $500,000 purchase price for the Warrants and the Series A Preferred Stock to the Company. The Earls Family Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of the Company's Board of Directors and the Co-Chief Executive Officer of the Company, controls both USV and the Earls Family Limited Partnership. Promptly after USV was issued the Warrants, USV transferred the Warrants to the Earls Family Limited Partnership. On November 29, 1999, the terms of the Series A Preferred Stock were amended to cancel the right of the holders of the Series A Preferred Stock to receive an annual dividend and to change the conversion price for the Series A Preferred Stock to $0.122. The amended Certificate of Designations, Preferences and Rights of the Series A Preferred Stock setting forth these changes was filed with the Delaware Secretary of State on December 31, 1999. USV has the right to convert its shares of Series A Preferred Stock to Common Stock at any time. Likewise, the Earls Family Limited Partnership has the right to exercise its Warrants to purchase Common Stock at any time. If all of the outstanding shares of Series A Preferred Stock were converted and the Warrants were exercised in full, the holders of such securities would be entitled to receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one share of Common Stock at a price of $1.00 per share. If all of USV's shares of Series A Preferred Stock were converted, USV would be 36 38 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS entitled to receive 47,649,758 shares of Common Stock. Because that amount exceeds the number of shares of Common Stock available for issuance under the Company's Restated Certificate of Incorporation, USV and the Company entered into an agreement, dated March 1, 2000, whereby USV waived its right to convert its shares of Series A Preferred Stock until an appropriate amendment to the Company's Restated Certificate of Incorporation is filed with the Delaware Secretary of State. Stock Compensation Plans Prior to 1997, the Company created three qualified and four nonqualified stock options plans that provide for the granting of incentive and nonqualified options to purchase the Company's Common Stock to selected officers, other key employees, directors and consultants. General terms provide for three-year vesting beginning one year from date of grant, with an exercise price equal to the market value of the Common Stock as of the grant date. The options expire three months after the employee's termination, or ten years from the date of grant. The qualified and nonqualified option plans have 531,600 and 290,000, shares, respectively, available for grant. During 1999, the Company created the U.S. Technologies, Inc. 1999 Stock Option Plan to provide for the granting of incentive and nonqualified options to purchase the Company's Common Stock to selected officers, other key employees, directors and consultants. General terms provide for an exercise price equal to the market value of the Common Stock as of the grant date. The options expire three months after the employees terminations, or ten years from the date of grant. The maximum number of shares that can be reserved under this plan is 3,115,000. 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 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 pride 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. 37 39 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 1999 (no options were granted during 1997 or 1998). Risk-free interest rate 5.4% Dividend yield -% Volatility factor 75.0% Weighted-average expected life (in years) 5.0
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the option's vesting period. The Company's pro forma information follows:
1999 1998 1997 ------------ ------------ ------------ Net loss applicable to common shareholders As reported $(2,781,595) $(2,564,709) $(2,242,745) Pro forma (2,939,384) (2,564,709) (2,242,745) Earnings per share As reported (0.10) (0.09) (0.08) Pro forma (0.10) (0.09) (0.08)
A summary of stock option activity, and related information for the years 1997, 1998 and 1999 follows. (There was no activity in 1998):
QUALIFIED PLANS NONQUALIFIED PLANS --------------------------------- ----------------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- ---------------- ------------- ----------------- Outstanding at January 1, 1997 113,580 2.50 -- -- Granted -- -- -- -- Exercised (50,000) 0.25 -- -- Forfeited or canceled (46,180) 4.27 -- -- --------- ----- --------- ----- Outstanding at December 31, 1997 and 1998 17,400 0.54 -- -- Granted 1,495,000 0.12 1,975,000 0.12 Exercised -- -- -- -- Forfeited or canceled -- -- -- -- --------- ----- --------- ----- Outstanding at December 31, 1999 1,512,400 0.13 -- -- ========= ===== ========= ===== Options exercisable at: December 31, 1997 and 1998 17,400 0.54 -- -- December 31, 1999 1,512,400 0.14 1,975,000 0.12
The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during 1999 is $0.10 per share. 38 40 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1996, the Company granted options, outside the option plans described above, to four other parties to purchase 200,000 shares of the Company's Rule 144 stock at $0.50 per share exercisable at various times through May 17, 2001. The Company also granted to a former board member the option to purchase 150,000 shares at $0.125 per share through May 25, 1999. The validity of the options granted to the former board member has been questioned by the Company based on several factors. The Company is evaluating the status of these options and will take appropriate actions based on that determination. As of December 31, 1998 and 1999, 100,000 of the $0.50 options and all of the $0.125 options remain outstanding. The range of exercise prices of all outstanding and exercisable options at December 31, 1999, is $0.125 - $0.84375, with a weighted average exercise price of $0.15. The options have remaining contractual lives of 0.4 - 9.8 years, with a weighted average contractual life of 9.7 years. 12. BUSINESS AND CREDIT CONCENTRATION The Company is dependent upon certain customers for a major portion of its sales. High End (a customer of the LTI segment) accounted for 15% of sales for the years ended December 31, 1999. The sales of services to IBM represented approximately 43% and 66% for the years ended December 31, 1998 and 1997, respectively. Texas Instruments accounted for approximately 7% and 19% of total sales for the years ended December 31, 1998 and 1997, respectively. Amounts due from three customers, Dell, Vektronix (customers of the LTI segment) and AIS (a customer of the LTI - Blythe segment) , constituted 87% of the Company's accounts receivable at December 31, 1999. IBM and Texas Instruments, along with other customers, High End Systems and Wyle EMG, comprised approximately 16% of net accounts receivable at December 31, 1998. The Company generally does not require collateral on its trade accounts receivable. During all years presented, the Company's operations were primarily in electronics manufacturing. Until such time as the Company successfully expands into the call center, furniture manufacturing, and other industries, the Company will be economically dependent on the health of the electronics manufacturing industry and the niche in which it provides products and services. The Company is also dependent on WCC since the operations of its primary operating facility is subject to the work program agreement described in Note 9, above. 13. RELATED PARTIES As of December 31, 1998, the Company had notes and interest receivable from Mr. Smith aggregating approximately $536,000 in the accompanying balance sheet under the caption "Net investments in and advances to subsidiary held for sale." In early 1999, in connection with Mr. Smith's resignation and his purchase of GWP from the Company, Mr. Smith paid the amount of proceeds of the sale of 3,366,152 shares of Common Stock to USV and executed a three-year note for approximately $1.2 million in connection with the purchase of GWP (Note 3). 14. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest was approximately $38,000, $11,000 and $17,000 for 1999, 1998 and 1997, respectively. During 1998, the Company converted $275,000 of debentures and accrued interest into 563,215 shares of common stock. On April 1, 1999, following a default under Mr. Smith's promissory note, the Company exercised its rights under the pledge agreement with Mr. Smith and sold the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing sale price on April 1, 1999 was $0.35 per share, for a total sale price of $1,050,000. The aggregate sale price of $1,050,000, less the expenses associated with the sale, was applied in reduction of Mr. Smith's indebtedness to the Company. The 3,000,000 shares of Common Stock were sold to USV. In payment of the $1,050,000 sale price, USV executed a promissory note in favor of the Company. 39 41 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FOURTH QUARTER ADJUSTMENTS Significant adjustments increasing the fourth quarter loss in 1999 and 1998 are indicated below. There were no significant adjustments increasing the fourth quarter loss in 1997.
1999 1998 -------- -------- Increase of allowance on note from former officer $288,000 $ -- Increase of allowance for doubtful accounts -- 140,000 Accrued expenses -- 90,000 -------- -------- Aggregate adjustment $288,000 $230,000 ======== ======== Aggregate adjustment per common share $ 0.01 $ 0.01 ======== ========
16. SEGMENT INFORMATION During 1998, the Company adopted SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing the performance. The Company's chief operating decision makers aggregate operating segments based on the location of the segment and whether it is prison-based or free-world. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has four reportable segments. The five reportable segments are USXX (Marietta, Georgia), LTI (Lockhart, Texas), TMD (Georgetown, Texas) and STI (Draper, Utah) and LTI Blythe (Blythe, California). USXX is the corporate office, LTI is a prison-based manufacturer of computer circuit boards, TMD is a freeworld manufacturer of computer circuit boards, STI is a prison-based inbound/outbound call center and LTI Blythe is a prison-based furniture manufacturer. Other segments include manufacturing of modular office furniture components and cut-and-sew operations. The accounting policies of the operating segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Segment amounts disclosed are prior to any elimination entries made in the consolidation. The chief operating decision-makers evaluate performance of the segments based on operating results and EBITDA. EBITDA represents earnings before interest expense, provision (benefit) for income taxes, depreciation and amortization, restructuring and special charges. EBITDA is not a measurement in accordance with generally accepted accounting principles ("GAAP") and should not be considered an alternative to, or more meaningful than, income from operations, net income or cash flows as defined by GAAP or as a measure of profitability or liquidity. All companies do not calculate EBITDA in the same manner and, accordingly, EBITDA may not be comparable with other companies. 40 42 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary information by segment follows (in thousands):
LTI 1999 USXX LTI TMD STI BLYTHE OTHER TOTAL - ----------------- -------- ------- ----- ------ ------ ----- ------- Net sales $ -- $ 1,901 $ 948 $ 22 $ 876 $ 18 $ 3,765 Operating profit (loss) (1,461) (837) (66) (67) (243) (52) (2,726) Depreciation and amortization 8 53 50 22 43 2 178 EBITDA (1,809) (67) (112) (61) (344) (57) (2,450) Total assets $ 2,887 $ 576 $ -- $ 115 $ 346 $ -- $ 3,924 ======= ======= ===== ===== ===== ==== ======= 1998 USXX LTI TMD STI OTHER TOTAL - ----------------- -------- ------ ------- ------- ------- ------- Net sales $ -- $3,918 $ 2,119 $ 13 $ 57 $ 6,107 Operating profit (loss) (1,552) 212 (660) (262) (172) (2,434) Depreciation and amortization 1 9 33 14 12 69 EBITDA (1,503) 394 (698) (181) (91) (2,079) Total assets $ 4,386 $1,031 $ 657 $ 337 $ 215 $ 6,626 ======= ====== ===== ===== ===== ======= 1997 USXX LTI TMD STI OTHER TOTAL - ----------------- -------- ------ ------- ------- ------- ------- Net sales $ -- $4,167 $ -- $ -- $ -- $ 4,167 Operating profit (loss) (1,706) 152 -- -- (751) (2,305) Depreciation and amortization 1 67 -- -- 111 179 EBITDA (578) 397 -- -- -- (181) Total assets $ 2,956 $ 532 $ -- $ -- $ -- $ 3,488 ======= ====== ===== ===== ===== =======
41 43 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, ---------------------------------- 1999 1998 ------------ ------------ (in thousands) Assets Total segment assets $ 3,924 $ 6,626 Eliminations (2,832) (4,258) ------------ ------------ Reported total assets $ 1,092 $ 2,368 ============ ============
17. CONTINGENCIES The Company had guaranteed certain liabilities, of up to $2.5 million, and the purchase of the minority interest in TMD, based on a multiple of earnings before interest, taxes, depreciation and amortization (Note 3). On February 16, 1999, in the case styled Fidelity Funding vs. Ken Smith, et al, in the 14th Judicial District of Dallas County, Texas, Fidelity Funding, Inc. (Fidelity) sued Mr. Smith and the Company in the amount of $839,449, the amount allegedly owed by Technology Manufacturing and Design, Inc., ("TMD") to Fidelity under a secured credit facility extended by Fidelity to TMD in November of 1998. The suit resulted after the Company sold its 51% interest in TMD to Mr. Smith and after TMD filed bankruptcy. The suit seeks to enforce a payment guaranty of the Company with respect to the balance of principal and accrued interest owed by TMD to Fidelity under this secured credit facility. The bankruptcy court for the Western District of Texas has permitted Fidelity to collect the remaining principal and interest due under this credit facility from the accounts receivable securing this credit facility. As a result, Fidelity decided not to pursue its action against the Company and on June 17, 1999, filed a nonsuit, dismissing this lawsuit. The Company is involved in several lawsuits related to prior management and claims against companies acquired or controlled by prior management. One of these suits claim that the Company is liable as a successor-in-interest for amounts owned by entities whose assets were acquired by the Company. The aggregate amount claimed under this lawsuit, including interest and attorney fees, is approximately $54,000. Management believes the claim is without merit, and accordingly is vigorously defending the lawsuit. The Company is involved in two lawsuits brought by former management employees who claim to be entitled to certain severance benefits and back pay. The aggregate amount claimed under these lawsuits, including interest and attorney fees, is approximately $360,000. Management is vigorously defending these lawsuits. 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, 1999 and 1998, the remaining balance of this accrual to resolve outstanding litigation was $28,000. 18. SUBSEQUENT EVENTS On February 21, 2000, the Company entered into an agreement ("E2E Acquisition Agreement") to acquire all of the outstanding stock of E2Enet, Inc. ("E2E"). The Company initially agreed to acquire E2E by purchasing all of E2E's outstanding stock in exchange for shares of a Series B Mandatorily Convertible 42 44 Preferred Stock, par value $0.02 per share ("Series B Preferred Stock"), to be newly created by the Company. However, in late March 2000, it became clear that if the E2E Acquisition remained structured as a share exchange, the transaction would not qualify for treatment as a tax-free exchange because certain stockholders of E2E would receive consideration other than voting stock of the Company. To preserve the tax-free nature of the E2E Acquisition, the Company, E2E and certain stockholders of E2E agreed on April 5, 2000 to change the structure of the E2E Acquisition from a share exchange to a merger between E2E and a wholly-owned subsidiary of the Company, U.S. Technologies Acquisition Sub, Inc. ("U.S. Technologies Acquisition"). Accordingly, the Company proposes to acquire E2E by causing U.S. Technologies Acquisition to merge with and into E2E. U.S. Technologies Acquisition will be the surviving corporation of this merger, and upon the consummation of this merger, U.S. Technologies Acquisition will change its name to E2E Net, Inc. As a result, upon the completion of the E2E Acquisition, E2E will become a wholly owned subsidiary of the Company. When the E2E Acquisition closes, E2E's stockholders will be issued shares of Series B Preferred Stock, which will have a stated liquidation preference aggregating approximately $11,200,000, and certain minority stockholders of E2E will also receive options to purchase shares of the Company's common stock, par value $0.02 ("Common Stock"). Upon their mandatory conversion as described below, these shares of Series B Preferred Stock will be converted into approximately 56,000,000 shares of Common Stock. The Company agreed, under the E2E Acquisition Agreement, to raise at least $6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing of the E2E Acquisition. To raise these funds, the Company recently commenced the private placement sale of $1,250,000 of additional shares of its Series A Convertible Preferred Stock, par value $0.02 (the "Series A Preferred Stock"), to USV Partners, LLC ("USV"), a limited liability company controlled by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer, which is the Company's largest shareholder, and at least $5,000,000 and up to $8,750,000 of its newly created Series C Mandatorily Convertible Preferred Stock, par value $0.02 ("Series C Preferred Stock"), to accredited investors. The Company has thus far received subscriptions or indications of interest for the purchase of approximately $5,200,000 of its Series C Preferred Stock, of which approximately $3,000,000 consists of subscriptions by USV. In connection with the private placements of the Series A Preferred Stock and the Series C Preferred Stock, the Company has received to date subscriptions for a total of approximately $6,450,000. The Series C Preferred Stock would be convertible into shares of Common Stock at a conversion price per share ranging from $0.90 to $2.00, which will be determined based on the closing sale price for a share of Common Stock on the closing date of the E2E Acquisition, as quoted on the OTC Bulletin Board. The proceeds of these offerings will be used primarily to finance additional investments in new and existing Internet businesses that focus on B2B and B2C e-commerce, the payment of costs incurred and liabilities assumed in connection with the E2E Acquisition and related business transactions and ongoing working capital needs. The Company intends, and is required by the E2E Acquisition Agreement to call a meeting of its stockholders for the purpose of amending the Company's Restated Certificate of Incorporation. The proposed amendment (the "Charter Amendment") will increase the number of shares of Common Stock the Company is authorized to issue to an amount sufficient to permit the conversion to Common Stock of all of the Company's then-outstanding shares of all of its authorized and designated series of convertible preferred stock, including the Company's Series A Preferred Stock, the Series B Preferred Stock to be issued to E2E's stockholders, and the Series C Preferred Stock. In addition to authorizing a sufficient number of shares of Common Stock to permit conversion to Common Stock of all of the Company's outstanding shares of convertible preferred stock, the Charter Amendment's proposed increase to the number of shares the Company is authorized to issue will also include an amount sufficient to permit the conversion to Common Stock of any other then-outstanding securities or options, which are convertible into or otherwise permit the holder thereof to purchase or otherwise receive shares of Common Stock. Upon the acceptance of the Charter Amendment by the Secretary of State of the State of Delaware, the Series B Preferred Stock and the Series C Preferred Stock will automatically be converted into shares of Common Stock. USV has also indicated its intention to convert all of its shares of Series A Preferred Stock to Common Stock at that time. The Company also announced that it will expand its Board of Directors in connection with the completion of the E2E Acquisition. The new directors will also stand for election at the Company's next annual meeting, which also is when the Company expects to present the Charter Amendment for Stockholder approval. 43 45 E2E has various interests in several development stage Internet e-commerce companies. These portfolio companies principally include: - Buyline.net, Inc. ("Buyline"). Buyline is a developer of B2B e-commerce applications, and is developing a proprietary Internet software program designed to be a universal platform for entry-level B2B e-commerce, linking buyers and sellers. Buyline's application for RFP/RFQ technology (Request for Proposal/Request for Quotation) will be used in a full range of on-line advertising, on Internet based directories, and in commercial web sites. - VIPRO Corporation ("Vipro"). Vipro is an Internet surety company, which provides repair guarantees against viruses that harm computers. The Company has e-commerce relationships with a leading Internet utility company, a credit card association, one of the largest warranty claims administrators in the world and over 170 Internet service providers. - Urban Box Office Network, Inc. ("UBO"). UBO is a developer of networked multi-media web sites that will provide e-commerce services to participants interested in urban culture, information, entertainment and products. - OneMade, Inc. ("OneMade"). OneMade is a developer of an e-commerce community that will serve participants in the arts, crafts, and hobby industries. OneMade intends to connect wholesalers, retailers, consumers and artists in these fields. - bluemercury, Inc. ("bluemercury"). bluemercury operates an e-commerce site for upscale cosmetic products and accessories. It intends to pursue a "clicks and bricks" strategy by also acquiring high-end cosmetic specialty retailers. - MEI Software Systems, Inc. ("MEI"). MEI provides customized software systems to manage the databases of trade associations, professional associations, fund-raising organizations and chambers of commerce. The Company intends to restructure some of E2E's investments in its portfolio companies and provide these entities with additional working capital to stimulate their further growth and expansion. E2E's initial investment in Buyline will be restructured and increased so that Buyline becomes a controlled operating subsidiary. On February 28, 2000, Buyline and the Company entered into an Agreement in Principle (the "Buyline Agreement"), which provides that E2E will invest $3,000,000 in Buyline and will receive in exchange shares of Buyline's common stock. This investment will consist of (1) the conversion of E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment of in kind services already rendered, and (3) an additional $1,000,000 cash investment. In addition, the two principal stockholders and creditors of E2E will each invest $250,000 in Buyline. Simultaneous with entering into the Buyline Agreement, the Company hired a technology executive who will become Buyline's President and Chief Executive Officer. The Company presently expects to complete definitive documentation for, and to complete, the Buyline restructuring shortly after closing the E2E Acquisition. Upon the consummation of the transactions contemplated by the Buyline Agreement, the Company, through E2E, will be the controlling shareholder of Buyline, and will designate and supervise the Buyline management team. 44 46 Also, on March 13, 2000, the Company reached an agreement with Vipro to invest directly or indirectly through E2E an additional $1,000,000 in Vipro, on or before April 12, 2000, in exchange for additional equity in the form of shares of Vipro's Series B Convertible Preferred Stock. On the same day, one of the principal creditors and stockholders of E2E that will become a stockholder of the Company upon the completion of the E2E Acquisition invested $1,000,000 in Vipro on terms identical to the Company's pending investment. E2E has not been actively involved in the development of its portfolio companies' business strategies, operations and management teams. Many of these portfolio companies are now largely supported by later stage investors and managed by executive groups independent of E2E. With the exception of Buyline, it is anticipated that E2E will retain its minority equity position in these original portfolio companies. It is anticipated that in the future the Company principally will follow the investment precedent established by its proposed restructuring of Buyline by seeking ownership positions, voting interests and management roles in new portfolio companies that provide the Company, through E2E, operating control of such portfolio company. 45 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable 46 48 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:
Name Age Position with the Company - ---- --- ------------------------- Gregory Earls (1)(2) 53 Co-Chairman and Co-Chief Executive Officer James V. Warren (2) 55 Co-Chairman and Co-Chief Executive Officer J. L. (Skip) Moore (3) 45 Executive Vice-President and Chief Operating Officer
(1) On February 11, 1999, Mr. Earls was elected to the positions of Chairman of the Company's Board of Directors and Chief Executive Officer. Since November 29, 1999, Mr. Earls has served as the Co-Chairman of the Board of Directors and the Co-Chief Executive Officer with James V. Warren. (2) On November 29, 1999, Mr. Warren was elected a Director, Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman and Chief Executive Officer of the Company were modified to include Mr. Warren. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Appointment of New Management Team." (3) On November 29, 1999, Mr. Moore was elected to serve as the Executive Vice- President and Chief Operating Officer of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Appointment of New Management Team." 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 his or her successor is elected and qualified. The Company intends to expand its Board of Directors in connection with its completion of the E2E Acquisition. The new directors will also stand for election at the Company's next annual meeting. See "Business - E2E Acquisition." The Company's current directors and executive officers are as follows: Gregory Earls has served as Director of the Company since April, 1998. On February 11, 1999, he was elected to the positions of Chairman of the Board and Chief Executive Officer of the Company. Since November 29, 1999, Mr. Earls has served as the Co-Chairman and Co-Chief Executive Officer with James V. Warren. Mr. Earls is also the President and a Director of U.S. Viewing Corporation, an investment management company he founded in 1986. Mr. Earls also serves as President and a Director of Equitable Production Funding of Canada, Inc., a communications holding company. From 1992 to 1996, he served as Chairman of the Board of Directors of Health and Sciences Television Network, Inc., a distributor of educational programming. In addition, Mr. Earls has also served as a member of the Board of Directors of Jayhawk Acceptance Corporation, a finance company of which he was a founder in 1994. Mr. Earls graduated from the University of Virginia in 1967. James V. Warren has served as a Director of the Company since November 29, 1999 and has been a significant shareholder of the Company for several years. At the same time as his appointment as a Director he also began, along with Mr. Earls, sharing responsibilities as the Company's Co-Chairman of the Board and Co-Chief Executive Officer. Mr. Warren is co-founder and President of The Spear Group, a global professional management company, located in Atlanta, Georgia, which develops and implements solutions for managing personnel and human resources. Mr. Warren has over 35 years experience in a broad range of management, sales and marketing and project management positions. J. L. (Skip) Moore has served as Executive Vice-President and Chief Operating Officer of the Company since November 29, 1999. Mr. Moore is responsible for all operating activities of the Company's prison based 47 49 outsourcing facilities. Most recently Mr. Moore served as Chief Operating Officer of The Spear Group. Previously he was Chief Executive Officer of Med-Quip, Inc., a medical products distribution company located in Atlanta, Georgia. Since receiving his B.A. Degree from Elon College in 1977, Mr. Moore has held a series of progressively responsible management and executive positions with various companies. KEY EMPLOYEES AND CONSULTANTS Larry C. Cobb, a consultant who assists the Company in meeting its public filing requirements, has been providing services to the Company since May 1998. Mr. Cobb's experience includes over 25 years of financial and accounting management with private and public companies in the manufacturing, construction, retail and service industries. Since 1994, Mr. Cobb has been an independent consultant specializing in turn-arounds, reorganizations and start-ups. Mr. Cobb received his BS degree in accounting from Mississippi State University in 1972 and a Master of Professional Accountancy degree from Georgia State University in 1978. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, certain officers and persons who own more than 10% of the outstanding Common Stock of the Company, to file with the Securities and Exchange Commission reports of changes in ownership of the Company's Common Stock held by such persons. Officers, directors and greater than 10% shareholders are also required to furnish the Company with copies of all forms they file under Section 16(a). Except as set forth below, 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 1999, the Company has complied with all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% shareholders. Certain holders of more than 10% of the Company's outstanding Common Stock and directors and officers of the Company failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934. For each such stockholder, director or officer, the number of late reports and number of transactions that were not reported on a timely basis are set forth below: - J.L. (Skip) Moore, the Company's Executive Vice President and Chief Operating Officer, inadvertently failed to file on a timely basis a Form 3 under Section 16(a), which was required to report Mr. Moore's appointment as an executive officer of the Company on November 29, 1999. - USV, a beneficial owner of more than 10% of the Company's outstanding Common Stock, inadvertently failed to file on a timely basis a Form 4 under Section 16(a), which was required to report changes in USV's beneficial ownership of Common Stock on November 29, 1999. - Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer, inadvertently failed to file on a timely basis a Form 4 under Section 16(a), which was required to report changes in Mr. Earls' beneficial ownership on November 29, 1999. Mr. Earls also inadvertently failed to file, on a timely basis, a Form 5, which was required to report changes in Mr. Earls' beneficial ownership during fiscal year 1999 attributable to the issuance to Mr. Earls on November 5, 1999 of presently exercisable options under the Company's 1999 Stock Option Plan to purchase 850,000 shares of Common Stock. 48 50 ITEM 11. EXECUTIVE COMPENSATION. The table below sets forth all cash and cash equivalent remuneration paid by the Company and its subsidiaries during the years ended December 31, 1999, 1998 and 1997 to each Co-Chief Executive Officer of the Company and the only other executive officer of the Company whose compensation for 1999 exceeded $100,000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation ----------------------- ------------------------------------------------ Restricted All Stock Options/ LTIP Other Fiscal Salary Bonus Other Award(s) SARs Payouts Compensation Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($) Gregory Earls (1) Co-Chairman of the Board 1999 99,918 0 0 0 850,000 0 0 President and 1998 0 0 0 0 0 0 0 Co-Chief Executive Officer 1997 0 0 0 0 0 0 0 James V. Warren (2) Co-Chairman of the Board 1999 0 0 0 0 1,500,000 0 0 President and 1998 0 0 0 0 0 0 0 Co-Chief Executive Officer 1997 0 0 0 0 0 0 0 John P. Brocard (3) Senior Vice-President and 1999 113,750 0 0 0 175,000 0 0 General Counsel 1998 110,000 0 0 0 0 0 0 1997 37,500 0 0 0 0 0 0
(1) Mr. Earls was appointed to the position of Chief Executive Officer of the Company on February 11, 1999. Since November 29, 1999, Mr. Earls has served as the Co-Chief Executive Officer with James V. Warren. (2) Mr. Warren was appointed to the position of Co-Chief Executive Officer of the Company on November 29, 1999. (3) Effective January 31, 2000, the Company terminated Mr. Brocard's employment with the Company. 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 Plans of 1990 and 1996 (the "Plans") were adopted by the Board of Directors and approved by the Company's stockholders on 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 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. 49 51 The Plans also provide that no option shall be exercisable 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 exercisable 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 exercised. In no event, however, shall an option be exercisable after 10 years from the date it was granted. 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 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 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 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. During the year ended December 31, 1998, no options were issued or exercised under the terms of the previously referenced option plans. On November 1, 1999, the Board of Directors of the Company adopted the 1999 Stock Option Plan (the "1999 Stock Option Plan"). The 1999 Stock Option Plan reserved 3,115,000 shares of Common Stock to be issued to officers, directors and key employees of the Company and its subsidiaries and affiliates. On February 21, 2000, the Board of Directors of the Company approved amendments to the 1999 Stock Option Plan, which included, among other things, the authorization to make option grants under such plan to consultants and an increase in the amount of shares of Common Stock available for sale under the 1999 Stock Option Plan to 22,500,000, subject to certain conditions including the effectiveness of the Charter Amendment. See "Business - E2E Acquisition." In early November 1999, the Company granted 1,510,000 options under the 1999 Stock Option Plan to a total of thirteen employees and consultants. These options carried an exercise price of $0.125 per share, based on the closing sale price of the Common Stock on November 5, 1999. These options were fully vested at the time of grant. On November 29, 1999, the Company issued 1,900,000 options under the 1999 Stock Option Plan to two newly appointed executive officers of the Company. Pursuant to a Management Agreement executed by these two individuals and the Company on November 29, 1999, these options carried an exercise price of $0.122 per share and were fully vested at the time of grant. See "Certain Relationships and Related Transactions." 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 1999, 1998 or 1997 under this plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of March 20, 2000 with respect to the beneficial ownership of the Company's Common Stock, by (i) each person known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each Named Executive Officer and (iii) each director and executive officer of the Company, and (iv) the directors and executive officers of the Company as a group. 50 52
