-----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, ITnFISmDj5wbgZ+JLxe3mJNKn1Yjmmi5GUqo8pzclXzwxHPX35XioxS4907hC+eV ZM8H3YCHonsC5uoMf+4ygQ== 0000950144-01-505219.txt : 20010808 0000950144-01-505219.hdr.sgml : 20010808 ACCESSION NUMBER: 0000950144-01-505219 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010807 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15960 FILM NUMBER: 1700131 BUSINESS ADDRESS: STREET 1: 1130 CONNECTICUT AVE NW STREET 2: SUITE 700 CITY: WASHINGTON STATE: DC ZIP: 20036 BUSINESS PHONE: 7705654311 MAIL ADDRESS: STREET 1: 3901 ROSWELL ROAD STREET 2: SUITE 300 CITY: MARIETTA STATE: GA ZIP: 30062 FORMER COMPANY: FORMER CONFORMED NAME: CAREAMERICA INC DATE OF NAME CHANGE: 19890720 10-K405 1 g70507e10-k405.txt 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, 2000 [ ] 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 (STATE OF OTHER JURISDICTION OF 73-1284747 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1130 CONNECTICUT AVENUE, SUITE 700 WASHINGTON, DC 20006 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES.) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 466-3100 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 [ ] NO [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES [X] NO [ ] The aggregate market value of voting common stock held by non-affiliates of the Registrant at June 29, 2001 was approximately $5,052,164 The number of shares outstanding of the Registrant's Common Stock, par value $0.02 per share, at June 29, 2001 was 29,610,786 shares. 2 TABLE OF CONTENTS
Page ---- PART I............................................................................... 1 ITEM 1. BUSINESS ................................................................... 1 Overview ................................................................... 1 Overview of Associated Companies............................................ 1 Yazam Acquisition........................................................... 4 Series F Stock Waiver and Replacement Agreement............................. 5 Ownership Position in Our Associated Companies.............................. 5 PIE Business of USXX........................................................ 7 Employees................................................................... 16 Acquisitions................................................................ 17 ITEM 2. PROPERTIES.................................................................. 17 ITEM 3. LEGAL PROCEEDINGS........................................................... 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 18 PART II.............................................................................. 19 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................. 19 Market Information.......................................................... 19 Holders of Common Stock..................................................... 19 Dividends................................................................... 19 Recent Sales of Unregistered Securities..................................... 20 ITEM 6. SELECTED FINANCIAL DATA..................................................... 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 23 Results of Operations....................................................... 23 Liquidity and Capital Resources............................................. 29 Effect of Inflation......................................................... 33 New Accounting Pronouncements............................................... 33 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.................................. 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................................... 35
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Page ---- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 36 PART III............................................................................. 36 ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS.......................................... 36 Executive Officers Who Are Not Directors.................................... 36 Board of Directors: Board Size and Composition......................................... 36 Directors.......................................................... 37 Board Committees and Meetings...................................... 39 Board Compensation................................................. 40 Section 16(a) Beneficial Ownership Reporting Compliance............ 41 ITEM 11. EXECUTIVE COMPENSATION..................................................... 41 Executive Compensation...................................................... 41 Summary Compensation Table.................................................. 41 Stock Option Plans.......................................................... 43 Employment Agreements, Termination of Employment, and Change-In-Control..... 43 Compensation Committee Interlocks and Insider Participation................. 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 44 Security Ownership.......................................................... 44 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 50 PART IV.............................................................................. 52 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K................................................ 52 SIGNATURES REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................... F-1 CONSOLIDATED FINANCIAL STATEMENTS.................................................... F-2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS...................................... F-40 INDEX OF EXHIBITS
-ii- 4 PART I ITEM 1. BUSINESS OVERVIEW U.S. Technologies Inc. ("U.S. Technologies," "USXX" or the "Company") develops and operates a network of technology and related companies. The Company builds and develops associated companies by providing them with operational assistance, capital support, industry expertise, other venture business services and access to a strategic network of business relationships. The Company's associated companies include technology and emerging growth companies that management believes have high growth potential. It is our strategy to actively manage, develop, operate and promote collaboration among our network of associated companies. In April 2000, the Company completed its acquisition of E2Enet, Inc ("E2Enet"). E2Enet was a privately held company that had interests in several development stage businesses. The acquisition of E2Enet provided the Company with a platform to participate in the growing technology industry. The completion of the E2Enet acquisition enhanced our opportunities for creative development of promising early stage businesses. Historically, the Company has been engaged through its wholly owned subsidiary, Labor-to-Industry Inc. ("LTI"), in the operation of industrial facilities located within both private and state prisons, which are staffed principally with inmate labor. LTI's prison-based operations are conducted under the guidelines of the 1979 Prison Industry Enhancement ("PIE") program. Current economic and business conditions have created a difficult environment in which to raise capital. The Company's ability to execute its business plan is, and its ability to continue as a going concern may be, dependant on its ability to raise capital in the next twelve months. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS - Liquidity and Capital Resources," "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT," "REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 2. U.S. Technologies was incorporated on September 9, 1986. Our principal executive offices are located at 1130 Connecticut Avenue, NW, Suite 700, Washington, DC 20036, and our phone number is (202) 466-3100. OVERVIEW OF ASSOCIATED COMPANIES We classify the technology companies in which we have interests as associated companies. Our PIE businesses are described separately below. We have acquired primarily interests in development stage technology companies. Through December 31, 2000, we had acquired interests in or established the eight technology companies listed below. 5 29th Street Partners, Inc. ("29th Street Partners") operates an e-commerce site for upscale cosmetics and accessories. 29th Street Partners intends to follow a "clicks and bricks" investment strategy by also acquiring high-end cosmetic specialty retailers and currently operates two retail stores in Washington, D.C. and one retail store in Philadelphia, Pennsylvania. On February 10, 2001, the assets of Bluemercury, Inc. ("Bluemercury"), an associated Company in which we had approximately a 29% interest, were contributed to 29th Street Partners, resulting in USXX having a 9.12% interest in 29th Street Partners. Buyline.net, Incorporated ("Buyline") developed B2B e-commerce applications. Buyline was creating a proprietary Internet software program designed to be a universal platform for entry-level B2B e-commerce, linking buyers and sellers. Buyline's software application for RFP/RFQ (Request for Proposal/Request for Quotation) technology was projected to be used in a full range of on-line advertising on Internet-based directories and in commercial web sites. Subsequent to the E2Enet Acquisition, the Company reorganized Buyline, and the Company also made an additional investment in Buyline, resulting in Buyline becoming a consolidated subsidiary of the Company. U.S. Technologies increased its holdings of Buyline to the present level by: - helping Buyline retire outstanding debts to Accenture L.L.P. ("Accenture"), formerly known as Andersen Consulting through an issuance of Company preferred stock to Accenture; and - purchasing an additional equity interest in Buyline for nominal consideration. During the fourth quarter of 2000, the net book value of the assets of Buyline was reduced to zero by an asset impairment charge, due to the loss of its primary client and the inability to retain the management personnel necessary to execute Buyline's business strategy. This resulted in a charge of approximately $1,817,000 to earnings. At that time, the Company had approximately a 64% equity interest in Buyline. On December 27, 2000, the Company purchased 3,450,000 shares of Buyline common stock for $345 from Northwood Ventures L.L.C. and Northwood Capital Partners L.L.C., entities controlled by Peter G. Schiff and Henry T. Wilson, members of the Company's Board of Directors Effective as of June 30, 2001, the Company sold all of its shares of Buyline.net, Incorporated to an entity wholly owned by Gregory Earls. As consideration for such shares, the purchaser delivered to the Company a promissory note in the principal amount of $100,000. The promissory note, plus accrued interest, will become due and payable only upon the earlier of, and only to the extent of: (i) any dividend distributions by Buyline or (ii) the sale by such purchaser of its shares of Buyline. The Company has the right to repurchase for $250,000 such Buyline shares at any time prior to June 30, 2004. Such transaction was approved by at least a majority of the disinterested directors of the Company. Gomembers.com ("Gomembers") provides software that helps associations, labor unions and professional societies manage a variety of tasks, including payroll and Internet integration. Initially, E2Enet had invested in MEI Software Systems, Inc. ("MEI"), which provided customized software systems to manage the databases of trade associations, professional associations, fund-raising organizations, and chambers-of-commerce. MEI was acquired by Gomembers on November 7, 2000, thereby converting the Company's approximately 5% interest in MEI to a 0.47% interest in Gomembers. -2- 6 OneMade, Inc. ("OneMade") provides an e-commerce community to serve wholesalers, retailers, consumers, and artists active in the arts, hobby and crafts industries. PromiseMark, Inc. ("PromiseMark"), formerly known as Vipro Corporation, is an Internet surety Company providing, among other services, repair guarantees against computer viruses. PromiseMark 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. On June 26, 2001 the Company paid $500,000 to purchase shares of PromiseMark's Series C preferred Stock and warrants to purchase shares of PromiseMark's Series C-1 Preferred Stock as part of a financing by which PromiseMark raised an additional $1.5 million to fund continuing operations. As a result of this financing the Company had an approximately 16% equity interest in PromiseMark. Urban Box Office, Inc. ("UBO") intended to develop networked multi-media web sites providing e-commerce services to Internet users interested in urban culture, information, entertainment, and products. On November 3, 2000, the date that UBO announced that it would be filing for bankruptcy, the Company had approximately a 8% equity interest in UBO on a fully diluted basis. During the fourth quarter, the investment in UBO was written off, resulting in approximately a $3,014,400 charge to earnings for asset impairment. Portris, Inc. (Portris), a software company formed in 2000, is developing technology that is intended to manage efficiently business group information over an Internet network. The Portris system would enable teams simultaneously to exchange information and collaborate on documents over networks. On October 16, 2000, the Company completed the acquisition of a 30.4% equity interest in Portris, Inc. Under the terms of the agreement, the Company received its interest in Portris for an aggregate of $380,000, which includes the cancellation of $250,000 of debt, which was included in the Company's notes receivable as of September 30, 2000, and providing an additional $130,000 in cash to Portris. On May 15, 2001 the Company purchased shares of Portris' Series A-1 Convertible Preferred Stock in return for cancellation of $370,000 in promissory notes and accrued interest, services rendered to Portris valued at $150,000 and $185, 000 in cash. Pursuant to this transaction the Company increased its equity interest in Portris to approximately 42%. Final Arrangements LLC ("Final Arrangements") is an Internet start-up that offers the ability to make funeral arrangements online. Initially, E2Enet had invested in WebMilestones.com ("WebMilestones"). WebMilestones was acquired by Final Arrangements on December 27, 2000, thereby converting the Company's 37.35% interest in WebMilestones to a 0.13% interest in Final Arrangements. -3- 7 YAZAM ACQUISITION On March 27, 2001, the Company consummated its acquisition by merger of Yazam.com, Inc ("Yazam"). Yazam had been engaged in seed-stage funding and business development services to emerging internet and technology related start-ups. At its peak, Yazam had investments in 26 portfolio companies in several different countries and approximately 129 employees. Principally due to reverses in the stock market, Yazam had effectively ceased capital raising and investment operations in the fourth quarter of 2000 pending its liquidation or sale. The purchase price for Yazam was $22,000,000 in cash plus 27,374 shares of the Company's Series F Convertible Preferred Stock and warrants to purchase an aggregate of 8,000,000 shares of the Company's Common Stock at $0.34 per share. Pursuant to the transaction, the Company principally obtained approximately $28.9 million of cash held by Yazam at closing, investments in various associated companies and a $1 million asset representing a business held and under contract for sale that has since closed. The net result is that, in addition to purchasing Yazam's interest in all of its associated companies and operating subsidiaries, the Company acquired approximately $6.9 million in cash and issued redeemable convertible preferred stock. Of the investments in 26 associated companies acquired from Yazam at the closing of the merger, Yazam prior to, the Merger wrote down its investment in 19 of such companies, in accordance with an assessment of the respective companies' cash position and potential to execute its business plan. The associated companies of Yazam are now being developed by existing U. S. Technologies personnel including seven Yazam professionals that remained with the Company after the Yazam Acquisition. Gregory FCA, the principal operating subsidiary acquired in the transaction, is a public relations and investor relations firm which will complement the Company's existing capabilities in providing business development services to associated companies. The Series F Stock issued in the transaction may be convertible into 27,374,000 shares of Common Stock of the Company. The issuance of shares of the Company's Common Stock upon the exercise of the 8,000,000 warrants (as described above) and the conversion of the Series F Convertible Preferred Stock into Common Stock will require the prior amendment of the Company's charter to increase the authorized common shares of the Company, as previously disclosed by the Company. In the event that the Company's charter is not amended prior to September 1, 2001, holders of the Company's Series F Convertible Preferred Stock will have the right to put their shares to the Company in accordance with the terms of the definitive merger agreement. The Yazam stockholders who received shares of Series F Stock may require the Company after such date to repurchase their shares of Series F Stock for a price per share equal to the average price of Company Common Stock as reported on the OTC BB (or other applicable nationally recognized market quotation system) for the 20 trading days prior to the date of the request multiplied by 1,000, but not less than $250 per share of Series F Stock (or $0.25 per common share), or a minimum of $6,843,500 in the aggregate. -4- 8 SERIES F STOCK WAIVER AND REPLACEMENT AGREEMENT In mid-July, 2001, the Company began negotiations with certain significant holders of the Series F Stock to obtain waivers of their put. On July 19 and 20, 2001 the Company entered into Waiver and Replacement Agreements with respect to the Series F Stock held by the two largest holders of that class. The Waiver and Replacement Agreements provide for a waiver of their put as well as their right to redeem their shares after March 27, 2003 that is set forth in the Series F Certificate of Designations. In return, the holders of those shares of Series F Stock received the right to require the Company to purchase their shares at a purchase price of $300.00 per share of Series F Stock (or $0.30 per share of Common Stock) during a ninety-day period beginning September 30, 2002. On July 19, 2001, the Carlyle Group entered into a Waiver and Replacement Agreement with the Company. On July 20, 2001, various affiliates of the Texas Pacific Group ("TPG") entered into an agreement to sell their shares of Series F Stock to USV Partners at $150.00 per share of Series F Stock (or $0.15 per share of common stock) by August 3, 2001 and USV entered into a Waiver and Replacement Agreement with respect to those shares. USV and its assignees expect to close the transaction the week of August 6, 2001. OWNERSHIP POSITION IN OUR ASSOCIATED COMPANIES From April 12, 2000 through December 31, 2000, we acquired interests in or established eight technology companies. The six technology companies listed below were owned by the Company and were still operating as of December 31, 2000. We classify companies in which we, directly or indirectly through wholly owned subsidiaries, have interests as associated companies. We have indicated below our percentage of equity ownership in each associated company. Our equity ownership/voting power percentages have been calculated based on the issued and outstanding common stock of each associated company, assuming the issuance of common stock upon the exercise of outstanding options and warrants and the conversion into common stock of outstanding convertible securities. Except where we indicate otherwise, our equity ownership and voting power percentages are the same. For those companies in which our equity ownership or voting power percentage is greater than 50%, we generally direct or control all of their operating activities and account for them as a consolidated subsidiary. For those companies in which our equity ownership or voting power percentage is at least 20%, but not more than 50%, we generally have significant involvement in and influence over their operating activities, with board representation and rights to participate in material decisions and accordingly account for them on the equity basis. For those companies in which our equity ownership and voting power percentage is less than 20%, we may not be actively involved in their management or day-to-day operations, but may have Board representation and may offer or provide them advisory services and accordingly account for them on the cost basis. We also seek to encourage and facilitate cooperation and mutual assistance among our associated companies. We have identified below by marking with an asterisk (*) each associated company that is a development stage company. A development stage company has not yet begun planned principal operations, or has begun planned principal operations but has not yet generated significant revenue from those operations. Whether a company is in the development stage is determined on a case-by-case basis by that company's management. There is no specific revenue -5- 9 threshold that is applicable in all cases. A development stage company typically will be devoting most of its efforts to activities such as financial planning, raising capital, research and development, acquiring operating assets, and recruiting and training personnel. Currently, five of our associated companies are in the development stage. Our percentage ownership in any of the associated companies is subject to change as we make new investments and our associated companies accept new investments from us or other investors.