Shares of Common Stock Percentage of Beneficial Owner Beneficially Owned (1) Outstanding Shares (2) - ----------------- ---------------------- ---------------------- Gregory Earls (3) 49,214,758 62.74% Co-Chairman, President and Co-Chief Executive Officer USV Partners LLC (4) 47,649,758 61.81% James. V. Warren (5) 7,857,152 25.39% Co-Chairman and Co-Chief Executive Officer J. L. (Skip) Moore (6) 442,000 1.48% Executive Vice-President and Chief Operating Officer John P. Brocard (7) 95,000 * Former Senior Vice-President and General Counsel All Officers and Directors as a 57,608,910 71.70% Group (4 individuals)
* Indicates less than one percent (1%) (1) "Beneficial Ownership" includes shares for which an individual, directly or indirectly, has or shares, or has the right within 60 days to have or share, voting or investment power or both. Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 of the Exchange Act. (2) The percentage of ownership reported for each person, entity or group appearing on the foregoing table is based on the 29,444,278 shares of Common Stock outstanding as of March 20, 2000 plus any shares of Common Stock such person, entity or group is entitled to receive upon the conversion of convertible securities or exercise of options that presently are or within sixty (60) days of March 20, 2000 will be convertible or exercisable. (3) The amount shown includes 850,000 shares Mr. Earls is entitled to purchase upon the exercise of presently exercisable stock options issued to Mr. Earls under the Company's 1999 Stock Option Plan (the "1999 Stock Option Plan"). The amount shown also includes 47,649,758 shares of Common Stock issuable to USV upon the conversion of the 500,000 shares of the Company's Series A Preferred Stock held directly by USV. Further, of the amount shown, 500,000 shares represent shares of Common Stock issuable to The Earls Family Limited Partnership upon the exercise of Warrants held directly by the Earls Family Limited Partnership. 6,366,152 shares of Common Stock held directly by USV are also included in the amount shown. Mr. Earls, the Co-Chairman and Co-Chief Executive Officer of the Company, is the sole member of USV Management, LLC, the manager of USV and is the President of the General Partner of the Earls Family Limited Partnership, Kandax Corporation. The power of USV to vote and dispose of the shares of Common Stock it directly owns and would directly own upon the conversion of the Series A Preferred Stock it owns is exercised through Mr. Earls. The power of the Earls Family Limited Partnership to vote and dispose of the shares of Common Stock it would directly own upon the exercise of the Warrants it owns is exercised through Mr. Earls. Additionally, of the amount shown, 315,000 shares are owned directly by Equitable Production Funding, Inc. By virtue of his majority ownership of the outstanding shares of Equitable Production Funding, Inc., Mr. Earls beneficially owns the shares of Common Stock directly held by Equitable Production Funding, Inc. (4) See note (3) above. USV's address is 2001 Pennsylvania Avenue, N.W., Suite 675, Washington, D.C. 20006. 51 53 (5) The amount shown includes 1,500,000 shares Mr. Warren is entitled to purchase upon the exercise of presently exercisable stock options issued to Mr. Warren under the 1999 Stock Option Plan. In addition, of the amount shown, 38,500 shares are owned directly by Mr. Warren's wife, Jane G. Warren. Mr. Warren shares the power to vote or to direct the vote of and dispose or direct the disposition of the 38,500 shares of Common Stock directly owned by his wife. (6) The amount shown includes 400,000 shares Mr. Moore is entitled to purchase upon the exercise of presently exercisable stock options issued to Mr. Moore under the 1999 Stock Option Plan. (7) Effective January 31, 2000, the Company terminated Mr. Brocard's employment with the Company. Option/SAR Grants in Last Fiscal Year
Potential Realized Value at Assumed Annual Alternative Rates of Stock Price to (f) and (g) Appreciation Grant Date Individual Grants for Option Term Value - -------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) % of Number of Total Securities Options/ Underlying SARs Options/ Granted to Exercise Grant SARs Employees or Base Date Granted in Fiscal Price Expiration Present Name (#) Year ($/Sh) Date 5% ($) 10%($) Value $ - -------------------------------------------------------------------------------------------------------------- Gregory Berls 850,000 24,5% .122 November 2009 $244,800 $448,000 $103,700 James AV Warran 1,500,000 43,2% .122 November 2009 $432,000 $777,000 $183,000 Ken Smith -- -- -- -- -- -- --
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs FY-End(#) FY-End($) Shares Acquired Exercisable/ Exercisable/ Name on Exercise(#) Value Realized ($) Unexercisable Unexercisable - ------------------------------------------------------------------------------------------------ Gregory Earls -- -- 850,000/0 $110,500/$0 James AV Warran -- -- 1,500,000/0 $195,000/$0 Ken Smith -- -- -- --
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On February 11, 1999, Kenneth H. Smith and the Company entered into a Severance Agreement (the "Severance Agreement"). Under the terms of the Severance Agreement, Mr. Smith resigned from his positions as the Company's President, Chief Executive Officer and as a Director. The Company agreed to retain Mr. Smith as an independent contractor for six (6) months and pay Mr. Smith $125,000 in six (6) equal installments for such consulting services. In addition, the Company agreed to pay Mr. Smith approximately $4,800, as reimbursement for certain automobile expenses. Pursuant to the Severance Agreement entered into between the Company and Mr. Smith, the Company sold its wholly owned subsidiary, GWP, to Mr. Smith. The sole asset of GWP was an ownership interest in an amount of capital stock of TMD, which represented a controlling interest in TMD. This majority interest in TMD was acquired by GWP in early October 1998 for $730,000, which was contributed by the Company to GWP for the express purpose of purchasing TMD stock. In addition to contributing to GWP the funds necessary to complete the purchase of a controlling interest in TMD, from early October 1998 through February 11, 1999, the Company, through GWP, also contributed approximately $1,337,000 in working capital funds to TMD. The Company also guaranteed certain existing obligations of TMD, including the repayment of TMD's Fidelity Funding Inc. loan, pursuant to the Loan and Security Agreement between TMD and Fidelity Funding, Inc., dated as of November 30, 1998. The sale of GWP was concluded on February 15, 1999. The total purchase price for GWP was approximately $2,451,000. This amount represented the Company's estimate of its investment in TMD through February 11, 1999 and certain legal and other transactional costs Mr. Smith agreed to assume. A portion of the purchase price for GWP was paid in the form of a promissory note executed by Mr. Smith in the principal amount of $1,234,832 bearing interest annually at the Wall Street Journal's prime rate of interest plus two percent (2%). The principal amount of Mr. Smith's promissory note and any accrued unpaid interest were due and payable in full on February 15, 2002. Mr. Smith and TMD also agreed to guarantee any of TMD's obligations for which the Company was a guarantor. Repayment of the promissory note and the performance of Mr. Smith's guaranty obligations to the Company were secured by Mr. Smith's pledge to the Company of his 3,000,000 shares of the Company's Common Stock. The performance of GWP's guaranty obligations to the Company was secured by GWP's pledge to the Company of all of its stock holdings in GWP. The remaining balance of the purchase price for GWP was paid through Mr. Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability company controlled by Gregory Earls, the Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer of the Company. The aggregate purchase price of these shares was approximately $1,076,000. USV paid this purchase price directly to the Company, which applied such funds toward the amount payable by Mr. Smith to the Company in connection with his purchase of GWP. On April 1, 1999, following a default under Mr. Smith's promissory note, the Company exercised its rights under the pledge agreement with Mr. Smith and sold the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing sale price on April 1, 1999 was $0.35 per share, for a total sale price of $1,050,000. The aggregate sale price of $1,050,000, less the expenses associated with the sale, was applied in reduction of Mr. Smith's indebtedness to the Company. The 3,000,000 shares of Common Stock were sold to USV. In payment of the $1,050,000 sale price, USV executed a 52 54 promissory note in favor of the Company. This promissory note was secured by USV's pledge of the 3,000,000 shares of Common Stock it purchased on April 1, 1999 and was paid in full by October 1999. On April 15, 1999, the Company entered into a forbearance agreement with Mr. Smith pursuant to which the parties agreed the amount outstanding under the promissory note Mr. Smith executed in connection with the sale of GWP was equal to $525,000. In addition, the Company agreed to refrain from taking any further action with respect to a default under Mr. Smith's promissory note until the earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse judgment is rendered against the Company by any court of competent jurisdiction in connection with its guaranty obligations of TMD, or (iii) any new default under Mr. Smith's promissory note. On May 11, 1999, the Company issued 500,000 shares of its Series A Preferred Stock to USV. The Company also issued Warrants to purchase 500,000 shares of the Company's Common Stock to USV. The aggregate purchase price paid by USV for the Series A Preferred Stock and the Warrants was $5,000,000. Promptly after USV was issued the Warrants, USV transferred the Warrants to the Earls Family Limited Partnership. Gregory Earls controls both USV and the Earls Family Limited Partnership. On November 29, 1999, the terms of the Series A Preferred Stock were amended to cancel the right of the holders of the Series A Preferred Stock to receive an annual dividend and to change the conversion price for the Series A Preferred Stock to $0.122. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources," and "Market for Registrant's Common Equity and Related Stockholder Matters - Recent Sales of Unregistered Securities." USV has the right to convert its shares of Series A Preferred Stock to Common Stock at any time. Likewise, the Earl's Family Limited Partnership has the right to exercise its Warrants to purchase Common Stock at any time. Each Warrant is exercisable for one share of Common Stock at a price of $1.00 per share. If all of the outstanding shares of Series A Preferred Stock were converted and the Warrants were exercised in full, the holders of such securities would be entitled to receive 48,149,758 shares of Common Stock. If all of USV's shares of Series A Preferred Stock were converted, USV would be entitled to receive 47,649,758 shares of Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Because that amount exceeds the number of shares of Common Stock available for issuance under the Company's Restated Certificate of Incorporation, USV and the Company entered into an agreement, dated March 1, 2000, whereby USV waived its right to convert its shares of Series A Preferred Stock until an appropriate Amendment to the Company's Restated Certificate of Incorporation is filed with the Delaware Secretary of State. See "Business-E2E Acquisition." On November 29, 1999, the Company entered into a Management Agreement (the "Management Agreement") with James V. Warren and J.L. (Skip) Moore. Under the terms of the Management Agreement, Mr. Warren was elected a Director, Co-Chairman and Co-Chief Executive Officer of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer of the Company, the Management Agreement provides that Mr. Warren will serve together with Gregory Earls, whose former positions as Chairman and Chief Executive Officer of the Company were modified to include Mr. Warren. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Appointment of New Management Team." Also, under the terms of the Management Agreement, Mr. Moore was elected Executive Vice President and Chief Operating Officer of the Company. The Management Agreement further provided as follows: - that the conversion price for the Series A Preferred Stock will be changed to the average last sale price per share of Common Stock for the 20 trading days immediately prior to the execution date of the Management Agreement or a conversion price of $0.122 per share; - that USV will use its best efforts to sell at a price of ten dollars ($10.00) per share in a private placement up to 300,000 shares of the Company's Series A Preferred Stock; - that Mr. Warren be granted options under the Company's 1999 Stock Option Plan to purchase 1,500,000 shares of Common Stock; and - that Mr. Moore be granted options under the Company's 1999 Stock Option Plan to purchase 400,000 shares of Common Stock. 53 55 To raise funds in connection with the E2E Acquisition, the Company recently commenced the private placement sale of $1,250,000 of additional shares of its Series A Preferred Stock to USV and at least $5,000,000 and up to $8,750,000 of its newly created Series C Preferred Stock to accredited investors. The Company has thus far received subscriptions or indications of interest for the purchase of approximately $5,200,000 of its Series C Preferred Stock, of which approximately $3,000,000 consists of subscriptions by USV. In connection with the private placements of the Series A Preferred Stock and the Series C Preferred Stock, the Company has received to date subscriptions for a total of approximately $6,450,000. These shares of Series A Preferred Stock and Series C Preferred Stock will be issued to USV concurrent with the completion of the E2E Acquisition, which is expected to occur in April once all closing conditions have been satisfied. The proceeds of these private placement sales will be used primarily to finance additional investments in new and existing internet businesses that focus on B2B and B2C e-commerce, the payment of costs incurred and liabilities assumed in connection with the E2E Acquisition and related business transactions and ongoing working capital needs. See "Business-E2E Acquisition." The Company's operations and accounting center is currently co-located in the offices of The Spear Group in Norcross, Georgia. James V. Warren, the Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer, is the co-founder and President of The Spear Group. The Company is negotiating a management services agreement with The Spear Group to provide operating, accounting and administrative services to the Company's prison facilities. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a) List of financial statements, financial statement schedules and exhibits. Report of Independent Certified Public Accountants on financial statement schedule Schedule II - Valuation and Qualifying Accounts, Years Ended December 31, 1999, 1998, and 1997 (b) Reports on Form 8-K filed during the last quarter of the year ended December 31, 1999. On December 8, 1999, the Company filed a Current Report on Form 8-K describing the terms of the Management Agreement and the appointment of two new executive officers of the Company. (c) Exhibits: The exhibits required by Item 601 of Regulation S-K are filed herewith. (See Index of Exhibits) (d) Financial Statement Schedules: The Financial Statement Schedules required by Regulation S-X are filed herewith. 54 56 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE The audits referred to in our report dated March 17, 2000, except for Note 18, which is as of April 5, 2000, relating to the consolidated financial statements of U.S. Technologies Inc., which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion such financial statement schedule presents fairly, in material respects, the information set forth therein. Atlanta, Georgia March 17, 2000, except for Note 18, which is as of April 5, 2000 55 57 U.S. Technologies Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1999, 1998 and 1997
Column A Column B Column C Column D Column E - ---------------------------------------------------------------------------------------------------------- Additions (1) (2) Balance at Charged to Charged to Balance at beginning cost and other end of Classification of period expenses accounts Deductions period - ---------------------------------------------------------------------------------------------------------- 1999: Accounts receivable - bad debt reserve $140,000 $ 66,000 $ -- $206,000 Inventory Obsolescence $211,000 $ -- $211,000 $ -- Note receivable officer - uncollectible reserve $ -- $526,000 $ -- $ -- $526,000 1998: Accounts receivable - bad debt reserve $ 18,000 $136,000 $ 14,000 $140,000 Inventory Obsolescence $834,000 $ -- $623,000 $211,000 1997: Accounts receivable - bad debt reserve $ 90,953 $ 18,000 $ 90,953 $ 18,000 Inventory Obsolescence $585,000 $306,888 $ 57,888 $834,000
NOTE: These valuation and qualifying accounts were deducted from the assets to which they apply. 56 58 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 5th day of April, 2000. U.S. TECHNOLOGIES INC. By: /s/ Gregory Earls --------------------------------------- Gregory Earls Co-Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
Signature Title Date - --------- ----- ---- /s/ Gregory Earls Co-Chief Executive Officer April 5, 2000 - ---------------------- Co-Chairman of the Board of Directors ------------- Gregory Earls Acting Principal Accounting Officer /s/ James V. Warren Co-Chief Executive Officer April 5, 2000 - ---------------------- Co-Chairman of the Board of Directors ------------- James V. Warren
57 59 INDEX OF EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 - Stock Exchange Agreement among U.S. Technologies Inc., E2Enet, Inc. and certain stockholders of E2Enet, Inc., dated as of February 21, 2000, as amended (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 28, 2000, and incorporated herein by reference) 2.2 - Stock Purchase Agreement by and between U.S. Technologies Inc. and Kenneth Smith, dated as of February 15, 1999 (Filed as Exhibit 2.6 to the Company's Current Report on Form 8-K, dated February 26, 1999, and incorporated herein by reference) 2.3 - Severance Agreement by and between U.S. Technologies Inc. and Kenneth Smith, dated as of February 11, 1999 (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 26, 1998, and incorporated herein by reference) 2.4 - Amended and Restated Stock Purchase Agreement by and between Technology Manufacturing & Design, Inc. and GWP, Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 20, 1998, and incorporated herein by reference) *2.5 - Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by and among the Company, US Technologies Acquisition Sub, Inc., E2E Net, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Johnathan Ledecky and certain other stockholders of E2E Net, Inc. 3.1 - Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the Company's Annual Report for the year ended December 31, 1997 and incorporated herein by reference) 3.2 - Restated By-Laws of the Company (Filed as Exhibit 3.2 to the Company's Annual Report for the year ended December 31, 1997 and incorporated herein by reference) 4.1 - Form of Certificate evidencing Common Stock of the Company (Filed as Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 33-11720) and incorporated herein by reference) 4.2 - Revised form of certificate evidencing Common Stock of the Company reflecting the change of the name to U.S. Technologies Inc. (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 14, 1989, and incorporated herein by reference)
58 60 4.3 - Rights Agreement, dated as of October 31, 1997, between the Company and American Securities Transfer & Trust, Inc., as Rights Agent (Filed as Exhibit 4 to the Company's Current Report, dated as of October 31, 1997, and incorporated herein by reference) 4.4 - Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of U.S. Technologies Inc., dated February 24, 1999 (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May 26, 1999, and incorporated herein by reference) *4.5 - Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of U.S. Technologies Inc., dated November 29, 1999 *4.6 - Waiver Agreement between USV Partners, LLC and the Company, dated March 1, 2000 10.1 - 1988 Employee Stock Option Plan, as amended (Filed as Exhibit 10(e) to the Company's Registration Statement on Form S-8 (No. 33-29048) and incorporated herein by reference) 10.2 - 1990 Employee Stock Option Plan, as amended (Filed as Exhibit 10 to the Company's Registration Statement on Form S-8 (No. 33-29048) and incorporated herein by reference) 10.3 - 1993 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 (No. 33-62686) and incorporated herein by reference) 10.4 - 1993A Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 (No. 33-69200) and incorporated herein by reference 10.5 - 1994 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 (No. 33-78892) and incorporated herein by reference) 10.6 - 1995 Employee Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 (No. 333-16199) and incorporated herein by reference) 10.7 - 1996 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 (No. 333-16199) and incorporated herein by reference) *10.8 - 1999 Stock Option Plan, as amended
59 61 10.9 - Agreement between the Company and Wackenhut Corrections Corporation, dated June 30, 1977 (Filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference) 10.10 - Amendment to Agreement between the Company and Wackenhut Corrections Corporation, dated January 28, 1998 (Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference) *10.11 - Industry Work Program Agreement between the Wackenhut Corrections Corporation and Labor-to-Industry Inc., dated as of April 22, 1998 10.12 - Investment Agreement between the Company and USV Partners, LLC, dated as of July 16, 1998 (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 26, 1999, and incorporated herein by reference) *10.13 - Lease Agreement by and between the State of California and Labor-to- Industry, Inc., dated as of August 1, 1998 10.14 - Promissory Note, dated February 15, 1999, executed by Kenneth H. Smith in favor of the Company, as amended (Filed as Exhibit 2.2 to the Company's Current Report on Form 8-K, dated February 26, 1999, and incorporated herein by reference) 10.15 - Agreement of Non-Dilution between Technology Manufacturing & Design, Inc. and the Company, dated February 15, 1999 (Filed as Exhibit 2.3 to the Company's Current Report on Form 8-K, dated February 26, 1999, and incorporated herein by reference) 10.16 - Stock Pledge and Guaranty Agreement by and between GWP, Inc. and the Company, dated February 15, 1999 (Filed as Exhibit 2.4 to the Company's Current Report on Form 8-K, dated February 26, 1999, and incorporated herein by reference) 10.17 - Stock Pledge and Guaranty Agreement by and between Kenneth H. Smith and the Company, dated February 15, 1999 (Filed as Exhibit 2.5 to the Company's Current Report on Form 8-K, dated February 26, 1999, and incorporated herein by reference) *10.18 - Industry Work Program Agreement by and between Wackenhut Corrections Corporation, American Quantum Cycles, Inc. and the Company, dated as of October 19, 1999
60 62 10.19 - Management Agreement by and between the Company, James V. Warren and J.L. (Skip) Moore (Filed as Exhibit 5.1 to the Company's Current Report on Form 8-K, dated December 8, 1999, and incorporated herein by reference) *10.20 - Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures, LLC, Northwood Capital Partners, LLC and the Company, dated March 13, 1999 *21.1 - Subsidiaries of the Registrant *23.1 - Consent of BDO Seidman, LLP *27.1 - Financial Data Schedule (for SEC use only)
- -------------- *To be provided herewith 61 EX-2.5 2 AMENDMENT TO THE STOCK EXCHANGE AGREEMENT 1 EXHIBIT 2.5 AMENDMENT TO STOCK EXCHANGE AGREEMENT This Amendment to Stock Exchange Agreement (the "Amendment") is made as of this 5th day of April, 2000, by and among U.S. Technologies Inc., a Delaware corporation (the "Company"), U.S. Technologies Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Newco"), E2Enet, Inc., a Delaware corporation ("E2E"), Northwood Ventures LLC, a New York limited liability company ("Northwood Ventures"), Northwood Capital Partners LLC, a New York limited liability company ("Northwood Capital" and, together with Northwood Ventures, "Northwood"), Jonathan J. Ledecky ("Ledecky") and the other E2E Stockholders (as defined below) (each of the foregoing, individually, a "Party," and, collectively, the "Parties"). Capitalized terms used but not defined herein have the respective meanings assigned to them in the Stock Exchange Agreement (as defined below). RECITALS: A. The Company, E2E and the E2E Stockholders entered into a Stock Exchange Agreement dated as of February 21, 2000 (the "Stock Exchange Agreement"), pursuant to which the Company agreed to acquire all of the issued and outstanding shares of capital stock of E2E (the "E2E Shares") from those persons who would own all of such shares as of the closing of the acquisition contemplated therein (the "E2E Stockholders"); B. In exchange for all of the issued and outstanding shares of E2E, the Company agreed to issue to the E2E Stockholders the Preferred Shares; and C. The Parties desire to amend the Stock Exchange Agreement to provide for (i) the merger of E2E with and into Newco, with Newco being the surviving corporation, and (ii) the conversion of the shares of capital stock of E2E into the Preferred Shares, all upon the terms and conditions set forth herein. AGREEMENTS: In consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Additional Party. Newco is added as a party to the Stock Exchange Agreement, and all references to Members of the Company Group shall be deemed to include Newco. 2. Amendment to Article I. (a) The definition of "Investment Documents" in Article I of the Stock Exchange Agreement is amended by replacing it in its entirety with the following: 2 "Investment Documents" shall mean this Agreement, the Preferred Shares, the Certificate of Designations, the Amended and Restated Registration Rights Agreement, the Voting Agreement relating to the Board of Directors of the Company and the Certificate of Merger (as defined below). (b) The following definition is added to Article I of the Stock Exchange Agreement: "Certificate of Merger" has the meaning given to it in Section 2.2. (c) The definition of "Preferred Shares" in Article I of the Stock Exchange Agreement is amended by replacing it in its entirety with the following: "Preferred Shares" means the duly authorized, validly issued, fully paid and non-assessable shares of the Series B Mandatorily Convertible Preferred Stock of the Company with an aggregate stated value equal to $11,200,000, mandatorily convertible into an aggregate of 56,000,000 shares of Common Stock as described in Section 3.1. 3. Amendment to Article II. Article II of the Stock Exchange Agreement is amended by replacing it in its entirety with the following: ARTICLE II. THE MERGER 2.1 Merger; Effects of Merger. (a) Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined below), (i) E2E shall be merged with and into Newco (the "Merger"), (ii) the separate existence of E2E shall thereupon cease, and (iii) the name of Newco, as the surviving corporation in the Merger (the "Surviving Corporation"), shall by virtue of the Merger be E2Enet, Inc. (b) The Merger shall have the effects set forth in the Delaware General Corporation Law (the "DGCL"). Without limiting the generality of the foregoing, at the Effective Time, all of the properties, rights, privileges, powers and franchises of E2E and Newco shall vest in the Surviving Corporation, and all of the debts, liabilities and duties of E2E and Newco shall become the debts, liabilities and duties of the Surviving Corporation. 2.2 Closing of Merger. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") shall take place at the offices of Fleischman and Walsh, L.L.P. at 10:00 a.m., local time, on a date satisfactory to the Company, Newco and E2E which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in 3 Articles IV and V hereof (other than those conditions which require the delivery of any documents or the taking of other actions at the Closing) (the "Closing Date"). On the Closing Date, the Parties agree to file with the Secretary of State of the State of Delaware a certificate of merger (the "Certificate of Merger") in the form required by, and executed in accordance with, the relevant provisions of the DGCL. The Merger will become effective upon filing of the Certificate of Merger with the Secretary of State of the State of Delaware (the "Effective Time"). 2.3 Articles of Incorporation. The Articles of Incorporation of Newco in effect at the time of the Merger shall be the Articles of Incorporation of the Surviving Corporation, until thereafter amended as provided thereunder and under the DGCL. 2.4 Bylaws. The Bylaws of Newco in effect at the time of the Merger shall be the Bylaws of the Surviving Corporation, until thereafter altered, amended or repealed as provided thereunder and under the Articles of Incorporation of the Surviving Corporation and the DGCL. 2.5 Directors and Officers of Surviving Corporation. The directors and officers of Newco immediately prior to the Effective Time will be the directors and officers of the Surviving Corporation, and each shall hold office from the Closing Date until such time as his successor is duly elected or appointed and qualified in the manner provided in the Articles of Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided by law. 2.6 Conversion of Shares. (a) E2E Shares. As of the Effective Time, by virtue of the Merger and without any action on the part of the E2E Stockholders, the E2E Shares held by each E2E Stockholder shall be converted into such E2E Stockholder's pro rata share of the Preferred Shares. As of the Closing Date, all of the certificates which immediately prior to the Closing represented E2E Shares shall be deemed for all purposes to evidence ownership of and to represent the Preferred Shares into which the E2E Shares formerly represented by such certificates have been converted as herein provided. (b) Exchange of Certificates. On or after the Closing Date, the E2E Stockholders shall surrender to Fleischman and Walsh, L.L.P., as exchange agent (the "Exchange Agent"), stock certificates representing their respective E2E Shares, together with stock powers duly executed in favor of the Company. Upon the surrender of any such stock certificate by or on behalf of any E2E Stockholder, the Company shall direct the Exchange Agent (1) on behalf of the Surviving Corporation, to cancel such stock certificate, and (2) on behalf of the 4 Company, to issue to such E2E Stockholder certificates representing the Preferred Shares into which the E2E Shares held by such E2E Stockholder shall have been converted at the Effective Time. The E2E Shares, when converted into the Preferred Shares at the Effective Time, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist. The Exchange Agent shall hold in escrow stock certificates representing all of the Preferred Shares issued in connection with the Merger until the earlier of (i) written notice by the Company directing the Exchange Agent to release such certificates; (ii) written notice by the Company directing the Exchange Agent to release such certificates following the Company's receipt of (x) a joinder to the Agreement and a consent and joinder to the Amendment, duly executed by each of the E2E Stockholders other than Ledecky and Northwood, (y) releases in the form of the letter from Hogan & Hartson L.L.P. to each E2E Stockholder dated March 20, 2000, duly executed by each of the E2E Stockholders other than Ledecky and Northwood, and (z) stock certificates representing all of the E2E Shares, together with stock powers duly executed in favor of the Company; or (iii) approval of the Charter Amendment and the conversion of the Preferred Shares into Common Stock as described in the Agreement (provided, however, that, notwithstanding approval of the Charter Amendment and the conversion of the Preferred Shares into Common Stock, the Exchange Agent shall continue to hold in escrow certificates representing shares of Common Stock issued to those E2E Stockholders who have not executed and delivered to the Company the documents described in Section 2.6(b)(ii) until the Company receives such documents). (c) Newco Shares. Each share of common stock, par value $0.01 per share, of Newco issued and outstanding immediately prior to the Closing Date shall be converted into and exchanged for one (1) validly issued, fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation. 2.7 Tax-Free Merger. It is intended that the Merger will constitute a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement will constitute a "plan of reorganization" within the meaning of the regulations promulgated under such section of the Code. 4. Amendments to Article IV. Sections 4.2(b), 4.2(f) and 4.10 of the Stock Exchange Agreement are deleted in their entirety. 5. Amendments to Article V. Sections 5.2(a), 5.2(d) and 5.3 of the Stock Exchange Agreement are deleted in their entirety. 