- ---------------------------------------------------------------------------------------------------------------------- ASSOCIATED COMPANY MARKET DATE FORMED ASSOCIATED SINCE EQUITY BOARD REPRESENTATION OWNERSHIP - ---------------------------------------------------------------------------------------------------------------------- 29th Street Partners Provides e-commerce February May 1999 9.12% The Company may (Formerly, Bluemercury, site for upscale 1999 E2Enet converted unilaterally designate Inc.)(1)* female cosmetic its interest in one member. products and Bluemercury to www.bluemercury.com accessories. 29th Street Total Directors - 3 Partners in 2001 - ---------------------------------------------------------------------------------------------------------------------- Gomembers.com (Formerly Provides customized 1992 November 2000 0.47% None MEI Software)(2) management software E2Enet made its systems to manage initial trade associations, investment in a professional predecessor, www.members.com associations and MEI, in trade unions. September 1999. - ---------------------------------------------------------------------------------------------------------------------- Onemade.com, Inc.(1)* Provides e-commerce April 1999 May 1999 12.25% The Company may site that will serve unilaterally designate participants in the one member and arts, crafts, and jointly, with the hobby industries. majority stockholders, designate one www.onemade.com additional member. Total Directors - 5 - ---------------------------------------------------------------------------------------------------------------------- Portris, Inc.(3)* Develops technology February October 2000 42.2% The Company may to facilitate the 2000 unilaterally designate simultaneous exchange two members. of information and collaboration on Total Directors - 9 documents over the www.portris.com Internet. - ---------------------------------------------------------------------------------------------------------------------- PromiseMark, Inc.(4)* Internet surety August October 1999 16.00% The Company may Company which 1999 unilaterally designate provides repair one member and jointly guarantees against designate three viruses that harm additional members. www.promisemark.com computers. Total Directors - 7 - ---------------------------------------------------------------------------------------------------------------------- Final Arrangements, LLC Provides Internet April 2000 July 2000 0.13% None (Formerly WebMilestones) publishing services. (The Company (1)* converted its interest in WebMilestones to Final Arrangements in www.arrangonline.com December 2001) - ---------------------------------------------------------------------------------------------------------------------- (1) Information current as of March 31, 2001. (2) Information current as of November 7, 2000. (3) Information current as of May 15, 2001. (4) Information current as of June 26, 2001. - ----------------------------------------------------------------------------------------------------------------------
Of the six associated companies shown above, four have generated revenues as of December 31, 2000. Competition. We face intense competition to develop and acquire interests in technology companies from traditional venture capital firms, companies with business strategies similar to our own, corporate strategic investors, other better financed Internet incubators and other capital providers. Competitors with business strategies similar to our own include publicly held CMGI, -6- 10 Internet Capital Group and Safeguard Scientifics, as well as private companies, including Idealab. In addition, we may face competition from an emerging group of online service providers that facilitate relationships between entrepreneurs and venture capitalists, such as vcapital.com and Garage.com. We also will be competing with corporate strategic investors that include Fortune 500 companies that are developing Internet strategies and Internet capabilities as well as investing in technology companies. Further, certain professional service firms, directly or through affiliated private investment funds, provide capital and services to technology companies that are clients. Many of our competitors have more experience identifying and acquiring interests in technology companies, and have greater financial and management resources, brand name recognition and industry contacts than we do. This intense competition could limit our opportunities to acquire interests in associated companies or force us to pay higher prices to acquire these interests. Further, the impact of this competition on the valuation of technology companies could result in lower returns. In addition, some of our competitors, including venture capital firms, private companies with business strategies similar to ours and corporate strategic investors, may have a competitive advantage over us because they have more flexibility than we do in structuring acquisitions in companies because they do not need to acquire majority or controlling interests in companies to avoid regulation under the Investment Company Act, as discussed below. Since we are principally acquiring interests in and developing technology companies we are also competing against large and well-financed technology companies, consulting firms and others for executives with appropriate management expertise in discrete technology fields. Due to the rapid growth and expansion of new technology, competition for experienced management is fierce. Management believes that it has been able to attract well-qualified personnel to help develop its associated companies and believes it can continue to do so but can provide no assurances in this regard. PIE BUSINESS OF USXX U.S. Technologies operates, through its wholly owned subsidiary, LTI, industrial facilities located within both private and state prisons. LTI staffs these facilities principally with inmate labor under the guidelines of the PIE program. In 1979, Congress established the PIE program to encourage state and local governments to create jobs for prisoners that approximate private sector work, pay the local prevailing wages for similar work, and enable inmates to acquire marketable skills to increase their chances for rehabilitation and employment upon release. In this outsourcing capacity, U.S. Technologies solicits manufacturing, assembly, repair, kitting, and fulfillment services and other businesses. Through LTI, U.S. Technologies selects inmates in a competitive process and trains them in the job skills needed for the contracted work as well as the general job skills required to secure and hold long-term employment. Up to 80% of the inmates' wages are withheld in order to pay fines, restitution to victims, alimony, child support and taxes, and to reimburse the government for the costs of their incarceration. According to the Federal Bureau of Justice and Assistance, the PIE program has been successful in reducing the recidivism rate. -7- 11 Under a 1997 agreement with Wackenhut Corrections Corporation, WCC allows U.S. Technologies to operate as its industry PIE partner in any WCC-managed correctional facility. WCC also has agreed to purchase products manufactured by the Company to the extent feasible. WCC runs 47 correctional facilities in the United States, Australia, England and Canada. In 1998, U.S. Technologies reached an agreement with the States of California and Florida to expand its operations into correctional facilities managed by those states. LTI operates an electronics plant at WCC's Lockhart, Texas corrections facility which presently manufactures and repairs circuit boards for Dell, Motorola, HDC and Texas Digital, among others. The Texas facility also performs various mechanical assembly operations on customer products which were formerly assembled in Mexico. LTI has a furniture manufacturing plant in a state correctional facility located in Blythe, California which presently manufactures office panel blanks for Unisource, Inc. LTI had completed construction of a motorcycle parts manufacturing operation in a WCC facility in South Bay, Florida. Because of financial problems of the motorcycle manufacturer, the Company ceased managing at this facility on September 30, 2000. On October 27, 2000, the motorcycle manufacturer entered bankruptcy. Previously, the Company operated a customer call center in a Draper, Utah correctional facility through its wholly owned subsidiary Service-To-Industry ("STI"). The center was closed during the first quarter of 1999 and has not reopened. STI still exists but no longer has any operations. Electronics Manufacturing. As a member of the Electronics Manufacturing Provider industry, U.S. Technologies, through LTI, provides contract manufacturing ("CM") services including cable and wire harness assembly, finished assembly rework and repair, 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 that the CM segment represents a growth opportunity for the outsourcing operations. Original Equipment Manufacturers ("OEM") such as Cisco, Hewlett-Packard, IBM, Lucent, Texas Instruments and many others are increasingly relying on CMs 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 OEMs include: - improved time to market since new products can be turned on quickly by a CM 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 CMs can efficiently purchase many generic components. Finally, CMs typically do not bear the same overhead and benefit burdens incurred by OEMs. The market for CM services is the multi-billion dollar electronics industry. LTI specializes in production of circuit boards which are ordered in shorter production runs and -8- 12 therefore does not 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. In fact, approximately 25% of LTI's annual sales in 2000 were for the assembly of boards under subcontract to larger CM's who could more cost effectively source low volume boards from LTI than assemble them in house. LTI's customer base consists of approximately 60 active customers. Furniture Manufacturing. Through its furniture manufacturing facility, U.S. Technologies manufactures office partitions and associated parts for use in the office workstation industry. The facility is capable of producing a high quality panel comparable to those produced and sold by Herman Miller and Steelcase. LTI's product is designed to be interchangeable with several manufacturers of office furniture. The major market served by the LTI's furniture manufacturing facility is the replacement or aftermarket office partition market. This market is dominated by a few large companies which offer alternatives to purchasing the higher priced products of Herman Miller and Steelcase. These companies offer finished products which are interchangeable with the more expensive products, but at a considerably lower price. In January 2000, LTI contracted with Unisource, Inc. to produce their panels. This manufacturer requires approximately one-shift, out of a possible three shifts, of the operating capabilities of the Blythe facility and accounted for approximately 17% of LTI's 2000 sales volume. LTI is actively seeking other customers to increase the plant's output and is negotiating with Unisource to produce additional products, warehouse finished goods, and provide order fulfillment services Motorcycle Manufacturing. LTI's motorcycle parts manufacturing and assembly facility was located in a WCC facility in South Bay, Florida, and began operations in the second quarter of 2000. Initially, the facility was designed to manufacture, paint and polish various motorcycle body parts with the intention of eventually accomplishing complete parts manufacture and assembly of motorcycles. Our motorcycle assembly plant had only one customer, American Quantum Motorcycles. American Quantum filed for bankruptcy protection on October 27, 2000 and all of the Company's operations in South Bay have ceased pending the outcome. Business Strategy. During the past year, the Company had considered selling its PIE business. Subsequently, management has decided to retain the PIE business. The Company's strategy for LTI 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 straightforward manner by maintaining corporate overhead at or below 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; -9- 13 - Provide ancillary services such as the final assembly of products 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 value added services in other markets where low cost labor without the soft costs of turnover, absenteeism, vacations, holidays, and employer paid benefits would be competitive advantages. 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 PIE programs. The Company is also working with state-run (non-privatized) correctional facilities where industrial workspace is available to establish PIE work programs. The Company continues to seek additional customers for its furniture manufacturing facility located in Blythe, California and is evaluating several options regarding its opportunities for entry into the fulfillment industry. Customers. Historically, LTI has been and remains dependent upon certain customers for a major portion of its sales. The top three customers, Dell Computer, Unisource Office Furniture, and Vant Electronics, together accounted for approximately 49% of LTI's sales for the year ended December 31, 2000. Amounts due from three customers, HDL Research Lab, Unisource Furniture and Vant Electronics accounted for 67% of total receivables. Markets. Within the electronics CM industry, the Company has promoted its services primarily in the Southwest region of the United States. However, recognizing that the market for its CM services is the multi-billion dollar electronics industry, the Company intends to broaden it's marketing geographically to capture additional business. 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 expensive products, but at a considerably lower price. The Company is negotiating with Unisource to produce additional products such as work surfaces, and to fully integrate its production of the partitions to include finishing the partitions with fabric and hardware, packaging, warehousing, and order fulfillment. The Company is also actively seeking other customers to increase the plant's output. Suppliers and Raw Materials. The raw materials used in each of LTI's industry segment 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 U.S. Technologies CM and furniture manufacturing segments consists of numerous small, regional companies and a significantly smaller group of -10- 14 large national companies. LTI competes directly with the smaller regional companies and avoids the markets dominated by the national companies. In fact, some of the largest national and international companies utilize LTI for completion of short run production and rework tasks that are part of their own processes but are too small for them to complete efficiently. When competing with smaller regional companies, U.S. Technologies has a distinct cost advantage created by being able to provide manufacturing facilities and without having to incur the same fringe personnel costs (health benefits, turnover, absenteeism, holidays, tardiness, and vacations, etc.) as companies that rely exclusively on free-world employees. Regulation of the PIE Business. 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 wages 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: - 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; - Workers compensation and unemployment compensation benefits must be provided; - Inmate participation in the program must be voluntary and in writing; - Organized labor and local private industry must be consulted prior to the initiation of a new PIE industry; - 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; and - 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. Regulation of our Associated Companies. U.S. companies that have more than one hundred (100) stockholders or whose shares are publicly traded in the U.S. and are, or hold -11- 15 themselves out to be, engaged primarily in the business of investing, reinvesting or trading of securities are regulated by the Securities and Exchange Commission (the "Commission" or "SEC") pursuant to the Investment Company Act of 1940, as amended. Investment Company Act regulations are inconsistent with USXX' strategy of actively managing, developing, operating and promoting collaboration among its network of associated companies. USXX would not be able to operate its business as a registered investment company. Management of USXX believes that because of the planned structure of USXX' interests in its associated companies and its business strategy, USXX is not currently subject to regulation under the Investment Company Act. However, USXX cannot assure you that the present structure of its associated Company interests and its business strategy will preclude regulation under the Investment Company Act, and USXX may need to take specific actions to avoid regulation under the Investment Company Act that may not be in its best interests or consistent with its strategy. To avoid regulation under the Investment Company Act and related SEC rules, USXX may need to sell assets that it would otherwise want to retain and may be unable to sell assets that it would otherwise want to sell. In addition, USXX may be forced to acquire additional, or retain existing, income-generating or loss-generating assets which it would not otherwise have acquired or retained and may need to forego opportunities to acquire interests in companies that it believed would benefit its business. If USXX were forced to sell, buy or retain assets in this manner, it may be prevented from successfully executing its business strategy. Because gains, losses, income and asset values for technology businesses can be highly volatile, and because future rounds of financing for rapidly moving technology associated companies will dilute USXX' ownership interests, the financial analyses relevant to its status under the Investment Company Act will be subject to regular change. The audit committee of USXX' board of directors, together with USXX' management, will decide financial and other valuation issues relevant to determining USXX' compliance with the Investment Company and related regulations. E-commerce Regulation and Other Legal Uncertainties. There are several new laws and regulations that affect the Internet and e-commerce. For example, Congress recently enacted laws regarding online copyright infringement and the collection of personal information and financial data. Additionally, the Federal government has applied old rules and regulations to this new medium in certain areas. E-commerce businesses are subject to the same numerous laws affecting interstate and international commerce in general. However, the application of these laws to online business is sometimes unclear and subject to litigation in both domestic and foreign jurisdictions. Although there generally remains a desire by legislators and regulators to keep the Internet as unfettered as possible with new rules and regulations, the Internet's popularity, increased use and its impact on consumers will undoubtedly foster the adoption of additional laws and regulations on a local, state and federal level, as well as globally. Current laws and regulations cover issues such as the collection and use of data from website visitors and related privacy issues, pricing, content, copyrights, trademarks, promotions, distribution and quality of goods and services, registration of domain names and use, and export and distribution of encryption technology. The enactment of additional laws or regulations may impede the growth -12- 16 of the technology industry, which could decrease the revenues of our associated companies and place additional economic burdens on them. Other specific areas of legislative and regulatory activity include: Taxes. Through the Internet Tax Freedom Act of 1998, Congress has enacted a three-year moratorium, ending on October 21, 2001, on the application of discriminatory, multiple or special taxes by the states on Internet access or on products and services delivered over the Internet. Congress further declared that there will be no federal taxes on goods, services and information sold exclusively over the Internet until the end of the moratorium. However, this moratorium does not prevent states from taxing activities or goods and services that the states would otherwise have the power to tax. Furthermore, the moratorium does not apply to some state taxes on Internet access that were in place before the moratorium was enacted, provided the tax was generally imposed and actually enforced. The moratorium also does not affect federal and state income taxes on the taxable income of e-commerce businesses. Online Privacy. In the past year, there has been considerable legislative and regulatory activity in regards to the protection of consumer privacy and the collection, distribution, and disclosure of personal and financial data online. The protection of privacy on the Internet is also becoming an area of increased litigation in state, federal and foreign courts. The Children's Online Privacy Protection Act of 1998 ("COPPA") requires that all commercial website operators and online services that are directed to children under the age of thirteen or who knowingly collect personal information from children (including the use of cookies and other tracking mechanisms) must obtain verifiable parental consent before collecting, using or disclosing such information. Additional requirements include posting of a website Privacy Notice, which must explain how the collection of personal information will be treated, in a "clear and prominent" place on the webpage and each area where the information is collected. Violators are subject to civil judgments and $10,000 fines per violation. State Attorneys General are also authorized to enforce COPPA via state action. The Federal Trade Commission ("FTC") issued regulations for COPPA that became effective in April 2000. The Financial Services Modernization Act of 1999 (also known as the Gramm-Leach-Bliley Act) governs the disclosure and sharing of nonpublic personal information to affiliates and third parties by a "financial institution," including information collected and shared over the Internet. Financial institutions are not limited to traditional banks or savings and loans, but defined broadly to encompass companies providing services such as leasing real or personal property (or acting as an agent, broker, or advisor in such leasing), providing investment, financial or economic advisor services, and operating a travel agency in connection with such services. The Act also restricts distribution of personal information such as social security numbers, credit history and loan application information without a customer's consent. The FTC's regulations implementing this new law were adopted May 2000 and are effective July 2001. In addition to its new regulations, the FTC has issued numerous guidelines on its long-standing prohibition on unfair or deceptive acts and practices in sales, advertising, marketing and promotional activities and the application of these rules to the Internet and e-commerce. The -13- 17 same consumer protection laws that apply to commercial activities in other media such as television and cable also apply to Internet transactions. Therefore, the FTC's Mail or Telephone Order Merchandise Rule, Telemarketing Sales Rule, Disclosure of Written Consumer Product Warranty Terms and Conditions Rule, and others also apply to online activity. The FTC has issued several substantive reports and recommendations for legislation to Congress in the areas of consumer protection. For example, in its third report on Internet privacy, "Privacy Online: Fair Information Practices in the Electronic Marketplace," released May 2000, the FTC concluded that self-regulation by most commercial websites to protect the privacy of Internet consumers was not effective. Thus, the FTC asked for congressional authority to regulate Internet privacy given the failure of most web sites to meet standards of disclosure for personal information. The FTC also asked for Congressional authority to regulate "online profiling," the process by which network advertising companies manage and provide advertising for unrelated websites based on tracking consumer data and Internet usage. It issued a report, "Online Profiling: Benefits and Concerns," and testified before the U.S. Senate Commerce Committee in June 2000. After the report was issued, a group of Internet advertising companies negotiated with the FTC to establish self-imposed privacy standards that would circumvent new legislation. The FTC made specific recommendations to Congress in July 2000 following its negotiations with the Internet advertising industry. Currently, there are no pending bills which would implement these recommendations. In addition, in 1998 the European Union ("EU") directed its member nations to enact much more stringent privacy protection laws than are generally found in the United States. The U.S. Department of Commerce has negotiated an agreement with the EU that will create a "safe harbor" for U.S. companies that agree to a voluntary self-regulatory code. The "U.S. Safe Harbor Privacy Principles" will allow the exportation of personal information from European citizens, including corporate employees. The Agreement was expected to become effective late July 2000. However, due to a number of unsettled areas its effectiveness was delayed until its eventual passage in November 2000. Under the safe harbor, as enacted, an EU organization can ensure that it is sending information to an organization that is complying with the safe harbor by checking it against a list of organizations which self-certify that they comply with the safe harbor. The list of self-certifying organizations is available on the Department of Commerce's Website. Private industry initiatives and standards have also developed concerning privacy issues, primarily as a means to circumvent new legislation and regulation. In addition to compliance with governmental regulation, we and our associated companies may decide that it is in our best interest to comply with industry standards or public opinion regarding privacy issues voluntarily. Online Content. The distribution and visual depiction of objectionable content on the Internet such as obscenity and child pornography is regulated under multiple criminal statutes and enforced by various local, state and federal law enforcement agencies. Internet Service Providers ("ISPs") and operators could be liable for "aiding and abetting" such illegal action if the distribution or reproduction of such material via its system is known. There is also legislation that serves to protect online service providers from civil liability in causes of actions such as libel and copyright infringement. The Communications Decency Act -14- 18 ("CDA"), part of the Telecommunications Act of 1996, provides for the protection for "Good Samaritan" blocking and screening of offensive material. The Act states that no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider. Operators are protected from civil liability if they merely pass along the content of others, even if an operator in good faith monitors the website for the removal of material the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected. However, an unresolved issue is the definition of "provider." Furthermore, the CDA has no effect on criminal law, intellectual property law, or state law. Protections from copyright infringement fall under the Digital Millennium Copyright Act of 1998 ("DMCA"), which created a safe harbor for online service providers from copyright liability for certain actions. ISPs are not liable when they conduct transitory communications, system caching, storage of information on systems or networks at direction of users, and use of information location tools. However, the DMCA does not offer protection from copyright infringement claims for music, literary or other creative content, issues currently in litigation in federal and foreign courts. Domain Names. The authority for the distribution and maintenance of web site addresses (i.e., domain names) generally is provided by the Internet Corporation for Assigned Names and Numbers ("ICANN"), which was established in 1998. The World Intellectual Property Organization ("WIPO") is also involved in the administration of domain names and has adopted new enforcement provisions for violators of registration procedures and trademark infringement, to be administered by ICANN. The distribution of web site addresses in the United States and in foreign countries has changed drastically with the growth of new registration companies and the pending addition of new generic top-level domain names (i.e., .bus). As a result, our associated companies may not be able to acquire or maintain relevant web site addresses in all countries where they conduct business. In 1999, Congress enacted the Anti-Cybersquatting Consumer Protection Act of 1999, to address domain name cybersquatting, which is the practice of registering an Internet address of an established trademark with the hopes of selling the Internet address to the affected company. The legislation also includes a prohibition on the registration of a domain name that is the name of another living person or a name that is confusingly similar to that name. The scope of the Act has not been precisely defined and the definition of cybersquatting has been challenged in numerous courts. Furthermore, several foreign jurisdictions have adopted stringent cybersquatting laws. Even more countries are reviewing the issue. As a result of increased legislation and trademark laws generally, we or our associated companies may be subject to liability based on use of domain names or trademarks that allegedly infringe the rights of third parties. Regulation of Communications Facilities. To some extent, the rapid growth of the Internet in the United States has been due to the relative lack of government intervention in the marketplace for Internet access. This lack of intervention may not continue in the future. For example, the Federal Communications Commission ("FCC") began a formal proceeding in -15- 19 September, 2000 on the issue of access to a cable company's platform by multiple ISPs. Non-affiliated ISPs have requested that the FCC regulate broadband Internet access over cable systems in much the same manner as telephone services, which could slow the deployment of broadband Internet access services. Additionally, local telephone carriers have petitioned the FCC to regulate Internet service providers in a manner similar to long distance telephone carriers by imposing access fees on the providers. The FCC is also expected to address the issue of payment of reciprocal compensation to telephone companies which terminate ISP traffic. This FCC decision could offset the relationships and arrangements for the provision of these services. Because of these proceedings or others, new laws or regulations could be enacted which could burden the companies that provide the infrastructure on which the Internet is based, slowing the rapid expansion of the medium and its availability to new users. Business Opportunities. An amendment to the Delaware General Corporation Law, which became effective on July 1, 2000, clarifies that a corporation has the power to waive in advance, in its certificate of incorporation or by action of its board of directors, the corporation's interest or expectations in business opportunities or classes or categories of business opportunities, as those opportunities may be defined by the corporation. These classes or categories of opportunities could be defined in many different ways, including by type of business, by who originated the business opportunity, by who has the interest in the business opportunity, by the period of time, or by the geographical location. Our Board of Directors may consider and take action as permitted by this new statutory provision. If we waive an opportunity in accordance with this provision, a director would not be required to present the waived opportunity to us, even if pursuing the opportunity could be in our best interest, and instead could present it to other businesses, including the director's own business. In addition to the specific issues outlined above, other generally applicable laws may also affect our associated companies and us. The exact applicability of many of these laws to Internet e-commerce is, however, uncertain. EMPLOYEES As of December 31, 2000, the Company employed approximately 120 persons, 13 are production and administrative personnel, 2 are members of executive management, and 105 are inmates. None of the Company's employees are represented by a union. We believe that our relationship with our employees is very strong. The Company benefits from a strongly motivated labor force which is hard working and productive for several reasons: - Inmates employed by LTI learn work habits and skills transferable to outside employment when they are released; and - Employed inmates have meaningful and productive jobs with LTI that provide a greater sense of accomplishment than other tasks within the institution. U.S. Technologies employed approximately seven people in its executive offices in Washington, D.C. as of December 31, 2000. -16- 20 ACQUISITIONS On September 27, 2000, the Company entered into an agreement to acquire by merger On-Site Sourcing, Inc., a provider of digital imaging, document management and litigation reprographics for approximately $35 million in U.S. Technologies' Common Stock and cash. The merger agreement terminated, pursuant to its terms, on March 31, 2001 and the parties are not currently in negotiations to merge. ITEM 2. PROPERTIES. Our wholly owned subsidiary, LTI, operates in a minimum security prison in Texas under an agreement with WCC, the Texas Department of Criminal Justice, the Division of Pardons and Parole 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 31, 2004, and provides an automatic three year extension unless notification has been given by either party at least six months prior to the expiration date of the current term. The amount of square footage may be increased or decreased depending upon the number of prisoners to be employed. The lease also provides for annual rental rates of $1.00 per year for the primary term and the first renewal term thereafter. Occupancy fees for successive renewal terms are to be negotiated by written agreement of the parties. 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 October of 2006. The lease provides for monthly payments of $726. U.S. Technologies leases executive office space in Washington, D.C. The office is approximately 8,200 square feet and the lease provides for monthly payments of $24,000. The lease on the office expires on December 31, 2004. The Company subleased some of this office space to some of its associated companies. U.S. Technologies' operations and accounting center is currently co-located in the offices of The Spear Group in Norcross, Georgia. James V. Warren, a director of the Company, is the co-founder and President of The Spear Group. We had a management services arrangement with The Spear Group to provide operating, accounting and administrative services to our prison facilities. During the year ended December 31, 2000, we paid the Spear Group approximately $97,000 pursuant to this arrangement. Such arrangement terminated in mid-March 2001. U.S. Technologies did not have a lease on the space it occupies at The Spear Group and paid $9,400 in rent to The Spear Group during the year-ended December 31, 2000. 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. 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. -17- 21 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. This action was settled during June of 2000 for approximately $155,000. 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 amount of approximately $30,000. This case is being vigorously defended by the Company. As part of our acquisition of E2Enet, the Company agreed to assume a $2,000,010 put agreement. The put agreement provided that two former E2Enet stockholders who were founders of one of the E2Enet associated companies (the "Blue Rock Founders") may put their E2Enet stock to Jonathan Ledecky, a founding shareholder of E2Enet for $2,000,010 in the aggregate. In the E2Enet acquisition, the Blue Rock Founders' shares were exchanged, collectively, for 107.56 shares of our Series B Stock. Together, the Blue Rock Founders' shares of Series B Stock were converted into 537,800 shares of our Common Stock. As part of the acquisition of E2Enet, USXX agreed to assume E2Enet founder Jonathan Ledecky's obligations under the put agreement. The Blue Rock Founders did not consent to this assignment, which consent was required pursuant to the terms of the put agreement. On May 15, 2000, the Blue Rock Founders gave notice to Jonathan Ledecky that they were exercising their put. On June 19, 2000, the Blue Rock Founders filed suit against Mr. Ledecky in the U.S. District Court for the District of Columbia alleging that he had failed to perform under the Put Agreement. On August 10, 2000, Mr. Ledecky filed an answer generally denying all of the allegations in the plaintiff's complaint. On March 30, 2001, this matter was settled with the Company paying Mr. Ledecky $1,994,750 to cover the costs of his settlement with the Blue Rock Founders. On January 3, 2001, Verktronix S.A. de C.V. and Rodolfo Avala-Avarzagoitia sued the Company in the 22nd Judicial District Court of Caldwell County, Texas for fraudulent inducement to enter a contract with LTI, breach of warranty and breach of contract for an unspecified amount of damages. The Company has filed a counterclaim for breach of contract and is seeking $114,777 in damages and will vigorously contest this matter. Management does not believe the results of this litigation will be material to the Company. From time to time the Company is subject to claims and suits that arise in the ordinary course of its business. While it is not possible to predict the ultimate outcome of these matters, the Company believes that any losses associated with any of such matters will not have a material effect on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the fourth quarter ended December 31, 2000, no matters were submitted to a vote of security holders of the Company. -18- 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's Common Stock had been quoted on the OTC Bulletin Board under the symbol "USXX" until being suspended as a result of its failure to file timely this Form 10-K. However, the Company's Common Stock may still be traded over the counter. The Company anticipates that its Common Stock will resume being quoted on the OTC Bulletin Board shortly after the Company becomes current in its reporting obligation. 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 quarter ended March 31, 2001 and the years ended December 31, 2000, 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 ------- ------- 2001 1st Quarter $0.5312 $0.1250 2nd Quarter $0.5468 $0.0937 2000 4th Quarter $0.8600 $0.1100 3rd Quarter $1.2200 $0.6300 2nd Quarter $2.9100 $1.0000 1st Quarter $5.7500 $0.1500 1999 4th Quarter $0.2600 $0.1000 3rd Quarter $0.4100 $0.2100 2nd Quarter $0.4600 $0.3200 1st Quarter $0.5900 $0.3400 1998 4th Quarter $0.6300 $0.3800 3rd Quarter $0.7100 $0.4200 2nd Quarter $0.9000 $0.6400 1st Quarter $0.9200 $0.4400
On June 29, 2001, the closing bid price of the Company's Common Stock, as quoted on the OTC Bulletin Board system, was $0.4531. HOLDERS OF COMMON STOCK As of June 29, 2001, there were 538 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 any earnings for the expansion and development of the Company's business. Future dividend policy and the payment of dividends, if -19- 23 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 has raised capital and completed acquisitions through the offer and sale of securities that are exempt from registration under the Securities Act of 1933 pursuant to the exemptions from registration provided by Regulation D promulgated under the Securities Act, Section 4(2) of the Securities Act or otherwise. The Company completed its acquisition of E2Enet pursuant to the E2E Stock Exchange Agreement. On April 12, 2000, the date of the closing of the acquisition of E2Enet, the Company's offering of 5,184 shares of Series C Stock for an aggregate of $5,184,000 was fully subscribed. Ultimately, the Company received funds for 4,534 shares of Series C Stock for an aggregate of $4,534,000. Net of issuance costs of $196,806, proceeds of the offering were $4,337,914. These shares will be mandatorily converted into an aggregate of 3,126,895 shares of Common Stock when the Company amends its Charter to authorize the issuance of additional Common Stock. Of these shares, USV Partners, LLC purchased 2,750 shares for $2,750,000. On April 12, 2000, the Company raised $1,250,000 through the sale of 125,000 shares of Series A stock, which are convertible into 10,245,900 shares of Common Stock, to USV. Gregory Earls, the Company's Chairman and Chief Executive Officer, is the sole member of the manager of USV. As of May 31, 2001 USV owned 507,140 shares of the 625,000 outstanding shares of Series A Stock. Upon the conversion of such Series A Stock, USV would be entitled to receive 41,568,852 shares of Common Stock. USV and the Company entered into a Waiver Agreement, dated as of March 1, 2000, whereby USV waived its right to convert its Series A shares into Common Stock until the Company's stockholders approve an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock. On September 20, 2000, this waiver was extended to include all other beneficial interests of Mr. Earls by an agreement among Mr. Earls, the Earls Family Limited Partnership and the Company. Mr. Earls and USV intend to convert all of their shares of Series A Stock to Common Stock if and when the charter amendment becomes effective. During the fiscal year ended December 31, 2000, the Company received a total of approximately $5,784,000 in connection with the private placement of Series A Preferred Stock and Series C Preferred Stock. The proceeds of these private placement sales have been, and will continue to be, used to finance additional investments in new and existing technology businesses, the payment of costs incurred and liabilities assumed in connection with the acquisition of E2Enet and related business transactions, and the Company's ongoing working capital needs and operating expenses. When the E2Enet Acquisition closed, E2Enet's stockholders were issued shares of Series B Preferred Stock, which have a total liquidation preference aggregating $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. -20- 24 On December 28, 2000, the Company entered into an agreement with Buyline.net, Incorporated ("Buyline"), one of the Company's associated companies, and Accenture. Buyline owed Accenture for software consulting and other services performed for Buyline. In order to support Buyline's efforts to satisfy in full the amount owed to Accenture, the Company issued to Accenture 1,552.5 shares of the Company's new Series D Mandatorily Convertible Preferred Stock, par value $0.02 per share ("Series D Preferred"), which shares are convertible into 1,552,500 shares of Common Stock of the Company. In consideration for the Company issuing its Series D Preferred stock to Accenture, Buyline issued to the Company 5,025,819 shares of Buyline Common Stock. Buyline also issued shares of its Common Stock to Accenture, which shares represent approximately 5.57% of the outstanding Common Stock of Buyline. On March 27, 2001, in connection with the Company's merger with Yazam.com, Inc., the Company issued warrants to purchase 8,000,000 shares of Company Common Stock and 27,374 shares of Series F Preferred Stock, which preferred shares are convertible into 27,374,000 shares of Company Common Stock upon amendment of the Company's charter. See, "BUSINESS -- Subsequent Events." On March 27, 2001, the Company and holders of Yazam Preferred securities and Yazam Warrants ("Yazam Holders") entered into a Registration Rights Agreement ("the Yazam Registration Rights Agreement"). Under the Yazam Registration Rights Agreement, the Yazam Holders have the right to compel the Company to register their respective shares at the Company's expense. The Yazam Holders also have unlimited registration rights to be combined, at the Company's expense, with certain registrations of any equity securities by the Company ("piggyback rights"), subject to restrictions which an underwriter might impose for the sale of the shares. This Yazam Registration Rights Agreement expires by its terms March 27, 2007. The Company, USV Partners, Northwood Capital, Northwood Ventures, Ledecky and other holders of the Company's Series B and C preferred stock, entered into an agreement regarding registration rights for the Series A, Series B, and Series C preferred stock and Common Stock into which they are to be converted. Collectively, the stockholders party to the agreement have the right on three occasions to compel the Company to register their respective shares at the expense of the Company and rights on other occasions to have such registration effected at the expense of the holders. These stockholders also have unlimited registration rights to be combined, at the Company's expense, with certain registrations of any equity securities by the Company piggyback rights, subject to restrictions which might be imposed by an underwriter for the sale of such shares. During the year ended December 31, 2000, the Company recognized a non-cash expense of approximately $14.8 million as a result of deemed beneficial conversion features of the Series A, Series B and Series C Preferred Stock issued in 2000. The beneficial conversion amount was calculated for each respective preferred series as the excess of the market price of the Company's Common Stock, or $2.188, on the April 12, 2000 measurement date over the conversion price of the Series A, Series B and Series C Preferred Stock, respectively $0.122, $0.200 and $1.450 times the number of the Company's common shares to be issued on conversion of each preferred series. -21- 25 The following table presents the dilution of the Company's Common Stock, which will result upon approval of the Company's Charter Amendment and conversion of the Company's convertible preferred shares. Common stock outstanding at December 31, 2000 29,610,786 Conversion of Series A Preferred Stock 51,229,508 Conversion of Series B Preferred Stock 56,000,000 Conversion of Series C Preferred Stock 3,126,895 Conversion of Series D Preferred Stock 1,552,500 Conversion of Series F Preferred Stock 27,374,000 ----------- 168,893,689* ===========
* Does not include conversion of subscribed but unissued preferred stock which is not determinable at the date of this report. Also does not include shares which would be issuable upon exercise of stock options and warrants. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 is derived from the Company's audited financial statements. This information should be read in conjunction with the financial statements for 2000, 1999 and 1998 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.
DECEMBER 31 ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------- ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Revenues $ 2,692,378 $ 3,764,785 $ 6,107,244 $ 4,166,626 $ 1,410,498 Operating Costs and Expenses: Cost of Sales 2,902,444 4,458,881 5,349,459 3,424,313 2,513,672 Selling Expenses 66,354 43,658 313,283 70,869 254,232 General and Administrative Expense (A)6,242,513 1,988,113 2,788,104 1,118,310 961,195 Impairment of Long-Lived Assets (B)12,304,800 -- -- 1,408,839 -- Restructuring Charge -- -- 90,000 196,903 -- Other - Litigation -- -- -- 252,256 -- Total Operating Costs 21,516,111 6,490,652 8,540,846 6,471,490 3,720,099 and Expenses Loss From Operations (18,823,733) (2,725,867) (2,433,602) (2,304,864) (2,309,601) Other Expense (Income) Gain on Sale of Subsidiary -- (E)(642,764) -- -- -- Interest (34,383) (28,893) 112,325 25,191 20,277 Equity in Loss of associated companies (A)640,350 -- -- -- -- Other (70,863) 202,271 18,782 (87,310) 253,134 Total Other 535,104 (469,386) 131,107 (62,119) 273,411
-22- 26
DECEMBER 31 ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------- ------------ ------------ ------------ ------------ Net Loss before share of Minority Interest in loss of Subsidiary (19,358,837) (2,256,481) (2,564,709) (2,242,745) (2,583,012) Minority Interest in loss of Subsidiary (C)707,740 -- -- -- -- Net Loss (18,651,097) (2,256,481) (2,564,709) (2,242,745) (2,583,012) Deemed Dividend (D)(14,757,650) -- -- -- -- Preferred Stock Dividend -- (F)525,114 -- -- -- Net Loss applicable to Common Stockholders (33,408,747) (2,781,595) (2,564,709) (2,242,745) (2,583,012) Basic and Diluted Loss Per Common Share (1.14) (0.10) (0.09) (0.08) (0.14) Weighed Average Shares Outstanding 29,408,063 28,795,278 28,996,607 26,793,999 18,555,439 BALANCE SHEET DATA: Working Capital (4,230,789) (794,439) (312,828) (849,592) (707,467) Total Assets 4,840,532 1,092,096 2,367,533 869,742 2,652,682 Total debt(1) 883,253 41,064 47,912 54,821 144,000 Stockholders' Equity (Capital Deficit) (49,302) (220,792) 724,042 (419,911) 1,088,520 (1) Includes long-term debt, current maturity of long-term debt, capital lease obligations, line of credit and notes payable.