5 6. Amendments to Article VII. (a) Section 7.6 of the Stock Exchange Agreement is amended by replacing it in its entirety with the following: 7.6 Governmental Approvals. No authorization, consent, approval, License, exemption of or filing or registration with any court or Government Entity is or will be necessary for, or in connection with, the offer, issuance, sale, execution or delivery by the Company of, or for the performance by the Company of its obligations under, any of the Investment Documents other than (i) under applicable securities laws with respect to the Charter Amendment, (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, and (iii) under applicable securities laws with respect to the transactions contemplated by the registration rights set forth in the Amended and Restated Registration Rights Agreement. (b) Article VII of the Stock Exchange Agreement is amended by adding the following Section 7.18: 7.18 Newco. (a) Newco is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. (b) Newco has all necessary corporate power and authority to enter into the Investment Documents to which it is a party and to carry out its obligations thereunder. Newco has duly executed and delivered (or will have, with respect to deliveries to be executed and delivered by it at Closing) each of the Investment Documents, and each is (or will be, with respect to deliveries to be executed and delivered by it at Closing) a legal, valid and binding obligation of Newco, enforceable against Newco in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally and by general principles of equity. (c) The authorized capital stock of Newco consists of 1,000 shares of common stock, par value $0.01 per share, of which 100 shares are issued and outstanding on the date hereof. Without limiting the generality of the foregoing Section 7.4, all of the outstanding shares of capital stock of Newco have been duly authorized and validly issued, and are fully paid, nonassessable and free and clear of all Liens. There are no options, warrants or rights to purchase shares of capital stock or other securities of Newco issued or outstanding, nor is Newco obligated in any other manner to issue shares of its capital stock or other securities. (d) Other than the filing of the Certificate of Merger, no authorization, consent, approval, License, exemption of or filing or registration 6 with any court or Government Entity is or will be necessary for or in connection with the execution or delivery by Newco of or the performance by Newco of its obligations under any of the Investment Documents. (c) Section 7.16 of the Stock Exchange Agreement is amended to replace the reference to the "Exchange" with a reference to the "Merger." 7. Amendments to Article VIII. (a) Section 8.2 of the Stock Exchange Agreement is amended such that all references therein to the "Company" shall be deemed to be references to the Company and Newco. (b) Section 8.2 of the Stock Exchange Agreement is amended by adding the following Section 8.2(h): (h) Tax-Free Merger. The Company and Newco agree that the Merger is intended to be a tax-free reorganization under Section 368 of the Code and that this Agreement is intended to be a "plan of reorganization" within the meaning of the regulations promulgated under such section of the Code. Neither the Company nor the Surviving Corporation will take or fail to take any action which would jeopardize the qualification of the Merger as such a reorganization (other than such actions as may be legally required). 8. Amendments to Article X. (a) Section 10.1(a) of the Stock Exchange Agreement is amended by replacing it in its entirety with the following: (a) This Agreement may be terminated and the Merger may be abandoned by (i) the mutual, written agreement of the E2E Representatives and the Company, (ii) by either the E2E Representatives or the Company if (x) the Merger shall not have been consummated by 5:00 p.m. Eastern Standard Time on April 11, 2000, provided that the party seeking to terminate this Agreement pursuant to this clause (ii) is not in breach of this Agreement (or in the case of the E2E Representatives, neither they nor any of the other E2E Stockholders are in breach of this Agreement), or (y) a Government Entity shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such Order or other action shall have become final and nonappealable; provided that the Party or Parties seeking to terminate this Agreement pursuant to this clause (ii) (y) shall have used all reasonable efforts to remove such Order. (b) Section 10.1(c) of the Stock Exchange Agreement is amended such that all references therein to the "Company" shall be deemed to be references to the Company or Newco, as the case may be. 7 9. Amendment to Article XI. Section 11.4 of the Stock Exchange Agreement is amended to add the following address for Newco: U.S. Technologies Acquisition Sub, Inc. c/o U.S. Viewing Corporation 2001 Pennsylvania Avenue, NW Suite 675 Washington, DC 20006 Attn: Gregory C. Earls Telephone: 202-466-3100 Facsimile: 202-466-4557 with a copy to: Fleischman and Walsh L.L.P. 1400 Sixteenth Street, N.W. Washington, DC 20036 Attn: Stephen A. Bouchard Telephone: 202-939-7945 Facsimile: 202-265-5706 10. Stock Exchange Agreement. Except as otherwise expressly provided in this Amendment, the provisions of the Stock Exchange Agreement remain in full force and effect. 11. Counterparts; Facsimile Signatures. This Amendment may be executed in one or more counterparts, and executed signature pages sent by a Party to the other Parties by facsimile shall be binding as evidence of such Party's agreement hereto and acceptance hereof. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 8 The parties hereto have executed this Amendment to Stock Exchange Agreement as of the date first written above. U.S. TECHNOLOGIES INC. By: /s/ C. Gregory Earls ---------------------------------------- Name: C. Gregory Earls Title: Co-Chairman and Co - CEO U.S. TECHNOLOGIES ACQUISITION SUB, INC. By: /s C. Gregory Earls ---------------------------------------- Name: C. Gregory Earls Title: President 9 [signature page to Amendment to Stock Exchange Agreement, dated as of April 5, 2000] E2ENET, INC. By: /s/ Steven J. Quamme ---------------------------------------- Name: Steven J. Quamme Title: Senior Vice President NORTHWOOD CAPITAL PARTNERS LLC By: /s/ Henry T. Wilson ---------------------------------------- Name: Henry T. Wilson Title: Managing Director NORTHWOOD VENTURES LLC By: /s/ Henry T. Wilson ---------------------------------------- Name: Henry T. Wilson Title: Managing Director /s/ Jonathan J. Ledecky -------------------------------------------- JONATHAN J. LEDECKY EX-4.5 3 AMENDED CERTIFICATE OF DESIGNATIONS 1 EXHIBIT 4.5 AMENDED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF U.S. TECHNOLOGIES INC. PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE U.S. Technologies Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"),does hereby certify that, pursuant to the authority contained in its Certificate of Incorporation, as amended and restated, and in accordance with Section 151 of the General Corporation Law of the State of Delaware, the following resolutions amending the terms of the Series A Convertible Preferred Stock, $0.02 par value, were duly adopted by the Board of Directors of the Corporation (the "Board") as of November 29, 1999. RESOLVED, subject to agreement of any holders of Series A Convertible Preferred Stock, that the Board hereby amends the terms of the Corporation's 1,000,000 shares of Series A Convertible Preferred Stock, $0.02 par value, such that: 1. The Dividends as set forth in paragraph 2 of that certain Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of U.S. Technologies Inc. as approved and executed as of February 24, 1999 (the "Certificate") are hereby waived and the right to receive such dividends on the part of the holders of the Series A Convertible Preferred Stock is canceled; and 2. As compensation to the holders of the Series A Convertible Preferred Stock for the cancellation of these dividends, the Conversion Price as established in paragraph 5(b)(i) of the Certificate is hereby modified such that the Conversion Price will be the average last sale price per share of Common Stock of U.S. Technologies Inc. for the twenty (20) trading days immediately prior to November 29, 1999 which price is $0.122 per share. FURTHER RESOLVED, that the Directors and Officers of the Company be and hereby are authorized and directed to take any and all further action that may be necessary or desirable to accomplish the above resolutions and authorized actions including but not limited to the execution and filing of all instruments or documents that may be necessary to place these resolutions or actions into effect. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed in its name by the undersigned duly authorized officers of the Corporation, this 29th day of November, 1999. By:/s/ Gregory Earls By:/s/ James V. Warren ---------------------------------- ---------------------------------- Gregory Earls, Co-Chairman James V. Warren, Co-Chairman Attest By:/s/ Dana Rochelle ---------------------------------- Dana Rochelle, Assistant Secretary 33 EX-4.6 4 WAIVER AGREEMENT 1 EXHIBIT 4.6 USV PARTNERS, LLC 2001 PENNSYLVANIA AVENUE, N.W. SUITE 675 WASHINGTON, D.C. 20006 (202) 466-4557 March 1, 2000 U.S. Technologies Inc. 6525 The Corners Parkway Suite 300 Norcross, Georgia 30092 Gentlemen: USV Partners, LLC, a Delaware limited liability company (the "Company"), has reached this agreement with U.S. Technologies Inc., a Delaware corporation ("US Tech"), in connection with US Tech's desire to file a Registration Statement on Form S-8 (the "Registration Statement") under the Securities Act of 1933, as amended, to register 3,115,000 shares of US Tech's common stock, par value $.02 per share ("Common Stock"), to be issued by US Tech pursuant to its 1999 Stock Option Plan, as amended (the "Plan"). As of the date hereof, the Company owns 500,000 shares of US Tech's Series A Convertible Preferred Stock, $0.02 par value ("Series A Preferred"). The rights and preferences of the holders of the Series A Preferred are set forth in (i) the Certificate of Designations, Preferences and Rights of the Series A Preferred, dated as of July 16, 1998, (ii) the Amended Certificate of Designations, Preferences and Rights of the Series A Preferred, dated as of February 24, 1999, and (iii) the Amended Certificate of Designations, Preferences and Rights of the Series A Preferred, dated as of November 29, 1999 (collectively, the "Certificate of Designations"). Pursuant to the Certificate of Designations, the shares of Series A Preferred owned by the Company are convertible into 47,649,758 shares of Common Stock. As of the date hereof, the Company also owns warrants to purchase 500,000 shares of Common Stock (the "Warrants"). The Company acknowledges that if it converted the Series A Preferred and exercised the Warrants it owns into and for Common Stock prior to the shares of Common Stock to be registered under the Registration Statement being issued and delivered as contemplated by the Registration Statement and the Plan, the number of shares of Common Stock that would be outstanding would exceed the minimum of such shares that US Tech is authorized to issue under its Restated Certificate of Incorporation, as amended (the "Charter"), and thus not be validly issued. As a significant stockholder of US Tech, the Company has a significant interest in US Tech's growth and development. The Company recognizes that the ability of US Tech to issue options under the Plan will enable US Tech to attract and retain talented employees. As a result, the Company does not desire to impede US Tech's efforts to register the Common Stock it 2 intends to issue upon the exercise of options granted under the Plan. US Tech has agreed to seek approval for and to effect a Charter Amendment as described below. Accordingly, notwithstanding the rights granted to US Tech under the Certificate of Designations and the Warrants, the Company hereby makes the following representations, warranties and covenants to US Tech: 1. Until US Tech's voting stockholders have approved an Amendment to the Charter (the "Charter Amendment"), authorizing the Company to issue an amount of Common Stock sufficient to permit the conversion to Common Stock of all of US Tech's then-outstanding shares of all of its authorized and designated series of convertible preferred stock and any other then-outstanding securities and options issued by the Company, which are convertible into or entitle the holder thereof to purchase or otherwise receive shares of Common Stock, including but not limited to Series A Preferred, the Warrants and the options issued under the Plan, and the Charter Amendment has been filed with and accepted by the Secretary of State of the State of Delaware, the Company will not exercise for or convert into Common Stock the Warrants, the shares of the Series A Preferred Stock or any other securities or options held by the Company as of the date hereof that are convertible into or give the Company the right to purchase or otherwise receive shares of Common Stock. 2. Until US Tech's voting stockholders have approved the Charter Amendment and it has been filed with and accepted by the Secretary of State of the State of Delaware, the Company will not exercise for or convert into Common Stock any securities and options issued by US Tech, which were purchased or otherwise acquired by or issued or granted to the Company after the date hereof and are convertible into or entitle the holder thereof to purchase or otherwise receive shares of Common Stock. The undersigned is authorized to act on behalf of the Company in regard to the matters set forth in this letter. USV Partners, LLC By: USV Management, LLC, its Manager By:/s/ C. Gregory Earls -------------------- C. Gregory Earls, Sole Member Acknowledged and Agreed to by U.S. Technologies Inc. By:/s/ James V. Warren ------------------- James V. Warren, Co-Chairman and Co-CEO EX-10.8 5 1999 STOCK OPTION PLAN, AS AMENDED 1 EXHIBIT 10.8 U.S. TECHNOLOGIES INC. 1999 STOCK OPTION PLAN, AS AMENDED 1. PURPOSE The purpose of the U.S. Technologies Inc. 1999 Stock Option Plan (the "Stock Option Plan") is to encourage and enable eligible directors, officers, key employees and consultants of U.S. Technologies Inc. (the "Company") and its subsidiaries to acquire proprietary interests in the Company, through the ownership of Common Stock of the Company (the "Stock"). The Company believes that directors, officers, key employees and consultants who participate in the Stock Option Plan will have a closer identification with the Company by virtue of their ability as shareholders to participate in the growth and earnings of the Company. The Plan also is designated to provide motivation for participating directors, officers, key employees and consultants to remain a director, employee or consultant of the Company and its subsidiaries and to give greater effort on behalf of the Company and its subsidiaries. It is the intention of the Company that the Stock Option Plan provide for the award of incentive stock options (the "Qualified Options") qualified under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder, as well as the award of nonqualified stock options (the "Non-Qualified Options"). Accordingly, the provisions of the Stock Option Plan related to the Qualified Options shall be construed so as to extend and limit participation in a manner consistent with the requirements of Section 422 of the Code. 2. DEFINITIONS The following words or terms shall have the following meanings: (a) "Agreement" shall mean a stock option agreement between the Company and an Eligible Employee or Eligible Participant pursuant to the terms of this Plan. (b) "Board of Directors" shall mean the Board of Directors of the Company. (c) "Change in Control of the Company" shall mean if: (a) any "person" (defined as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than a "person" who together with all members of such person's family as of November 29, 1999 was the beneficial owner, directly or indirectly, of thirty-five percent (35%) or more of the Company's Common Stock, is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's outstanding securities then entitled to vote for the election of directors; (b) there is a change in the composition of the Board over a period of twenty-four (24) consecutive months of less such that a majority of the Board members (rounded up to the next whole number) cease, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (x) have been Board members continuously since the beginning of such period or (y) have been elected or nominated for election as Board members during such period by at least two-thirds of the Board members described in clause (x) who were still in office at the time such election or nomination was approved by the Board; or (c) the shareholders shall approve the sale of all or substantially all of the assets of the Company or any merger, consolidation, issuance of securities or purchase of 36 2 assets, the result of which would be the occurrence of any event described in clause (a) or (b) above. (d) "Committee" shall mean the committee by the Board of Directors for the purpose of administering the Stock Option Plan, which committee shall at all times consist of two or more Non-Employee Directors. (e) "Company" shall mean U.S. Technologies Inc., a corporation chartered under the laws of the State of Delaware. (f) "Eligible Employee(s)" shall mean key employees regularly employed by the Company or a Subsidiary (including officers, whether nor not they are directors) as the Board of Directors or the Committee shall select from time to time. (g) "Eligible Participant(s)" shall mean an Eligible Employee, a Non-Employee Director or consultants or advisors who are not employees of the Company or a Subsidiary but who, in the sole discretion of the Board of Directors or the Committee, are providing or are expected to provide benefits, including actual services, to the Company or a Subsidiary. (h) "Market Price" shall mean the fair market value of the Company's Common Stock as determined by the Board of Directors or the Committee, acting in good faith, under any method consistent with the Code, or Treasury Regulations thereunder, which the Board of Directors or the Committee shall in its discretion select and apply at the time of the grant of the option concerned. Subject to the foregoing, the Board of Directors or the Committee, in fixing the market price, shall have full authority and discretion and be fully protected in doing so. (i) "Non-Employee Director(s)" means a member of the Board of Directors or a member of the board of directors of a Subsidiary, in each case, who is not a regular salaried employee of the Company or one of its Subsidiaries. As it relates to members of the Committee as such term is defined in this Section 2, "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended (including any successor statute, rule or regulation) and the meaning of an "outside director" as set forth in Section 162(m) of the Code and the rules and regulations thereunder (including any successor statute, rule or regulation). (j) "Optionee" shall mean an Eligible Employee or Eligible Participant having a right to purchase Common Stock pursuant to the Stock Option Plan. (k) "Option(s)" shall mean the right or rights granted to Eligible Employees or Eligible Participants to purchase Common Stock under the Stock Option Plan. (l) "Permanent and total disability" shall be as defined in Section 22(e)(3) of the Code. (m) "Plan" shall mean this U.S. Technologies Inc. 1999 Stock Option Plan. (n) "Shares", "Stock" or "Common Stock" shall mean shares of the $.02 par value common stock of the Company. 37 3 (o) "Subsidiary" shall mean any corporation, if the Company owns or controls, directly or indirectly, a majority of the voting stock of such corporation. (p) "Ten Percent Owner" shall mean an individual who, at the time an Option is granted, owns directly or indirectly (under the ownership attribution rules of Code Section 424(d)) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or a Subsidiary. 3. EFFECTIVE DATE The effective date of the Stock Option Plan (the "Effective Date") shall be the date the Stock Option Plan is adopted by the Board of Directors or the date the Stock Option Plan is approved by the shareholders of the Company, whichever is earlier. The Stock Option Plan must be approved by the affirmative vote of not less than a majority of the Shares entitled to vote at a meeting at which a quorum is present, which shareholder vote must be taken within twelve months after the date the Stock Option Plan is adopted by the Board of Directors. Such shareholder vote shall not alter the Effective Date of the Stock Option Plan. In the event shareholder approval of the adoption of the Stock Option Plan is not obtained within the aforesaid twelve-month period, then any Options granted in the intervening period shall be nonqualified stock options and not entitled to incentive stock option treatment under the provisions of Section 422 of the Code. 4. SHARES RESERVED FOR PLAN The Common Stock to be sold to Eligible Participants under the Stock Option Plan may at the election of the Board of Directors or the Committee be either treasury shares or Shares originally issued for such purpose. The maximum number of Shares which shall be reserved and made available for sale under the Stock Option Plan shall be 22,500,000; provided, however, that such Shares shall be subject to the adjustments provided in Section 8(h); and provided further that, options shall not be granted with respect to more than 5,500,000 Shares unless and until the Company's Restated Certificate of Incorporation has been amended to authorize the issuance of at least 200,000,000 shares of common stock. Any Shares subject to an Option which for any reason expires or is terminated unexercised may again be subject to an Option under the Stock Option Plan. 5. ADMINISTRATION OF THE STOCK OPTION PLAN The Stock Option Plan shall be administered by the Board of Directors or the Committee. Within the limitations described herein and except as otherwise provided in the Stock Option Plan, the Board of Directors or the Committee shall administer the Stock Option Plan, select the Eligible Participants to whom Options will be granted, determine the number of shares of Stock to be optioned to each Eligible Participant and interpret, construe and implement the provisions of the Stock Option Plan. The Board of Directors or the Committee shall also determine the price to be paid for the shares of Stock upon exercise of each Option, the period within and the times at which (including vesting, whether exercisable in whole or in part and the acceleration of any vesting) each Option may be exercised, and the terms and conditions, 38 4 consistent with the terms of the Stock Option Plan, of each Option granted pursuant to the Stock Option Plan; provided that, unless otherwise expressly set forth to the contrary in an Optionee's Agreement, in the event of a Change in Control of the Company, all outstanding Options not then exercisable but subject to vesting pursuant to such Optionee's Agreement shall be deemed vested and shall immediately become exercisable. The Board of Directors and the Committee, in connection with their administration of the plan, may adopt or effect, or authorize the Company to adopt or effect, procedures and practices with respect to the Stock Option Plan and options awarded or exercised pursuant thereto so that actions, including option exercises, are in compliance or satisfy, when appropriate, relevant legal requirements, including under applicable securities and tax (including withholding taxes) laws and related rules, regulations and policies. The Board of Directors and Committee members shall be reimbursed for out-of-pocket expenses reasonably incurred in the administration of the Stock Option Plan. If the Stock Option Plan is administered by the Board of Directors, a majority of the members of the Board of Directors shall constitute a quorum, and the act of a majority of the members of the Board of Directors present at any meeting at which a quorum is present, or acts approved in writing by all members of the Board of Directors shall be the acts of the Board of Directors. If the Stock Option Plan is administered by the Committee, a majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members of the Committee shall be the acts of the Committee. 6. ELIGIBILITY Options granted pursuant to Section 8 shall be granted only to Eligible Employees. Options granted pursuant to Section 9 may be granted to Eligible Participants. 39 5 7. DURATION OF THE STOCK OPTION PLAN The Stock Option Plan shall expire on the tenth anniversary of the Effective Date, but with respect to Options granted hereunder prior to such date, shall remain in effect until all Shares subject to or which may become subject to the Stock Option Plan shall have been purchased pursuant to such Options; provided that Options under the Stock Option Plan must be granted within ten years from the Effective Date. 8. QUALIFIED INCENTIVE STOCK OPTIONS It is intended that Options granted under this Section 8 shall be "qualified incentive stock options" as defined under the provisions of Section 422 of the Code and the regulations thereunder or corresponding provisions of subsequent revenue laws and regulations in effect at the time such Options are granted. Such Options shall be evidenced by Agreements in such form and not inconsistent with this Plan as the Committee or the Board of Directors shall approve from time to time, which Agreements shall contain in substance the following terms and conditions: (a) Price. The purchase price for shares of Stock purchased upon exercise will be equal to 100% of the Market Price on the day the Option is granted, as determined by the Board of Directors or the Committee; provided that the purchase price of Stock deliverable upon the exercise of a qualified incentive stock option granted to a Ten Percent Owner shall be not less than one hundred ten percent (110%) of the Market Price on the day the Option is granted, as determined by the Board of Directors or the Committee, but in no case less than the par value of such shares of Stock. (b) Number of Shares. The Agreement shall specify the number of shares of Stock which the Optionee may purchase under such Option. (c) Exercise of Options. The Shares subject to the Option may be purchased in whole or in part by the Optionee in accordance with the terms of the Agreement, from time to time after shareholder approval of the Stock Option Plan, but in no event later than ten years from the date of grant of the Option. Notwithstanding the foregoing, shares of Stock subject to an Option granted to a Ten Percent Owner shall be exercisable no later than five years from the date of grant of the Option. (d) Medium and Time of Payment. Shares of Stock purchased pursuant to an Agreement shall be paid for in full at the time of purchase. Payment of the purchase price shall be in cash; provided, however, that in lieu of cash, an Optionee may, to the extent permitted by applicable law, exercise an Option in whole or in part, by delivering to the Company shares of common stock of the Company (in proper form for transfer and accompanied by all requisite stock transfer tax stamps or cash in lieu thereof) owned by such Optionee (including shares to be acquired pursuant to the Option being exercised) having a fair market value equal to the aggregate purchase price of the shares as to which the Option is being exercised. The fair market value of the stock so delivered shall be determined as of the date immediately preceding the date on which the Option is exercised, or as may be required in order to comply with or to conform to the requirements of any applicable laws or regulations. Upon receipt of payment, the Company 40 6 shall, without transfer or issue tax, deliver to the Optionee (or other person entitled to exercise the Option) a certificate or certificates for such shares of Stock. (e) Rights as a Shareholder. An Optionee shall have no rights as a shareholder with respect to any shares of Stock covered by an Option until the date of issuance of the stock certificate to the Optionee for such shares of Stock. Except as otherwise expressly provided in the Stock Option Plan, no adjustments shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. (f) Non-assignability of Option. No Option shall be assignable or transferable by the Optionee except by will or by the laws of descent and distribution. During the lifetime of the Optionee, the Option shall be exercisable only by him or her. (g) Effect of Termination of Employment or Death. In the event that an Optionee during his or her lifetime ceases to be an employee of the Company or of a Subsidiary for any reason (including retirement) other than death or permanent and total disability, any Option or unexercised portion thereof which was otherwise exercisable on the date of termination of employment shall expire 90 days from the date of such termination, but in no event after the term provided in the Optionee's Agreement; provided, however, that if such Optionee is also a director of the Company, or a Subsidiary at the time of cessation of employment, the termination of the employment of the Optionee will be deemed to have occurred only upon the Optionee's resignation or retirement as a director of the Company or Subsidiary. In the event that an Optionee ceases to be an employee of the Company or a Subsidiary for any reason (including retirement) other than death or permanent and total disability prior to the time that an Option or portion thereof becomes exercisable, such Option or portion thereof which is not then exercisable shall terminate and be null and void. Whether authorized leave of absence for military or government service shall constitute termination of employment for the purpose of this Plan shall be determined by the Board of Directors or the Committee, which determination shall be final and conclusive. In the event that an Optionee ceases to be an employee of the Company or a Subsidiary by reason of death or permanent and total disability, any Option or unexercised portion thereof which was otherwise exercisable on the date such Optionee ceased employment shall expire unless exercised within a period of one year from the date on which the Optionee ceased to be an employee, but in no event after the term provided in the Optionee's Agreement. In the event that an Optionee ceases to be an employee of the Company or a Subsidiary by reason of death or permanent and total disability, any Option or portion thereof which was not exercisable on the date such Optionee ceased employment shall become immediately exercisable for a period of one year from the date on which the Optionee ceased to be an employee, but in no event after the term provided in the Optionee's Agreement. In the event of the death of an Optionee, the Option shall be exercisable by his or her personal representatives, heirs or legatees, as provided herein. (h) Recapitalization. In the event that dividends are payable in Common Stock of the Company or in the event there are splits, subdivisions or combinations of the Common Stock, the number of shares of Stock available under the Stock Option Plan shall be increased or decreased 41 7 proportionately, as the case may be, and the number of shares of Stock deliverable upon the exercise thereafter of any Option theretofore granted shall be increased or decreased proportionately, as the case may be. (i) Reorganization. In case the Company is merged or consolidated with another corporation and the Company is not in the surviving corporation, or in case the property or stock of the Company is acquired by another corporation, or in case of a separation, reorganization, recapitalization or liquidation of the Company, the Board of Directors of the Company, or the Board of Directors of any corporation assuming the obligations of the Company hereunder, shall either (i) make appropriate provision for the protection of any outstanding Options by the substitution on an equitable basis of appropriate stock of the Company, or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect to the Common Stock, provided only that the excess of the aggregate fair market value of the shares of Stock subject to Option immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares of Stock subject to Option immediately before such substitution over the purchase price thereof, or (ii) upon written notice to the Optionee provide that the Option (subject to the second paragraph of Section 5, including in the discretion of the Board of Directors any portion of such Option which is not then exercisable) must be exercised within sixty days of the date of such notice, or it will be either terminated or (including, in the discretion of the Board of Directors, any portion of such Option which is not then exercisable) deemed exercised based on the net value of such Option in light of its then exercise price per share and the value of the consideration to be received by holders of Common Stock as a result of such transaction or event. If any adjustment under this Section 8(i) would create a fractional share of Stock or a right to acquire a fractional share, such shall be disregarded and the number of shares of Stock available under the Stock Option Plan and the number of shares of Stock covered under any Options previously granted pursuant to the Stock Option Plan shall be the next lower number of shares of Stock, rounding al fractions downward. An adjustment made under this Section 8(i) by the Board of Directors shall be conclusive and binding on all affected persons. Except as otherwise expressly provided in this Plan, the Optionee shall have the no rights by reason of any subdivision or consolidation of shares of stock of any class, or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation; and any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or prices of Common Stock subject to an Option. The grant of an Option pursuant to the Stock Option Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. (j) Annual Limitation. The aggregate fair market value (determined at the time the Option is granted) of the shares of Stock with respect to which qualified incentive stock options are exercisable for the first time by an Optionee during any calendar year (under all incentive stock option plans of the Company) shall not exceed $100,000. Any excess over such amount 42 8 shall be deemed to be related to and part of a nonqualified stock option granted pursuant to Section 9 of the Stock Option Plan. (k) General Restriction. Each Option shall be subject to the requirement that if at any time the Board of Directors shall determine, in its discretion, that the listing, registration or qualification of the shares of Stock subject to such Option upon any securities exchange or under any state or federal law, or the consent of approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issue or purchase of shares of Stock thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. Alternatively, such Options shall be issued and exercisable only upon such terms and conditions and with such restrictions as shall be necessary or appropriate to effect exemption from such listing, registration, or other qualification requirement. 9. NONQUALIFIED STOCK OPTIONS (a) Within the limitations described in Section 9(b), the Board of Directors or the Committee may grant to Eligible Participants Options under the Stock Option Plan which are not "qualified incentive stock options" as defined under the provisions of Section 422 of the Code. Such nonqualified stock options shall be evidenced by Agreements in such form and not inconsistent with this Plan as the Board of Directors or the Committee shall approve from time to time, which Agreements shall contain in substance the same terms and conditions as set forth in Section 8 hereof with respect to qualified incentive stock options (except that, with respect to Options awarded to Non-Employee Directors, references to employment with the Company shall be deemed to mean service on the Board of Directors and, with respect to consultants, references to employment with the Company shall be deemed to mean benefits being provided or expected to be provided, including actual services, to the Company or a Subsidiary); provided, however, that the limitations set forth in Sections 8(a) and 8(c) with respect to Ten Percent Owners shall not be applicable to nonqualified stock options granted to any Ten Percent Owner, and the limitation set forth in Section 8(j) with respect to the annual limitation of incentive stock options shall not be applicable to nonqualified stock option grants; provided further, that nonqualified stock options may be granted at a purchase price equal to not less than 75% of the Market Price on the day the Option is granted. (b) With respect to Non-Employee Directors then serving on the Committee, nonqualified stock options may be granted pursuant to Section 9(a) of the Stock Option Plan to such Non-Employee Directors only upon authorization and approval by the Board of Directors or the shareholders of the Company; provided that, where the Board of Directors authorizes Option grants under this Section 9(b), the Non-Employee Director to receive such Options shall not participate in the Board of Director's authorization of such grant. 