(A) In April 2000 the Company completed its acquisition of E2Enet. General and administrative expenses increased as a result of the acquisition, and the Company began recognizing its share of equity in the losses of certain E2Enet affiliated companies accounted for on the equity method. (B) During 2000 and in conjunction with the Company's ongoing evaluation of its affiliated companies, impairment losses were recognized as a result of certain associated companies ceasing operations or curtailing their activities. (C) The Company recorded the minority interest's share of losses of Buyline during 2000. (D) During 2000 the Company recorded deemed dividends on certain series of its convertible preferred stock shares issued with beneficial conversion features. (E) In February 1999 the Company realized an approximate $643,000 gain upon the sale of GWP. (F) In November 1999, the terms of the Company's Series A Convertible Preferred Stock were modified to cancel the right of the holders to receive an annual dividend. 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. 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: -23- 27
DECEMBER 31 ------------------------------ 2000 1999 1998 1997 ------ ---- ---- ---- STATEMENT OF OPERATION DATA: Revenues 100% 100% 100% 100% Operating Costs and Expenses: Cost of Sales 108% 118% 88% 82% Selling Expenses 3% 1% 5% 2% General and Administrative Expense 232% 53% 46% 27% Impairment of Long-Lived Assets 457% -- -- 34% Restructuring Charge -- -- 1% 5% Other - Litigation -- -- -- 6% Total Operating Costs 800% 172% 140% 155% and Expenses Loss From Operations (700)% (72)% (40)% (55)% Other Expense (Income): Gain on Sale of Subsidiary -- (17)% -- -- Equity in Loss of associated companies 24% -- -- -- Interest (2)% (1)% 2% 1% Other (3)% 5% -- (2)% Total Other 20% (12)% 2% (1)% Net Loss before share of Minority Interest (719)% (60)% (42)% (54)% in loss of Subsidiary Minority Interest in loss of Subsidiary 27% -- -- -- Net Loss (693)% (60)% (42)% (54)% Deemed Dividends (549)% -- -- -- Preferred Stock Dividend -- 14% -- -- Net Loss applicable to Common Stockholders (1,241)% (74)% (42)% (54)%
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999. During the year ended December 31, 2000, the Company had net loss applicable to common shareholders of $33,408,747 or $1.14 per weighted-average share, on net sales of $2,671,378, as compared to a net loss applicable to common shareholders of $2,781,595 or $0.10 per weighted-average share on net sales of $3,764,785 for the year ended December 31, 1999. The net sales decrease of 29% was primarily the result of 1999 including approximately six weeks of sales for Technology Manufacturing & Design, Inc. ("TMD") of $948,000. The Company's ownership interest in TMD was sold in mid-February 1999. Sales of the Company's electronics manufacturing operations for 2000 were approximately $2,065,000 or 8.6% greater than 1999. Management's efforts to increase sales further in 2000 were adversely effected by quality problems with existing electronics products, which reduced reorders for 2000 and impaired the ability to attract new customers. The quality problems, relating to training on manual electronic assembly operations have been corrected by more extensive supervision of new employees and increased emphasis on quality control. There were no significant changes in the customer mix in electronics manufacturing operations for 2000 versus 1999. Management continues to solicit new customers and encourage additional orders from existing customers and expects these efforts to be successful. Sales of the Company's furniture manufacturing operations for 2000 were approximately $522,000 or 40% less than 1999. The furniture manufacturing operations in 1999 were dedicated -24- 28 to a single customer, Affordable Interior Systems, Inc. ("AIS") a national company supplying modular office furniture to commercial accounts. In November 1999, AIS and the Company were unable to successfully renegotiate the manufacturing contract and the contract was cancelled. It was not until February 2000 that the company was able to replace AIS with Unisource Office Furniture, Inc. ("Unisource"), a company with operations primarily on the West Coast of the United States. A combination of no sales for January and part of February of 2000 plus reduced sales to Unisource, compared to AIS, caused the decline in sales. Management is attempting to locate new customers for its furniture manufacturing operations, however due to the specialized nature of the facilities manufacturing equipment, primarily for planning wooden products, the universe of potential customers is limited. Cost of sales, in the amount of $2,902,444, decreased as a percentage of net sales to 109% for the year ended December 31, 2000 from $4,458,881, which represented 118% of net sales, for the year ended December 31, 1999. The decrease in the cost of sales percentage is primarily due to Lockhart's change of customer mix resulting in the use of more customer supplied materials and consequently reducing cost of sales as a percent of sales. Gross margin as a percentage of net sales has decreased from a positive 12.4% during 1998 to negative 18.4% and a negative 8.6% during 1999 an 2000, respectively. A primary cause of the decrease is a reduction in sales, exclusive of the sales of TMD, of approximately $1,371,000 from 1998 to 2000 due primarily to the loss of an electronics manufacturing contract with IBM to produce a specific circuit board, known as the "Tiger" board. During 1998 Tiger board production accounted for approximately $1,150,000 in sales and carried approximately a 45% gross profit margin. The Company's electronics manufacturing facility has been unable to attract another customer with a single product to replace the Tiger board volume and instead consistently produces products with differing manufacturing requirements and short production runs, resulting in lower gross margin percentages. Management continues to solicit customers with products which have longer production runs, but frequently longer runs consist of smaller homogeneous circuit boards which go to facilities equipped for high speed processing versus the Company's facility which is better suited to larger circuit boards which require more hand assembly. Selling expenses in the amount of $66,354 represented 2% of net sales during the year ended December 31, 2000 compared to $43,658 representing 1% of net sales for the year ended December 31, 1999. The increase in the selling expenses percentage is primarily due to the increased use of outside commission sales personnel. General and administrative expenses totaled $6,242,513 for the year ended December 31, 2000 which represented 234% of net sales, compared to $1,988,113 which represented 53% of net sales for the year ended December 31, 1999. Included in general and administrative expense for the year ended December 31, 2000 were depreciation and goodwill amortization related to the 2000 acquisitions of E2Enet and Buyline of approximately $1,747,000, approximately $1,115,000 related to general and administrative expenses of E2Enet and Buyline and approximately $747,000 of compensation expense resulting from the granting of stock options. The general and administrative expenses of Buyline amounted to approximately $973,000 of the combined approximately $1,115,000 expenses of E2E and Buyline during 2000. Due to the -25- 29 ceasing of operations of Buyline during December 2000, the Company expects the general and administrative expenses of Buyline to be less than $50,000 during 2001. The balance of the increase, or approximately $761,000, was the result of increased legal, staff and office expenses to accommodate the Company's investment activities. During 2000, the Company relocated its corporate headquarters in Washington, DC to larger offices. This was done to accommodate staff increases necessary to manage its associated companies, which were acquired during 2000 and 2001. Company management is committed to aggressively monitoring the performance of its associated companies to ensure that its return on investments is maximized and felt that the increased expenses were required to accomplish this goal. The Company expects to add additional staff and facilities during 2001 associated with its merger with Yazam, which will continue to staff offices in New York and Israel. Management projects that these additional general and administrative expenses will approximate $1,300,000 during the period following the merger with Yazam, March 28, 2001 through December 31, 2001. These expenditures will be required to manage the Company's 26 associated companies as well as seek out new investment opportunities. During the year ended December 31, 2000, the Company recorded an expense of $12,304,800 resulting from the impairment of certain assets associated with E2Enet. The impairment included approximately; $3,014,400 due to the bankruptcy of Urban Box Office, $3,866,000 due to the 100% write-off of goodwill associated with the April 2000 acquisition of E2Enet, $1,817,000 due to the ceasing of Buyline's operations and $3,607,400 due to a reduction of the estimated fair market value of the Company's investment in its remaining associated companies. There was no comparable expense recorded during the year ended December 31, 1999. During the year ended December 31, 1999, the Company recorded a gain on the sale of GWP, Inc. 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, Inc. There was no comparable gain recorded during the year ended December 31, 2000. During the year ended December 31, 2000, the Company recorded an expense of $640,350 representing the Company's share of the losses of certain of our associated companies acquired from E2Enet that are carried on the equity basis. There was no comparable expense recorded during the year ended December 31, 1999. Management expects to record continuing expenses during 2001 as a result of losses of associated companies carried on the equity basis. While the extent of these non-cash losses is difficult to predict, management does not expect these losses to exceed $1,250,000 during 2001. During the year ended December 31, 2000, the Company recorded other income of $70,863. During the year ended December 31, 1999, the Company recorded other expense of $202,271. A significant part of this expense was $154,641, which -26- 30 represented legal and accounting expenses incurred to secure the $5,000,000 subscription for the Company's convertible preferred stock. During the year ended December 31, 2000, the Company recorded a reduction of $707,740 in its net loss due to the portion allocable to the minority ownership interest in the Company's consolidated subsidiary, Buyline. There was no comparable reduction of expense recorded during the year ended December 31, 1999. During the year ended December 31, 2000, the Company recognized a non-cash expense of approximately $14,757,650 as a result of deemed beneficial conversion features of the Series A, Series B and Series C Preferred Stock. The beneficial conversion amount was calculated for each respective preferred series as the excess of the market price of the Company's Common Stock $2.188 on the April 12, 2000, measurement date over the conversion price of the Series A, Series B and Series C Preferred Stock, respectively $0.122, $0.200 and $1.450 times the number of the Company's common shares to be issued on conversion of each preferred series. During the year ended December 31, 1999, the Company recorded $525,114, representing cash dividends paid on the Company's Series A Convertible Preferred Stock. Under an agreement reached with the preferred stockholder in November 1999, no further dividends will be paid on the preferred stock in exchange for the Company reducing the conversion price for each share of the Company's Common Stock from $0.410 per share to $0.122 per share. There were no comparable dividends paid during the year ended December 31, 2000. Due to the continuing losses by the Company, the 100% reserve against the Company's $14,347,000 net deferred tax asset continues to be recognized at December 31, 2000. Additionally, as a result of the series of transactions which resulted in a change in control of the Company as defined by the Internal Revenue Code, the Company is limited in the utilization of net operating losses generated prior to December 28, 2000 to $176,000 per year. Additionally, the Company's merger with Yazam on March 27, 2001 resulted in another change in control that would limit the utilization of net operating losses generated in the period up to March 27, 2001. 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, a reorganization of the facility, and the loss of the sales contract with IBM for manufacturing the Tiger Board during 1999. 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 -27- 31 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. 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 gains 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 -28- 32 accumulated net operating losses and anticipates that, as of December 31, 2000, approximately $574,000 per year of net operating losses were available to offset future annual taxable income. LIQUIDITY AND CAPITAL RESOURCES. During the three years ended December 31, 2000, 1999, and 1998 the Company experienced negative operating cash flows of $5,632,756, $2,660,402 and $2,870,611, respectively. Negative cash flows from operations resulted principally from operating losses incurred during these years. The primary operating uses of cash during 2000 were to fund net losses of $18,651,097, net of non-cash items such as losses from impairment of assets of $12,304,800, depreciation of $1,750,927, non-cash expense of stock option issuance of $746,614, and equity in the losses of associated companies of $640,350. Net cash used in 2000 operating activities was unfavorably impacted by decreases of $703,979 and $ 1,057,661 in accounts payable and accrued expenses, respectively, and minority interest in losses of a subsidiary of $707,740. The primary operating uses of cash during 1999 were to fund net losses of $2,256,481 plus a non-cash gain on the sale of TMD of $642,764 and cash advances of $711,682 to TMD prior to its sale. 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 $311,548, respectively, offset 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, net of a $972,892 non-cash loss from the operations of TMD and less $767,450 cash transfers to TMD. The 1998 net cash used in operating activities was adversely effected by increases in accounts receivable and inventories of $367,648 and $510,922, respectively and a decrease in accrued expenses of $501,951, while being favorably impacted by a $747,196 increase in accounts payable. During the year ended December 31, 2000, investing activities used a net amount of $2,043,750, consisting primarily of investments of $972,339 in associated companies and increases in notes receivables from associated companies of $938,364. During the year ended December 31, 1999, investing activities provided a net amount of $400,653. This amount was negatively impacted by advances of $200,000 to a former shareholder and equipment purchases of $475,347. This amount was positively impacted the collection of $1,076,000 proceeds from the sale of the subsidiary held for 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. Cash provided by financing activities of $7,673,165, $2,159,060 and $3,638,366 during 2000, 1999 and 1998, respectively, were primarily the net proceeds of preferred stock, Common Stock and debt issuance. 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" -29- 33 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 Chairman of the Company's Board of Directors and the 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. As of December 31, 1999 USV had the right to convert its shares of Series A Preferred Stock to Common Stock at any time. Likewise, the Earls Family Limited Partnership had the right to exercise its Warrants to purchase Common Stock at any time. If these 500,000 shares of Series A Preferred Stock were converted and the Warrants were exercised in full, the holders of such securities would have been entitled to receive 41,483,606 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 - E2Enet Acquisition." During the year ended December 31, 2000, the Company raised, in accordance with the E2Enet Acquisition Agreement, $5,784,000. To raise these funds, the Company sold $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 Chairman and Chief Executive Officer, which is the Company's largest shareholder, and $4,534,000 or, $4,337,914 net of issuance costs, of its newly created Series C Preferred Stock, to accredited investors. Of the 4,534 shares of Series C Preferred issued, USV purchased 2,725 shares for $2,725,000. The Series C Preferred Stock is convertible into shares of the Company's Common Stock at a conversion price per share of $1.45, which was determined based on the closing sale price for a share of Common Stock on the closing date of the E2Enet Acquisition, as quoted on the OTC Bulletin Board. Conversion of the 125,000 shares of the Series A Preferred Stock would result in the issuance of approximately 10,246,000 shares of the Company's Common Stock. Conversion of all 4,534 shares of the Series C Preferred Stock would result in the issuance of approximately 3,127,000 shares of the Company's Common Stock. The proceeds of these offerings were used primarily to finance additional investments in new and existing Internet businesses that focus on B2B and B2C -30- 34 e-commerce, the payment of costs incurred and liabilities assumed in connection with the E2Enet Acquisition and related business transactions and ongoing working capital needs. See "Business - E2Enet Acquisition." Working capital decreased by $3,295,826 from a negative $794,439 as of December 31, 1999, to a negative $4,090,265 as of December 31, 2000. The most significant components of the decrease in working capital were the accrual of a liability of approximately $2,000,000 related to the guarantee of a put obligation assumed in the E2Enet acquisition and increases in notes payable, of approximately $686,000 and accounts payable for E2Enet, of approximately $387,000, for E2Enet and Buyline combined. Gross accounts receivable increased by $157,964 to $559,253, representing approximately 78 days sales, at December 31, 2000, from $401,289, representing approximately 51 days sales as of December 31, 1999. The increase in accounts receivable was due to clients not paying accounts due according to the terms of their purchase orders. Inventory decreased by $90,741 to $69,834 at December 31, 2000 from $260,575 at December 31, 1999. During the year ended December 31, 2000, accounts payable increased by $711,349, including approximately $507,000 related to E2E to $1,715,586, including $352,562 resulting from manufacturing activities which represented 52 days cost of sales, from $1,004,237, including $318,490 resulting from manufacturing activities which represented 47 days cost of sales in the year ended December 31, 1999. 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 $11,686 to $401,289, 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. The Series F Stock issued in the Yazam Acquisition may be convertible into 27,374,000 shares of Common Stock of the Company. The issuance of shares of the Company's Common Stock upon the exercise of such warrants or the conversion of the Series F Convertible Preferred Stock into Common Stock will require the prior amendment of the Company's charter to increase the authorized common shares of the Company, as previously disclosed by the Company. In the event that the Company's charter is not amended prior to September 1, 2001, holders of the Company's Series F Convertible Preferred Stock will have the right to sell their shares to the Company in accordance with the terms of the definitive merger agreement. The Yazam stockholders who receive shares of Series F Stock may require the Company after such date to repurchase their shares of Series F Stock for a price per share of the average price of Company Common Stock as reported on the OTC BB (or other applicable nationally recognized market quotation system) for the 20 trading days prior to the date of the request multiplied by 1,000, but not less than $250 per share of Series F Stock (or $0.25 per common share) or a minimum of $6,843,500. Because of this repurchase option, the Series F Convertible Preferred Stock will not be included in the Company's stockholders' equity at the end of the first quarter of 2001. -31- 35 The Company cannot determine with certainty whether the average price per share will exceed $0.25 in these circumstances and therefore cannot with certainty estimate the maximum financial obligation to repurchase the Series F Convertible Preferred Stock. Currently, the Company is exploring several alternatives with regard to its obligations under the repurchase obligation including negotiating with Series F stockholders to amend or waive the repurchase obligation or possibly delivering presently authorized but unissued Company Common Stock to Series F stockholders to the extent to which they put their shares to the Company. However, if the Company is required to fund its obligation to repurchase Series F Stock, it may have to raise additional funds to do so and there can be no assurance that the Company will be able to raise such additional funds. See, "BUSINESS - Series F Stock Waiver and Replacement Agreement." Historically, the capital the Company needed, both for working capital and to pursue acquisition opportunities, have exceeded the Company's cash flows from operations. These shortfalls have been met by the Company's ability to raise capital through equity transactions involving the Company's convertible preferred stock. The Company's independent certified public accountants have raised this matter in their Report on the Consolidated Financial Statements as contributing to uncertainty over the Company's ability to continue as a going concern. The Company's ability to continue as a going concern depends on its ability to raise capital in the next twelve months. Current economic and business conditions have created a difficult environment in which to raise capital. The Company's ability to execute its business plan is, and its ability to continue as a going concern may be, dependant on its ability to raise capital. See, "BUSINESS - Overview," "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT," "REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 2. The Company's sources of funds to pursue acquisition opportunities and provide working capital during 2001 will come from equity transactions involving the Company's convertible preferred stock. Management projects approximately $1,800,000 will be invested in new and existing associated companies during 2001. In addition, approximately another $230,000 will be invested in capital expenditures. The Company has allocated approximately $150000 of its projected capital expenditures to equipment additional at LTI's electronics manufacturing facility. The Company is committed to providing adequate capital to LTI's manufacturing operations to improve operations, increase sales and improve profitability. The sources of funds to cover these investments and to provide the Company's working capital will come from operations, sales of the Company's preferred stock and possible sale of investments in associated companies. Management projects that approximately $1-2,000,000 will have to be raised during 2001, through the preferred stock sales to accomplish the Company's goals. The Company's ability to support its business objectives is dependent upon its ability to generate cash flow from operations, complete the development of its capital raising operations and attract investors to its equity offerings. While there is no assurance that these objectives can be attained, the Company believes there is a reasonable expectation of achieving these goals. Should the Company be unable to achieve its objectives and successfully execute its business -32- 36 plan, the Company may be required to significantly curtail its acquisition and investment activities. EFFECT OF INFLATION. Inflation has not had a material impact on the Company's operations. NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The adoption of SFAS No. 141 and SFAS No. 142 is not expected to have a material effect on the Company's financial position, results of operations and cash flows in 2002 and subsequent years. Effective January 1, 2001, the Company adopted SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of SFAS No. 125. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and revises the accounting standards for securitizations and transfers of financial assets and collateral. The adoption of this standard on January 1, 2001 did not have a material effect on the Company's results of operations and financial position. This standard also required new disclosures in 2000. Such requirements were not applicable to the Company. In 2000, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of Accounting Principles Board Opinion No. 25. Interpretation No. 44 clarifies the application of APB No. 25 to the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. The Company's policies have been amended for the adoption of FIN No. 44. Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, the Company has reviewed its accounting policies for the recognition of revenue. SAB No. 101 was required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The company's policies for revenue recognition are consistent with the views expressed within SAB No. 101. See note 1, "Summary of Significant Accounting Policies," for a description of the Company's policies for revenue recognition. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge -33- 37 accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS 138 Accounting For Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS No. 133, liberalized the application of SFAS 133 in a number of areas. The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001, to affect its financial statements. 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. Current economic and business conditions have created a difficult environment in which to raise capital. The Company's ability to execute its business plan is, and its ability to continue as a going concern may be, dependant on its ability to raise capital. 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 2001 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 acquisitions and investments, and prospects for acquisitions and investments. The Company cautions that the actual developments and results of the Company's acquisitions and investments may differ from its expectations. There can be no assurance that the conditions necessary to completing any 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 of the Company's associated companies provide no assurance that such associated company will succeed or that the Company'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 and the Company's associated companies continue to have access to financing sources on reasonable terms in order to pursue its and their business plans, by the success or failure of the business plans of the Company, and the Company's associated companies, by economic conditions generally and particularly in the developing technology market, by competition and technological changes in the Company's and the Company's associated companies industries and businesses, and by the results of the Company's and the -34- 38 Company's associated 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. See, "BUSINESS - Overview," "MANAGEMENT'S DISCUSSION AND ANALYSIS - Liquidity and Capital Resources," "REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 2. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. The Company presently has no derivative financial instruments. However, the carrying value of other financial instruments, such as accounts receivable, notes receivable, accounts payable and notes payable approximate fair value because of their short-term nature. During the year ended December 31, 2001, the Company had a line of credit. The interest payable on the line of credit that was based on the prime rate and exposed the Company to interest rate risk in the event that the prime rate increased and the Company had outstanding balances under the line of credit. The line of credit was retired as of June 30, 2001. Impairment Risk. At December 31, 2000, we held ownership interests in 6 associated companies that were not publicly traded. We assess the net realizable value of these associated companies on a regular basis to determine if we have incurred any other than temporary decline in the value of our investment. For the year ended December 31, 2000, we incurred approximately $12,305,000 in impairment charges, related mainly to our investment in associated companies and the goodwill and/or specific assets associated with our investment in consolidated companies. We may incur additional impairment charges in future periods. Foreign Exchange Risk. Because we now have interests in companies that are domiciled outside the United States, we are subject to foreign currency risk. To the extent that we maintain deposits in any country outside the United States, we will be subject to changes in the relative values of the dollar and the currency of the associated company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements of U.S. Technologies Inc. and Report of Independent Certified Public Accountant are set forth on pages F-1 through F-40 of the Consolidated Financial Statements herein: Report of Independent Certified Public Accountant Consolidated Balance Sheets -- December 31, 2000 and December 31, 1999. Consolidated Statements of Earnings -- Years ended December 31, 2000, December 31, 1999 and December 31, 1998. Consolidated Statements of Stockholder's Equity -- Years ended December 31, 2000, December 31, 1999 and December 31, 1998. Consolidated Statements of Cash Flows -- Years ended December 31, 2000, December 31, 1999 and December 31, 1998. Notes to Consolidated Financial Statements. Quarterly data (unaudited) for U.S. Technologies Inc. for the years ended December 31, 2000 and December 31, 1999. (See Note 20). -35- 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS The executive officers of the Company are elected annually by and serve at the pleasure of the Board for one year or until their successors are elected and qualified. The following executive officers of the Company were, or are, not directors: David Ledecky became associated with the Company in March 2000 as a consultant and served as Vice-President of operations from May 2000 until December 2000 when he resigned from the Company. From May 1999 to August 1999, Mr. Ledecky was Senior Vice-President and chief operating officer of E2Enet, Inc. Mr. Ledecky was a co-founder, director, senior vice-president, and chief legal administrative officer of Building One Services Corporation (formerly Consolidated Capital Corp. and Ledecky Brothers LLC, predecessor of Building One Services Corporation) from February 1997 to May 1999. From December 1992 to February 1997, Mr. Ledecky was an attorney at the Washington, D.C. law firm of Gomez, Boyd & Luskin. Age: 40. J.L. (Skip) Moore served as Executive Vice-President and Chief Operating Officer of the Company from November 1999 until March 2001. Mr. Moore was responsible for all operating activities of the Company's prison-based outsourcing facilities until March 15, 2001, when he resigned from the Company. Prior to joining the Company, Mr. Moore had been employed by the Spear Group in a number of capacities, most recently as chief operating officer. During his tenure at the Spear Group, Mr. Moore served as director and officer of several of the Spear Group's subsidiaries. Age: 46 Richard C. Legge, Jr. ("Rick") accepted the position of President of Labor-To-Industry in March 2001. From October 2001 to March 2001 he served as acting President of BuyLine.net, one of our associated companies, where his role was to develop a strategy to preserve shareholder value in this struggling e-commerce company. From May 1997 to October 2000 Rick was Division Manager of Joelson-Taylor Products a large regional manufacturer of building products. For the twelve years ended in 1997 Rick lead the growth and international expansion of CES Wireless Electronics where he held positions including Sales Manager, Engineering Manager, V.P. Business Development and President, and then through a management buyout became Principle Owner and Chairman. Rick has over twenty years of electronics manufacturing experience and has led several successful turn-arounds. Allyson Holland joined the Company in May 2001 as Vice President of Finance, Controller and Principal Accounting Officer. From 1999 to 2001 Ms. Holland was Vice President of Finance and Administration with Direct Capital Securities Inc., an e-commerce company and capital access firm. From 1998 to 1999 Ms. Holland was Chief Financial Officer and Compliance Officer of Halbert Hargrove, an investment advisory firm and broker dealer. From 1997 to 1998 Ms. Holland was Chief Financial Officer of DBC Securities, a broker dealer and bond analytic company. Ms. Holland has over twenty years experience in the securities and financial services industries including Drexel Burnham and Lambert, Beverly Hills, where she worked in the High Yield and Convertible Bond Department as Vice President of the Business Management Division. BOARD OF DIRECTORS BOARD SIZE AND COMPOSITION The Company's Bylaws provide that the Board of Directors shall consist of not less than one nor more than fifteen 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 Board of Directors voted to expand its size to eight members in April, 2000 in connection with the Company's acquisition of E2Enet, in June, 2000 to nine members and in May, 2001 up to ten members. With respect to the ten present directors of the Company, eight of such directorships are governed by a voting agreement, dated as of April 12, 2000, by and among the Company, USV Partners, LLC, James V. Warren, Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J. Ledecky. Under the voting agreement, each of the parties has agreed to vote all of their U.S. -36- 40 Technologies Common Stock and all other U.S. Technologies securities then owned or acquired so that the board of directors shall be composed of four directors designated by USV Partners, LLC, two directors designated by Jonathan Ledecky and two directors designated jointly by Northwood Ventures LLC and Northwood Capital Partners LLC. DIRECTORS Eric D. Becker Director Since May 2001 Eric Becker is a Managing Partner and co-founder of Sterling Venture Partners. In 1983 Mr. Becker co-founded and served as a Managing General Partner of Sterling Capital, Ltd. He also co-founded and served as chief executive officer for Tango Communications, a Sterling portfolio company, prior to its sale to a public company. Mr. Becker is a director of a number of Sterling Venture Partners portfolio companies. He serves on the boards of the Maryland/Israel Development Center, Port Discovery Children's Museum, and the Garrison Forest School. Age: 39 Beth Dozoretz Director since June 2000 Beth Dozoretz has been Senior Vice President and a Director of FHC Health Systems since June 1998. In 1999, she was the National Finance Chair of the Democratic National Committee. Prior to June 1998, she was primarily a homemaker and active in charitable and political interests. Ms. Dozoretz is also a member of the board of the U.S. Holocaust Memorial Museum, the Executive Committee of the American Israel Public Affairs Committee, George Washington University's National Council for Political Management, Harvard University's John F. Kennedy School of Government Women's Leadership Section, the Rabin Medical Center, the D.C. Jewish Community Center, and the Meridian House. Age: 49 Gregory Earls Director since February 1999 Gregory Earls currently is the Chairman of the Board, the Chief Executive Officer and the President of the Company. Mr. Earls presently is also acting in the roles of Chief Financial Officer and Principal Accounting Officer of the Company. Mr. Earls had been the Co-Chairman of the Board and Co-Chief Executive Officer of the Company with James V. Warren from November 1999 until March 15, 2001. Mr. Earls served as sole Chairman of the Company's Board of Directors and sole Chief Executive Officer from February 1999 until he began to share the positions with Mr. Warren in November 1999. Mr. Earls has been President and Chief Executive Officer of U.S. Viewing Corporation, a private investment management Company, since 1980. Mr. Earls is also president and a director of privately held Equitable Production Funding of Canada, Inc., a film licensing and communications holding Company. He is also president and a director of National Networks, Inc., a private investment 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 which was acquired by Primedia, Inc. in -37- 41 1996. Mr. Earls has served as a director of Jayhawk Acceptance Corporation since he co-founded the finance Company in 1994. Mr. Earls' previous business experience also included work with a large investment banking firm in the 1990's. Age: 56 Arthur J. Maxwell Director since April 2000 Since 1989 Arthur Maxwell has been president and chief executive officer of Affordable Interior Systems, one of the largest business furniture manufacturers in the U.S. Age: 43. George J. Mitchell Director since April 2000 The Honorable George J. Mitchell was a U.S. Senator from Maine from 1980 to 1995, and was Senator Majority Leader from 1989 to 1995. Since 1995, Senator Mitchell has been senior counsel to Verner, Liipfert, Bernard, McPherson & Hand of Washington, D.C., and senior counsel to Preti, Flaherty, Beliveau, Pachios & Halley of Portland, Maine. Senator Mitchell was Chairman of the Northern Ireland Peace Talks from 1996 to 1998. He also is a member of the board of directors of Federal Express Corporation, Unum Provident Corporation, KTI, Inc., The Walt Disney Company, Xerox Corporation, Starwood Hotels and Resorts, Unilever NV, Casella Waste Systems, Inc. and Staples, Inc. Age: 67 Carl J. ("Rick") Rickertsen Director since April 2000 Carl J. Rickertsen has been chief operating officer and a partner at Thayer Capital Partners, a Washington, D.C. investment management firm, since 1994. Mr. Rickertsen heads Thayer Capital Partners' information technology practice. He also is chairman of the board of directors of SAGA Systems, Inc., and a director of E-Plus Inc. and Global Vacation Group, Inc. Age: 41 Peter G. Schiff Director since April 2000 Peter G. Schiff is President of Northwood Ventures LLC, a private venture capital investment firm which he co-founded in 1983. He is also President of Northwood Capital Partners LLC and managing general partner of Rabbit Hollow Partners. Age: 49 James V. Warren Director since November 1999 Mr. Warren was the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of the Company from November 1999 until March 15, 2001. He and Mr. Earls shared responsibilities as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers of the Company. Mr. Warren also is President and Chief Executive Officer of The Spear Group, a global professional management Company located in Atlanta, Georgia that he co-founded in -38- 42 1981. The Spear Group develops and implements solutions for personnel and human resources management. Age: 67 William H. Webster Director since April 2000 The Honorable William H. Webster has been a senior partner in the Washington, D.C. office of the law firm of Milbank, Tweed, Hadley & McCloy since 1991. From 1987 to 1991, he was the Director of the U.S. Central Intelligence Agency. Mr. Webster was Director of the Federal Bureau of Investigation from 1978 to 1987. He was a judge on the U.S. Court of Appeals, 8th Circuit, from 1973 to 1978. Age: 77 Henry T. Wilson Director since April 2000 Henry T. Wilson has been a managing director of Northwood Ventures LLC and Northwood Capital Partners LLC, private venture capital investment firms, since 1991. From 1986 to 1991, he was a Vice-President for investment banking at Merrill Lynch & Co. Age: 41 BOARD COMMITTEES AND MEETINGS In the past year, the Board of Directors met three times, the Compensation Committee met twice and the Audit Committee met once. All directors attended at least 75% of the full board and individual committee meetings. Executive Committee. The Board of Directors has an Executive Committee composed of Gregory Earls, Carl J. Rickertsen and Peter G. Schiff. Mr. Earls serves as the Executive Committee Chairman. This committee was formed, and its members elected, by the Company's Board of Directors at its meeting held on May 15, 2000. During the intervals between meetings of the Board of Directors, this committee has the authority to exercise all of the powers of the Board of Directors in the management of the Company's business, property and affairs unless restricted by statute, by the Company's Restated Certificate of Incorporation, or by its Bylaws. This committee must exercise such authority in the best interests of the Company and consistent with any specific directions of the Board of Directors. Pursuant to resolutions adopted by the Board of Directors of the Company, the Board of Directors delegated to the Executive Committee the authority to approve any of the Company's equity investments not exceeding $1,000,000. Any such equity investments exceeding $1,000,000 requires the approval of the entire Board of Directors. Compensation Committee. The Board of Directors has a Compensation Committee composed of George J. Mitchell, Carl J. Rickertsen and Peter G. Schiff. Mr. Rickertsen serves as the Compensation Committee Chairman. This committee was formed, and its members elected, by the Company's Board of Directors at its meeting held on May 15, 2000. This Committee's responsibilities include administration of the Company's option plans. -39- 43 Audit Committee. The Board of Directors has an Audit Committee composed of William H. Webster, Henry T. Wilson, and Arthur Maxwell. Mr. Webster serves as the Audit Committee Chairman. The Audit Committee was formed, and its members elected, by the Company's Board of Directors on May 15, 2000. This committee has the duties of recommending to the Board of Directors the appointment of independent auditors, reviewing their charges for services, reviewing the scope and results of the audits performed, reviewing the adequacy and operation of the Company's internal accounting controls, and performing other accounting, financial and operating control duties with respect to the Company. The Company's Audit Committee is not required to have a charter. However, on September 6, 2000, the Audit Committee approved and on September 12, 2000, the Board of Directors adopted an Audit Committee Charter, a copy of which will be attached as an Appendix to the Company's Proxy Statement for its Annual Meeting. The Board of Directors believes that all members of the Audit Committee are independent within the meaning of the NASD listing standards and SEC rules. BOARD COMPENSATION Directors of the Company are reimbursed for travel expenses related to their service on the Board of Directors. This reimbursement was the sole compensation directors received from the Company for their service as directors until 2000 when directors were granted stock options. Mr. Earls and the outside directors of the Company at the time of the closing of the E2E Acquisition were each awarded 250,000 stock options as of February 21, 2000 at an exercise price of $0.90. Those directors were Messrs. Webster, Mitchell, Rickertsen, Schiff, Wilson and Earls. Outside director Beth Dozoretz received a similar award of 250,000 stock options as of June 1, 2000 at an exercise price of $0.98. These options all have a three year vesting period. The Chairmen of the three Board Committees are awarded 15,000 stock options for their service. Such awards, with an exercise price of $1.34 per share, were made on May 16, 2000 to each of Messrs. Earls, Rickertsen and Webster. Each member, including the Chairmen, of the Board Committees are awarded 25,000 stock options for their service. Such awards, with an exercise price of $1.34 per share, were made on May 16, 2000, to each of Messrs. Earls, Mitchell, Webster, Wilson and Maxwell. Because Messrs. Rickertsen and Schiff are on two committees, they received 50,000 stock options each. All of these option grants have a three year vesting period, which requires the directors' service to continue through such period. These stock option awards and the June 1, 2000 grant to Beth Dozoretz were made subject to the condition that the Charter Amendment authorizing additional Common Stock becomes effective. On June 6, 2000, Mr. Earls was awarded 1,200,000 stock options as of June 6, 2000 at an exercise price of $1.56. These options have a four year vesting period. On May 11, 2001, the Board of Directors were awarded 350,000 stock options each for their services for the most recent year. Such awards were made with an exercise price of $0.28 per share and have a three year vesting period, which requires directors service to continue through such period. Each director that served on a Board Committee received an additional 25,000 stock options. Such awards were made to each of Messrs. Maxwell, Mitchell, Rickertsen, Schiff, Webster and Wilson. Each director that served as a chairman of a Board Committee received an additional 25,000 stock options. Such awards were made to Messrs. Rickertsen and -40- 44 Webster. On the same date, Mr. Earls received 2,400,000 stock options for his service to the Company over the past year. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 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% stockholders also are required to furnish the Company with copies of all forms they file under Section 16(a). To the best of 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 2000, the Company has complied with all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% stockholders. ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION The table below sets forth compensation paid by the Company and its subsidiaries for services rendered in all capacities during the year ended 2000 to each Co-Chief Executive Officer of the Company and the only other executive officer of the Company whose compensation for 2000 exceeded $100,000. SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------- -------------------------------------------------- RESTRICTED ALL STOCK OPTIONS/ LTIP NAME AND PRINCIPAL FISCAL SALARY BONUS OTHER AWARDS(S) SARS PAYOUTS OTHER POSITION YEAR ($) ($) ($) ($) (#) ($) COMPENSATION - ------------------------------------------------------------------------------------------------------------------------- Gregory Earls (1) Chairman of the 2000 250,000 0 0 0 1,450,000 0 0 Board, President and 1999 99,918 0 0 0 850,000 0 0 Chief Executive 1998 0 0 0 0 0 0 0 Officer James Warren (2) Former Co-Chairman of 2000 0 0 0 0 0 0 0 the Board and Former 1999 0 0 0 0 1,500,000 0 0 Co-Chief Executive 1998 0 0 0 0 0 0 0 Officer J.L. (Skip) Moore (3) Executive Vice President 2000 111,023 0 0 0 300,000 0 0 1999 0 0 0 0 400,000 0 0 1998 0 0 0 0 0 0 0
(1) Mr. Earls was appointed Chief Executive Officer of the Company on February 11, 1999. From November 29, 1999 to March 15, 2001, Mr. Earls served as Co-Chief Executive Officer with James V. Warren. -41- 45 (2) Mr. Warren was appointed and served as Co-Chief Executive Officer of the Company from November 29, 1999 until March 15, 2001 (3) Mr. Moore resigned from the Company in March 2001, the 300,000 options granted to Mr. Moore were terminated on the date of his resignation.
OPTION GRANTS INDIVIDUAL GRANTS POTENTIAL REALIZATION VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM -------------------------- ---------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5%(3) 10%(3) - --------------------------------------------------------------------------------------------------------- Gregory Earls(4) 1,200,000(5) 17.5% 1.562 06/06/10 1,178,800 2,987,300 Gregory Earls 250,000 3.6% 0.90 02/21/10 139,600 354,600 J.L. (Skip) Moore 300,000 4.4% 1.343 06/06/10 253,400 642,000
(1) Unless otherwise noted, options vest on a three-year schedule. (2) On the date of grant, all options were granted at market price. (3) The dollar amounts under these columns are the result of calculations from the date of grant to the expiration of the option at the 5% and 10% annual appreciation rates set by the Securities and Exchange Commission and, therefore, are not intended to forecast possible future appreciation, if any, in the price of the Common Stock. No gain to the optionee is possible without an increase in price of the Common Stock. In order to reach the potential values set forth in the 5% and 10% columns of this table for options with a ten year term, the price per share of the Company's Common Stock would be $2.544, $1.450 and $2.188, respectively. In order to reach the potential values set forth in the 10% column of this table for options with a ten year term, the price per share of the Company's Common Stock would be $4.051, $2.308 and $3.483, respectively. (4) These option grants are conditional; options may only be exercised following amendment of the Company's Charter to authorize the issuance of additional shares of Common Stock. (5) These options vest equally over four years.