10. AMENDMENT OF THE STOCK OPTION PLAN The Stock Option Plan may at any time or from time to time be terminated, modified or amended by the affirmative vote of not less than a majority of the shares present and voting thereon by the Company's shareholders at the meeting of the shareholders at which a quorum is present. The Board of Directors may at any time and from time to time modify or amend the 43 9 Stock Option Plan in any respect, except that without shareholder approval the Board of Directors may not (i) increase the maximum number of shares of Stock for which Options may be granted under the Stock Option Plan (other than increases due to changed in capitalization as referred to in Section 8(h) hereof), or (ii) extend the maximum period during which Options may be granted or exercised, or (iii) change the class of persons eligible for Options under the Stock Option Plan, or (iv) otherwise materially modify the requirements as to eligibility for participation in the Stock Option Plan. The termination or any modification or amendment of the Stock Option Plan shall not, without the written consent of an Optionee, affect his or her rights under an Option or right previously granted to him or her. With the written consent of the Optionee affected, the Board of Directors or the Committee may amend outstanding Agreements in a manner not inconsistent with the Stock Option Plan. Without employee consent, the Board of Directors or the Committee may at any time and from time to time modify or amend outstanding Agreements in such respects as it shall deem necessary in order that incentive stock options granted hereunder shall comply with the appropriate provisions of the Code and regulations thereunder which are in effect from time to time respecting qualified incentive stock options. The Board of Directors may also suspend the granting of Options pursuant to the Stock Option Plan at any time and may terminate the Stock Option Plan at any time; provided, however, no such suspension or termination unless (i) the affected participant consents in writing to such modification or amendment or (ii) there is a dissolution or liquidation of the Company. 11. BINDING EFFECT All decisions of the Board of Directors or the Committee involving the implementation, administration or operation of the Stock Option Plan or any offering under the Stock Option Plan shall be binding on the Company and on all persons eligible or who become eligible to participate in the Stock Option Plan. 12. APPLICATION OF FUNDS The proceeds received by the Company from the sale of Common Stock pursuant to Options exercised hereunder will be used for general working capital. 44 EX-10.11 6 INDUSTRY WORK PROGRAM AGREEMENT 1 EXHIBIT 10.11 INDUSTRY WORK PROGRAM AGREEMENT This agreement is entered into effective this 22 day of April, 1998, by and between The Wackenhut Corrections Corporation, 4200 Wackenhut Drive, Palm Beach Gardens, Florida 33410 hereinafter OPERATOR, and Labor-to-Industry Inc. whose principal office is located at 3901 Roswell Road, Suite 300, Marietta, Georgia 30067, hereinafter "INDUSTRY CONTRACTOR," the Texas Department of Criminal Justice, Parole Division, hereinafter DIVISION, and the City of Lockhart, Texas, hereinafter referred to as "CITY". WHEREAS, Subchapter C of Chapter 497 of the Government Code authorizes the establishment and operation of a prison work program by a private facility operator under subcontract to a city or county; and WHEREAS, the City of Lockhart, Texas in conjunction with the Texas Department of Criminal Justice, has built a five hundred (500) bed work program facility pursuant to the above statutory authority and has in turn subcontracted, responsibilities to OPERATOR; and WHEREAS, OPERATOR desires to continue to provide a work program area to the INDUSTRY CONTRACTOR for the purpose of establishing and maintaining a resident (inmate) work program in accordance with all applicable laws and regulations; NOW, therefore, in consideration of mutual benefits and covenants hereinafter set forth, the parties hereby agree as follows: 1. Initial Term This agreement shall become effective upon its execution and delivery and shall continue in full force and effect, for an initial term ending January 31, 2001 unless earlier terminated pursuant to Section 11, below. In the event the contract between OPERATOR and the City of Lockhart terminates or expires, this contract will terminate also. 2. Renewal Term This agreement shall automatically be extended for successive subsequent terms of three (3) years each, unless either OPERATOR or INDUSTRY CONTRACTOR terminates this agreement by written notice to the other at least six (6) months prior to the expiration date of the then current term, or this agreement is otherwise earlier terminated, pursuant to the provisions of Section II below. 3. Right of Occupancy/Occupancy Fee A. OPERATOR hereby grants to the INDUSTRY CONTRACTOR a right of occupancy in the designated Industries Building and agrees to provide the INDUSTRY 1 of 12 2 CONTRACTOR with approximately 28,700 sq. ft. for Work Program activities, hereinafter referred to as the AREA. B. During the this Term and the first renewal term thereafter, INDUSTRY CONTRACTOR shall pay to OPERATOR the sum of One Dollar ($1.00) per year. Occupancy fees for the Renewal Term(s) shall be negotiated and approved by written agreement of the parties hereto at least one (1) year prior to the expiration of the then current term. 4. Occupancy Restrictions Nothing herein shall be construed as creating either a rental agreement or a lease; the INDUSTRY CONTRACTOR may not sublet, sublease, assign, or transfer this agreement or any of its rights or obligation hereunder, nor may INDUSTRY CONTRACTOR enter into any other agreement regarding the occupancy herein granted, without the express prior written agreement of OPERATOR. The occupancy of the AREA shall at all times be consistent with the terms of this agreement regarding work authorized and work hours. Work hours and type of industry shall be subject to OPERATOR approval. 5. INDUSTRY CONTRACTOR Obligations INDUSTRY CONTRACTOR hereby agrees: A. To provide OPERATOR at their request, a description of the product and/or services INDUSTRY CONTRACTOR intends to produce and/or deliver, in the intended market for products and/or services. B. Upon approval by OPERATOR of INDUSTRY CONTRACTOR'S submitted plan, to make all required improvements and install all necessary furnishings, equipment and fixtures, at INDUSTRY CONTRACTOR'S cost, without damage to the AREA or surrounding property. C. That all materials personal property, inventory items, equipment, and/or fixtures or other property of any kind or description whatsoever (exclusive of those items specified in Appendix B) installed or brought into the AREA by INDUSTRY CONTRACTOR, it agents or employees, shall be at INDUSTRY CONTRACTOR'S sole risk and neither the STATE, OPERATOR, CITY OF LOCKHART, or any employees or agents thereof, shall be liable for any damage or loss suffered thereto except such damage or loss as may be caused by the intentional act or gross negligence of the STATE, OPERATOR, CITY OF LOCKHART or any other their agents or employees; 2 of 12 3 D. That all permanent improvements or fixtures permanently attached to the AREA shall become the property of the real owner-in-interest of the building in which the AREA is located, unless otherwise agreed in writing between all applicable parties. E. That no additional alternations to the AREA may be made by INDUSTRY CONTRACTOR without the prior written approval of OPERATOR, which approval shall not be unreasonably withheld. F. That INDUSTRY CONTRACTOR, its employees and agents will comply with all OPERATOR policies and procedures as well as all applicable federal, state, and local laws, ordinances, and regulations, with particular emphasis on federal and state wage and hour laws regarding payment for work and other rules and regulations of the federal and state agencies having jurisdiction over employment relations. The INDUSTRY CONTRACTOR warrant that the OPERATOR is not a secondary employer. The INDUSTRY CONTRACTOR agrees that no goods produced under this Agreement shall be placed in commerce in violation of the laws of the State of Texas or the United States as they relate to the utilization of prison labor and Prison Industry Certification requirements. G. That all deliveries, shipments, and employees are subject to search before entering or leaving the Facility premises; H. To keep the AREA clean, neat and orderly and to promptly report any damage to the building structure, interior fixture(s), or unsafe conditions to OPERATOR; I. To properly maintain in safe working condition all INDUSTRY CONTRACTOR installed equipment and fixtures; J. That throughout the term of this agreement, INDUSTRY CONTRACTOR shall be responsible for the cost of all utilities and telephone service to INDUSTRY CONTRACTOR'S provided AREA, which utilities shall be sub-metered and billed directly to INDUSTRY CONTRACTOR; K. That all INDUSTRY CONTRACTOR'S employees and agents assigned to the AREA shall be subject to background security checks by OPERATOR, and that OPERATOR shall have the right to deny entrance to the AREA to any INDUSTRY CONTRACTOR employee or agent reasonably deemed by OPERATOR to present a security risk; L. That all INDUSTRY CONTRACTOR'S employees assigned to the AREA shall be obligated to successfully complete the security training provided by OPERATOR; M. To interview, hire and train its Resident employees except as otherwise provided herein; 3 of 12 4 N. In the hiring of all Resident employees, to comply with all requirements of federal, state, and local non-discrimination statutes and/or regulations. The INDUSTRY CONTRACTOR shall provide the OPERATOR with job descriptions and personnel procedures for all inmate jobs in the industry work program. O. To provide an on-site supervisor at all times Residents are working in the AREA and to provide for job supervision and instruction to all hired Resident employees; P. To pay Resident employees at a rate prevailing in the area for similar work; at no time shall the pay rate be less than the Federal Minimum Wage. Q. To make Resident employee wage payments to OPERATOR as trustee of Resident pay accounts, with assurances that the withholding for and the payment of applicable social security, income, unemployment, or other taxes based on the wages and earnings of an employee or otherwise will be timely made and paid in accordance with applicable law. INDUSTRY CONTRACTOR shall provide OPERATOR with a written earnings and wage distribution report on a monthly basis on all resident employees. All Resident employee wage payments to OPERATOR shall be made on a bi-weekly basis, unless otherwise agreed to by OPERATOR; R. That work hour schedules for all Resident employees assigned to the industry work program shall be established by OPERATOR, through the request of INDUSTRY CONTRACTOR. OPERATOR shall use its best efforts to comply with INDUSTRY CONTRACTOR'S scheduling requests. Overtime hours may be arranged, at the request of the INDUSTRY CONTRACTOR, with prior approval of OPERATOR. If resident employees work overtime, INDUSTRY CONTRACTOR will share in the expense of paying OPERATOR employees overtime wages. S. That INDUSTRY CONTRACTOR shall, effective ninety (90) days after the execution of this agreement, employ not fewer than one-hundred (125) Resident employees working a minimum of thirty-five (35) hours per week on a continuing basis, unless otherwise agreed to in writing by OPERATOR and subject to the availability of qualified Resident employees within the facility. All work performed by Residents shall be performed in accordance with the prevailing working conditions within the CITY. T. That the employment of Residents will not result in the displacement of employed workers within the CITY, that the Residents will not be employed as strikebreakers or in impairing existing contracts at other industries wherever situated, and that the Resident will not be exploited in any form which might adversely affect the community, the Residents, or the DIVISION; U. That the STATE, CITY OF LOCKHART, OPERATOR, and their employees or agents shall not be held liable for any damage to INDUSTRY CONTRACTOR or any 4 of 12 5 third party arising from or related to any work stoppage or resident lock downs regardless of the reasons therefor; V. To protect, defend, indemnify and hold harmless the STATE, CITY OF LOCKHART, OPERATOR, and their employees or agents, from any liability claims and damages arising from or relating to this agreement except such liability claims and damages arising from or related to the actions or (when under an obligation to act) failure to act of the STATE, CITY OF LOCKHART, OPERATOR or any of their employees or agents; W. To comply with all state and local license requirements and pay all local personal property taxes. X. The INDUSTRY CONTRACTOR shall maintain insurance coverage for its equipment, supplies and materials located in the prison industries building against casualty occurrences. Further the INDUSTRY CONTRACTOR shall maintain liability insurance coverage on itself, its agents, servants and employees in an amount no less than $250,000 per person per claim, $500,000 aggregate. The INDUSTRY CONTRACTOR shall also maintain workers' compensation insurance on its employees in accordance with the laws of the State of Texas and the PIE Certification requirements. The INDUSTRY CONTRACTOR shall deliver to OPERATOR a duly authenticated certificate evidencing such insurance, within seven (7) days of execution of this agreement, and upon each insurance renewal date. Y. INDUSTRY CONTRACTOR shall indemnify and hold harmless OPERATOR, CITY, and DIVISION from any and all liability arising out of or in connection with INDUSTRY CONTRACTOR'S use, production, storage, or disposal of any "hazardous materials" or "hazardous waste" hereinafter defined. OPERATOR shall have the right to inspect and approve all storage and disposal procedures. "HAZARDOUS MATERIAL" shall mean any substance which is or contains (i) any "hazardous substance" as now or hereafter defined in 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. 9601 et seq.) or any regulations promulgated under CERCLA; (ii) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq. ("RCRA") or regulations promulgated under RCRA; (iii) any substance regulated by the Toxic Substances Control Act (15 U.S.C. 2601 et seq.); (iv) gasoline, diesel fuel, or other petroleum hydrocarbons; (v) asbestos and asbestos containing materials, in any for, whether friable or non-friable; (vi) polychlorinated biphenyls; (vii) radon gas; and any additional substances or materials which are now or hereafter classified or considered to be hazardous or toxic under Environmental Requirements (as hereinafter defined) or the common law, or any other applicable laws relating to the Property. "Hazardous waste" shall mean a solid waste, or combination of solid wastes, which because of its quantity, 5 of 12 6 concentration, or physical, chemical, or infectious characteristics may (a) cause, or significantly contribute to an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness; or (b) pose a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported, or disposed of, or otherwise managed. 42 U.S.C. 6903, as amended. INDUSTRY CONTRACTOR shall be in compliance and current on all changes to the above-referenced statutes and shall immediately comply with any amendments to those sections or any statutes promulgated by the State of Texas. Z. Certificate of Good Standing. INDUSTRY CONTRACTOR shall, on an annual basis, deliver to OPERATOR a Certificate of Good Standing from the State of Texas Comptroller's Office that indicates that INDUSTRY CONTRACTOR is current on all taxes due. AA. ACA Assistance. Where ACA accreditation is being sought by OPERATOR INDUSTRY CONTRACTOR shall comply with all ACA standards applicable to the Industry Program and shall collect and maintain the required documentation to assist OPERATOR to achieve and maintain accreditation. 6. OPERATOR'S Obligations OPERATOR agrees to: A. Provide INDUSTRY CONTRACTOR with the AREA described in Section 3, and provide for project management and supervision for all improvements in the AREA. B. Provide orientation training regarding OPERATOR security procedures for INDUSTRY CONTRACTOR'S staff, employees, and/or agents located at or regularly frequenting the AREA; C. Provide security for the AREA and to provide other resident custody support as determined by OPERATOR; D. Provide INDUSTRY CONTRACTOR with resident employee referrals through OPERATOR'S classification system in a timely manner; E. Serve as Trustee of resident employee payroll accounts and to apply the proceeds of such accounts in accordance with the terms of all applicable State laws, regulations, and contract provisions; F. Use its best efforts to assign this agreement to any subsequent private or public OPERATOR; 6 of 12 7 G. Provide a mutually agreeable Vocational/Educational training tailored to INDUSTRY CONTRACTOR'S needs for initial pre-hire training through the OPERATOR'S Vocational/Educational Program. H. Assist in provision of Hazcom Training for residents and INDUSTRY CONTRACTOR'S employees utilizing course materials to be supplied by INDUSTRY CONTRACTOR. However, such assistance will not reduce, diminish or otherwise waive any legal liabilities, properly and legally the responsibility of INDUSTRY CONTRACTOR. 7. DIVISION Obligations A. DIVISION agrees that in the event of the termination of OPERATOR'S services prior to the expiration of the then current INDUSTRY CONTRACTOR'S term, DIVISION, should it become the OPERATOR of the project, will continue to meet the OPERATOR'S obligations hereunder, including the ongoing requirements of classification and assignment of appropriate inmates to allow INDUSTRY CONTRACTOR to continue its Work Program for the remainder of such then current term, either through the services of another contracted private Operator, or through direct DIVISION operation of the Facility. Notwithstanding the foregoing provision, the DIVISION reserves the right to terminate this agreement upon six (6) months prior written notice to the parties hereto based upon a determination by the Texas Board of Criminal Justice that the Project shall no longer be dedicated to the Work Program facility; provided however, that INDUSTRY CONTRACTOR shall be allowed one extension of three (3) months prior to the termination under this provision if INDUSTRY CONTRACTOR is, in good faith, unable to obtain a new facility and relocate its operations thereto in an orderly and business like manner in such initial six (6) month period. 8. CITY Obligations CITY agrees that in the event of the termination of OPERATOR'S services prior to the expiration of the then current INDUSTRY CONTRACTOR'S term, and CITY'S assumption of such Operator management and operation duties and responsibilities, CITY will continue to meet the OPERATOR'S obligations hereunder, including the ongoing assignment of appropriate inmates to allow INDUSTRY CONTRACTOR to continue its Work Program for the remainder of such then current term, either through the services of another contracted private OPERATOR or through direct CITY operation of the Facility. 9. DIVISION Rights The parties hereto agree that the DIVISION shall have the right, in its own name, to enforce the terms and provisions of this agreement. 7 of 12 8 10. Contingencies and other Obligations This agreement shall be subject to the contingencies and additional obligations set forth in Appendix A, a copy of which is attached hereto. 11. Termination A. Either OPERATOR or INDUSTRY CONTRACTOR may terminate this agreement upon one hundred (180) days prior written notice to the other. Provided, however, that if this Agreement is terminated by OPERATOR, that INDUSTRY CONTRACTOR shall be allowed one extension of three (3) months prior to the termination under this provision if INDUSTRY CONTRACTOR is, in good faith, unable to obtain a new facility and relocate its operations thereto in an orderly and business like manner in such initial six (6) month period. However, this agreement may be terminated or suspended on an immediate basis by OPERATOR if in its sole discretion its continuance would constitute a safety or security risk to inmates, employees, third parties, or the public. OPERATOR shall not unreasonably exercise this authority and shall provide INDUSTRY CONTRACTOR a reasonable time, within the time limits stated above, to relocate its operations. B. The DIVISION may terminate this Agreement upon six (6) months prior written notice to the parties hereto based upon a determination by the Texas Board of Criminal Justice that the facility shall no longer be dedicated to a Work Program Facility. Provided, however, that if this Agreement is terminated by DIVISION, that INDUSTRY CONTRACTOR shall be allowed one extension of three (3) months prior to termination under this provision if INDUSTRY CONTRACTOR is in good faith unable to obtain a new facility and relocate its operations thereto in an orderly and business like manner in such initial six (6) month period. 12. Default by INDUSTRY CONTRACTOR A material failure to keep, perform, meet or comply with any covenant, agreement, term or provision of this Agreement to be kept, observed, met, performed, or complied with by INDUSTRY CONTRACTOR hereunder, which such failure continues for a period of sixty (60) days after INDUSTRY CONTRACTOR has written notice thereof, shall constitute an Event of Default on the part of INDUSTRY CONTRACTOR. 13. Opportunity to Cure In an Event of Default by INDUSTRY CONTRACTOR that INDUSTRY CONTRACTOR reasonably believes (i) cannot be cured within the sixty (60) days allowed to cure such Event of Default and (ii) that such Event of Default can be cured through a diligent, on-going, and conscientious effort on the part of INDUSTRY CONTRACTOR within a reasonable period not to exceed six (6) months, unless extended by OPERATOR, 8 of 12 9 then INDUSTRY CONTRACTOR may, within the sixty (60) day cure period, submit a plan for curing the Event of Default to OPERATOR. Upon receipt of any such plan for curing an Event of Default, OPERATOR shall promptly review such plan and at its discretion, which must be reasonable in the circumstances, may allow, or not allow, INDUSTRY CONTRACTOR to pursue such plan of cure. The decision of OPERATOR will be communicated in writing to INDUSTRY CONTRACTOR. OPERATOR agrees that it will not exercise its remedies hereunder with respect to such Event of Default for so long as INDUSTRY CONTRACTOR diligently, conscientiously, and timely undertakes to cure the Event of Default in accordance with the approved plan. If OPERATOR does not allow an extension of the cure period, the sixty (60) day time period shall be tolled during the period of time the request is pending before the OPERATOR. 14. Use or Lose Space In the event that the INDUSTRY CONTRACTOR does not utilize the AREA in the most efficient manner to maximize work production and the number of resident employees to be employed, the OPERATOR may, in its discretion, remove from INDUSTRY CONTRACTOR'S use that amount of space in the AREA not being utilized. In the event of this circumstance, OPERATOR shall give INDUSTRY CONTRACTOR written notice of its intention to reduce the work space made available to INDUSTRY CONTRACTOR. INDUSTRY CONTRACTOR shall have ninety days after it has received written notice thereof to more efficiently utilize the space to be removed from it by OPERATOR, and at the same time, submit a plan to OPERATOR as to how that space will be more efficiently utilized. If after the ninety days, the INDUSTRY CONTRACTOR is still not utilizing the space in the most efficient manner in accordance with OPERATOR'S expectations, that space will be taken away from INDUSTRY CONTRACTOR and, in the discretion of the OPERATOR, made available to itself or other INDUSTRY CONTRACTORS. This provision of paragraph 14 shall apply only in the event that the INDUSTRY CONTRACTOR is unable to comply with paragraph 5(s), otherwise this paragraph 14 will not be applicable. 15. Default by OPERATOR A material failure to keep, perform, meet or comply with any covenant, agreement, term or provision of this Agreement to be kept, observed, met, performed, or complied with by OPERATOR hereunder, which such failure continues for a period of sixty (60) days after OPERATOR has written notice thereof, shall constitute an Event of Default on the part of the OPERATOR. 16. Opportunity to Cure In the Event of Default by OPERATOR that OPERATOR reasonably believes (i) cannot be cured within the sixty (60) days allowed to cure such Event of Default and (ii) that such 9 of 12 10 Event of Default can be cured through a diligent, on-going, and conscientious effort on the part of OPERATOR within a reasonable period not to exceed six (6) months, unless extended by INDUSTRY CONTRACTOR, then OPERATOR may, within the sixty (60) day cure period, submit a plan for curing the Event of Default to INDUSTRY CONTRACTOR. Upon receipt of any such plan for curing an Event of Default, INDUSTRY CONTRACTOR shall promptly review such plan and at its discretion, which must be reasonable in the circumstances, may allow, or not allow, OPERATOR to pursue such plan of cure. The decision of INDUSTRY CONTRACTOR will be communicated in writing to OPERATOR. INDUSTRY CONTRACTOR agrees that it will not exercise its remedies hereunder with respect to such Event of Default for so long as OPERATOR diligently, conscientiously, and timely undertakes to cure the Event of Default in accordance with the approved plan. If INDUSTRY CONTRACTOR does not allow an extension of the cure period, the sixty (60) day time period shall be tolled during the period of time the request is pending before the INDUSTRY CONTRACTOR. 17. All parties agree that in the event of a non-appropriation of funds by the Texas legislature for The Lockhart Work Program Correctional Facility, this Agreement will terminate at such time as appropriations are no longer available to operate this facility. 18. This Agreement may be executed in one or more separate counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 19. Complete Agreement This Agreement contains all of the terms and conditions agreed to by the parties involved. No other understandings, oral or otherwise, regarding the subject matter of this Agreement shall be deemed to exist or to be binding upon any party hereto. 20. Modifications This Agreement may not be modified, altered or amended except by written agreement executed by all the parties hereto. 10 of 12 11 IN WITNESS WHEREOF, the parties hereto affix their respective authorization signatures effective the date first set forth above. Wackenhut Corrections Corporation (OPERATOR): By: /s/ Patricia McNair Persante -------------------------------- Patricia McNair Persante Sr. Vice President U.S. Technologies Inc. (INDUSTRY CONTRACTOR) By: /s/ K.H. Smith -------------------------------- K.H. Smith, President [Signatures continued on the following page] Texas Department of Criminal Justice (STATE) By: -------------------------------- Melinda Hoyle Bozarth Director of Parole Division City of Lockhart (CITY) By: -------------------------------- John Allred Mayor, City of Lockhart 11 of 12 12 APPENDIX A CONTINGENCIES AND OTHER OBLIGATIONS OPERATOR shall provide INDUSTRY CONTRACTOR the following: 1. Three reserved parking spaces in close proximity to the main entrance, to be marked as specified for INDUSTRY CONTRACTOR from time to time. Additional parking will be made available for INDUSTRY CONTRACTOR'S non resident employees. 2. OPERATOR'S medical staff shall be available to INDUSTRY CONTRACTOR for emergencies incurred in the AREA to the same extent the staff would be available to the OPERATORS employees. 3. OPERATOR will use its best efforts to assist INDUSTRY CONTRACTOR in obtaining and maintaining a tax abatement from the CITY and from Caldwell County. 12 of 12 EX-10.13 7 LEASE AGREEMENT 1 EXHIBIT 10.13 STATE OF CALIFORNIA DEPARTMENT OF GENERAL SERVICES REAL ESTATE SERVICES DIVISION JOINT VENTURE BY-STATE LEASE AGREEMENT LEASE COVERING PREMISES LOCATED AT LEASE NO.: L-1724 CHUCKAWALLA VALLEY STATE PRISON 19025 WILEYS WELL ROAD BLYTHE,CA 92225 AGENCY DEPARTMENT OF CORRECTIONS This Lease, dated for reference purposes only, this first day of August 1998, by and between the State of California, acting by and through its Director of General Services, with the approval of the Department of Corrections hereinafter called STATE, and Labor-to-Industry Inc., hereinafter called LESSEE. The parties agree as follows: WITNESSETH The STATE, by virtue of Title 15, Article 9, Section 3480 of the California Code of Regulations, has added the Joint Venture Program, which seeks to contract with privately owned businesses in a unique cooperative venture to produce goods or services. Pursuant to Section 14672.16(a) of the Government Code, Proposition 139, effective November 7, 1990, known as the "Prison Inmate Labor Initiative of 1990", the primary purposes of the Joint Venture Program are to establish contracts that give priority to inmate employment which will retain or reclaim jobs in California, support emerging California industries or create jobs for a deficient labor market and further rehabilitation, provide vocational training, develop job skills and qualify inmates for employment upon release from the institution. LESSEE agrees to enter into a cooperative venture with the STATE to manufacture and produce goods at the Chuckawalla Valley State Prison (CVSP), utilizing and hiring the services of inmates of the STATE in accordance with the terms and conditions Stated in the Standard Agreement #CV98042, dated September 1, 1998, between the California Department of Corrections (CDC) and the LESSEE. DESCRIPTION 1. STATE does hereby lease to LESSEE, and LESSEE hereby hires from STATE approximately 20,300 (square feet) of warehouse space, and approximately 16,000 (square feet) of space on C Facility for a total of 36,300 square feet, located within the boundaries of CVSP, situated in the County of Riverside, State of California, hereinafter called the Premises, as outlined in red on Exhibits "A", "B-l" and "B-2" incorporated herein and by this reference, made a part hereof. 1 2 TERM 2. The term of the Lease shall be for a period of five (5) years, commencing on September 1, 1998 and terminating on August 31, 2003, with such rights of termination as may be hereinafter expressly set forth. This Lease may be renewed in writing by the parties for additional successive five (5) year terms, which shall not exceed fifty (50) years total. The provisions of each renewal shall be negotiated between the parties and are subject to the Department of General Services approval. RENT 3. Effective December 1, 1998, the monthly rental rate shall be SEVEN HUNDRED TWENTY SIX DOLLARS AND NO CENTS ($726.00), payable monthly, in advance. Payments shall be made as follows: Department of General Services Attn.: Receivable Unit, PAL (#L-1724) P. O. Box 151 Sacramento, CA 95812-0151 UTILITIES 4. a. LESSEE agrees to pay all water, electric and other utility charges in connection with LESSEE's use of the Premises during the term of this Lease. STATE assumes no liability for the existence or non-existence nor service connection to said utilities. Direct billing by CVSP will be charged each month in arrears, based upon estimated use, beginning on the first day of each month starting October 1, 1998. Payment shall be made directly to CVSP, in person or mailed to the address as shown in Paragraph 14 herein. b. LESSEE acknowledges the existence of an interruptible power supply agreement with Southern California Edison. In the event of a power loss, the LESSEE shall have the same rate of commercial power recovery as CVSP. c. Installation, monthly billing, maintenance and removal of any telephone systems will be the sole responsibility of the LESSEE. d. Trash removal shall be the sole responsibility of the LESSEE. RENTAL ADJUSTMENT 5. It is hereby mutually agreed that, notwithstanding anything to the contrary herein contained and in the event the costs to the STATE to furnish space, maintenance and administrative services increase in any one year period during the term hereof, the monthly rental rate shall, at the option of the STATE, be adjusted to include such increase in costs, effective upon commencement of the next following annual anniversary date of the Lease. The LESSEE's monthly rate for utilities may be adjusted to include any increase in the cost to the STATE for furnishing utilities. STATE will give LESSEE written notice of any increase in the utility rate thirty (30) days prior to such date when said increase shall become effective. 2 3 TERMINATION 6. The parties hereto agree that either party may terminate this Lease at anytime during the term hereof by giving notice to the other party in writing thirty (30) days prior to the date when termination shall become effective. Notice must be given in accordance with the instructions contained in paragraph 14 herein. USE 7. LESSEE agrees to use the Premises for the purposes of manufacturing of office furnishings only and for no other purposes. LESSEE's activities will be conducted hereunder only in a manner agreed upon by the STATE and the event any operation or person is determined objectionable by the Warden of said institution, LESSEE agrees to discontinue such operation or remove such person after notice thereof. CANCELLATION 8. Any violation of the terms of this Lease or of the rules and regulations of CVSP shall be grounds for immediate cancellation of the Lease and removal of the LESSEE. DEFINITION OF ADULT 9. Adult Offender (AO), as used in this Lease, OFFENDER is anyone under the care, custody, and control of CDC. LEASE COORDINATOR 10. The Warden of CVSP, or designee, is appointed as the "Lease Coordinator" for the institution during the term of this Lease. LEASE REVIEW 11. This Lease shall be subject to an annual review by the STATE, the Lease Coordinator and the LESSEE, who shall assure the STATE the original purpose of the Lease is being carried out and determine what, if any, adjustments should be made in the terms and conditions of this Lease. HOLDING OVER 12. Any holding over after expiration of the term of this Lease with the consent of STATE expressed or implied, shall be deemed to be a tenancy only from month-to-month. Said month-to-month tenancy shall be subject otherwise to all the terms and conditions of this Lease so far as applicable. RECOVERY OF LEGAL FEES 13. If action be brought by STATE for the recovery of any rent due under the provisions hereof or for any breach hereof, or to restrain the breach of any agreement contained herein, or for the recovery of possession of said Premises, or to protect any right given to STATE against LESSEE, and if STATE shall prevail in such action, LESSEE shall pay to STATE such amount of all costs and expenses including attorney's fees in said action as the court shall determine to be reasonable, which shall be fixed by the court as part of the costs of said action. 