OPTIONS EXERCISED IN 2000 AND 2000 YEAR-END VALUES (A) (B) (C) (D) (E) - ------------------------------------------------------------------------------------------------------------------------ SHARES VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY ACQUIRED ON REALIZED UNEXERCISED OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END ($) NAME EXERCISE (#) ($) (#) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------ Gregory Earls --- --- 1,200,000 / 1,450,000(1) - 0 - James Warren --- --- 1,500,000 / 0 - 0 - J.L. (Skip) Moore --- --- 400,000 / 300,000(1)(2) - 0 -
(1) These option grants are conditional; such options may only be exercised following amendment of the Company's Charter to authorize the issuance of additional shares of Common Stock. (2) Mr. Moore resigned from the Company in March 2001, and the 300,000 options granted to Mr. Moore in the year ended December 31, 2000 were terminated. -42- 46 STOCK 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 originally 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." On May 11, 2001, the Board of Directors of the Company approved amendments to the 1999 Stock Option Plan, as amended, to authorize an increase in the number of shares of Common Stock available for grants under the 1999 Stock Option Plan, as Amended to 30 million; provided, however that options shall not be exercisable with respect to more than 8,000,000 shares unless the Company's charter has been amended to authorize the issuance of at least 200,000,000 shares of Common Stock. The Company granted 6,861,667 options under the 1999 Stock Option Plan to twenty employees and consultants other than directors and named executive officers in the year ended December 31, 2000. These options carry an exercise price of either $0.90 or $1.343 per share, based on the closing sale price of the Common Stock on the date of grant. On November 5, 1999, Gregory Earls was granted 850,000 options at an exercise price of $0.125 per share. EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL The Company added James V. Warren and J.L. (Skip) Moore to its management team by entering into a Management Agreement, dated as of November 29, 1999, with Mr. Warren and Mr. Moore. 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. Gregory Earls' positions as chairman and chief executive officer of the Company were modified to include Mr. Warren. Mr. Moore was elected to serve as the Company's executive vice-president and chief operating officer. The accounting functions of the Company were moved from the Company's manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance with the Management Agreement. Mr. Warren resigned his position as co-chairman and co-chief executive officer effective March 15, 2001. Mr. Moore resigned from the Company in March, 2001. See "Certain Relationships and Related Transactions." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Until May 15, 2000, the Board of Directors did not have a separate compensation committee. Prior to May 15, 2000, all decisions regarding management compensation were made by the full Board of Directors. From February 1999 to November 1999, Gregory Earls was the sole member of the Board of Directors. From November 1999 until April 2000, the Board of -43 47 Directors consisted solely of Gregory Earls and James V. Warren. During their respective terms as directors, Messrs. Earls and Warren were also executive officers of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SECURITY OWNERSHIP The following table shows as of April 25, 2001, the number of all shares of the Company's voting securities beneficially held by each director, by each named executive officer and by each person known by the Company to beneficially own 5% or more of any class of the Company's voting securities, and by all directors and executive officers as a group. Except as otherwise indicated, to our knowledge, each owner has sole voting and investment power over his shares. -44- 48
SHARES OF COMMON STOCK BENEFICIALLY OWNED ASSUMING CONVERSION OF ALL VESTED AND UNVESTED SHARES OF SHARES OF OPTIONS AND SERIES A SERIES B WARRANTS TO PREFERRED PREFERRED ACQUIRE STOCK % OF STOCK % OF COMMON % OF BENEFICIALLY SERIES A BENEFICIALLY SERIES B NAME STOCK(1) CLASS(2) OWNED(1) CLASS OWNED(1) CLASS - ----------------------------------------------------------------------------------------------------------------------------------- Gregory 6,043,027(5) 12.91% 587,000(6) 93.92% -- -- Earls(4) USV Partners, 2,549,352 5.45% 507,140(9) 81.14% -- -- LLC(8) Jonathan -- -- -- -- 52,641.85 47.00% Ledecky(11) Northwood Ventures -- -- -- -- 49,656.77 44.34% LLC(12) Texas Pacific 1,109,055(14) 2.37% -- -- -- -- Group(13) The Carlyle 857,671(14) 1.83% -- -- -- -- Group(15) James V. 7,857,152(17) 16.79% 5,000(18) * -- -- Warren(16) Northwood Capital Partners -- -- -- -- 7,094.17 6.33% LLC(19) Microdent 295,749(14) * -- -- -- -- Ltd.(20) China Development Industrial 184,843(14) * -- -- -- -- Bank(21) Peter G. 400,000(23) * -- -- -- -- Schiff(22) Carl J. 415,000(25) * -- -- -- -- Rickertsen(24) George J. 375,000(27) * -- -- 69.79(28) * Mitchell(26) William H 390,000(30) * -- -- -- -- Webster(29) Henry T. 375,000(33) * -- -- -- -- Wilson(32) Arthur J. 375,000(35) * -- -- -- -- Maxwell(34) Beth 350,000(38) * -- -- -- -- Dozoretz(37) J. L. (Skip) 400,000(40) * -- -- -- -- Moore(39) David 700,000(42) 1.50% -- -- 174.26(43) * Ledecky(41) Accenture LLP (f/k/a Andersen Consulting -- -- -- -- -- -- L.L.P.)(44) ALL DIRECTORS 17,680,179 37.78% 592,000 94.72% 244.05 * AND EXECUTIVE OFFICERS AS A GROUP(45) SHARES OF COMMON STOCK BENEFICIALLY OWNED ASSUMING CONVERSION % OF OF ALL ALL CLASSES OUTSTANDING COMBINED AND CLASSES OF ALL SHARES OF SHARES OF SHARES OF PREFERRED OUTSTANDING SERIES C SERIES D SERIES F STOCK AND OPTIONS AND PREFERRED PREFERRED PREFERRED EXERCISE OF WARRANTS STOCK % OF STOCK % OF STOCK % OF ALL OPTIONS CONVERTED TO BENEFICIALLY SERIES C BENEFICIALLY SERIES D BENEFICIALLY SERIES F AND WARRANTS COMMON NAME OWNED(1) CLASS OWNED(1) CLASS OWNED(1) CLASS OUTSTANDING(1) STOCK(3) - ------------------------------------------------------------------------ ------------ ------------------------------------------ Gregory 2,120(7) 46.76% -- -- -- -- 55,619,850(5) 29.89% Earls(4) USV Partners, 2,120(10) 46.76% -- -- -- -- 45,580,273 24.49% LLC(8) Jonathan -- -- -- -- -- -- 26,320,923 14.14% Ledecky(11) Northwood Ventures -- -- -- -- -- -- 24,828,385 13.34% LLC(12) Texas Pacific -- -- -- -- 10,119.77 36.96% 11,228,825 6.03% Group(13) The Carlyle -- -- -- -- 7,825.96 28.59% 8,683,631 4.67% Group(15) James V -- -- -- -- -- -- 8,266,988 4.44% Warren(16) Northwood Capital Partners -- -- -- -- -- -- 3,547,085 1.91% LLC(19) Microdent -- -- -- -- 2,698.61 9.85% 2,994,359 1.61% Ltd.(20) China Development Industrial -- -- -- -- 1,686.63 6.16% 1,871,473 1.01% Bank(21) Peter G -- -- -- -- -- -- 400,000 * Schiff(22) Carl J -- -- -- -- -- -- 415,000 * Rickertsen(24) George J -- -- -- -- -- -- 409,893 * Mitchell(26) William H 150(31) 3.31% -- -- -- -- 493,448 * Webster(29) Henry T -- -- -- -- -- -- 375,000 * Wilson(32) Arthur J 500(36) 11.03% -- -- -- -- 719,828 * Maxwell(34) Beth -- -- -- -- -- -- 350,000 * Dozoretz(37) J. L. (Skip) -- -- -- -- -- -- 400,000 * Moore(39) David -- -- -- -- -- -- 787,131 * Ledecky(41) Accenture LLP (f/k/a Andersen Consulting -- -- 1,552.5 100% -- -- 1,552,500 * L.L.P.)(44) ALL DIRECTORS 2770 61.09% -- -- -- -- 68,237,138 36.67% AND EXECUTIVE OFFICERS AS A GROUP(45)
* CONSTITUTES LESS THAN 1% OF THE COMPANY'S CLASS OF, OR FULLY-DILUTED, STOCK AS APPLICABLE. -45- 49 (1) "Beneficial Ownership" includes shares for which an individual, directly or indirectly, has or shares, or has the right within sixty (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, however, all options awarded through April 25, 2001 are included without regard to Rule 13d-3. Options to purchase shares of Common Stock will be considered to be vested if such options vest by June 24, 2001. (2) The percentage of ownership reported for each person, entity or group appearing in this column is based on the 29,086,786 shares of Common Stock outstanding as of April 25, 2001, plus shares of Common Stock issuable upon the exercise or conversion of all outstanding options and warrants (including shares of Common Stock issuable upon the exercise of all unvested options and shares of Common Stock issuable upon the exercise or conversion of options and warrants which are not exercisable or convertible until after the amendment of the Company's Restated Certificate of Incorporation, as described herein (the "Charter Amendment"). Assuming such exercises and conversions, the Company would have 46,800,953 shares outstanding. For purposes of calculating the percentage in this column, we have assumed that no shares of the Company's preferred stock have been converted into shares of Common Stock notwithstanding the fact that up to 38,000 shares of Series A Preferred Stock under certain circumstances may be converted into 3,114,734 shares of Common Stock. (3) The percentage of ownership reported for each person, entity or group appearing in this column is based on the 29,086,786 shares of Common Stock outstanding as of April 25, 2001, plus shares of Common Stock issuable upon the exercise or conversion of all outstanding options and warrants and the conversion of all shares of Series A, Series B, Series C, Series D and Series F Preferred Stock (including shares of Common Stock issuable upon the exercise of all unvested options and all shares of Common Stock issuable upon the exercise or conversion of options, warrants, Series A, Series B, Series C, Series D and Series F shares which are not exercisable or convertible until after the Charter Amendment). Assuming such exercises and conversions, the Company would have 186,083,856 shares of Common Stock outstanding. (4) Mr. Earls is the Chairman and Chief Executive Officer of the Company. -46- 50 (5) This amount includes the following shares which may be deemed to be beneficially owned by Mr. Earls: (i) 500,000 shares issuable upon the exercise of warrants held directly by The Earls Family Limited Partnership; (ii) 693,675 shares owned directly by Equitable Production Funding, Inc.; (iii) 2,300,000 shares issuable upon the exercise of stock options issued to Mr. Earls under the Company's 1999 Stock Option Plan, as amended (the "1999 Plan"); and (iv) 2,549,352 shares of Common Stock held by USV Partners, LLC ("USV"). Mr. Earls is the sole member of USV Management, LLC, the manager of USV, and an investor in USV. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Earls may be deemed to be the beneficial owner of all shares owned by USV. Mr. Earls disclaims beneficial ownership over the shares of Common Stock held directly by USV, except for an amount of such shares held by USV represented by Mr. Earls' pecuniary interest therein. This amount excludes shares beneficially owned by James V. Warren. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Earls may be deemed to be the beneficial owner of all shares owned by James V. Warren because Mr. Earls is entitled to vote Mr. Warren's shares solely for purpose of effecting the Charter Amendment. Mr. Earls disclaims beneficial ownership over all shares of Common Stock beneficially owned by Mr. Warren. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Earls may be deemed to be the beneficial owner of all shares owned by The Earls Family Limited Partnership and Equitable Production Funding, Inc. because Mr. Earls owns all of the capital stock of Equitable Production Funding, Inc. and controls The Earls Family Limited Partnership. Pursuant to an agreement entered into by Mr. Earls, USV and The Earls Family Limited Partnership in favor of the Company, such parties have agreed not to convert any securities held by them which are convertible into shares of Common Stock (including options, warrants, Series A preferred shares and Series C preferred shares) until after the Charter Amendment. Of the amount included in this column: (i) 1,233,333 shares of Common Stock are issuable upon the exercise of vested options and warrants not exercisable until after the Charter Amendment and (ii) an additional 1,066,667 shares of Common Stock are issuable upon the exercise of unvested options which are not exercisable until after the Charter Amendment. (6) Such shares of Series A Preferred Stock are convertible into 48,114,754 shares of Common Stock. The amount shown includes 507,140 shares of the Company's Series A Preferred Stock, which are convertible into 41,568,852 shares of Common Stock, held directly by USV. Mr. Earls is the sole member of USV Management, LLC, the manager of USV, and an investor in USV. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Earls may be deemed to be the beneficial owner of all shares owned by USV. Mr. Earls disclaims beneficial ownership over the shares of Common Stock held directly by USV, except for an amount of such shares held by USV represented by Mr. Earls' pecuniary interest therein. Pursuant to an agreement entered into by Mr. Earls, USV and The Earls Family Limited Partnership in favor of the Company, such parties have agreed not to convert any securities convertible into shares of Common Stock (including options, warrants, Series A preferred shares and Series C preferred shares) until after the Charter Amendment. (7) These 2,120 shares of Series C Preferred Stock, which are mandatorily convertible into 1,462,069 shares of Common Stock after the Charter Amendment, are held directly by USV. Mr. Earls is the sole member of USV Management, LLC, the manager of USV. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Earls may be deemed to be the beneficial owner of all shares owned by USV. Mr. Earls disclaims beneficial ownership over the shares of Common Stock directly beneficially owned by USV, except for an amount of such shares held by USV represented by Mr. Earls' pecuniary interest therein. Pursuant to an agreement entered into by Mr. Earls, USV and The Earls Family Limited Partnership in favor of the Company, such parties have agreed not to convert any securities held by them which are convertible into shares of Common Stock (including shares of Series C Preferred Stock) until after the Charter Amendment. (8) USV's address is c/o U.S. Technologies Inc., 1130 Connecticut Avenue, NW, Suite 700, Washington, D.C. 20036. (9) Such shares of Series A Preferred Stock are convertible into 41,568,852 shares of Common Stock. Pursuant to an agreement entered into by USV in favor of the Company, USV has agreed not to convert any securities held by them which are convertible into shares of Common Stock (including shares of Series A Preferred Stock) until after the Charter Amendment. (10) Such shares of Series C Preferred Stock are mandatorily convertible into 1,462,069 shares of Common Stock after the Charter Amendment. Pursuant to an agreement entered into by USV in favor of the Company, USV has agreed not to convert any securities held by it which are convertible into shares of Common Stock (including shares of Series C Preferred Stock) until after the Charter Amendment. (11) Mr. Ledecky's address is c/o U.S. Technologies Inc., 1130 Connecticut Avenue, NW, Suite 700, Washington, D.C. 20036. (12) Northwood Ventures LLC's and Northwood Capital Partners LLC's address is 485 Underhill Boulevard #205, Syosset NY 11791-3491. These entities will be referred to herein together as "Northwood" and may be deemed to be a "group" for purposes of Rule 13d of the Exchange Act. (13) Texas Pacific Group's address is 201 Main Street, Suite 2420, Fort Worth, Texas 76111. The amount shown includes: 5,608.18 shares of Series F preferred stock and 614,617 warrants owned directly by TPG Partners III, L.P., 728.61 shares of Series F preferred stock and 79,851 warrants owned directly by TPG Parallel III, L.P., 146.66 shares of Series F preferred stock and 16,072 warrants owned directly by TPG Dutch Parallel III, C.V., 338.14 shares of Series F preferred stock and 37,058 warrants owned directly by TPG Investor III, L.P., 2,599.83 shares of Series F preferred stock and 284,923 warrants owned directly by T2 Partners, L.P., 196.38 shares of Series F preferred stock and 21,522 warrants owned directly by T3 Parallel, L.P., 151.07 shares of Series F preferred stock and 16,556 warrants owned directly by T3 Dutch Parallel, C.V., 145.58 shares of Series F preferred stock and 15,955 warrants owned directly by T3 Investors, L.P., 8.84 shares of Series F preferred stock and 969 warrants owned directly by FOF Partners III, L.P., and 196.48 shares of Series F preferred stock and 21,532 warrants owned directly by FOF Partners III-B, L.P. -47- 51 (14) This amount represents warrants to purchase shares of Common Stock. (15) The Carlyle Group holds these shares through CIPE Investment I, L.P. and its address is 57 Berkeley Square, London, W1X5DA, United Kingdom. (16) Mr. Warren is a director of the Company. (17) This amount includes: (i) 6,318,652 shares of Common Stock that are owned directly by Mr. Warren and may be voted by Mr. Earls in favor of the Charter Amendment as discussed in footnote five above; (ii) 1,500,000 shares of Common Stock issuable upon the exercise of presently exercisable stock options issued to Mr. Warren under the 1999 Plan; and (iii) 38,500 shares of Common stock owned directly by Mr. Warren's wife, which Mr. Warren may be deemed to beneficially own. (18) Such shares of Series A Preferred Stock are convertible into 409,836 shares of Common Stock after the Charter Amendment becomes effective. Mr. Warren invested $50,000 in USV in April 2000 and acquired a membership interest in USV. Based on Mr. Warren's investment in USV, Mr. Warren may be deemed to have a beneficial interest in shares of Series A Preferred Stock held by USV in an amount so disclosed in this column. (19) Northwood Capital Partners LLC's address is 485 Underhill Boulevard, #205, Syosset, NY 11791-3491. See Note 12. (20) Microdent Ltd.'s address is Technology Park, Manhat, 91487, Jerusalem, Israel. (21) China Development Industrial Bank Inc.'s address is 9 F 125 Nanking East Road, Section 5, Taipei 105, Taiwan. (22) Mr. Schiff is a director of the Company. Mr. Schiff is the president of both Northwood Ventures LLC and Northwood Capital Partners LLC. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Schiff may be deemed to be the beneficial owner of these shares. (23) This amount includes: (i) 83,333 shares of Common Stock issuable upon the exercise of presently exercisable vested options; (ii) an additional 50,000 shares of Common Stock issuable upon the exercise of options which will vest on June 6, 2001 but may not be exercised until after the Charter Amendment; (iii) an additional 100,000 shares of Common Stock issuable pursuant to options which have not vested and are subject to the Charter Amendment; and (iv) 166,666 shares of Common Stock issuable upon the exercise of options which have not vested and are not subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (24) Mr. Rickertsen is a director of the Company. (25) This amount includes: (i) 83,333 shares of Common Stock issuable upon the exercise of presently exercisable vested options; (ii) an additional 55,000 shares of Common Stock issuable upon the exercise of options which will vest on June 6, 2001 but may not be exercised until after the Charter Amendment; (iii) an additional 110,000 shares of Common Stock issuable pursuant to options which have not vested and are subject to the Charter Amendment; and (iv) 166,666 shares of Common Stock issuable upon the exercise of options which have not vested and are not subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (26) Senator Mitchell is a director of the Company. (27) This amount includes: (i) 83,333 shares of Common Stock issuable upon the exercise of presently exercisable vested options; (ii) an additional 41,600 shares of Common Stock issuable upon the exercise of options which will vest on June 6, 2001 but may not be exercised until after the Charter Amendment; (iii) an additional 83,400 shares of Common Stock issuable pursuant to options which have not vested and are subject to the Charter Amendment; and (iv) 166,666 shares of Common Stock issuable upon the exercise of options which have not vested and are not subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (28) Such shares of Series B Preferred Stock are mandatorily convertible into 34,893 shares of Common Stock after the Charter Amendment. (29) Judge Webster is a director of the Company. (30) This amount includes: (i) 83,333 shares of Common Stock issuable upon the exercise of presently exercisable vested options; (ii) an additional 46,667 shares of Common Stock issuable upon the exercise of options which will vest on June 6, 2001 but may not be exercised until after the Charter Amendment; (iii) an additional 93,333 shares of Common Stock issuable pursuant to options which have not vested and are subject to the Charter Amendment; and (iv) 166,666 shares of Common Stock issuable upon the exercise of options which have not vested and are not subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (31) Such shares of Series C Preferred Stock are mandatorily convertible into 103,448 shares of Common Stock after the Charter Amendment. (32) Mr. Wilson is a director of the Company. Mr. Wilson is a managing director of both Northwood Ventures LLC and Northwood Capital Partners LLC. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Wilson may be deemed to be the beneficial owner of shares held by Northwood. (33) This amount includes: (i) 83,333 shares of Common Stock issuable upon the exercise of presently exercisable vested options; (ii) an additional 41,600 shares of Common Stock issuable upon the exercise of options which will vest on June 6, 2001 but may not be exercised until after the Charter Amendment; (iii) an additional 83,400 shares of Common Stock issuable pursuant to -48- 52 options which have not vested and are subject to the Charter Amendment; and (iv) 166,666 shares of Common Stock issuable upon the exercise of options which have not vested and are not subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (34) Mr. Maxwell is a director of the Company. (35) This amount includes: (i) 83,333 shares of Common Stock issuable upon the exercise of presently exercisable vested options; (ii) an additional 41,600 shares of Common Stock issuable upon the exercise of options which will vest on June 6, 2001 but may not be exercised until after the Charter Amendment; (iii) an additional 83,400 shares of Common Stock issuable pursuant to options which have not vested and are subject to the Charter Amendment; and (iv) 166,666 shares of Common Stock issuable upon the exercise of options which have not vested and are not subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (36) Such shares are convertible into 344,828 shares of Common Stock. Such shares are held directly by Affordable Interior Systems. Mr. Maxwell is the President and Chief Executive Officer of Affordable Interior Systems. For purposes of Rule 13d-3 of the Securities Exchange Act of 1934, Mr. Maxwell may be deemed to be the beneficial owner of these shares. However, Mr. Maxwell disclaims beneficial ownership of any of the shares owned by Affordable Interior Systems. (37) Ms. Dozoretz is a director of the Company. (38) This amount includes: (i) 87,500 shares of Common Stock issuable upon the exercise of options which will vest in the first week of June 2001 but may not be exercised until after the Charter Amendment and (ii) an additional 262,500 shares of Common Stock issuable pursuant to options which have not vested and are subject to the Charter Amendment. Such options were received as compensation for service on the Company's board of directors. (39) Mr. Moore resigned from the Company in March 2001. (40) All of Mr. Moore's options are currently vested and exercisable. (41) Mr. Ledecky resigned from the Company in December 2000. (42) Upon Mr. Ledecky's resignation from the Company, Mr. Ledecky's options became fully vested, but 300,000 of such options are not exercisable until after the Charter Amendment. (43) Such shares are mandatorily convertible into 87,131 shares of Common Stock after the Charter Amendment (44) Accenture LLP's address is 100 South Wacker Drive, Chicago Illinois 60606. (45) Includes the shares described in all footnotes above relating to directors and executive officers. There were no other executive officers of the Company as of December 31, 2000. -49- 53 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company issued 500,000 shares of its Series A Stock to USV in a subscription offering that closed May 15, 1999. The Company also issued to USV warrants to purchase 500,000 shares of the Company's Common Stock. For the Series A Stock and the warrants, USV paid an aggregate of $5,000,000. USV transferred the warrants to the Earls Family Limited Partnership shortly after their issuance in consideration for approximately $400,000 in cash contributed by the Earls Family Limited Partnership to USV. Gregory Earls controls both USV and the Earls Family Limited Partnership. The terms of the Series A Stock were amended on November 29, 1999 to cancel the right of the Series A stockholders to receive an annual dividend and in consideration thereof to change the conversion price for the Series A Stock to $0.122. On April 12, 2000, USV purchased an additional 125,000 shares of Series A Stock at $10.00 per share. On April 12, 2000, USV also purchased 2,120 shares of Series C Preferred Stock, which shares are convertible into 1,461,069 shares of Common Stock. As of March 1, 2000 the amount of shares of Common Stock derived from conversion of the Company's Convertible Preferred Stock would have exceeded the number of shares of Common Stock authorized by the Company's Restated Certificate of Incorporation. Therefore, USV and the Company entered into a March 1, 2000 waiver agreement pursuant to which USV waived its right of conversion until an appropriate amendment to the Company's Restated Certificate of Incorporation is filed with the Delaware Secretary of State. On September 20, 2000, this waiver was extended to cover all convertible securities beneficially owned by Mr. Earls. Under the terms of a November 29, 1999 Management Agreement with both James V. Warren and J.L. (Skip) Moore, Mr. Warren was elected Director, Co-Chairman, and Co-Chief Executive Officer of the Company. As Co-Chairman and Co-Chief Executive Officers, Mr. Warren shared responsibilities for those positions with Gregory Earls. Mr. Moore was elected Executive Vice President and Chief Operating Officer of the Company. The Management Agreement also provided that: - the conversion price for the Series A Stock was changed to $0.122 per share; - Mr. Warren was granted options under the Company's 1999 Plan to purchase 1,500,000 shares of Common Stock; and - Mr. Moore was granted options under the Company's 1999 Plan to purchase 400,000 shares of Common Stock. In connection with the E2Enet acquisition, the Company committed to raise capital for general corporate purposes. To fulfill this commitment, the Company sold Series C stock. On April 12, 2000, the Company's offering of 5,184 shares of Series C Stock for an aggregate of -50- 54 $5,184,000 was fully subscribed. Ultimately, the Company received funds for 4,534 shares of Series C Stock for an aggregate of $4,534,000 or $4,337,914 net of issuance costs. Several directors of the Company took part in that offering. William Webster purchased 150 shares. Affordable Interior Systems, an entity controlled by Arthur Maxwell, purchased 500 shares through Affordable Interior Systems, and USV, which is controlled by Gregory Earls, purchased 2,120 shares. In connection with the Company's offering of Series A Preferred Stock in April 2000, Mr. Warren invested $50,000 in USV. Therefore, Mr. Warren was an indirect beneficial interest in 5,000 shares of Series A Stock that are owned directly by Mr. Warren. As of December 31, 2000, the Company's operations and accounting center was located in the offices of The Spear Group in Norcross, Georgia. James V. Warren, the former Co-Chairman of the Company's Board of Directors and former Co-Chief Executive Officer, is the co-founder and president of The Spear Group. The Company had a management services arrangement with The Spear Group to provide operating, accounting, and administrative services for the Company's prison facilities. In March 2001, the operating services were moved to DeBary, Florida and accounting and administrative services were consolidated in the Company's executive officers in Washington, D.C. The Company's management services arrangement with The Spear Group also terminated. However, during 2000, the Company paid approximately $97,000 to The Spear Group pursuant to this arrangement. On December 27, 2000, the Company purchased 3,450,000 shares of Buyline common stock for $345 from Northwood Ventures L.L.C. and Northwood Capital Partners L.L.C., entities controlled by Peter G. Schiff and Henry T. Wilson, members of the Company's Board of Directors. Effective as of June 30, 2001, the Company sold all of its shares of Buyline.net, Incorporated to an entity wholly owned by Gregory Earls. As consideration for such shares, the purchaser delivered to the Company a promissory note in the principal amount of $100,000. The promissory note, plus accrued interest, will become due and payable only upon the earlier of, and only to the extent of: (i) any distributions by Buyline or (ii) the sale by such purchaser of its shares of Buyline. The Company has the right to repurchase for $250,000 such Buyline shares at any time prior to June 30, 2004. Such transaction was approved by at least a majority of the disinterested directors of the Company. On July 20, 2001, various affiliates of the Texas Pacific Group ("TPG") entered into an agreement to sell their shares of Series F Stock to USV Partners at $150.00 per share (or $0.15 per share of common stock) by August 3, 2001 and USV entered into a Waiver and Replacement Agreement with respect to those shares. USV and its assignees expect to close on the transaction the week of August 6, 2001. See, "BUSINESS - Series F Stock Waiver and Replacement Agreement." -51- 55 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 (1) Schedule II - Valuation and Qualifying Accounts, Years Ended December 31, 2000, 1999, and 1998 (b) Reports on Form 8-K filed during the last quarter of the year ended December 31, 2000. On October 4, 2000, the Company filed a Current Report on Form 8-K describing the terms of a Definitive Merger Agreement to acquire On-Site Sourcing, Inc. (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. -52- 56 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 Seventh day of August, 2001. U.S. TECHNOLOGIES INC. By: /s/ Gregory Earls ------------------------------------- Gregory Earls Chairman and 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 U.S. Technologies Inc. and in the capacities indicated, as of August 7, 2001
Signature Title Date Director, Chief Executive Officer and August 7, 2001 /s/ Gregory Earls Chief Financial Officer - ------------------------------------ Gregory Earls Director August 7, 2001 /s/ Beth Dozoretz * - ------------------------------------ Beth Dozoretz Director August 7, 2001 /s/ Arthur J. Maxwell * - ------------------------------------ Arthur J. Maxwell Director August 7, 2001 /s/ George J. Mitchell * - ------------------------------------ George J. Mitchell Director August 7, 2001 /s/ Carl J. Rickertsen * - ------------------------------------ Carl J. Rickertsen
-53- 57 Director August 7, 2001 /s/ Peter G. Schiff * - ------------------------------------ Peter G. Schiff Director August 7, 2001 /s/ James V. Warren * - ------------------------------------ James V. Warren Director August 7, 2001 /s/ William H. Webster * - ------------------------------------ William H. Webster Director August 7, 2001 /s/ Henry T. Wilson * - ------------------------------------ Henry T. Wilson Vice President and August 7, 2001 Allyson Holland Corporate Controller/ - ------------------------------------ Principal Accounting Officer Allyson Holland *By: /s/ Gregory Earls ------------------------ Gregory Earls Attorney-in-fact
-54- 58 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors U.S. Technologies Inc. Washington, D.C. We have audited the accompanying consolidated balance sheets of U.S. Technologies Inc. as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity (capital deficit), and cash flows for each of the three years in the period ended December 31, 2000. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. 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. at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a working capital and net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Atlanta, Georgia May 9, 2001, except for Note 19(c), which is as of June 30, 2001, and Note 19(d), which is as of July 20, 2001 F-1 59 U.S. TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999 ----------- ----------- ASSETS CURRENT Cash $ 6,110 $ 9,451 Trade accounts receivable, net of reserves of $158,000 and $206,000 (Notes 9, 15 and 20) 401,253 195,289 Inventory, net (Notes 5, 9 and 20) 169,834 260,575 Prepaid expenses 81,848 39,340 ----------- ----------- Total current assets 659,045 504,655 PROPERTY AND EQUIPMENT, net of accumulated depreciation (Notes 6 and 9) 656,820 571,383 INVESTMENTS IN ASSOCIATED COMPANIES (Notes 3, 4 and 20) 3,434,217 -- NOTE RECEIVABLE (Note 7) 90,000 -- OTHER 450 16,058 ----------- ----------- Total assets $ 4,840,532 $ 1,092,096 =========== =========== CURRENT LIABILITIES Accounts payable $ 1,715,586 $ 1,004,237 Accrued expenses (Notes 8 and 20) 290,985 267,587 Obligation under put option assumed in conjunction with E2E acquisition (Note 3) 2,000,010 -- Line of credit (Note 9) 197,392 -- Notes payable (Note 10) 685,861 27,270 ----------- ----------- Total current liabilities 4,889,834 1,299,094 NOTES PAYABLE AND CAPITAL LEASE OBLIGATION, less current portion (Note 10) -- 13,794 ----------- ----------- Total liabilities 4,889,834 1,312,888 ----------- ----------- MINORITY INTERESTS (Note 3) -- -- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 9, 10, 12, 14, 15, 18 and 19) CAPITAL DEFICIT (Note 12) Series A convertible preferred stock; votes as if converted to common stock; $0.02 par value; 1,000,000 shares authorized; 625,000 and 500,000 issued and outstanding 6,250,000 5,000,000 Series B mandatorily convertible preferred stock; votes as if converted to common stock on certain issues; $0.02 par value; 112,000 shares authorized, issued and outstanding 11,200,000 -- Series C mandatorily convertible preferred stock; votes as if converted to common stock on certain issues; $0.02 par value; 8,750 shares authorized; 4,534 shares issued and outstanding 4,337,914 -- Series D mandatorily convertible preferred stock; votes as if converted to common stock on certain issues; $0.02 par value; 2,000 shares authorized; 1,552.5 shares issued and outstanding 170,775 -- Series A convertible preferred stock issuable -- 289,703 Series E mandatorily convertible preferred stock issuable; will vote as if converted to common stock on certain issues upon issuance; 10,000 shares authorized; none issued and outstanding 1,199,200 -- Common stock; $.02 par value; 40,000,000 shares authorized; 29,610,786 and 29,195,278 shares issued and outstanding 592,216 583,906 Additional paid-in capital 27,601,507 12,125,450 Accumulated deficit (51,400,914) (17,992,167) Treasury stock, at cost -- (227,684) ----------- ----------- Total capital deficit (49,302) (220,792) ----------- ----------- Total liabilities and capital deficit $ 4,840,532 $ 1,092,096 =========== ===========
See accompanying notes to consolidated financial statements. F-2 60 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000 1999 1998 ------------ ------------ ------------ REVENUES Product sales (Note 15) $ 2,671,378 $ 3,764,785 $ 6,107,244 Consulting revenues (Note 16) 21,000 -- -- ------------ ------------ ------------ Total revenues 2,692,378 3,764,785 6,107,244 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Cost of sales 2,902,444 4,458,881 5,349,459 Selling expense 66,354 43,658 313,283 General and administrative expense, including non-cash compensation expense of $746,614, $195,740 and $0 (Notes 6 and 12) 6,242,513 1,988,113 2,788,104 Impairment of long-lived assets (Notes 3, 4 and 20) 12,304,800 -- -- Restructuring charge (Note 13) -- -- 90,000 ------------ ------------ ------------ Total operating costs and expenses 21,516,111 6,490,652 8,540,846 ------------ ------------ ------------ Loss from operations (18,823,733) (2,725,867) (2,433,602) ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest, net 34,383 28,893 (112,325) Equity in loss of associated companies (Note 4) (640,350) -- -- Other, net 70,863 (202,271) (18,782) Gain on sale of subsidiary -- 642,764 -- ------------ ------------ ------------ Total other income (expense) (535,104) 469,386 (131,107) ------------ ------------ ------------ Net loss before share of minority interest in loss of subsidiary (19,358,837) (2,256,481) (2,564,709) Minority interest in loss of subsidiary (Note 3) 707,740 -- -- ------------ ------------ ------------ NET LOSS (18,651,097) (2,256,481) (2,564,709) Deemed dividends (Note 12) (14,757,650) -- -- Preferred stock dividends (Note 12) -- (525,114) -- ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(33,408,747) $ (2,781,595) $ (2,564,709) ============ ============ ============ Basic and diluted loss per common share $ (1.14) $ (0.10) $ (0.09) ============ ============ ============ Weighted average common shares outstanding 29,408,063 28,795,278 28,996,607 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 61 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series B Shares Series A Mandatorily ------------------------------- Convertible Convertible Common Treasury Preferred Preferred Stock Stock Stock Stock ---------- ------------ ------------ ------------ BALANCE, JANUARY 1, 1998 28,632,063 -- $ -- $ -- Stock issued to retire debt 563,215 -- -- -- Purchase of treasury shares -- (400,000) -- -- Proceeds from convertible preferred -- -- -- -- stock issuable 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) -- -- Redemption of shares -- (3,000,000) -- -- Sale of treasury stock -- 3,000,000 -- -- Proceeds from convertible preferred -- -- -- -- stock issuable Issuance of preferred stock -- -- 5,000,000 -- Compensatory stock option grants -- -- -- -- Net loss -- -- -- -- Cash dividends on Series A Convertible Preferred Stock -- -- -- -- ---------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1999 29,195,278 (400,000) 5,000,000 -- Stock issuances related to exercise of options and warrants and stock issued in connection with the Buyline acquisition 815,508 -- -- -- Retirement of treasury stock (400,000) 400,000 -- -- Issuance of Series A and C Preferred Stock for cash Series B Preferred Stock in connection with the E2E acquisition and related deemed dividends -- -- 1,250,000 11,200,000 Issuance of Series D preferred stock to settle liability of a subsidiary -- -- -- -- Proceeds from convertible preferred stock issuable -- -- -- -- Compensatory stock option grants -- -- -- -- Net loss -- -- -- -- ---------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 2000 29,610,786 $ -- $ 6,250,000 $ 11,200,000 ========== ============ ============ ============ Series E Series C Series D Series A Mandatorily Mandatorily Mandatorily Convertible Convertible Convertible Convertible Preferred Preferred Preferred Preferred Stock Stock Stock Stock Issuable Issuable ------------ ------------ ------------ ------------ BALANCE, JANUARY 1, 1998 $ -- $ -- $ -- $ -- Stock issued to retire debt -- -- -- -- Purchase of treasury shares -- -- -- -- Proceeds from convertible preferred -- -- 3,648,682 -- stock issuable Advance to stockholder -- -- -- -- Accrued interest on note receivable - stockholder -- -- -- -- Transfer to subsidiary to be sold -- -- -- -- Net loss -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1998 -- -- 3,648,682 -- Redemption of shares -- -- -- -- Sale of treasury stock -- -- -- -- Proceeds from convertible preferred -- -- 1,641,021 -- stock issuable Issuance of preferred stock -- -- (5,000,000) -- Compensatory stock option grants -- -- -- -- Net loss -- -- -- -- Cash dividends on Series A Convertible Preferred Stock -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1999 -- -- 289,703 -- Stock issuances related to exercise of options and warrants and stock issued in connection with the Buyline acquisition -- -- -- -- Retirement of treasury stock -- -- -- -- Issuance of Series A and C Preferred Stock for cash Series B Preferred Stock in connection with the E2E acquisition and related deemed dividends 4,337,914 -- (289,703) -- Issuance of Series D preferred stock to settle liability of a subsidiary -- 170,775 -- -- Proceeds from convertible preferred stock issuable -- -- -- 1,199,200 Compensatory stock option grants -- -- -- -- Net loss -- -- -- -- ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 2000 $ 4,337,914 $ 170,775 $ -- $ 1,199,200 ============ ============ ============ ============ Common Treasury Paid-in Accumulated Stock Stock Capital Deficit ------------ ------------ ------------ ------------ BALANCE, JANUARY 1, 1998 $ 572,642 $ -- $ 12,241,811 $(13,170,977) Stock issued to retire debt 11,264 -- 213,013 -- Purchase of treasury shares -- (227,684) -- -- Proceeds from convertible preferred -- -- -- -- stock issuable Advance to stockholder -- -- -- -- Accrued interest on note receivable - stockholder -- -- -- -- Transfer to subsidiary to be sold -- -- -- -- Net loss -- -- -- (2,564,709) ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1998 583,906 (227,684) 12,454,824 (15,735,686) Redemption of shares -- (1,050,000) -- -- Sale of treasury stock -- 1,050,000 -- -- Proceeds from convertible preferred -- -- -- -- stock issuable Issuance of preferred stock -- -- -- -- Compensatory stock option grants -- -- 195,740 -- Net loss -- -- -- (2,256,481) Cash dividends on Series A Convertible Preferred Stock -- -- (525,114) -- ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1999 583,906 (227,684) 12,125,450 (17,992,167) Stock issuances related to exercise of options and warrants and stock issued in connection with the Buyline acquisition 16,310 -- 191,477 -- Retirement of treasury stock (8,000) 227,684 (219,684) -- Issuance of Series A and C Preferred Stock for cash Series B Preferred Stock in connection with the E2E acquisition and related deemed dividends -- -- 14,757,650 (14,757,650) Issuance of Series D preferred stock to settle liability of a subsidiary -- -- -- -- Proceeds from convertible preferred stock issuable -- -- -- -- Compensatory stock option grants -- -- 746,614 -- Net loss -- -- -- (18,651,097) ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 2000 $ 592,216 $ -- $ 27,601,507 $(51,400,914) ============ ============ ============ ============ Note Receivable Stockholder Total ------------ ------------ BALANCE, JANUARY 1, 1998 $ (359,692) $ (716,216) Stock issued to retire debt -- 224,277 Purchase of treasury shares -- (227,684) Proceeds from convertible preferred -- 3,648,682 stock issuable 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) ------------ ------------ BALANCE, DECEMBER 31, 1998 -- 724,042 Redemption of shares -- (1,050,000) Sale of treasury stock -- 1,050,000 Proceeds from convertible preferred -- 1,641,021 stock issuable Issuance of preferred stock -- -- Compensatory stock option grants -- 195,740 Net loss -- (2,256,481) Cash dividends on Series A Convertible Preferred Stock -- (525,114) ------------ ------------ BALANCE, DECEMBER 31, 1999 -- (220,792) Stock issuances related to exercise of options and warrants and stock issued in connection with the Buyline acquisition -- 207,787 Retirement of treasury stock -- -- Issuance of Series A and C Preferred Stock for cash Series B Preferred Stock in connection with the E2E acquisition and related deemed dividends -- 16,498,211 Issuance of Series D preferred stock to settle liability of a subsidiary -- 170,775 Proceeds from convertible preferred stock issuable -- 1,199,200 Compensatory stock option grants -- 746,614 Net loss -- (18,651,097) ------------ ------------ BALANCE, DECEMBER 31, 2000 $ -- $ (49,302) ============ ============