3 4 NOTICES 14. All notices herein provided to be given or which may be given by either party to the other, shall be deemed to have been fully given when made in writing and deposited in the United States mail, certified and postage prepaid, and addressed as follows: To the LESSEE: Labor-To-Industry Inc. Chuckawalla Valley U.S. Technologies Inc. 3901 Roswell Road, Suite 300 Marietta, GA 30062 To the STATE: Department of General Services Real Estate Services Division 400 R Street, Suite 5000 Sacramento, CA 95814 To the STATE: Department of Corrections (Institution) Chuckawalla Valley State Prison Attn.: Warden P.O. Box 2289 Blythe, CA 92226 The address to which notices may be mailed to either party may be changed by written notice given by subject party to the other, but nothing herein contained shall preclude the giving of any such notice by personal service. RIGHT OF ENTRY 15. During continuance in force of this Lease, there shall be and is hereby expressly reserved to STATE and to any of its agencies, contractor agents, employees, representatives or licensees, the right at any and all times, and any and all places, to temporarily enter upon said Premises for STATE purposes. FAILURE TO PERFORM 16. In the event of the failure, neglect, or refusal of LESSEE to do or perform work, or any part thereof, or any act or thing in this Lease provided to be done and performed by LESSEE, STATE shall, as its option, have the right to do and perform the same, and LESSEE hereby covenants and agrees to pay STATE the cost hereof on demand. 4 5 CONDITION OF PREMISES 17. LESSEE accepts the Premises as being in good order, condition and repair, unless otherwise specified herein, provided, however, that LESSEE shall conduct a final walk through of the Premises prior to occupancy. LESSEE further agrees that on the last day of the term, or sooner termination of this Lease, to surrender up to STATE, the Premises with any appurtenances or improvements in the same condition as when received, reasonable use and wear thereof and damage by act of God excepted. LESSEE has inspected said Premises and it is agreed that the area stated herein and outlined on Exhibits "A", "B-1", and "B-2" is only approximate and the STATE does not hereby warrant or guarantee the actual area included hereunder. LESSEE accepts the air compressor located in C Facility at CVSP as is, and will be responsible for its repair, maintenance and certification. COMPLIANCE 18. LESSEE agrees to maintain said Premises in compliance with the sanitation laws and regulations of the State of California, and in compliance with all other laws of the STATE, and the rules and regulations of CVSP. LESSEE shall, at his sole cost and expense, comply with all of the laws and requirements of all Municipal, State, and Federal authorities now in force including, but not limited to, the Mojave Desert Air Quality Management District or which may hereinafter be in force pertaining to the Premises and the use of the Premises as provided in this Lease. ABANDONMENT 19. If the LESSEE abandons, vacates, surrenders, or is dispossessed by process of law from the Premises, any personal property belonging to LESSEE and left on the Premises shall be deemed to be abandoned, at the option of the STATE. EASEMENTS AND 20. This Lease is subject to all existing RIGHTS-OF-WAY easements and rights of way. STATE further reserves the right to grant additional public utility easements as may be necessary and LESSEE hereby consents to the granting of any such easement. The public utility will be required to reimburse LESSEE for any damages caused by the construction work on the easement area. MAINTENANCE 21. a. STATE shall maintain Premises in reasonable functional condition during the term of this Lease. b. Janitorial services will be provided by LESSEE during the term of this Lease. ALTERATIONS/REPAIRS 22. LESSEE shall not construct improvements upon the Premises or make alterations hereto, either temporary or permanent without first having obtained written approval of STATE. All improvements and alterations shall be in compliance with the Public Health and Safety Codes and shall conform to the California Occupational Safety and Health Standards. 5 6 SURRENDER OF PREMISES 23. Upon termination of this Lease for any cause, the LESSEE shall remove any and all equipment and improvements of the LESSEE and restore the entire Premises to its condition prior to the execution of this Lease, except however, the STATE may approve, in writing, any deviation from this requirement. MEDICAL 24. With the exception of AO's, no medical support will be provided to LESSEE or LESSEE's employees by CVSP or by the STATE, unless for life threatening emergencies. PROHIBITED ITEMS 25. a. Since the Premises are situated on the grounds of CVSP, the LESSEE will comply with all rules and regulations adopted by said Institution. No article or material which the STATE considers as being contraband shall be brought on the Premises. Said rules prohibit, but are not limited to: beer, alcoholic beverages, narcotics, the possession or use of firearms, explosives or edged weapons, or restricted controlled substances. Any willful violation of said rules and regulations or of the terms of this Lease will be grounds for immediate cancellation of this Lease and removal of the LESSEE. b. No cellular phones or two-way radio systems will be used on institutional grounds by LESSEE or LESSEE's employees. Cordless phones and pagers will be allowed only with prior approval of the warden. c. Smoking is not allowed in or upon the Premises. HOLD HARMLESS 26. This Lease is made upon the express condition that the State of California is to be free from all liability and claims for damages by reason of any injury to any person or persons, including LESSEE, or property of any kind whatsoever and to whomsoever belonging including LESSEE, from any cause or causes whatsoever while in, upon, or in any way connected with the Premises during the term of this Lease or any occupancy hereunder, except those arising out of the sole negligence of the STATE. LESSEE agrees to defend, indemnify, and save harmless the State of California from all liability, loss, cost or obligation on account of or arising out of any such injury or loss, however occurring. LESSEE further agrees to provide necessary Workers Compensation Insurance for all non AO employees of LESSEE upon said Premises at the LESSEE's own cost and expense. DAMAGE TO PROPERTY 27. Notwithstanding any other language to the contrary, the STATE, its agents or employees shall not be liable or responsible for any damage to property or persons on the Premises pursuant to this Lease caused by acts of the AOs of the STATE or by employees of CVSP while in the performance of their duties in respect to the AOs. LESSEE understands that the Premises are a part of a correctional institution and such possible damage or injury is one of the risks of occupancy. CVSP reserves the right to go on the Premises for search and to preserve law and order, or to perform any other act or acts necessary or advisable for the welfare of such AOs. 6 7 INSURANCE 28. LESSEE shall furnish a Certificate of Insurance with the STATE's Lease Number indicated on the face of said certificate, issued to STATE with amounts of Commercial General Liability of at least $1,000,000 per occurrence and Fire Legal Liability of at least $100,000 naming the State of California, its officers, agents and employees as additional insureds. Said certificate of insurance shall be issued by an insurance company with a rating which is acceptable to the Department of General Services, Office of Risk and Insurance Management. It is agreed that STATE shall not be liable for the payment of any premiums or assessments on the insurance coverage required by this paragraph. The Certificate of Insurance shall provide that the insurer will not cancel the insured's coverage without thirty (30) days prior written notice to STATE. LESSEE agrees that the insurance herein provided for shall be in effect at all times during the term of the Lease. In the event said insurance coverage expires at any time or times during the term of this Lease, LESSEE agrees to provide STATE, at least thirty (30) days prior to said expiration date, a new Certificate of Insurance, evidencing insurance coverage as provided for herein for not less than one (1) year. New Certificates of Insurance are subject to the approval of the Department of General Services. In the event LESSEE fails to keep in effect at all times, insurance coverage as herein provided, STATE may, in addition to any other remedies it may have, terminate this Lease upon the occurrence of such event. LOSSES 29. The STATE will not be responsible for losses, or damage to personal property, equipment or material of the LESSEE or LESSEE's employees or agents. All losses shall be reported to the STATE immediately upon discovery. TAXES/ASSESSMENTS 30. LESSEE agrees to pay all lawful taxes, assessments, or charges which at anytime may be levied upon interest in this agreement. It is understood that this Lease may create a possessory interest subject to property taxation and LESSEE may be subject to the payment of property taxes levied on such interest. NON-DISCRIMINATION 31. LESSEE agrees that it will not discriminate against any employee or applicant for employment because of race, color, religion, ancestry, national origin, sex, age or physical handicap. LESSEE agrees to ensure that applicants are employed and that employees are treated during employment, without regard to their race, color, religion, ancestry, national origin, sex, age or physical handicap. (See California Government Code Sections 12920-12994 for further details.) DEBT LIABILITY 32. STATE will not be liable for any debts or claims that arise from the DISCLAIMER operation of this Lease. PARTNERSHIP DISCLAIMER 33. LESSEE and any and all agents and employees of LESSEE shall act in an independent capacity and not as officers or employees of the STATE. Nothing herein contained shall be construed as constituting the parties herein as partners. 7 8 ENVIRONMENTAL 34. A. The LESSEE agrees to comply with all COMPLIANCE applicable Federal, State and local regulations pertaining to hazardous materials' use, storage and disposal. The LESSEE shall indemnify and hold harmless the STATE and its agents and representatives for any violation of environmental and/or hazardous materials law caused by LESSEE or LESSEE's representatives. Furthermore, LESSEE shall reimburse the STATE for any and all costs related to investigation, clean up and/or fines incurred by the STATE for environmental regulation non-compliance by the LESSEE or LESSEE's representative. B. If the LESSEE is required to prepare a Business Plan, as specified by Health and Safety Code Section 25500 et seq., or a Hazardous Waste Contingency Plan, as specified in 22 CCR 66264.51 et seq., then a copy of the plan shall be submitted first to the Associate Warden, Business Services. C. If LESSEE or LESSEE's representative generates any regulated hazardous wastes on the STATE's property, LESSEE agrees to dispose of such wastes in accordance with all applicable Federal, State and local regulations. Copies of all hazardous waste manifests or disposal certificates shall be submitted to the Associate Warden, Business Services. D. Storage of hazardous waste shall comply with 22 CCR 66264 et al., and all applicable fire regulations. The LESSEE shall not apply to become a "Permitted" hazardous waste storage facility without permission from the Associate Warden, Business Services. E. The STATE or its representatives reserves the right to inspect all areas which are Leased or rented by LESSEE, for the purpose of verifying environmental compliance. F. The LESSEE shall provide copies of Material Safety Data Sheets (MSDS) for all hazardous materials used on STATE's property to the Associate Warden, Business Services. G. Any violation in Federal, State or local environmental law including but not limited to the Mojave Desert Air Quality Management District, deemed serious by the STATE will be grounds for termination of Lease in accordance with applicable sections herein. Termination of Lease by either party or evacuation of Leased property by LESSEE shall not relieve LESSEE of environmental or hazardous materials related liabilities incurred by the STATE during LESSEE's occupancy or incurred as a result of LESSEE's actions. PROTECTION OF PREMISES 35. LESSEE shall not commit or suffer to be committed any waste or nuisance upon the Premises and further agrees to exercise due diligence in the protection of the Premises against damage or destruction by fire or other cause at all times. There shall be no hunting on the Premises. 8 9 MINERAL RIGHTS 36. LESSEE agrees not to interfere, in any way, with the interests of any person or persons that may presently, or in the future, hold oil, gas, or other mineral rights upon or under said Premises; nor shall LESSEE, in any way, interfere with the rights of ingress and egress of said interest holders. DESTRUCTION 37. If fire or other casualty totally destroys the Premises, this Lease shall terminate. If the building is not replaced by the LESSEE's insurance company, any monies received from LESSEE's insurance policy for the building shall be conveyed to the STATE. This applies to the building only and does not include LESSEE's personal property, equipment or material of the LESSEE or LESSEE's employees or agents. SUBLET 38. LESSEE shall not assign this Lease in any event and shall not sublet the Premises or any part thereof and will not permit the use of the Premises by anyone other than the LESSEE without prior written consent of the STATE, including approval by the Department of General Services, which may be withheld for any reason. MUTUAL CONSENT 39. Notwithstanding anything herein contained to the contrary, this Lease may be terminated, and the provisions of this Lease may be altered, changed, or amended by mutual consent in writing of the parties hereto. Any amendment is subject to the approval by the Department of General Services. BINDING 40. The terms and provisions of this agreement shall extend to and shall bind and inure to the benefit of the heirs, representatives, assigns, and successors in interest of the parties hereto. SECTION HEADINGS 41. All section headings contained herein are for convenience of reference only and are not intended to define or limit the scope of any provision of this Lease. ESSENCE OF TIME 42. Time is of the essence for each and all of the provisions, covenants and conditions of this agreement. 9 10 IN WITNESS WHEREOF, this Lease has been executed by the parties hereto as of the date first hereinabove written. STATE OF CALIFORNIA LESSEE: LABOR-TO-INDUSTRY INC. DEPARTMENT OF GENERAL SERVICES REAL ESTATE SERVICES DIVISION BY: /s/ Approval Recommended: -------------------------------- BY: /s/ TITLE: President -------------------------------- ------------------------- TITLE: Real Estate Officer TELEPHONE: 770-565-4311 ----------------------------- ------------------------- APPROVED: BY: /s/ Cheryl L. Allen -------------------------------- TITLE: Senior Real Estate Officer ----------------------------- DATE: 9/10/98 ----------------------------- APPROVED: STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS BY: /s/ Judy Buckman -------------------------------- Judy Buckman, Chief TITLE: Business Management Branch ----------------------------- STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS CHUCKAWALLA VALLEY STATE PRISON BY: /s/ -------------------------------- TITLE: Warden ----------------------------- TELEPHONE: (760) 922-5300 X5000 ------------------------- 10 11 [MAP] 11 12 EXHIBIT B-1 Chuckawalla Valley State Prison PIA WAREHOUSE Approximately 20,295 sq. ft. of floor space One 18 x 14 roll-up door One 12 x 12 roll-up door with dock access One access door off of dock Approximately 476 sq. ft. of office space (including restrooms) [MAP] 12 13 EXHIBIT B-2 Chuckawalla Valley State Prison [MAP] Approximately 16,000 sq. ft. floor space PIA SEWING One roll-up door accessing dock EX-10.18 8 INDUSTRY WORK PROGRAM AGREEMENT 1 EXHIBIT 10.18 INDUSTRY WORK PROGRAM AGREEMENT South Bay Correctional Facility and Moore Haven Correctional Facility This agreement is entered into effective this 19 day of October, 1999, by and between Wackenhut Corrections Corporation, 4200 Wackenhut Drive, Palm Beach Gardens, Florida 33410, hereinafter referred to as the "OPERATOR", U.S. Technologies Inc. 3901 Roswell Road, Suite 300, Marietta, Georgia 30067, hereinafter referred to as the "INDUSTRY CONTRACTOR", and American Quantum Cycles, 731 Washburn Road, Melbourne, Florida 32934, hereinafter referred to as "AQ". The "Prison Industry Enhancement Certification Program (PIE)", 18 USC ss.1761(c) and "Inmate Labor and Correctional Work Programs, Chapter 946, F.S. authorizes Adult Offenders (AO) to manufacture, repair and assemble products for sale, or provide services pursuant to the contract with the public; and The State's primary purpose of the PIE Program is to further the State's effort in AO rehabilitation, provide vocational training under real work settings, develop job skills and work habits and to qualify AOs for employment upon release from the institution; and The Correctional Privatization Commission (CPC) has entered into Operations and Management Agreements with OPERATOR to provide correctional services at the South Bay Correctional Facility (SBCF) and Moore Haven Correctional Facility (MHCF). INDUSTRY CONTRACTOR is by this document, entering into an agreement with OPERATOR to provide an industry work program at SBCF and MHCF. The INDUSTRY CONTRACTOR wishes to participate and enter into a cooperative venture with the OPERATOR to assist the State in establishing an industrial operations program at the SBCF and MHCF that can meet the objectives of the PIE Program, and the State for AOs of the State. Whereas, OPERATOR desires to train and employ AOs in a realistic working environment and to provide a work program area to the Industry Contractor for the purpose of establishing and maintaining a resident (inmate) work program in accordance with all PIE Program and other applicable laws and regulations. 2 Now, therefore, in consideration of the mutual benefits and covenants hereinafter set forth, the parties hereby agree as follows: 1. Initial Term The term of this contract shall commence on October 19, 1999 and shall be for a minimum of seven years or as long as the OPERATOR is contractually permitted to occupy the SBCF and MHCF, unless earlier terminated pursuant to Section 8, set forth below. In the event that U.S. Technologies becomes unwilling or unable (as a result of termination of this Agreement or otherwise) to perform its obligations under this Agreement, then AQ, upon written notice to OPERATOR, shall have the right to assume the rights and obligations of INDUSTRY CONTRACTOR hereunder. 2. Renewal Term This agreement will automatically be extended for successive terms of one year each unless either OPERATOR, INDUSTRY CONTRACTOR OR AQ terminates this agreement by written notice to the other at least ninety (90) days prior to the expiration date of the then current term, or this agreement is otherwise earlier terminated, pursuant to the provisions of Section 8 below mentioned. 3. Right of Occupancy/Occupancy Fee A. OPERATOR hereby grants to the INDUSTRY CONTRACTOR and AQ the right of occupancy in the designated Industry Buildings at SBCF and MHCF (the "Buildings") and agrees to provide the INDUSTRY CONTRACTOR with approximately 20,500 square feet at each facility for Work Program activities, hereinafter referred to as the AREA. The OPERATOR represents and warrants that the Buildings shall be modified in accordance with the plans and specifications furnished to OPERATOR by INDUSTRY CONTRACTOR and AQ not later than thirty (30) days after the OPERATOR has taken delivery of the equipment and that the Buildings will be designed and maintained to conduct safely the activities described in Section 4B. OPERATOR agrees to work with INDUSTRY CONTRACTOR to negotiate any agreement to expand the AREA for work program activities when necessary for further expansion. B. During this Term and the first renewal term thereafter, INDUSTRY CONTRACTOR shall pay to OPERATOR the sum of One Dollar ($ 1.00) per year. Occupancy fees for the Renewal Term(s) shall be negotiated and approved -2- 3 by written agreement of the parties hereto at least one (1) year prior to the expiration of the then Current term. 4. Occupancy Restriction A. Nothing herein shall be construed as creating either a rental agreement or a lease; the INDUSTRY CONTRACTOR may not sublet, sublease, assign, or transfer this agreement or any of its rights or obligations hereunder, nor may INDUSTRY CONTRACTOR enter into any other agreement regarding the occupancy herein granted, without the express prior written agreement of OPERATOR. The occupancy of the AREA shall at all times be consistent with the terms of this agreement regarding work authorized and work hours. B. The type of industry to be put into the AREA would include, but not be limited to, polishing, painting, fiberglass fabrication, assembly, inventory management and quality control work associated with the production and assembly of touring motorcycles for AQ. Work hours associated with services shall be subject to OPERATOR approval. 5. INDUSTRY CONTRACTOR and AQ Obligations INDUSTRY CONTRACTOR, AQ, hereby agree: A. To employ AOs in various aspects of motorcycle production and assembly as described in Section 4B above. Specifically, the painting, polishing and fiberglass fabrication will all take place at the SBCF (PHASE I) and all assembly, in order to produce the finished product will take place at the MHCF (PHASE II). B. To provide and manage all of the labor force as well as hire free-world employees to supervise the AOs working in the PIE program at SBCF and MHCF. C. That AQ shall provide supervisory and quality control (QC) training and will also inspect the final product at the MHCF before it is shipped to its ultimate destination. D. That AQ shall repay OPERATOR for all of the capital and other expenses, excluding build-out and installation costs, but including freight if paid by OPERATOR, for PHASE I equipment expenditures over seven years at an interest rate of 11.0%. After OPERATOR has made all expenditures related -3- 4 to PHASE I, a payback schedule will be determined based upon the aforementioned 11.0% interest rate and seven (7) year term. OPERATOR will provide notice and itemization of all expenditures as well as the payback schedule to AQ (but not earlier than forty five (45) days after the AREA has become operable). Payments will be made in quarterly installments, with the first payment due forty five (45) days after OPERATOR has provided expenditure and payback schedule information to AQ. In the event of contract cancellation or terminations prior to the end of the seven (7) year payback period, all outstanding unpaid quarterly payments will become due and must be paid to OPERATOR or assumed by AQ within thirty (30) days of the date of contract cancellation or termination. Title to the Equipment shall be taken in the name of AQ, subject to the liens of OPERATOR, and OPERATOR's lender to secure payment as above provided. The equipment for PHASE I and its costs are set forth in Attachment A. E. That upon successful implementation of PHASE I the INDUSTRY CONTRACTOR shall contribute $175,000, OPERATOR shall contribute $100,000, and AQ shall invest the balance of funds for capital expenditures associated with Phase II. The capital expenditures (including acquisition of equipment) required for Phase II will be identified upon purchase. AQ agrees to repay OPERATOR and INDUSTRY CONTRACTOR the sums of $100,000 and $175,000 respectively, over seven years at an interest rate 11.0%. Payments will be made in quarterly installments, with the first due thirty (30) days after notice of successful completion of PHASE I and commencement of operations of Phase II. In the event of contract cancellation or termination prior to the end of the seven (7) year payback period, all outstanding unpaid quarterly payments will become due and must be paid to OPERATOR and INDUSTRY CONTRACTOR within thirty (30) days of the date of contract cancellation or termination. The financing will be secured by all equipment and leasehold improvements acquired during Phases I and II. F. That all materials, personal property, inventory items, equipment, and/or fixtures or other property of any kind or description whatsoever installed or brought into the AREA by INDUSTRY CONTRACTOR, its agents or employees, shall be at INDUSTRY CONTRACTOR's sole risk and neither the CPC, OPERATOR, or any employees or agents thereof, shall be liable for any damage or loss suffered thereto unless such damage or loss arises out of the negligence, recklessness, intentional or willful acts or misconduct of the CPC, OPERATOR, or any of their agents or employees. -4- 5 G. That all permanent improvements or fixtures permanently attached to the AREA shall become the property of the real owner-in-interest of the building in which the AREA is located, unless otherwise agreed in writing between all applicable parties. The parties acknowledge that all raw materials, work in process and finished good inventory is owned exclusively by AQ. H. That no additional alternations to the AREA may be made by INDUSTRY CONTRACTOR without the prior written approval of OPERATOR, which approval shall not be unreasonably withheld. I. That INDUSTRY CONTRACTOR and AQ, their employees and agents will comply with all OPERATOR written policies and procedures, (which first shall be furnished to INDUSTRY CONTRACTOR and AQ) as well as all applicable federal, state, and local laws, ordinances, and regulations, with particular emphasis on federal and state wage and hour laws regarding payment for work and other rules and regulations of the federal and state agencies having jurisdiction over employment relations. The INDUSTRY CONTRACTOR warrants that the OPERATOR is not a secondary employer. The INDUSTRY CONTRACTOR agrees that no goods produced under this Agreement shall be placed in commerce in violation of the laws of the State of Florida or the United States as they relate to the utilization of prison labor and Prison Industry Enhancement Certification Program requirements. J. That all deliveries, shipments, and employees are subject to search before entering or leaving the Facility premises. K. To keep the AREA clean, neat and orderly and to promptly report any damage to the building structure, interior fixture(s), or unsafe conditions to OPERATOR. L. To properly maintain in safe working condition all INDUSTRY CONTRACTOR installed equipment and fixtures. M. That throughout the term of this agreement, INDUSTRY CONTRACTOR shall be responsible for the cost of all utilities and telephone service to INDUSTRY CONTRACTOR's provided AREA, which utilities shall be sub-metered and billed directly to INDUSTRY CONTRACTOR; N. That all INDUSTRY CONTRACTOR and AQ employees and agents assigned to the Area shall be subject to background security checks by -5- 6 OPERATOR, and that OPERATOR shall have the right to deny entrance to the AREA to any INDUSTRY CONTRACTOR or AQ employee or agent reasonably deemed by OPERATOR to present a security risk; O. That all INDUSTRY CONTRACTOR and AQ employees assigned to the AREA shall be obligated to successfully complete the security training provided by OPERATOR; P. In the hiring of all AO employees, comply with all requirements of federal, state, and local non-discrimination statutes and/or regulations. The INDUSTRY CONTRACTOR shall provide the OPERATOR with job descriptions and personnel procedures for all inmate jobs in the industry work program. Q. To provide a non-inmate on-site supervisor at all times AOs are working in the AREA and to provide for job supervision and instruction to all hired AO employees. At least one non-inmate free-world employee shall be provided for the first twenty or fewer AOs employed. If the number of AOs exceeds twenty, INDUSTRY CONTRACTOR will provide additional non-inmates employees at a ratio they deem necessary to properly supervise the inmate population, after consulting with the OPERATOR. R. To pay AO employees in accordance with Employment Development Department (EDD) guidelines as developed for this contract; at no time shall the pay rate be less than the Federal Minimum Wage, or Florida minimum wage, whichever is greater. S. INDUSTRY CONTRACTOR shall be responsible for all payroll functions and all tax and other legal deductions. Wage payments shall be made not less often than semi-monthly in the name of Florida Department of Corrections (DOC) for (inmate name and DOC Number), and delivered according to instructions provided by Florida Statute. T. Inmates will be paid only for actual hours worked, after they have successfully completed vocational/technical training and have received fourteen (14) days of actual on-the-job training. AOs will not be paid while they are in training. Employed inmates will work or be in training at least four (4) hours per day. The work hour schedules for all AO employees assigned to the Industry work program shall be established by OPERATOR, after consultation with the INDUSTRY CONTRACTOR, and AQ and OPERATOR shall use its best efforts to comply with INDUSTRY CONTRACTOR's and AQ's -6- 7 scheduling requests Overtime hours may be arranged, at the request of the INDUSTRY CONTRACTOR, and AQ with prior approval of OPERATOR. U. That INDUSTRY CONTRACTOR shall, effective ninety (90) days after the training period has been completed, employ not fewer than ten (10) AOs working a minimum of twenty (20) hours per week on a continuing basis. Subject to the availability of qualified AOs within the facilities and the volume of business, INDUSTRY CONTRACTOR shall use its reasonable efforts to employ at least the minimum number of inmates as referenced in Attachment B. Notwithstanding anything to the contrary in this Agreement, INDUSTRY CONTRACTOR and AQ shall have the right to reject or terminate any AO for any reasons which do not constitute a violation of federal or state laws. INDUSTRY CONTRACTOR shall give notice and reasons of any adverse personnel action involving AOs to OPERATOR within fourteen (14) days of any such action. Further, INDUSTRY CONTRACTOR and AQ may increase or decrease work levels at the facilities to reflect fluctuations in orders. V. That the employment of AOs will not, to the knowledge of the INDUSTRY CONTRACTOR, result in the displacement of employed workers within South Central Florida, that the AOs will not be employed as strikebreakers or impair existing contracts at other industries wherever situated, and that the AOs will not be exploited in any form which might adversely affect the community, the AOs, CPC or the DOC. W. That the CPC, DOC, OPERATOR, and their employees or agents shall not be held liable for any damage to Industry Contractor or any third party arising from or related to any work stoppage or resident lock downs regardless of the reasons therefor. X. To protect, defend, indemnify and hold harmless the CPC, DOC, OPERATOR, and their employees or agents, from any liability claims and damages arising from or relating to this agreement unless such liability arises out of the negligence, recklessness, intentional or willful acts, or misconduct of the CPC, DOC, OPERATOR, or any of their employees or agents. Y To comply with all state and local license requirements and pay all local personal property taxes. Z. The INDUSTRY CONTRACTOR shall maintain insurance coverage for its equipment, supplies and materials located in the industries building against -7- 8 casualty occurrences. Further the INDUSTRY CONTRACTOR shall maintain liability insurance coverage on itself, its agents, servants and employees in an amount no less than $1,000,000 per occurrence for bodily injury and property damage liability combined. The INDUSTRY CONTRACTOR shall also maintain workers' compensation insurance on its employees in accordance with the laws of the State of Florida and the PIE Certification requirements. The INDUSTRY CONTRACTOR shall deliver to OPERATOR a duly authenticated certificate evidencing such insurance within sixty (60) days of execution of this agreement, and upon each insurance renewal date. AA. INDUSTRY CONTRACTOR shall indemnify and hold harmless OPERATOR and CPC from any and all liability arising out of or in connection with INDUSTRY CONTRACTOR'S use, production, storage, or disposal of any "hazardous materials" or "hazardous waste" hereinafter defined. OPERATOR shall have the right to inspect and approve all storage and disposal procedures. "HAZARDOUS MATERIAL" shall mean any substance which is or contains (i) any "hazardous substance" as now or hereafter defined in 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. 9601 et seq.) or any regulations promulgated under CERCLA; (ii) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq. ("RCRA") or regulations promulgated under RCRA; (iii) any substance regulated by the Toxic Substances Control Act (15 U.S.C. 2601 et seq.); (iv) gasoline, diesel fuel, or other petroleum hydrocarbons; (v) asbestos and asbestos containing materials, in any form, whether friable or non-friable; (vi) polychlorinated biphenyl's; (vii) radon gas: and any additional substances or materials which are now or hereafter classified or considered to be hazardous or toxic under Environmental Requirements (as hereinafter defined) or the common law, or any other applicable laws relating to the Property. "Hazardous waste" shall mean a solid waste, or combination of solid wastes, which because of its quantity, concentration, or physical, chemical, or infectious characteristics may (a) cause, or significantly contribute to an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness; or (b) pose a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported, or disposed of, or otherwise managed. 42 U.S.C. 6903, as amended. INDUSTRY CONTRACTOR shall be in compliance and current on all changes to the above-referenced statutes and shall immediately comply with any -8- 9 amendments to those sections or any statutes promulgated by the State of Florida. BB. Certificate of Good Standing. INDUSTRY CONTRACTOR shall, on an annual basis, deliver to OPERATOR a Certificate of Good Standing from the State of Florida Comptroller's Office that indicates that INDUSTRY CONTRACTOR is current on all taxes due. CC. ACA Assistance. Where ACA accreditation is being sought by OPERATOR, INDUSTRY CONTRACTOR shall comply with all ACA standards applicable to the Industry Program and shall collect and maintain the required documentation to assist OPERATOR to achieve and maintain accreditation. 6. OPERATOR'S OBLIGATIONS OPERATOR agrees to: A. Provide INDUSTRY CONTRACTOR with the AREA described in Section 3, and provide for project management and supervision for all improvements in the AREA and the installation of equipment. B. Provide orientation training regarding OPERATOR security procedures for INDUSTRY CONTRACTOR's staff, employees, and/or agents located at or regularly frequenting the Area. C. Provide all appropriate security for the AREA and other resident custody support. D. Use its best efforts, including making arrangement with correctional authorities for the relocation of AOs so that all available jobs are filled, to provide INDUSTRY CONTRACTOR with AO employees through OPERATOR's classification system in a timely manner. E. Serve as Trustee of resident employee payroll accounts and to apply the proceeds of such accounts in accordance with the terms of all-applicable Florida State laws, regulations, and contract provisions. F. Provide a mutually agreeable Vocational/Educational training tailored to INDUSTRY CONTRACTOR's and AQ's needs for initial pre-hire training through the OPERATOR's Vocational/Educational Program. After -9- 10 AO successfully completes the training, he will receive fourteen (14) days of on-the-job training before becoming eligible for hire. G. Assist in Hazcom Training of residents and INDUSTRY CONTRACTOR's employees utilizing course materials to be supplied by INDUSTRY CONTRACTOR. However, such assistance will not reduce, diminish or otherwise waive any legal liabilities, properly and legally the responsibility of INDUSTRY CONTRACTOR. 7. Contingencies and other Obligations This agreement shall be subject to only contingencies and additional obligations if agreed upon and in writing by OPERATOR and INDUSTRY CONTRACTOR. 8. Termination A. Either OPERATOR, INDUSTRY CONTRACTOR or AQ, in its exclusive discretion, may terminate its obligations under this agreement upon thirty (30) day's prior written notice to the others, provided, however, that if this Agreement is terminated by OPERATOR, that INDUSTRY CONTRACTOR and AQ shall be allowed one extension of up to six (6) months prior to the termination under this provision in order to obtain a new facility and relocate its equipment and operations thereto in an orderly and business-like manner. B. This agreement may be terminated or suspended on an immediate basis by OPERATOR if it shall have been advised by the DOC that its continuance would constitute a safety or security risk to inmates, employees, third parties, or the public or if CPC or DOC shall terminate all agreements with OPERATOR. C. In the event OPERATOR is terminated from its operations and management agreements with the DOC or the CPC to provide correctional services at either SBCF or MHCF, it will use its best efforts to assist INDUSTRY CONTRACTOR and AQ with help reasonably necessary to continue their operations with the DOC and the CPC. -10- 11 9. Default by INDUSTRY CONTRACTOR A material failure to keep, perform, meet or comply with any covenant, agreement, term or provision of this Agreement to be kept, observed, met, performed, or complied with by INDUSTRY CONTRACTOR hereunder, which such failure continues for a period of sixty (60) days after INDUSTRY CONTRACTOR has written notice thereof shall constitute an Event of Default on the part of INDUSTRY CONTRACTOR. INDUSTRY CONTRACTOR shall indemnify OPERATOR for all losses incurred by reason of not being able to conduct the contemplated activities at the Buildings. 10. Space Usage In the event that the INDUSTRY CONTRACTOR does not utilize the AREA in the most efficient manner to maximize work production and the number of resident employees to be employed, the OPERATOR may, in its discretion, remove from INDUSTRY CONTRACTOR'S use that amount of space in the Area not being utilized. In the event of this circumstance, OPERATOR shall give INDUSTRY CONTRACTOR written notice of its intention to reduce the workspace made available to INDUSTRY CONTRACTOR. INDUSTRY CONTRACTOR shall have ninety days after it has received written notice thereof to more efficiently utilize the space to be removed from it by OPERATOR, and at the same time, submit a plan to OPERATOR as to how that space will be more efficiently utilized. If after the ninety days, the INDUSTRY CONTRACTOR is still not utilizing the space in the most efficient manner in accordance with OPERATOR'S expectations, that space will be taken away from INDUSTRY CONTRACTOR and, in the discretion of the OPERATOR, made available to itself or other INDUSTRY CONTRACTORS. This provision of paragraph 11 shall apply only in the event that the INDUSTRY CONTRACTOR is unable to comply with Section 5; otherwise this Section 11 will not be applicable. 11. Default by OPERATOR A material failure to keep, perform, meet or comply with any covenant, agreement, term or provision of this Agreement to be kept, observed, met, performed, or complied with by OPERATOR hereunder, which such failure continues for a period of ten (10) days after OPERATOR has written notice thereof, shall constitute an Event of Default on the part of the OPERATOR, provided, however, that OPERATOR shall not be in default if it is taking all reasonable actions to comply with such agreement and that such compliance can be obtained in not more than thirty (30) days. OPERATOR shall indemnify INDUSTRY CONTRACTOR and AQ for all losses incurred by reason of not being able to conduct the contemplated activities at the Buildings. -11- 12 12. Original Agreement This Agreement may be executed in one or more separate counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 13. Complete Agreement This Agreement contains all of the terms and conditions agreed to by the parties involved. No other understandings, oral or otherwise, regarding the subject matter of this Agreement shall be deemed to exist or to be binding upon any party hereto. 14. Modifications This Agreement may not be modified, altered or amended except by written agreement executed by all the parties hereto. IN WITNESS WHEREOF, the parties hereto affix their respective authorization signatures effective the date first set forth above. Wackenhut Corrections Corporation U.S. Technologies Inc. (OPERATOR) (INDUSTRY CONTRACTOR) By: /s/ Patricia McNair Persante By: /s/ Greg Earls ---------------------------------- ------------------------------- Patricia McNair Persante Greg Earls Senior Vice President, Contracts President, Chairman and CEO Date: 10-19-99 Date: 10-21-99 -------------------------------- ----------------------------- American Quantum Cycles, Inc. (AQ) By: /s/ Gary W. Irving -------------------------------- Gary W. Irving Chief Operating Officer Date: 10-20-99 ----------------------------- -12- 13 ATTACHMENT A EQUIPMENT LIST FOR PHASE I
COST -------------- 1. Special, Sidedraft, Pressurized, Dry Filter Automotive Paint Spray Booth $ 48,604.00 2. Paint Mix Room Special Non-Pressurized Dry Filter Industrial $ 6,186.00 3. Production Paint Spray Booth $ 5,865.00 4. Optional Air Make Up Unit for Production Booth $ 5,199.00 5. Super-Slave Gel-Coat Dispensing Equipment $ 7,128.00 6. Hankinson Refrigerated Air Dryer $ 1,252.00 7. Haz-Vault Hazardous Material Storage Locker $ 11,810.00 8. Haz-Vault Options $ 7,405.00 9. Spray Equipment $ 1,776.00 10. Installation of Items 1,2,3, and 4 $ 13,200.00 TOTAL INVESTMENT BASED ON QUOTE FROM LEE PATTERSON CO. $ 108,425.00
EQUIPMENT REQUIRED FOR START-UP OF POLISHING STATION
Description Part Nos.* Qty. Unit Price - ----------- ---------- ---- ---------- Air Tools: 90 Degree Angle Die Grinder 3Y495 10 $ 381.00 $ 3,810.00 High-Speed Die Grinder 3Y489 10 $ 268.00 $ 2,680.00 Dual Action Orbital Sanders 52345 10 $ 263.00 $ 2,630.00 Belt Sanders 1/2 x 12 3Y493 5 $ 505.00 $ 2,525.00 Floor Mounted Polisher: Polisher 2Z341 10 $ 209.00 $ 2,090.00 Stands 4Z154 10 $ 80.00 $ 800.00 Polishing/tembler/deburr: 18 Lbs. Tumbler 6A898 2 $ 190.00 $ 380.00 45 Lbs. Tumbler 6A899 2 $ 374.00 $ 748.00 *All part numbers are out of Grainger TOTAL POLISHING INVESTMENT $ 15,663.00 GRAND TOTAL $ 124,088.00
-13- 14 MINIMUM AND MAXIMUM LABOR BY FUNCTIONAL AREA AND PRODUCTIVITY LEVEL (NUMBER OF BIKES/MONTH)
100 Bikes/Month 200 Bikes/Month 300 Bikes/Month ------------------------------------------------------ Paint Min Semi-Skilled Labor 4 8 13 MAX SEMI-SKILLED LABOR 15 30 50 Polishing Min Semi-Skilled Labor 3 5 8 MAX SEMI-SKILLED LABOR 10 20 30 Fiberglass Min Semi-Skilled Labor 3 5 8 MAX SEMI-SKILLED LABOR 10 20 30 Final Assembly Min Semi-Skilled Labor 13 26 39 MAX SEMI-SKILLED LABOR 52 104 156 Inventory Min Semi-Skilled Labor 3 6 9 MAX SEMI-SKILLED LABOR 12 24 36 ------------------------------------------------------ Quality Control Min Semi-Skilled Labor 3 6 9 MAX SEMI-SKILLED LABOR 12 24 36 Grand Total Min Semi-Skilled Labor 15 30 46 MAX SEMI-SKILLED LABOR 111 222 338
ATTACHMENT B -14- EX-10.20 9 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.20 STOCK PURCHASE AGREEMENT BY AND AMONG VIPRO CORPORATION, NORTHWOOD VENTURES, LLC, NORTHWOOD CAPITAL PARTNERS, LLC AND U.S. TECHNOLOGIES INC. MARCH 13, 2000 45 2 CONTENTS
Page ---- SECTION 1. AUTHORIZATION AND CLOSING. 1 ------------------------- 1A. Authorization of the Stock 1 -------------------------- 1B. Purchase and Sale of the Stock 1 ------------------------------ SECTION 2. CONDITIONS OF THE PURCHASERS' AND THE COMPANY'S CLOSING 2 ------------------------------------------------------ OBLIGATIONS ----------- 2A. Initial Closing--Conditions to Northwood's Obligation 2 ----------------------------------------------------- 2B. Second Closing--Conditions to USXX's Obligations 4 ------------------------------------------------ 2C. Initial Closing--Conditions to the Company's Obligations 6 ----------------------------------------------------- 2D. Second Closing--Conditions to the Company's Obligations 7 ----------------------------------------------------- SECTION 3. COVENANTS OF THE COMPANY. 8 ------------------------ 3A. Financial Statements and Other Information 8 ------------------------------------------ 3B. Inspection of Property 9 ---------------------- 3C. Restrictions 10 ------------ 3D. Affirmative Covenants 13 --------------------- 3E. Current Public Information 14 -------------------------- 3F. Public Disclosures 14 ------------------ 3G. Hart-Scott-Rodino Compliance 14 ---------------------------- SECTION 4. COVENANTS OF THE PURCHASERS. 15 --------------------------- 4A. Public Disclosure 15 ----------------- SECTION 5. TRANSFER OF RESTRICTED SECURITIES. 15 --------------------------------- SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. 15 --------------------------------------------- 6A. Organization and Corporate Power 15 -------------------------------- 6B. Capital Stock and Related Matters 16 --------------------------------- 6C. Registration Rights 17 ------------------- 6D. Authorization; No Breach 17 ------------------------ 6E. Subsidiaries; Investments 18 ------------------------- 6F. Tax Matters 18 ----------- 6G. Litigation, Etc. 19 ---------------- 6H. Brokerage 20 --------- 6I. Governmental Consent, Etc. 20 ------------------------- 6J. Financial Statements 20 -------------------- 6K. Title to Property and Assets; Contracts and Leases 20 -------------------------------------------------- 6L. Related-Party Transactions and Certain Actions 21 ---------------------------------------------- 6M. Employees; Employee Compensation 21 -------------------------------- 6N. Patents and Trademarks 22 ---------------------- 6O. Proprietary Information and Inventions Agreements 22 ------------------------------------------------- 6P. ERISA 22 -----
46 3 6Q. Compliance with Laws and Insurance 23 ---------------------------------- 6R. Minute Books 23 ------------ 6S. Business Plan 23 ------------- 6U. Real Property Holding Company 24 ----------------------------- SECTION 7. DEFINITIONS. 25 ----------- SECTION 8. MISCELLANEOUS 28 ------------- 8A. Expenses 28 -------- 8B. Remedies 28 -------- 8C. Purchaser's Investment Representations 29 -------------------------------------- 8D. Consent to Amendments 30 --------------------- 8E. Survival of Representations and Warranties 30 ------------------------------------------ 8F. Indemnification 31 --------------- 8G. Successors and Assigns 32 ---------------------- 8H. Generally Accepted Accounting Principles 32 ---------------------------------------- 8I. Severability 33 ------------ 8J. Counterparts 33 ------------ 8K. Descriptive Headings; Interpretation 33 ------------------------------------ 8L. Governing Law 33 ------------- 8M. Notices 33 ------- 8N. Rights 35 ------ 8O. Amendments 35 ---------- Schedule 1 -- Purchase Schedule Schedule 2 -- Schedule of Exceptions Exhibit A -- Certificate of Designation Exhibit A-1 -- Certificate of Incorporation Exhibit B -- Bylaws Exhibit C -- Registration Rights Agreement Exhibit D-1 -- Stockholders' Agreement Exhibit E-1 -- Legal Opinion Exhibit F-1 -- Business Plan Exhibit F-2 -- Financial Information
47 4 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (this "AGREEMENT") is made as of March 13, 2000, by and among VIPRO CORPORATION, a Delaware corporation (the "COMPANY"), Northwood Ventures LLC, a New York limited liability company ("NORTHWOOD VENTURES"), Northwood Capital Partners, LLC, a New York limited liability company ("NORTHWOOD CAPITAL") and U.S. Technologies Inc., a Delaware corporation ("USXX"). Northwood Ventures and Northwood Capital are collectively referred to herein as "NORTHWOOD." Northwood and USXX are sometimes collectively referred to herein as the "PURCHASERS" and individually as a "PURCHASER". Except as otherwise indicated herein, capitalized terms used herein are defined in Section 7 hereof. In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement, intending to be legally bound, hereby agree as follows: SECTION 1. AUTHORIZATION AND CLOSING. 1A. AUTHORIZATION OF THE STOCK. The Company shall authorize the issuance and sale to the Purchasers of up to 1,043,552 shares of its Series B Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"), having the rights and preferences set forth on the form of Certificate of Designation attached hereto as Exhibit A (the "Certificate of Designation"). 1B. PURCHASE AND SALE OF THE STOCK (i) Subject to the terms and conditions of this Agreement, the Company agrees to sell to Northwood, and Northwood agrees to purchase from the Company a total of 521,776 shares of Preferred Stock at a price of $1.91653 per share, and the Company agrees to sell to USXX and/or any of its controlled Affiliates, and USXX and/or any of its controlled Affiliates agrees to purchase from the Company a total of 521,776 shares of Preferred Stock at a price of $1.91653 per share. Such shares of Preferred Stock shall be purchased in two separate closings subject to the conditions set forth in this Agreement. (ii) At the initial closing of the purchase and sale of the Preferred Stock pursuant hereto (the "Initial Closing"), the Company shall sell to Northwood Ventures and, subject to the terms and conditions set forth herein, Northwood Ventures shall purchase from the Company, 469,598 shares of Preferred Stock at a price of $1.91653 per share; provided, however, that the total purchase price payable by Northwood Ventures at the Initial Closing for the Preferred Stock shall be reduced by the unpaid principal amount of the Northwood Note, and -i- 5 any accrued interest thereon, as of the Initial Closing Date. The Company shall also sell to Northwood Capital at the Initial Closing and, subject to the terms and conditions set forth herein, Northwood Capital shall purchase from the Company 52,178 shares of Preferred Stock at a price of $1.91653 per share. The Initial Closing shall take place at the offices of Fleischman and Walsh, L.L.P., 1400 Sixteenth Street, N.W., Washington, D.C. 20036 at 10:00 a.m. no later than the third business day after the date that all of the conditions set forth in Section 2A have been satisfied or waived, or such other date as may be agreed upon by the parties in writing (the "INITIAL CLOSING DATE"). At the Initial Closing, in connection with the purchase and sale of the Preferred Stock pursuant hereto, the Company shall deliver to each of Northwood Ventures and Northwood Capital stock certificates evidencing the Preferred Stock purchased at the Initial Closing by such entity, registered in such entity's name, upon payment of the purchase price thereof by check or wire transfer of immediately available funds to such account as is designated by the Company. (iii) At the second closing of the purchase and sale of the Preferred Stock pursuant hereto (the "Second Closing"), the Company shall sell to USXX and/or any of its controlled Affiliates and, subject to the terms and conditions set forth herein and on the Purchase Schedule, USXX and/or any of its controlled Affiliates shall have the right to purchase from the Company a total of 521,776 shares of Preferred Stock at a price of $1.91653 per share (as adjusted from time to time as a result of stock dividends, stock splits, recapitalizations, and similar events); provided, however, that the total purchase price payable by USXX at the Second Closing shall be reduced by $50,000. USXX shall have no right or obligation to purchase such shares of Preferred Stock after April 12, 2000. Such purchase of the Preferred Stock shall be made by USXX and/or any of its controlled Affiliates at such time (the "SECOND CLOSING DATE") and subject to the conditions set forth on the Purchase Schedule attached hereto as Schedule 1. The delivery of the Preferred Stock purchased by USXX and/or any of its controlled Affiliates hereunder and the payment therefor shall otherwise be made in the same manner as set forth in Section 1B(ii). SECTION 2. CONDITIONS OF THE PURCHASERS' AND THE COMPANY'S CLOSING OBLIGATIONS. 2A. INITIAL CLOSING--CONDITIONS TO NORTHWOOD'S OBLIGATIONS. The obligation of Northwood to purchase and pay for the Preferred Stock at the Initial Closing is subject to Northwood's satisfaction as of the Initial Closing Date of the following conditions: (I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties contained in Section 6 and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto shall be true and correct at and as of the Initial Closing Date in all material respects as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and except for those representations and warranties that are made by their terms as of a date specified herein which shall be true and correct in all material respects as of such specified date, and the Company shall have performed -2- 6 in all material respects all of the covenants required to be performed by it hereunder prior to the Initial Closing Date. (II) CERTIFICATE OF INCORPORATION; BYLAWS. The Company's Certificate of Incorporation, together with all amendments thereto, and any other certificates of designation or other similar documents or instruments filed with the Secretary of State of Delaware shall be in the form and substance set forth in Exhibit A-1 hereto, shall be in full force and effect under the laws of the state of Delaware as of the Initial Closing Date and shall not have been amended or modified, except as provided in the Certificate of Designation which shall be filed with the Delaware Secretary of State on or before the Initial Closing Date. The Company's bylaws (the "BYLAWS") shall be in the form and substance set forth in Exhibit B hereto, shall be in full force and effect under the laws of the State of Delaware as of the Initial Closing Date, and shall not have been amended or modified. (III) REGISTRATION AGREEMENT. The Company and Northwood shall have entered into a registration rights agreement in form and substance set forth in Exhibit C attached hereto (the "REGISTRATION AGREEMENT"). (IV) STOCKHOLDERS' AGREEMENT. The Company and each of its stockholders immediately prior to the Initial Closing Date shall have terminated each and every stockholders agreement or (similar arrangement) in effect immediately prior to the Initial Closing Date. The Company, Northwood and each of the Company's other stockholders shall have entered into a stockholders agreement in form and substance set forth in Exhibit D-1 attached hereto (the "STOCKHOLDERS' AGREEMENT"). (V) CONSENTS AND APPROVALS. The Company shall have received or obtained all third-party and governmental and regulatory consents and approvals necessary for the consummation of the transactions contemplated hereby. (VI) COMPLIANCE WITH APPLICABLE LAWS. The purchase of Preferred Stock by Northwood hereunder shall not be prohibited by any applicable law or governmental regulation, shall not subject Northwood to any penalty, liability or, in the reasonable judgment of Northwood, other onerous conditions under any governmental approval or consent obtained in connection with the transactions contemplated hereby, and shall be permitted by laws and regulations of the jurisdictions to which Northwood is subject. (VII) DUE DILIGENCE. Northwood shall have completed its due diligence review of the Company and found nothing, in its reasonable sole discretion, that is objectionable to Northwood. (VIII) LEGAL OPINION. Northwood shall have been furnished with a legal opinion in the form of Exhibit E-1 attached hereto (the "LEGAL OPINION"). -3- 7 (IX) CLOSING DOCUMENTS. The Company shall have delivered to Northwood all of the following documents: (a) an Officer's Certificate, dated the Initial Closing Date, stating that the conditions specified in Sections 2A(i) through 2A(vi), inclusive, have been fully satisfied; (b) the Legal Opinion specified in Section 2A(viii) hereof; (c) certified copies of the resolutions duly adopted by the Company's board of directors (its "BOARD") authorizing the execution, delivery, and performance of this Agreement, the Registration Agreement, the Stockholders' Agreement and each of the other agreements contemplated hereby in connection with the Initial Closing, the filing of the Certificate of Designation, the issuance and sale of the Preferred Stock and the consummation of all other transactions contemplated by this Agreement in connection with the Initial Closing; (d) certified copies of (1) the Certificate of Incorporation (including the Certificate of Designation); and (2) the Company's Bylaws, each as in effect on the Initial Closing Date; and (e) such other documents relating to the transactions contemplated hereby as Northwood or its counsel may reasonably request. Any condition specified in this Section 2A may be waived only if such waiver is set forth in a writing executed by Northwood. 2B. SECOND CLOSING--CONDITIONS TO USXX'S OBLIGATIONs. The obligation of USXX to purchase and pay for the Preferred Stock at the Second Closing is subject to USXX's satisfaction as of the Second Closing of the following conditions: (I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties contained in Section 6 and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto shall be true and correct at and as of the Second Closing Date in all material respects as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and except for those representations and warranties that are made by their terms as of a date specified herein which shall be true and correct in all material respects as of such specified date, and the Company shall have performed in all material respects all of the covenants required to be performed by it hereunder prior to the Second Closing Date. To the extent required to satisfy the condition set forth in this Section 2B(i), the Company shall have provided USXX with an updated Schedule of Exceptions that is accurate and complete as of the Second Closing Date; provided that if such updated Schedule of Exceptions reflects any material adverse change in the business (including business prospects), financial condition or results of operations of the Company, USXX shall have the right to -4- 8 consider such change a material breach of the Company's representations and warranties hereunder with respect to the Second Closing, with its sole remedy being that it shall have no obligation to purchase any Preferred Stock at the Second Closing. (II) CERTIFICATE OF INCORPORATION; BYLAWS. The Company's Certificate of Incorporation, together with all amendments thereto, and any other certificates of designation or other similar documents or instruments filed with the Secretary of State of Delaware shall be in the form and substance set forth in Exhibits A and A-1 hereto, shall be in full force and effect under the laws of the state of Delaware as of the Second Closing Date and shall not have been amended or modified. The Company's bylaws (the "BYLAWS") shall be in the form and substance set forth in Exhibit B hereto, shall be in full force and effect under the laws of the State of Delaware as of the Second Closing Date, and shall not have been amended or modified. (III) REGISTRATION AGREEMENT. The Company and USXX and/or any of its Affiliates purchasing Preferred Stock hereunder shall have entered into the Registration Agreement, which shall not have been amended or modified, and shall be in full force and effect as of the Second Closing Date. (IV) STOCKHOLDERS' AGREEMENT. The Company, each of the Company's other stockholders and USXX and/or any of its Affiliates purchasing Preferred Stock hereunder shall have entered into the Stockholders' Agreement, which shall not have been amended or modified, and shall be in full force and effect as of the Second Closing Date. (V) CONSENTS AND APPROVALS. The Company shall have received or obtained all third-party and governmental and regulatory consents and approvals necessary for the consummation of the transactions contemplated hereby. (VI) COMPLIANCE WITH APPLICABLE LAWS. The purchase of Preferred Stock by USXX and/or any of its Affiliates at the Second Closing hereunder shall not be prohibited by any applicable law or governmental regulation, shall not subject USXX and any of its Affiliates purchasing Preferred Stock hereunder to any penalty, liability or, in the reasonable judgment of USXX, other onerous conditions under any governmental approval or consent obtained in connection with the transactions contemplated hereby, and shall be permitted by laws and regulations of the jurisdictions to which USXX and any of its Affiliates purchasing Preferred Stock hereunder is subject. (VII) DUE DILIGENCE. USXX shall have completed any additional due diligence review of the Company and found nothing, in its reasonable sole discretion, that is objectionable to USXX. (VIII) LEGAL OPINION. USXX shall have been furnished with a legal opinion in the form of Exhibit E-1 attached hereto. -5- 9 (IX) CLOSING DOCUMENTS. The Company shall have delivered to USXX all of the following documents: (a) an Officer's Certificate, dated the Second Closing Date, stating that the conditions specified in Sections 2B(i) through 2B(vi), inclusive, have been fully satisfied; (b) the Legal Opinion specified in Section 2B(viii) hereof; (c) certified copies of the resolutions duly adopted by the Company's Board authorizing the execution, delivery, and performance of the Registration Agreement, the Stockholders' Agreement and each of the other agreements contemplated hereby in connection with the Second Closing, the issuance and sale of the Preferred Stock and the consummation of all other transactions contemplated by this Agreement in connection with the Second Closing; (d) certified copies of (1) the Certificate of Incorporation (including the Certificate of Designation); and (2) the Company's Bylaws, each as in effect on the Second Closing Date; and (e) such other documents relating to the transactions contemplated hereby as USXX or its counsel may reasonably request. Any condition specified in this Section 2B may be waived only if such waiver is set forth in a writing executed by USXX. 2C. INITIAL CLOSING--CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligation of the Company to issue Preferred Stock to Northwood at the Initial Closing is subject to the Company's satisfaction as of the Initial Closing of the following conditions: (I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of Northwood contained in Section 8C hereof in respect of the Initial Closing shall be true and correct at and as of the Initial Closing Date as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and Northwood shall have performed all of the covenants in respect of the Initial Closing required to be performed by Northwood at or prior to the Initial Closing Date. (II) PAYMENT OF PURCHASE PRICE. Northwood shall have paid by the Initial Closing Date the purchase price for the Preferred Stock to be purchased by it at the Initial Closing. (III) STOCKHOLDERS' AGREEMENT. Northwood shall have executed and delivered to the Company the Stockholders' Agreement. -6- 10 (IV) REGISTRATION AGREEMENT. Northwood shall have executed and delivered to the Company the Registration Agreement. 2D. SECOND CLOSING--CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligation of the Company to issue Preferred Stock to USXX and/or any of its Affiliates at the Second Closing is subject to the Company's satisfaction as of the Second Closing of the following conditions: (I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of USXX contained in Section 8C hereof in respect of the Second Closing shall be true and correct at and as of the Second Closing Date as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and USXX shall have performed all of the covenants in respect of the Second Closing required to be performed by USXX hereunder at or prior to the Second Closing Date. (II) PAYMENT OF PURCHASE PRICE. USXX and/or any of its Affiliates purchasing Preferred Stock hereunder shall have paid by the Second Closing the purchase price for the Preferred Stock to be purchased by it at the Second Closing, as provided on the Purchase Schedule. (III) STOCKHOLDERS' AGREEMENT. USXX shall have executed and delivered to the Company the Stockholders' Agreement. (IV) REGISTRATION AGREEMENT. USXX shall have executed and delivered to the Company the Registration Agreement. -7- 11 SECTION 3. COVENANTS OF THE COMPANY. Until such time as the Company has completed a Qualified Public Offering: 3A. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall deliver to each holder of at least twenty percent (20%) of the Purchaser Preferred and each holder of at least twenty percent (20%) of the Purchaser Common: (i) as soon as available but in any event within forty-five (45) days after the end of each quarterly accounting period in each fiscal year, unaudited consolidating and consolidated statements of income and cash flows of the Company and its Subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and consolidating and consolidated balance sheets of the Company and its Subsidiaries as of the end of such quarterly period, all prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments; (ii) accompanying the financial statements referred to in Section 3A(i), an Officer's Certificate stating that neither the Company nor any of its Subsidiaries is in default under any of its material agreements or, if any such default exists, specifying the nature and period of existence thereof and what actions the Company and its Subsidiaries have taken and propose to take with respect thereto; (iii) within ninety (90) days after the end of each fiscal year, audited consolidating and consolidated statements of income and cash flows of the Company and its Subsidiaries for such fiscal year, and audited consolidating and consolidated balance sheets of the Company and its Subsidiaries as of the end of such fiscal year, setting forth in each case comparisons to the annual budget and to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by: (a) with respect to the consolidated portions of such statements (except with respect to budget data), an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized standing selected by the Company and reasonably acceptable to the Purchaser; and (b) a copy of such firm's annual management letter to the Board; (iv) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations or financial affairs given to the Company by its independent accountants (and not otherwise contained in other materials provided hereunder); (v) at least thirty (30) days before the beginning of each fiscal year, an annual budget prepared on a monthly basis for the Company and its Subsidiaries for such fiscal year (displaying anticipated statements of income and cash flows), and promptly upon preparation thereof any other significant budgets prepared by the Company and any revisions of such annual -8- 12 or other budgets, and within thirty (30) days after any monthly period in which there is a material adverse deviation from the annual budget, an Officer's Certificate explaining the deviation and what actions the Company has taken and proposes to take with respect thereto; provided that the budget for the fiscal year ending December 31, 2000 shall not be due until March 1, 2000; and (vi) with reasonable promptness, such other information and financial data concerning the Company and its Subsidiaries, regularly prepared by the management of the Company or otherwise available without significant cost or effort, as any Person entitled to receive information under this Section 3A may reasonably request. Each of the financial statements referred to in Sections 3A(i) and (iii) shall be consistent with the books and records of the Company (which in turn shall be accurate and complete in all material respects) and in accordance with generally accepted accounting principles applied on a consistent basis and shall present fairly the financial condition and results of operation of the Company and its Subsidiaries as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company and its Subsidiaries taken as a whole). In addition to the information to be delivered to certain holders of the Purchaser Stock specified in this Section 3A, the Company shall deliver to the Board and the Purchasers promptly (but in any event within ten (10) business days) after the discovery or receipt of notice of any default under any material agreement to which the Company or any of its Subsidiaries is a party or any other event or circumstance affecting the Company or any of its Subsidiaries which is reasonably likely to have a material adverse effect on the financial condition, operating results, assets, operations, or business prospects of the Company or any of its Subsidiaries (including the filing of any material litigation against the Company or any of its Subsidiaries or the existence of any material dispute with any Person which involves a reasonable likelihood of such litigation being commenced), an Officer's Certificate specifying the nature and period of existence thereof and what actions the Company and its Subsidiaries have taken and propose to take with respect thereto. 3B. INSPECTION OF PROPERTY. The Company shall permit each holder of at least 20% of the Purchaser Preferred, or the representatives of any such Person, upon reasonable notice and during normal business hours and such other times as any such holder may reasonably request, to: (i) visit and inspect any of the properties of the Company and its Subsidiaries; (ii) examine the corporate and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom; and (iii) discuss the affairs, finances, and accounts of any such corporations with the directors, officers, key employees, and independent accountants of the Company and its Subsidiaries; provided that the Company shall have the right to have its chief financial officer present at any meetings with the Company's independent accountants. -9- 13 3C. RESTRICTIONS. (i) So long as a Qualified Public Offering has not been consummated and the Purchasers and/or their Affiliates collectively own of record or beneficially at least 10% of the outstanding Common Stock (giving effect to the Purchaser Preferred on an as converted basis) without the prior written consent of the Northwood Representative and the USXX Representative (as such terms are defined in the Stockholders' Agreement), the Company shall not and shall not commit to: (a) directly or indirectly declare or pay any dividends, other than from earnings, or make any distributions upon any of its equity securities, other than payments of dividends on, or redemption payments in respect of, or in connection with the conversion of, the Preferred Stock pursuant to the Certificate of Designation; (b) permit any Subsidiary to accomplish that which the Company can not accomplish without prior written consent of one of the Investor's Representative pursuant to this 3C(i); (c) except as set forth on Schedule 3C hereto or as expressly contemplated by this Agreement or the Employment Agreement entered into between the Company and Bernard Brenner, the CEO of the Company (the "Brenner Employment Agreement"), authorize, issue, sell, or enter into any agreement providing for the issuance (contingent or otherwise), or permit any of its Subsidiaries to authorize, issue, sell, or enter into any agreement providing for the issuance (contingent or otherwise) of any equity securities or debt securities with equity features or securities exercisable or convertible into equity securities or debt securities with equity features to the Founders; (d) effect or permit any of its Subsidiaries to effect any consolidation or merger of the Company with or into any other corporation (other than a wholly-owned Subsidiary) or other entity or person (other than for the purpose of reincorporating the Company in another jurisdiction), any share exchange with another entity or any other corporate reorganization, in which the Stockholders' of the Company immediately prior to such consolidation, merger, share exchange, or reorganization own less than 50% of the resulting corporation's voting power immediately after such consolidation, merger, share exchange, or reorganization, or any transaction or series of related transactions in which in excess of 50% of the Company's voting power is transferred; (e) sell, lease, or otherwise dispose of, or permit any of its Subsidiaries to sell, lease, or otherwise dispose of, more than twenty percent (20%) of the consolidated assets of the Company and its Subsidiaries (computed on the basis of book value, determined in accordance with generally accepted accounting principles consistently applied, or fair market value, determined by the Board in its reasonable good faith judgment) in any transaction or series of related transactions (other than sales of inventory in the ordinary course of business); -10- 14 (f) liquidate, dissolve, or effect, or permit any of its Material Subsidiaries to liquidate, dissolve, or effect, a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization into partnership form); (g) materially change the businesses or activities in which the Company and its Subsidiaries were engaged on the date of this Agreement; (h) make, or permit any of its Subsidiaries to make, any loans or advances to, guarantees for the benefit of, or Investments in, any Person (other than a wholly-owned Subsidiary), except for: (a) reasonable advances to employees in the ordinary course of business; (b) Investments having a stated maturity no greater than one year from the date the Company makes such Investment in (1) obligations of the United States government or any agency thereof or obligations guaranteed by the United States government, (2) certificates of deposit of commercial banks having combined capital and surplus of at least $50 million or (3) commercial paper with a rating of at least "Prime-1" by Moody's Investors Service, Inc.; and (c) those that have been made in the ordinary course of business; (i) except as expressly contemplated by this Agreement, make any amendment to the Certificate of Incorporation (including the Certificate of Designation) or the Company's Bylaws, or file any resolution of the Board or certificate of designation with the Secretary of State of Delaware; (j) make any material capital expenditures above the amounts set forth therefor in the annual budget (including, without limitation, payments with respect to capitalized leases, as determined in accordance with generally accepted accounting principles consistently applied); (k) terminate, suspend, promote or demote either of Bernard Brenner or James Basara; (l) enter into, or cause any Subsidiary to enter into, any agreement which would restrict the Company's or any of its Subsidiaries' right or ability to perform the provisions of this Agreement or to conduct its business as currently conducted; or (m) issue any stock options or increase the salary, bonus or other employee benefits of the Founders; it being acknowledged and agreed that Bernard Brenner will be entitled to a maximum base salary, bonuses and other employee benefits as provided in the Brenner Employment Agreement. (ii) So long as a Qualified Public Offering has not been consummated and the Purchasers and/or their Affiliates collectively own of record or beneficially at least 10% of the -11- 15 outstanding Common Stock (giving effect to the Purchaser Preferred on an as converted basis) without the approval of the majority of the Board; the Company shall not and shall not commit to: (a) directly or indirectly declare or pay any dividends on earnings; (b) except as expressly contemplated by this Agreement, authorize, issue, sell, or enter into any agreement providing for the issuance (contingent or otherwise), or permit any of its Subsidiaries to authorize, issue, sell, or enter into any agreement providing for the issuance (contingent or otherwise) of any equity securities or debt securities with equity features or securities exercisable or convertible into equity securities or debt securities with equity features; (c) enter into, amend, modify, or supplement or permit any of its Subsidiaries to enter into, amend, modify, or supplement any agreement, transaction, commitment, or arrangement with any of its or any of its Subsidiaries' officers, directors, advisory board members, employees, or Affiliates or any individual related by blood, marriage, or adoption to any such Person (a "RELATIVE") or any entity in which any such Person or individual owns a beneficial interest (a "RELATED ENTITY"), except for normal and customary employment arrangements and benefit programs on reasonable terms that have been previously approved by the holders of a majority of the outstanding Purchaser Stock and except as otherwise expressly contemplated by this Agreement; (d) create, incur, assume, or suffer to exist, or permit any of its Subsidiaries to create, incur, assume, or suffer to exist, Indebtedness or other non-ordinary course liabilities exceeding the greater of $100,000 or amounts approved therefor by the Board and the holders of a majority of the outstanding Purchaser Stock in the annual budget; (e) hire, terminate, suspend, promote or demote any member of the Company's senior management team or the senior management team of any of its Material Subsidiaries; (f) approve any business plan or annual budget of the Company or any of its Subsidiaries for any fiscal year; (g) change its fiscal year, which shall end on December 31; or (h) except pursuant to this Agreement, directly or indirectly redeem, purchase, or otherwise acquire, or permit any of its Subsidiaries to redeem, purchase, or otherwise acquire, any of the Company's or any Subsidiary's equity securities (including, without limitation, warrants, options, and other rights to acquire equity securities) excluding redemptions of or conversion of the Preferred Stock in accordance with the terms of the Certificate of Incorporation. -12- 16 3D. AFFIRMATIVE COVENANTS. Unless the Company obtains the prior written consent of the holders of a majority of the then-outstanding Purchaser Preferred and Purchaser Common, the Company shall, and shall cause each Subsidiary to: (i) comply with all applicable laws, rules, and regulations of all governmental authorities, the violation of which would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations, or business prospects of the Company and its Subsidiaries taken as a whole, and pay and discharge when payable all Taxes, assessments, and governmental charges (except to the extent the same are being contested in good faith and adequate reserves therefor have been established); (ii) enter into and maintain appropriate (as determined by the Board) non-disclosure, noncompete, and non-solicitation agreements with its employees; (iii) cause any agreement entered into by the Company or any Subsidiary after the date hereof which provides for the sale of capital stock of the Company (or the capital stock of any Subsidiary of the Company) to, or employment of, a senior management or junior management employee to be in form and substance substantially similar to the draft of such agreement previously approved by the Purchasers prior to execution; (iv) within 90 days of the date of the Initial Closing use its best efforts to obtain from financially sound and reputable insurers (A) term life insurance on the life of Bernard Brenner in the amount of $1,000,000, (B) fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed and (C) products liability and errors and omissions insurance in amounts customary for companies similarly situated; and the Company shall maintain such insurance in accordance with commercially reasonable standards; each such policy shall name the Company as loss payee; and such insurance shall not be cancelable by the Company without the approval of the Purchasers; (v) refrain from adopting any stock option plan for employees, consultants and/or directors other than the Company's existing stock option plan providing for the issuance of up to 1,037,612 shares of Common Stock (such existing plan being herein referred to as an "EMPLOYEE STOCK OPTION PLAN"); (vi) refrain from of issuing any equity or debt securities of the Company or any subscriptions, warrants, options, convertible securities, or other rights (contingent or other) to purchase or otherwise acquire equity securities of the Company other than (A) Employee Stock Options; (B) up to 1,000,000 shares of Common Stock to be issued by the Company in connection with its private placement to be completed after the date of this Agreement; and (C) the Company's Common Stock to be issued to Sideout Technologies, Inc. ("Sideout") as partial payment for Sideout's web development services actually performed for the Company provided that (1) the total number of shares of Common Stock to be issued to Sideout shall not exceed an -13- 17 aggregate value of $100,000 and (2) the price per share of the Common Stock to be issued to Sideout shall be established by the Board on the basis of the fair market value of the Common Stock on each date of issuance. 3E. CURRENT PUBLIC INFORMATION. At all times after the Company has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities Exchange Act, the Company shall file all reports required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action as any holder or holders of Restricted Securities may reasonably request, all to the extent required to enable: (i) such holders to sell Restricted Securities pursuant to Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission; or (ii) the Company to be eligible to register its securities pursuant to a registration statement on Form S-2 or S-3 or any similar registration form hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to any holder of Restricted Securities a written statement as to whether it has complied with such requirements. 3F. PUBLIC DISCLOSURES. The Company shall not, nor shall it permit any of its Subsidiaries or other Affiliates to, disclose any Purchaser's (or its Affiliates') name or identity as an investor in the Company in any press release or other public announcement or in any document or material filed with any governmental entity, without the prior written consent of such Purchaser, unless such disclosure is required by applicable law or governmental regulations or by order of a court of competent jurisdiction, in which case, before making such disclosure the Company shall give written notice to such Purchaser describing in reasonable detail the proposed content of such disclosure and shall permit such Purchaser to review and comment upon the form and substance of such disclosure. 3G. HART-SCOTT-RODINO COMPLIANCE. In connection with any transaction in which the Company, or any Subsidiary, is involved which is required to be reported under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to time (the "HSR ACT"), the Company, or any such Subsidiary, shall prepare and file all documents with the Federal Trade Commission and the United States Department of Justice which may be required to comply with the HSR Act, and shall promptly furnish all materials thereafter requested by any of the regulatory agencies having jurisdiction over such filings, in connection with the transactions contemplated thereby. The Company, or any such Subsidiary, shall take all reasonable actions and shall file and use reasonable best efforts to have declared effective or approved all documents and notifications with any governmental or regulatory bodies, as may be necessary or may reasonably be requested under federal antitrust laws for the consummation of the subject transaction. -14- 18 SECTION 4. COVENANTS OF THE PURCHASERS. 4A. PUBLIC DISCLOSURE. The Purchasers shall consult with the Company before issuing any press release or otherwise making any public statement or making any other non-confidential disclosure (whether or not in response to any inquiry) regarding the existence or terms of this Agreement and no Purchaser shall issue any such press release or make any such statement or disclosure without the prior approval of the Company (which approval shall not be unreasonably withheld), including such press releases, statements or disclosures as may be required by law. In addition, no Purchaser shall issue any public statement or make any other non-confidential disclosure regarding the existence or terms of any agreement the Company has with any third party without the written approval of the Company (which approval shall not be unreasonably withheld). SECTION 5. TRANSFER OF RESTRICTED SECURITIES. Each Purchaser acknowledges that the Restricted Securities are transferable only pursuant to: (a) public offerings registered under the Securities Act and applicable state law; (b) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule or rules are available; and (c) any other legally available means of transfer. In connection with the transfer of any Restricted Securities (other than a transfer described in clauses (a) or (b) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer. In connection with the transfer of any Restricted Securities (other than a transfer described in clause (a) above), the holder thereof shall deliver to the Company an opinion of counsel reasonably satisfactory to the Company that registration thereof under the Securities Act and applicable state law is not required. In addition, upon the request of a Purchaser, the Company shall promptly supply to such Purchaser or its prospective transferees all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144A of the Securities and Exchange Commission. SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a material inducement to the Purchasers to enter into this Agreement and purchase the Preferred Stock, the Company hereby represents and warrants to (1) Northwood that as of the date of this Agreement and (2) USXX that as of the date of this Agreement, except as set forth on the Schedule of Exceptions attached hereto as Schedule 2 and furnished to the Purchasers or, as applicable, USXX (with respect to the Second Closing), specifically identifying the relevant subparagraph(s) hereof: 6A. ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and is qualified to do business in every jurisdiction in which the failure to so qualify might reasonably be expected to have a material adverse effect on the financial condition, operating results, assets, operations, or business prospects of the Company and its Subsidiaries taken as a whole. The -15- 19 Company has all requisite corporate power and authority and all material licenses, permits, and authorizations necessary to own and operate its properties, to carry on its businesses as now conducted and presently proposed to be conducted, and to carry out the transactions contemplated by this Agreement. The copies of the Company's Certificate of Incorporation and Bylaws, and the copies of the charters and bylaws (or other similar organizational documents) of each Subsidiary of the Company, which have been furnished to each Purchaser, reflect all amendments made thereto at any time before the date on which said documents were furnished to each Purchaser and are correct and complete. 6B. CAPITAL STOCK AND RELATED MATTERS. (i) The authorized capital stock of the Company consists of 16,000,000 shares of capital stock. 4,000,000 shares are designated as preferred stock, par value $.01 per share, of which 1,000,000 are designated Series A Convertible Preferred Stock, par value $.01 per share ("Series A Preferred Stock"). 12,000,000 shares are designated as Common Stock par value $.01 per share. Immediately prior to the Initial Closing, the Company had 4,000,000 shares of Common Stock issued and outstanding, and 857,413 shares of Series A Preferred Stock issued and outstanding. Except for (i) such issued and outstanding shares and (ii) the conversion privileges of the Series A Preferred Stock and the Preferred Stock, the Company does not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor does it have outstanding any rights, arrangements or options to subscribe for, receive or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans other than pursuant to, and as contemplated by, this Agreement. No stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities of the Company or rights to purchase equity securities of the Company provides for acceleration or other changes in the vesting provisions or other terms of such securities, as the result of any merger, sale of stock or assets, change in control or other similar transaction by the Company. The Company is not now and is not to be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options, or other rights to acquire its capital stock, except pursuant to this Agreement and the Stock Purchase Agreement, dated October 7, 1999, by and among the Company and the holders of the Series A Preferred Stock. All of the outstanding shares of the Company's capital stock are validly issued, fully paid, and nonassessable. Provided that the purchase price set forth herein for the Purchaser Stock is paid to the Company as provided herein, all shares of Purchaser Stock will be validly issued, fully paid and nonassessable when issued by the Company in accordance with the terms hereof. (ii) There are no statutory or contractual stockholders preemptive rights or rights of refusal with respect to the issuance of any of the Purchaser Stock hereunder, except as expressly provided herein, and as expressly provided in the Stockholders' Agreement and the Registration Agreement. All shares of the Company's capital stock and other securities issued by the Company have been issued in transactions exempt from registration under the Securities Act and applicable state securities or "blue sky" laws, and the offer, sale and issuance of said -16- 20 capital stock and other securities has not violated any applicable federal or state securities laws. Based in part on truth and accuracy the investment representations of the Purchasers in Section 8C hereof, the offer, sale, or issuance of the Purchaser Stock hereunder will not require registration under the Securities Act or any applicable state securities laws. Except for the Stockholders' Agreement and the Registration Agreement, there are no agreements between the Company's stockholders with respect to the voting or transfer of the Company's capital stock or with respect to any other aspect of the management of the Company's affairs. 6C. REGISTRATION RIGHTS. Except as provided in the Registration Agreement, the Company is not presently under any obligation and has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may be subsequently issued. 6D. AUTHORIZATION; NO BREACH. The execution, delivery, and performance of this Agreement, the Registration Agreement, the Stockholders' Agreement and all other agreements contemplated hereby in connection with the Initial Closing to which the Company will enter into on the Initial Closing Date and the filing of the Certificate of Designation have been duly authorized by the Company. The execution, delivery, and performance of all of the agreements contemplated hereby in connection with the Second Closing to which the Company will enter into on the Second Closing Date will have been duly authorized by the Company as of the Second Closing Date. Each of this Agreement, the Registration Agreement, the Stockholders' Agreement, the Certificate of Designation, and each other agreement contemplated hereby to which the Company will enter into in connection with the Initial Closing constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. All other agreements contemplated hereby to which the Company will enter into in connection with the Second Closing will each constitute a valid and binding obligation of the Company, enforceable in accordance with its terms. The execution and delivery by the Company of this Agreement, the Registration Agreement, the Stockholders' Agreement and all other agreements contemplated hereby in connection with the Initial Closing which the Company will enter into on the Initial Closing Date, the offering, sale, and issuance of the Purchaser Preferred hereunder, the filing of the Certificate of Designation contemplated herein and the fulfillment of and compliance with the -17- 21 respective terms hereof and thereof by the Company do not and will not: (i) conflict with or result in a breach of the terms and conditions of; (ii) constitute a material default under; (iii) result in the creation of any Lien, security interest, charge, or encumbrance upon the Company's capital stock or assets pursuant to; (iv) give any third party the right to modify, terminate, or accelerate any obligation under; (v) result in a material violation of; or (vi) require any authorization, consent, approval, exemption, or other action by or notice to any court or administrative or governmental body pursuant to, the Certificate of Incorporation or Bylaws of the Company, or any law, statute, rule, or regulation to which the Company is subject, or any agreement, instrument, order, judgment, or decree to which the Company or any of its Affiliates, or employees is a party or by which it or any of the foregoing Persons is bound. The Company is not in violation or default in any respect of (A) any provision of its Certificate of Incorporation or Bylaws, (B) any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, the violation or default of which has or could have a material adverse effect on the Company, or (C) any provision of any federal or state statute, rule or regulation applicable to the Company, the violation or default of which has or could have a material adverse effect on the Company. 6E. SUBSIDIARIES; INVESTMENTS. The Company does not own or hold any shares of stock or any other security or interest in, and does not directly or indirectly control, any other Person or any rights to acquire any such security or interest, and the Company has never had any Subsidiary. The Company is not a participant in any joint venture, partnership or similar arrangement. 6F. TAX MATTERS. (i) The Company has filed all Tax Returns that it was required to file and all such Tax Returns were correct and complete in all material respects. The Company has paid or will pay all Taxes due on or before the Initial Closing, regardless of whether shown on any such Tax Returns, except such as are being contested in good faith by appropriate proceedings (to the extent any such proceedings are required) and with respect to which the Company is maintaining reserves adequate for their payment, and which are described on the Schedule of Exceptions. The accrued but unpaid Taxes of the Company for tax periods through the date of the unaudited financial statements of the Company for the year ended June 30, 1999 do not exceed the accruals and reserves for Taxes (other than deferred Taxes) set forth on the said financial statements. All Taxes attributable to the period January 1, 1999 through the Initial Closing are attributable to the conduct by the Company of its operations in the ordinary course of business. The Company has no actual or potential liability for any Tax obligation of any taxpayer (including without limitation any affiliated group of corporations or other entities that included the Company during a prior period) other than the Company. All Taxes that the Company is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper governmental entity, except such as are being contested in good faith by appropriate proceedings (to the extent any such proceedings are required), with respect to which the Company is maintaining reserves adequate for their payment and which are described in the -18- 22 Schedule of Exceptions. The Federal Tax Returns of the Company have never been audited by the Internal Revenue Service. No deficiency assessment with respect to, or proposed adjustment of, the Company's Taxes is pending or, to the best of the Company's knowledge, threatened. There is no tax lien, whether imposed by any Federal, state, county or local taxing authority, outstanding against the assets, properties or business of the Company. Neither the Company nor any of its stockholders has ever filed an election pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that the Company be taxed as an S corporation. (ii) The Company has previously provided to the Purchasers correct and complete copies of all federal income Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by the Company. No examination or audit of any Tax Returns of the Company by any governmental entity is currently in progress or, to the knowledge of the Company, threatened or contemplated. The Company has not waived any statute of limitations with respect to Taxes or agreed to an extension of time with respect to a tax assessment or deficiency. (iii) The Company is not a "consenting corporation" within the meaning of Section 341(f) of the Code and none of the assets of the Company is subject to an election under Section 341(f) of the Code. The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code. The Company is not a party to any Tax allocation or sharing agreements. (iv) The Company is not and has never been a member of an "affiliated group" of corporations (within the meaning of Section 1504 of the Code). (v) No deductions by the Company for severance payments are subject to limitation based on the "golden parachute provisions" of Section 280G of the Code. 6G. LITIGATION, ETC. Except as set forth on the Schedule of Exceptions, there are no actions, suits, proceedings, orders, investigations or claims pending or, to the best of the Company's knowledge, threatened against or affecting the Company (or to the best of the Company's knowledge after due inquiry, pending or threatened against or affecting any of the officers, directors or employees of the Company with respect to their business or proposed business activities) at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality (including, without limitation, any actions, suits, proceedings or investigations with respect to the transactions contemplated by this Agreement) which could have a material adverse effect on the financial condition, operating results, assets, operations or business prospects of the Company taken as a whole; the Company is not subject to any arbitration proceedings under collective bargaining agreements or otherwise or, any governmental investigations or inquiries; and, there is no basis for any of the foregoing. The Company is not subject to any judgment, order or decree of any court or other governmental agency. The Company has not received any opinion or memorandum or legal advice from legal -19- 23 counsel to the effect that it is exposed, from a legal standpoint, to any liability or claim which may be material to its business. 6H. BROKERAGE. There are no claims for brokerage commissions, finders fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Company. The Company shall pay, and hold the Purchasers harmless against, any liability, loss or expense (including, without limitation, attorneys fees and out-of-pocket expenses) arising in connection with any such claim. 6I. GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or authorization of, or declaration to or filing with, any governmental authority is required in connection with the execution, delivery and performance by the Company of this Agreement or the other agreements contemplated hereby, or the consummation by the Company of any other transactions contemplated hereby or thereby, the offer, sale or issuance of the Preferred Stock by the Company or the issuance of Common Stock upon conversion of the Preferred Stock, except: (i) the filing of the Certificate of Designation with the Secretary of State of the State of Delaware; and (ii) such filings as have been made prior to the Closing, except any notices of sale required to be filed with the Securities and Exchange Commission under Regulation D of the Securities Act, or such post-closing filings as may be required under applicable state securities laws, which will be timely filed within the periods therefor. 6J. FINANCIAL STATEMENTS. The Company has delivered to the Purchasers a business plan (the "BUSINESS PLAN"), which Business Plan is appended as Exhibit F-1 hereto, unaudited financial statements for the years ended June 30, 1998 and June 30, 1999, the six months ended December 31, 1999 and the year ended December 31, 1999, together with the financial projections as of January 19, 2000 (collectively, the "FINANCIAL INFORMATION"), a copy of each of which is appended as Exhibit F-2 hereto. Except as disclosed in the Financial Information, the Company is not a guarantor or indemnitor of any Indebtedness of any other person, firm or corporation. All such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the financial position of the Company for the periods covered. The Company maintains a standard system of accounting established and administered in accordance with generally accepted accounting principles. Since its formation, there has not been any event or condition of any type that has materially and adversely affected the business, prospects, properties or financial condition of the Company. 6K. TITLE TO PROPERTY AND ASSETS; CONTRACTS AND LEASES. Except (i) as reflected in the Financial Information; (ii) for Liens and current taxes not yet delinquent; (iii) for Liens imposed by law and incurred by the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like; (iv) for Liens in respect of pledges or deposits under workers' compensation laws or similar legislation; or (v) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, the Company has good and marketable title to its property and assets, if any, free and clear of all mortgages, Liens, claims and encumbrances. With respect to the property and assets it leases, if any, the Company is in compliance with such leases and holds a valid leasehold -20- 24 interest free of any Liens, claims, or encumbrances, subject to clauses (i) through (v) above. There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company, in excess of $10,000 (ii) the license of any patent copyright, trade secret or other proprietary right to or from the Company, (iii) provisions restricting or affecting the development, manufacture or distributions of the Company's products or services or (iv) indemnification by the Company with respect to infringements of proprietary rights. The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Certificate of Incorporation or Bylaws that adversely affects its business as now conducted or as proposed to be conducted in the Business Plan, its properties or its financial condition. 6L. RELATED-PARTY TRANSACTIONS AND CERTAIN ACTIONS. No employee, officer, consultant, stockholder or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or guarantee credit) to any of them, other than (i) for payment of salary for services rendered; (ii) reimbursement for reasonable expenses incurred on behalf of the Company; and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any option plan). None of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, stockholders, officers, or directors of the Company may own stock in publicly traded companies that may compete with the Company. No officer, director, consultant or stockholder or any member of their immediate families is, directly or indirectly, interested in any material contract with the Company (other than such contracts as relate to any such person's related ownership of capital stock or other securities of the Company). The Company has not (A) declared or paid any dividends or authorized or made any distributions upon or with respect to any class or series of its capital stock, (B) incurred any indebtedness for money borrowed or any other liabilities individually or in excess of $10,000, (C) made any loans or advances to any person, other than ordinary advances for travel expenses, or (D) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. 6M. EMPLOYEES; EMPLOYEE COMPENSATION. To the best of the Company's knowledge, there is no strike, labor dispute or union organization activities pending or threatened between it and its employees. None of the Company's employees belongs to any union or collective bargaining unit. The Company has materially complied with all applicable state and federal equal opportunity and other laws related to employment. No employee or consultant of the Company is or will be in material violation of any judgment, decree, or order or any term of any employment contract, patent disclosure agreement, or other contract or agreement relating to the relationship of any such employee or consultant with the Company, or any other party because of the nature of the business conducted or presently proposed to be conducted by the Company or to the use by the employee or consultant of his or her efforts with respect to the Company. The Company is not aware that any officer or key employee, or that any group of key -21- 25 employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. The consulting relationship of each consultant to the Company is terminable at the will of the Company. 6N. PATENTS AND TRADEMARKS. The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and proprietary rights and processes necessary for its business as now conducted, except for those disclosed on the Schedule of Exceptions (including without limitation its corporate names) and as proposed to be conducted without any conflict with, or infringement of the rights of, others. The Schedule of Exceptions contains a complete list of all patents and pending patent applications of the Company. Except for agreements with its own employees or consultants, substantially in the form referenced in Section 6P below, and standard end-user license agreements, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses, or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and proprietary rights and processes of any other person or entity. The Company has not violated or, by conducting its business as proposed, would not violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets or any other proprietary rights or processes of any person or entity in such a manner as will or may have an adverse effect on the business, operations or prospects of the Company. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants, or commitments of any nature) or any other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant, or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to use any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. 6O. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each current and former employee and officer of the Company has executed a confidentiality/nonsolicitation/noncompete agreement substantially in the form or forms which has been delivered to the Purchaser. A copy of such form or forms is (are) appended as Exhibit G hereto. No current or former employee or officer has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee's confidentiality agreement. 6P. ERISA. The Company does not maintain or have any obligation to contribute to or any other liability with respect to or under (including but not limited to current or potential withdrawal, liability), nor has it ever maintained or had any obligation to contribute to or any -22- 26 other liability with respect to or under: (i) any plan or arrangement whether or not terminated, which provides medical, health, life insurance or other welfare types benefits for current or future retired or terminated employees (except for limited continued medical benefit coverage required to be provided under Section 4980B of the IRC or as required under applicable state law); (ii) any "multiemployer plan" (as defined in Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")); (iii) any employee plan which is a tax-qualified "defined benefit plan" (as defined in Section 3(35) of ERISA), whether or not terminated; (iv) any employee plan which is tax-qualified "defined contribution plan" (as defined in Section 3(34) of ERISA), whether or not terminated; or (v) any other plan or arrangement providing benefits to current or former employees, including any bonus plan, plan for deferred compensation, employee health or other welfare benefit plan or other arrangement, whether or not terminated. For purposes of this Section 6Q, the term "Company" includes all organizations under common control with the Company pursuant to Section 414(b) or (c) of the IRC. 6Q. COMPLIANCE WITH LAWS AND INSURANCE. The Company has not violated any law or any governmental regulation or requirement which violation would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of the Company, and the Company has not received notice of any such violation. The Company is not subject to any clean up liability, and the Company has no reason to believe it may become subject to any clean up liability, under any federal, state or local environmental law, rule or regulation. 6R. MINUTE BOOKS. The copy of the minute books of the Company provided to the Purchasers contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and accurately reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes in all material respects. 6S. BUSINESS PLAN. The Business Plan delivered to the Purchasers was prepared in good faith by the Company and does not, to the best of the Company's knowledge after reasonable investigation, contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements therein not misleading, except that with respect to assumptions, projections and expressions of opinion or predictions contained in the Business Plan, the Company represents only that such assumptions, projections, expressions of opinion and projections were made in good faith and that the Company believes there is a reasonable basis therefor. 6T. DISCLOSURE. Neither this Agreement nor any of the schedules, other agreements to be entered into by the Company on the date hereof, or certificates or other items prepared or supplied to the Purchasers by or on behalf of the Company with respect to the transactions contemplated hereby contain any untrue statement of a material fact regarding the Company or omit a material fact regarding the Company necessary to make each statement contained herein or therein not misleading. There is no fact which the Company has not disclosed to the -23- 27 Purchasers in writing and of which any of its officers, directors or executive employees is aware and which has had or might reasonably be anticipated to have a material adverse effect upon the existing or expected financial condition, operating results, assets, customer or supplier relations, employee relations or business prospects of the Company. 6U. REAL PROPERTY HOLDING COMPANY. The Company is not a real property holding company within the meaning of Section 897 of the IRC. SECTION 7. DEFINITIONS. For the purposes of this Agreement, the following terms have the meanings set forth below: "AFFILIATE" of any particular person or entity means any other person or entity controlling, controlled by, or under common control with such particular person or entity. "AFFILIATED GROUP" means an affiliated group as defined in Section 1504 of the IRC (or any analogous combined, consolidated, or unitary group defined under state, local, or foreign income Tax law). "BRENNER EMPLOYMENT AGREEMENT" has the meaning set forth in Section 3C(i)(c) hereof. "BUSINESS PLAN" has the meaning set forth in Section 6J hereof. "COMMON STOCK" means the Company's common stock, par value $.01 per share. "EMPLOYEE STOCK OPTIONS" means options issued to eligible employees, consultants or directors under an Employee Stock Option Plan. "EMPLOYEE STOCK OPTION PLAN" has the meaning set forth in Section 3D(vi) hereof. "FOUNDER" or "FOUNDERS" means one or all of Bernard Brenner, Robert Sofsky and Gregory Gershuni. "INDEBTEDNESS" means all indebtedness for borrowed money (including purchase money obligations), all indebtedness under revolving credit arrangements, all capitalized lease obligations, and all guarantees of any of the foregoing, exceeding $100,000 in the aggregate on a consolidated basis during any twelve (12) month period. "INVESTMENT" as applied to any Person means: (i) any direct or indirect purchase or other acquisition by such Person of any notes, obligations, instruments, stock, securities, or -24- 28 ownership interest (including partnership interests and joint venture interests of any other Person, and; (ii) any capital contribution by such Person to any other Person. "IRC" means the Internal Revenue Code of 1986, as amended, and any reference to any particular IRC section shall be interpreted to include any revision of or successor to that section regardless of how numbered or classified. "LIEN" means any mortgage, pledge, security interest, encumbrance, lien, or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof), any sale of receivables with recourse against the Company, any of its Subsidiaries or any of its Affiliates, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute other than to reflect ownership by a third party of property leased to the Company or any of its Subsidiaries under a lease which is not in the nature of a conditional sale or title retention agreement, or any subordination arrangement in favor of another Person (other than any subordination arising in the ordinary course of business). "MATERIAL SUBSIDIARY" means any Subsidiary included in the group of the Company's Subsidiaries, which, together with the Company, accounts for ninety percent (90%) of the lesser of: (X) the Company's and all of its Subsidiaries' revenues on a consolidated basis during any twelve (12) month period; or (Y) the Company's and all of its Subsidiaries' assets on a consolidated basis during any twelve (12) month period. "NORTHWOOD NOTE" means the Convertible Demand Note, dated February 24, 2000, executed by the Company as Maker in favor of Northwood Ventures with a principal amount of $100,000. "OFFICER'S CERTIFICATE" means a certificate signed by the Company's Chairman, President or its Chief Financial Officer (but without personal liability), stating that: (i) the officer signing such certificate has made or has caused to be made such investigations as are necessary in order to permit him to verify the accuracy of the information set forth in such certificate; and (ii) such certificate does not misstate any material fact and does not omit to state any fact necessary to make the certificate not misleading. "PERSON" means an individual, a partnership, a limited partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, and a governmental entity or any department, agency, or political subdivision thereof. "PREFERRED STOCK" means the Company's Series B Convertible Preferred Stock, par value $.01 per share. "PURCHASER COMMON" means: (i) the Common Stock issued to any Purchaser or any of its Affiliates upon the conversion of the Preferred Stock; and (ii) any capital stock issued -25- 29 or issuable with respect to the Common Stock referred to in clause (i) above by way of stock dividends or stock splits or in connection with a combination of shares, recapitalization, merger, consolidation, or other reorganization. As to any particular shares of Purchaser Common, such shares shall cease to be Purchaser Common when they have been: (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them; or (b) distributed to the public through a broker, dealer, or market maker pursuant to Rule 144 under the Securities Act (or any similar rule then in force). "PURCHASER PREFERRED" means (i) the Preferred Stock issued to any Purchaser or any of its Affiliates hereunder; and (ii) any capital stock issued or issuable with respect to the Preferred Stock referred to in clause (i) above by way of stock dividends or stock splits or in connection with a combination of shares, recapitalization, merger, consolidation, or other reorganization. As to any particular shares of Purchaser Preferred, such shares shall cease to be Purchaser Preferred when they have been: (a) converted into Common Stock; (b) redeemed by the Company; (c) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them; or (d) distributed to the public through a broker, dealer, or market maker pursuant to Rule 144 under the Securities Act (or any similar rule then in force). "PURCHASER STOCK" means, collectively, the Purchaser Preferred and the Purchaser Common. "QUALIFIED PUBLIC OFFERING" means the first firm commitment underwritten public offering of shares of Common Stock pursuant to an effective registration statement under the Securities Act in which the gross proceeds received by the Company are at least $15 million. For purposes of this Agreement, a Qualified Public Offering shall be deemed to have occurred upon the effectiveness of the registration statement filed with respect to such offering, subject to any consequences under this Agreement of such Qualified Public Offering having been deemed to have occurred being reversed and nullified if the closing of the sale of such shares pursuant to such offering does not occur within ten business days after such effectiveness. "RESTRICTED SECURITIES" means: (i) the Purchaser Stock issued or issuable hereunder; and (ii) any securities issued with respect to the securities referred to in clause (i) above by way of a stock dividend or stock split or in connection with the conversion of stock, or in connection with combination of shares, recapitalization, merger, consolidation, or other reorganization. As to any particular Restricted Securities, such securities shall cease to be Restricted Securities when they have: (a) been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them; (b) become eligible for sale pursuant to Rule 144(k) (or any similar provision then in force) under the Securities Act; or (c) been otherwise transferred and new certificates for them not bearing the Securities Act legend set forth in Section 8C have been delivered by the Company in accordance with Section 8C. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in Section 8C. -26- 30 "SECURITIES ACT" means the Securities Act of 1933, as amended, or any similar federal law then in force. "SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar federal law then in force. "SECURITIES AND EXCHANGE COMMISSION" includes any governmental body or agency succeeding to the functions thereof. "SERIES A PREFERRED STOCK" means the Company's Series A Convertible Preferred Stock, par value $.01 per share. "STOCK" means the Company's Preferred Stock and Common Stock. "SUBSIDIARY" means, with respect to any Person, any corporation, limited liability company, partnership, association, or other business entity of which: (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof; or (ii) if a limited liability company, partnership, association, or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association, or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association, or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association, or other business entity. References to a "SUBSIDIARY" of the Company shall be given effect only at such times as the Company has one or more Subsidiaries. "TAX" OR "TAXES" means any: (i) federal, state, local, or foreign income, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee or other withholding, or other tax, of any kind whatsoever, including any interest, penalties, or additions to tax or additional amounts in respect of the foregoing; (ii) liability of the Company for the payment of any amounts of the type described in clause (i) arising as a result of being (or ceasing to be) a member of any Affiliated Group (or being included (or required to be included) in any Tax Return relating thereto); and (iii) liability of the Company for the payment of any amounts of the type described in clause (i) as a result of any express or implied obligation to indemnify or -27- 31 otherwise assume or succeed to the liability of any other person (including, but not limited to, as a successor or transferee). "TAX RETURNS" means returns, declarations, reports, claims for refund, information returns, or other documents (including any related or supporting schedules, statements, or information) filed or required to be filed in connection with the determination, assessment, or collection of Taxes of any party or the administration of any laws, regulations, or administrative requirements relating to any Taxes. SECTION 8. MISCELLANEOUS. 8A. EXPENSES. (i) As a further inducement for the Purchasers to consummate the transactions contemplated hereby, the Company agrees to pay, and hold each Purchaser harmless against liability for the payment of: (i) its reasonable fees and expenses (including its reasonable fees and expenses of its counsel and other advisors) arising in connection with the interpretation and enforcement of its rights, provided that such Purchaser is the prevailing party with respect to any interpretation or enforcement dispute, under this Agreement, the Registration Agreement, the Stockholders' Agreement and the other agreements contemplated hereby and thereby, the Certificate of Incorporation and the Company's Bylaws; and (ii) stamp documentary and other similar taxes which may be payable in respect of the execution and delivery of this Agreement, or the issuance, delivery or acquisition of any shares of stock purchased hereunder; provided that the Company's obligation shall not extend to transfer taxes on any subsequent transfer. In addition, the Company shall pay all reasonable expenses of the Purchasers' representatives in connection with their attendance at meetings of the Board and/or committees thereof. (ii) As a further inducement for the Company to consummate the transactions contemplated hereby, if (A) the Initial Closing or the Second Closing does not occur due to the fault of a Purchaser and (B) there exists no breach of any representation, warranty or covenant of the Company under this Agreement, then such Purchaser agrees to reimburse the Company for attorneys' fees that the Company has incurred in connection with the transactions contemplated by this Agreement; provided, however, that the total amount payable to the Company by the Purchasers hereunder as reimbursement for attorneys' fees shall not exceed $20,000. 8B. REMEDIES. Each holder of Purchaser Stock issued hereunder shall have all rights and remedies set forth in this Agreement and the Certificate of Designation and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement, and to exercise all other rights granted by law. -28- 32 8C. PURCHASER'S INVESTMENT REPRESENTATIONS. Each Purchaser hereby represents and warrants to the Company that such Purchaser is acquiring the Restricted Securities purchased hereunder or acquired pursuant hereto for its own account with the present intention of holding such securities for purposes of investment, and that it has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein shall prevent any Purchaser and subsequent holders of Restricted Securities from transferring such securities in compliance with the provisions of the Stockholders' Agreement and the Registration Agreement. Each Purchaser hereby represents and warrants to the Company that the execution, delivery, and performance of this Agreement, the Registration Agreement, the Stockholders' Agreement and all other agreements contemplated hereby in connection with the Initial Closing and the Second Closing to which such Purchaser or any of its Affiliates will enter into on the Initial Closing Date and, if applicable, the Second Closing Date have been duly authorized by such Purchaser or such Purchaser's Affiliate. This Agreement, the Registration Agreement, the Stockholders' Agreement and all other agreements contemplated hereby in connection with the Initial Closing that each Purchaser will enter into on the Initial Closing Date each constitutes a valid and binding obligation of such Person, enforceable in accordance with its terms. With respect to the Second Closing, USXX represents and warrants that, when entered into as of the Second Closing Date, the Registration Agreement and Stockholders' Agreement will each constitute a valid and binding obligation of USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder, each enforceable in accordance with its terms. All other agreements contemplated hereby in connection with the Second Closing that USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder will enter into on the Second Closing Date will each constitute a valid and binding obligation of USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder, each enforceable in accordance with its terms. The execution and delivery by each Purchaser of this Agreement, the Registration Agreement, Stockholders' Agreement and all other agreements contemplated hereby in connection with the Initial Closing which each Purchaser is entering into on the Initial Closing Date, the purchase of the Preferred Stock hereunder at the Initial Closing, and the fulfillment of and compliance with the respective terms hereof and thereof by such Purchaser do not and will not: (i) conflict with or result in a breach of the terms, conditions, or provisions of; (ii) constitute a default under; (iii) result in a violation of; or (iv) require any authorization, consent, approval, exemption, or other action by or notice to any court or administrative or governmental body pursuant to, the certificate of incorporation, certificate of formation, partnership agreement, bylaws or any similar constitutive document of such Purchaser, or any law, statute, rule, or regulation to which such Purchaser is subject, or any agreement, instrument, order, judgment, or decree to which such Purchaser or any of its Affiliates, or employees is a party or by which it or any of the foregoing Persons is bound. The execution and delivery by USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder of the Registration Agreement, the Stockholders' Agreement and all other agreements contemplated hereby in connection with the Second Closing which USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder will enter into on the Second Closing Date, the purchase of the Preferred Stock hereunder by USXX and/or any Affiliate of USXX at the Second Closing, and the fulfillment of and compliance with the respective terms hereof and thereof by USXX and/or any of its Affiliates do not and will not: (i) conflict with or result in a breach of the terms, conditions, or -29- 33 provisions of; (ii) constitute a default under; (iii) result in a violation of; or (iv) require any authorization, consent, approval, exemption, or other action by or notice to any court or administrative or governmental body pursuant to, the certificate of incorporation, certificate of formation, partnership agreement, bylaws or any similar constitutive document of USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder, or any law, statute, rule, or regulation to which USXX and/or any Affiliate of USXX purchasing Preferred Stock hereunder is subject, or any agreement, instrument, order, judgment, or decree to which USXX or any of its Affiliates, or employees is a party or by which it or any of the foregoing Persons is bound. Each certificate for Restricted Securities shall be imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON MARCH 13, 2000, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE PURCHASE AGREEMENT DATED AS OF MARCH 13, 2000, BETWEEN THE ISSUER (THE "COMPANY") AND CERTAIN INVESTORS AND THE CONDITIONS SPECIFIED IN THE AGREEMENTS REFERENCED IN THE PURCHASE AGREEMENT, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE." If the holder of the Restricted Securities delivers to the Company an opinion of counsel reasonably acceptable to the Company that no subsequent transfer of such Restricted Securities shall require registration under the Securities Act, the Company shall promptly upon such contemplated transfer deliver new certificates for such Restricted Securities which do not bear the Securities Act legend set forth in this Section 8C. 8D. CONSENT TO AMENDMENTS. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of a majority of the holders of all shares of the then-outstanding Purchaser Stock. No other course of dealing between the Company and the holder of any Stock or any delay in exercising any rights hereunder or under the Certificate of Designation shall operate as a waiver of any rights of any such holders. 8E. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained herein or made in writing by any party in connection herewith shall survive the Second Closing Date and for a period of eighteen (18) months thereafter regardless of any -30- 34 investigation made by any Purchaser or on its behalf. In the event that the Second Closing does not occur, all representations and warranties contained herein or made in writing by any party in connection herewith shall survive for a period of eighteen (18) months from the Initial Closing Date. 8F. INDEMNIFICATION. (i) Subject to Section 8F(iii) and (iv), (i) the Company shall indemnify the Purchasers against and agrees to hold the Purchasers harmless from any and all claims, damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) (collectively, "DAMAGES") actually incurred or suffered by any Purchaser or such Purchaser's Affiliate on or after the Initial Closing Date (or, as applicable, after the Second Closing Date) arising out of any material misrepresentation, inaccuracy or breach of any representation, warranty, covenant or promise by the Company contained in this Agreement, the Registration Agreement or the Stockholders' Agreement (or in any certificate document, list or schedule delivered to any Purchaser or any Purchaser's Affiliate by the Company hereunder or thereunder). (ii) Subject to Section 8F(iii) and (iv), (i) each of USXX and Northwood shall severally, and not jointly, indemnify the Company against and agrees to hold the Company harmless from any and all Damages actually incurred or suffered by the Company on or after the Initial Closing Date (or, as applicable, after the Second Closing Date) arising out of any material misrepresentation, inaccuracy or breach of any representation, warranty, covenant or promise by, as applicable, USXX or Northwood or any Affiliate of USXX or Northwood contained in this Agreement, the Registration Agreement or the Stockholders' Agreement (or in any certificate document, list or schedule delivered to Company by, as applicable, USXX or Northwood or any Affiliate of USXX or Northwood hereunder or thereunder). (iii) If any party hereto who is entitled to indemnification hereunder shall seek indemnification pursuant to this Section 8F ("INDEMNITEE"), such Indemnitee shall give prompt notice to the party hereto against which indemnification is sought ("INDEMNITOR") of the assertion of any claim, or the commencement of any action, suit or proceeding by a third party, in each case in respect of which indemnity may be sought hereunder, but no failure to give such notice shall relieve the Indemnitor of any liability hereunder. The Indemnitor may, at its expense, participate in or assume the defense of any such action, suit or proceeding involving a third party with counsel reasonably acceptable to such Indemnitee, and after notice from the Indemnitor of its election to assume the defense thereof, the Indemnitor shall not be liable to such Indemnitee for any legal fees or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof. Each Indemnitee will have the right to employ its counsel in any such action, but the fees and expenses of such counsel will be at the expense of such Indemnitee unless (1) the employment of counsel by such Indemnitee has been authorized in writing by the Indemnitor, (2) such Indemnitee has reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the Indemnitor -31- 35 (in which case the Indemnitor will not have the right to direct the defense of such action on behalf of such Indemnitee) or (3) the Indemnitor has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees and expenses of only one counsel will be at the expense of the Indemnitor, and the Indemnitor shall reimburse or pay such fees and expenses as they are incurred. Whether or not the Indemnitor chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. (iv) The Indemnitor shall not be liable under this Section 8F for any settlement effected without its consent of any claim, litigation or proceeding by a third party in respect of which indemnity may be sought hereunder (which consent shall not be unreasonably withheld), unless the Indemnitor refuses to acknowledge liability for indemnification under this Section 8F and/or declines to defend any Indemnitee in such claim, litigation or proceeding. Any contrary provision in this Section 8F or elsewhere notwithstanding, (A) the maximum liability of the Company under this Section 8F to each Purchaser and such Purchaser's Affiliates shall not exceed the amount invested in the Company by such Purchaser and its Affiliates hereunder and (B) the maximum liability of each Purchaser and such Purchaser's Affiliates under this Section 8F to the Company shall not exceed the amount invested in the Company by such Purchaser and its Affiliates hereunder. 8G. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not; provided that this Agreement may not be assigned by the Company without the prior written consent of the Purchasers and their Affiliates holding a majority of all of the Purchaser Stock. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for the Purchasers' benefit as the Purchasers or the holders of the Purchaser Stock are also for the benefit of, and enforceable by, any subsequent holder of at least twenty percent (20%) of the Purchaser Stock. The rights and obligations of each Purchaser under this Agreement and the agreements contemplated hereby may be assigned by such Purchaser at any time, in whole or in part, to any Affiliate of such Purchaser. 8H. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any accounting determination or calculation is required to be made under this Agreement or the exhibits hereto, such determination or calculation (unless otherwise provided) shall be made in accordance with generally accepted accounting principles, consistently applied, except that, if because of a change in generally accepted accounting principles the Company would have to alter a previously utilized accounting method or policy in order to remain in compliance with generally accepted accounting principles, then such determination or calculation shall continue to be made in accordance with the Company's previous accounting methods and policies. All numbers set -32- 36 forth herein which refer to share prices or numbers or amount will be appropriately adjusted to reflect stock splits, stock dividends, combinations of shares, and other recapitalizations affecting the subject class of stock. 8I. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but, if any provision of this Agreement is held to be prohibited by or invalid under applicable law, then such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 8J. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 8K. DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine, or neuter forms, and the singular form of nouns, pronouns, and verbs shall include the plural and vice versa. The use of the word "INCLUDING" in this Agreement shall be by way of example rather than by limitation. Reference to any agreement, document, or instrument means such agreement, document, or instrument as amended or otherwise modified from time to time in accordance with the terms thereof, and if applicable hereof. Without limiting the generality of the immediately preceding sentence, no amendment or other modification to any agreement, document, or instrument that requires the consent of any Person pursuant to the terms of this Agreement or any other agreement will be given effect hereunder unless such Person has consented in writing to such amendment or modification. The use of the words "or," "either," and "any" shall not be exclusive. 8L. GOVERNING LAW. The corporate law of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders. All questions concerning the construction, validity, and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. 8M. NOTICES. All notices, demands, or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, upon machine-generated acknowledgment of receipt after transmittal by facsimile, sent to the recipient by reputable express courier service (charges prepaid) or mailed to the recipient by certified or registered mail, return receipt requested, and postage prepaid. Such notices, demands, and other communications shall be sent to the Purchaser and to the Company at the address indicated below: -33- 37 IF TO THE COMPANY: VIPRO Corporation 3998 Fair Ridge Drive, Suite 125 Fairfax, Virginia 22033 Attention: Bernard Brenner Facsimile: (703) 591-2313 Telephone: (703) 591-2200, Ext. 700 WITH A COPY (WHICH SHALL NOT CONSTITUTE NOTICE) TO: Fulbright and Jaworski L.L.P. 666 Fifth Avenue New York, New York 10103 Attention: Carl Kaplan Facsimile: (212) 752-5958 Telephone: (212) 318-3224 IF TO USXX: U.S. Technologies Inc. 2001 Pennsylvania Avenue, N.W. Suite 675 Washington, D.C. 20006 Attention: C. Gregory Earls Facsimile: (202) 466-3100 Telephone: (202) 466-4557 WITH A COPY (WHICH SHALL NOT CONSTITUTE NOTICE) TO: Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Stephen A. Bouchard Facsimile: (202) 667-8543 Telephone: (202) 939-7911 -34- 38 IF TO NORTHWOOD: Northwood Ventures LLC 485 Underhill Boulevard, Suite 205 Syosset, New York 11791 Attention: Peter G. Schiff Facsimile: (516) 364-0879 Telephone: (516) 364-5544 WITH A COPY (WHICH SHALL NOT CONSTITUTE NOTICE) TO: Andrew J. Beck Torys 237 Park Avenue New York, New York 10017 Facsimile: (212) 682-0200 Telephone: (212) 880-6010 8N. RIGHTS. This Agreement shall not confer any rights or remedies upon any Person, other than the parties hereto and their respective heirs, successors, and permitted assigns. 8O. AMENDMENTS. Any reference contained herein to any agreement, instrument, or other document shall include any amendments or modifications made to such agreement, instrument, or other document made from time to time in accordance with the terms thereof, and if applicable, hereof. [SIGNATURES BEGIN ON THE NEXT PAGE] -35- 39 IN WITNESS WHEREOF, the parties hereto have executed this Purchase Agreement on the date first written above. VIPRO CORPORATION By:/s/ Bernard D. Brenner ---------------------- Bernard D. Brenner President and Chief Executive Officer U.S. TECHNOLOGIES INC. By:/s/ C. Gregory Earls -------------------- C. Gregory Earls President and Co-Chief Executive Officer NORTHWOOD VENTURES LLC By:/s/ Peter G. Schiff ------------------- Peter G. Schiff Manager NORTHWOOD CAPITAL PARTNERS LLC By:/s/ Peter G. Schiff ------------------- Peter G. Schiff Manager -36- EX-21.1 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Service-to-Industry, Inc. Technology-to-Industry, Inc. Labor-to-Industry, Inc. U.S. Technologies Acquisition Sub, Inc. Each subsidiary of the Registrant has been organized and is a corporation existing under the laws of the State of Delaware. EX-23.1 11 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS U.S. Technologies Inc. Marietta, Georgia We hereby consent to the incorporation by reference of our reports dated March 17, 2000, except for Note 18, which is as of April 5, 2000, relating to the consolidated financial statements appearing in the Company's Form 10-K for the year ended December 31, 1999, into the Company's previously filed registration statement on Form S-8, Registration No. 333-31518, relating to the Company's 1999 Stock Option Plan, including the prospectus therein. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP Atlanta, Georgia April 6, 2000 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1999, UNAUDITED FINANCIAL STATEMENTS OF US TECHNOLOGIES, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS IN FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999. (IN THOUSANDS) YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 9 0 401 206 261 505 1,901 1,330 1,092 1,284 0 0 5,290 584 (6,095) 1,092 3,765 3,765 4,459 6,491 (469) 0 38 (2,781) 0 (2,781) 0 0 0 (2,781) (0.10) (0.10)
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