See accompanying notes to consolidated financial statements. F-4 62 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 1999 1998 ------------ ----------- ----------- OPERATING ACTIVITIES Net loss $(18,651,097) $(2,256,481) $(2,564,709) 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 1,750,927 178,230 68,573 Equity in losses of associated companies 640,350 -- -- Loss (gain) on disposal of assets 42,706 178,496 (118,000) Advances, net of deficit in operating results, to subsidiary -- (711,682) (767,450) held for sale Loss on settlement of note receivable 76,726 -- -- Impairment of long-lived assets 12,304,800 -- -- Minority interest in loss of subsidiary (707,740) -- -- Restructuring costs -- -- 90,000 Inventory valuation allowance 80,000 -- -- Provision for bad debts 158,000 66,000 136,000 Issuance of stock options 746,614 195,740 -- Changes in operating assets and liabilities, net of effects of acquisitions: Receivables (363,964) 311,548 (367,648) Inventory 10,741 325,280 (510,922) Prepaid expenses 40,796 (9,509) (25,587) Other assets 25 28,367 (29,005) Accounts payable (703,979) (119,790) 747,196 Accrued expenses (3,057,671) (203,837) (501,951) Obligation under put option assumed in conjunction with E2E acquisition 2,000,010 -- -- ------------ ----------- ----------- Net cash used in operating activities (5,632,756) (2,660,402) (2,870,611) ------------ ----------- ----------- INVESTING ACTIVITIES Net proceeds from disposal of assets -- 1,076,000 118,000 Investments in affiliates (972,339) -- -- Cash advances on notes receivable (938,364) -- -- Capital expenditures (210,861) (475,347) (431,298) Net cash acquired in (paid for) acquisitions 77,814 -- (730,000) Proceeds from collection of notes and other receivables -- -- 385,194 Advances to former shareholder -- (200,000) -- ------------ ----------- ----------- Net cash used in investing activities (2,043,750) 400,653 (658,104) ------------ ----------- ----------- FINANCING ACTIVITIES Proceeds from convertible preferred stock issued or issuable 6,497,411 1,641,021 3,648,682 Investments by minority interests 707,740 -- -- Issuance of common stock 167,523 -- -- Net borrowings under line of credit 197,392 -- -- Proceeds from issuance of notes payable 151,673 11,760 -- Principal payments on notes payable (48,574) (18,607) (6,909) Sale of treasury stock -- 1,050,000 -- Preferred stock dividends paid -- (525,114) -- Proceeds from issuance of convertible debentures -- -- 224,277 Purchase of treasury stock -- -- (227,684) ------------ ----------- ----------- Net cash (used in) provided by financing activities 7,673,165 2,159,060 3,638,366 ------------ ----------- ----------- Increase (decrease) in cash (3,341) (100,689) 109,651 CASH, beginning of period 9,451 110,140 489 ------------ ----------- ----------- CASH, end of period $ 6,110 $ 9,451 $ 110,140 ============ =========== ===========
F-5 63 U.S. TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 1999 1998 ------------ ----------- ----------- Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 17,000 $ 38,000 $ 11,000 Supplemental schedule of non-cash investing and financing activities: Conversion of debentures and accrued interest into common -- -- 275,000 stock Conversion of notes receivable into investments in Associated Companies 771,638 -- -- Conversion of note receivable acquired in E2E acquisition to 747,500 -- -- investment in Associated Companies Note payable issued for payment of the premium of an insurance policy 85,000 -- -- Common stock issued in conjunction with Buyline acquisition 40,264 -- -- Series B mandatorily convertible preferred stock issued in 11,200,000 -- -- conjunction with E2E acquisition Series D mandatorily convertible preferred stock issued to 170,775 -- -- settle the liability of a subsidiary Deemed dividends relative to Series A, B and C preferred stock 14,757,650 -- --
On April 12, 2000, the Company exchanged 112,000 shares of Series B mandatorily convertible preferred stock for all of the outstanding shares of E2E (See Note 3). In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 15,180,000 Value of Series B mandatorily convertible preferred shares issued (11,200,000) ------------ Liabilities assumed $ 3,980,000 ============
On April 26, 2000, the Company acquired a controlling interest (20,700,005 shares) in Buyline in exchange for conversion of existing notes and additional cash investment. Additionally, the Company acquired 634,699 shares of Buyline from its founder in exchange for 23,008 shares of Company common stock. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of net assets acquired, including net cash acquired of $77,814 $ 2,400,000 Notes receivable converted into Buyline equity (1,131,000) Value of Company common shares issued (40,000) ------------ Liabilities assumed $ 1,229,000 ============
See accompanying notes to consolidated financial statements. F-6 64 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" or "USXX") is a service firm that funds, operates and develops technology and emerging growth companies. USXX identifies companies with high growth potential to optimize their performance by deploying operational assistance, capital support, industry expertise, and access to a strategic network of business relationships. The Company also performs labor and service intensive "outsourcing" work for Fortune 1000 and other select companies. Currently, the work is performed by inmates in detention facilities located in Texas and California under the guidelines of a 1979 Federal Government Program known as the Prison Industry Enhancement program ("PIE"). The Company performs electronic and furniture assembly, manufacturing, enhancement, rework, packaging and sorting of products. The Company operates in privatized prisons under an 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 WCC also permits the Company to contract with state and federally operated facilities. WCC does not have an ownership interest in the Company. The Company's wholly-owned subsidiaries include E2Enet, Inc. ("E2E"), Labor-to-Industry Inc. ("LTI"), Service-to-Industry Inc. ("STI") and through February 12, 1999, GWP, Inc. ("GWP"). The Company also owned a majority interest in Buyline.net, Inc. ("Buyline"), which was sold on June 30, 2001 (see Note 19). E2E has made early stage investments in several development stage technology businesses ("Associated Companies"). LTI produces labor intensive tangible products and STI was a service provider operating an inbound/outbound call center. GWP was a holding company for a 51% interest in Technology Manufacturing and Design, Inc. ("TMD"). TMD was a "free-world" (i.e., non-prison) contract manufacturer of electronic circuit boards. Buyline was a developer of business to business e-commerce applications. 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 suspended operations in January 1999. GWP and the 51% interest in TMD were acquired effective October 5, 1998. On February 12, 1999, GWP and its interest in TMD were sold to the former president of the Company, Mr. Kenneth H. Smith, as part of a severance agreement (Notes 3 and 20). On July 31, 2000, the Company announced that it has decided to initiate efforts to divest its current prison-based outsourcing services business so that it may focus exclusively on its transformation into a distributive Internet operating company. The Company has no current plan to move forward to divest these operations. On April 12, 2000, the Company acquired E2E, formerly a privately held technology services company. Subsequent to the acquisition, the Company's focus is developing and operating a network of technology and related companies. The Company builds and develops Associated Companies by providing them with operational assistance, capital support, industry expertise, other business services and access to a strategic network of business relationships. USXX Associated Companies primarily include technology and emerging companies with perceived growth potential. F-7 65 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The consolidated statements of operations, cash flows and changes in stockholders' equity include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. Accounting for Investments The various investments that the Company acquires are accounted for under three broad methods: the consolidation, equity and cost methods. The accounting method applied is generally determined based on the Company's voting interest in the investee, the degree of influence exercised over the investee's operations, and the level of control over key management decisions. Consolidation Entities in which the Company owns more than 50% of the outstanding voting securities are accounted for under the consolidation method of accounting. Under this method, the subsidiary company's results are reflected within the Company's financial statements. All significant intercompany accounts and transactions are eliminated. Participation of other stockholders in the earnings or losses of the consolidated subsidiary is reflected as minority interest such that the Company's results of operations reflect only the Company's share of such earnings or losses. Equity Method Investee companies over which the Company exercises significant influence are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to the investee company depends on several factors, including but not limited to: an ownership interest level of 20% to 50% in the voting securities of the investee, active participation on the investee's board of directors, approval of the investee's operating and budgetary decisions, and other ownership rights which allow the Company to exercise significant control over the investee. Under the equity method of accounting, an investee's results of operations are not reflected within the Company's consolidated accounts, however, the Company's share of the earnings or losses of the investee is reflected in the caption "equity in loss of investees" in the statement of operations. The amount by which the Company's carrying value at the time of the initial purchase of the investment exceeds its share of the underlying net assets of investments accounted for under the equity method of accounting is amortized on a straight-line basis over the estimated useful life of the underlying assets or investments, generally three years. Amortization is reflected as an adjustment of the Company's share of the investee's earnings or losses. Cost Method Investments not accounted for under the consolidation or equity methods of accounting are accounted for under the cost method of accounting. Under this method, the Company's share of the earnings or losses of the investee is not included in the statement of operations. However, cost method impairment charges are recognized in the statement of operations if circumstances indicate a permanent impairment. F-8 66 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company records its ownership interest in equity securities of investments accounted for under the cost method at cost, unless these securities have readily determinable fair values based on quoted market prices, in which case these interests would be classified as available-for-sale securities or some other classification in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company used the cost method for certain of its investments and had no available-for-sale investments at December 31, 2000 and 1999. All investments are stated at the lower of cost or net realizable value. Goodwill Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Goodwill is amortized on a straight-line basis over the periods benefited, principally three years. Accumulated amortization amounted to approximately $1,607,000 at December 31, 2000. Asset Impairment Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. On a continuous basis, but no less frequently than at the end of each quarterly reporting period, the Company evaluates the carrying value for financial statement purposes of its interests in, and advances to, each of its associated companies for impairment. These evaluations of impairment are based on achievement of business plan objectives and milestones of each associated company, the fair value of each ownership interest and advance relative to its carrying value, the financial condition and prospects of the associated company, and other relevant factors. The business plan objectives and milestones that are considered include, among others, those related to financial performance, such as achievement of planned financial results and completion of capital raising activities, and those that are not primarily financial in nature, such as the launching of a web site, the hiring of key employees, the number of people who have registered to be part of the associated company's web community, and the number of visitors to the associated company's web site per month. For financial statement purposes, the fair value of the Company's ownership interests in, and advances to, privately held associated companies is generally determined based on the prices paid by third parties for ownership interests in the associated companies, to the extent third party ownership interests exist, or based on the achievement of business plan objectives and the milestones described above. As discussed in Notes 3 and 4, during 2000 the Company recognized losses of $12,304,800 related to the impairment of its investments in Associated Companies and goodwill. 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. F-9 67 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Expenditures for additions, renewals and improvements of property and equipment are capitalized. Expenditures for repairs, maintenance and gains or losses on disposals are included in operations. Depreciation is computed using the straight-line method over the following estimated lives:
ESTIMATED LIVES ---------------------------------- Equipment 5-7 years Furniture and fixtures 7 years Vehicles 3 years Leasehold Improvements Lesser of 6 years or term of lease
Revenue Recognition and Accounts Receivable Revenue is recognized on the sale of products or services when the products are shipped or the services are performed, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. Shipping, handling and warehousing costs are included in costs of sales in the statement of operations. Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, the Company has reviewed its accounting policies for the recognition of revenue. SAB No. 101 was required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company's policies for revenue recognition are consistent with the views expressed within SAB No.101. An allowance for doubtful accounts is provided based on periodic review of the accounts. Restructuring Charges 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. The Company's net operating loss carryforwards are subject to limitation based upon transactions occurring that resulted in a change in control as defined in the Internal Revenue Code (see Note 11). F-10 68 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings per Share The Company presents basic and diluted earnings per share in accordance with the provisions of SFAS No. 128, Earnings Per Share. 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 The Company accounts for its stock compensation plans under SFAS No. 123, Accounting for Stock Based Compensation. 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 issued to employees 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 price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. Under the intrinsic value method, compensation expense is only recognized if the exercise price of the employee stock option is less than the market price of the underlying stock on the date of grant. 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. Examples include the availability of funding for technology companies, valuation of technology companies, bad debts and fixed asset lives. Actual results could vary from these estimates. 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. F-11 69 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The adoption of SFAS No. 141 and SFAS No. 142 is not expected to have a material effect on the Company's financial position, results of operations and cash flows in 2002 and subsequent years. Effective January 1, 2001, the Company adopted SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of SFAS No. 125. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and revises the accounting standards for securitizations and transfers of financial assets and collateral. The adoption of this standard on January 1, 2001 did not have a material effect on the Company's results of operations and financial position. This standard also required new disclosures in 2000. Such requirements were not applicable to the Company. In 2000, the Financial Accounting Standards Board issued Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of Accounting Principles Board Opinion No. 25. Interpretation No. 44 clarifies the application of APB No. 25 to the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. The Company's policies have been amended for the adoption of FIN No. 44. Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, the Company has reviewed its accounting policies for the recognition of revenue. SAB No. 101 was required to be implemented in fourth quarter 2000. SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The company's policies for revenue recognition are consistent with the views expressed within SAB No. 101. See note 1, "Summary of Significant Accounting Policies," for a description of the Company's policies for revenue recognition. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction F-12 70 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS 138 Accounting For Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS No. 133, liberalized the application of SFAS 133 in a number of areas. The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001, to affect its financial statements. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. 2. GOING CONCERN The Company's consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred significant losses during each of the three years in the period ended December 31, 2000, and had working capital deficiencies at December 31, 2000 and 1999. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. On March 27, 2001, the Company acquired Yazam.com Inc. ("Yazam") (see Note 19 "Subsequent Events"). As a result of the acquisition of Yazam, the Company obtained approximately $6,900,000 in cash (and assumed liabilities of approximately $2,800,000), which will be used to support the Company's working capital and investing requirements during 2001. In addition to the acquisition cost for Yazam, the Company plans selectively to invest additional funds in those acquired companies of Yazam which are deemed to have the most potential to achieve their strategic business objectives. Any return may be realized through future cash flows from the acquired companies or through the sale of the acquired companies, once their business operations are properly developed. If prior to September 1, 2001, the Company is unable to issue sufficient shares of its common stock to allow the conversion of the Series F Preferred Stock and the exercise of the warrants issued to the former Yazam shareholders, these former Yazam shareholders have the right to put their shares of Series F Preferred Stock to the Company for a price equal to the greater of $250 per share or the average price of USXX's common stock for the 20 days prior to the exercise date multiplied by 1,000. The minimum amount that the Company would need to pay to the former Yazam stockholders should this repurchase be required is approximately $6,844,000. The Company has subsequently entered into transactions with respect to certain shares of the Series F Preferred Stock modifying their respective rights (see Note 19(d)). The Company's ability to support its business objectives is dependent upon its ability to raise capital, primarily through sales of convertible preferred stock and common stock (subsequent to the passing of the proposed charter amendment discussed in Note 12). The Company's continued ability to access the capital markets may be dependant on its ability to generate cash flow from operations (through increasing revenues and controlling costs at its LTI operations and generating revenues as a result of providing services to the Associated Companies), positive earnings or realizing a return from the cash flow of, or sale of its interests in, one or more of its Associated Companies. Should the Company be unable to raise sufficient capital to meet its cash flow needs, the Company may be required to significantly curtail its operations and investing activities. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 18 for Commitments and Contingencies. F-13 71 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. BUSINESS COMBINATIONS AND IMPAIRMENT OF LONG-LIVED ASSETS E2Enet, Inc. and Associated Companies On April 12, 2000, the Company acquired all of the outstanding stock of E2E by merging E2E into a wholly owned subsidiary of the Company, U.S. Technologies Acquisition Sub, Inc., which subsequently changed its name to E2E net, Inc. As a result, upon the completion of the E2E acquisition, E2E became a wholly owned subsidiary of the Company. This transaction was accounted for as a purchase. The results of operations of E2E subsequent to April 12, 2000 are included in the Company's consolidated financial statements. In consideration for the exchange of their E2E shares, E2E's stockholders were issued 112,000 shares of Series B Mandatorily Convertible Preferred Stock, which have a stated liquidation preference aggregating approximately $11,200,000. The Company also assumed liabilities in the aggregate amount of approximately $3,980,000 in conjunction with the acquisition. The Company agreed, under the E2E Acquisition Agreement, to raise new capital funds at or prior to the closing of the E2E Acquisition. To raise these funds, the Company completed the private placement sale of $1,250,000 of additional shares of its Series A Convertible Preferred Stock (the "Series A Preferred Stock"), to USV, and $4,337,914 of its Series C Mandatorily Convertible Preferred Stock ("Series C Preferred Stock"), to various accredited investors. The proceeds of these offerings has been used primarily to finance additional investments in new and existing technology businesses, the payment of costs incurred and liabilities assumed in connection with the E2E Acquisition and related business transactions and ongoing working capital needs. E2E had interests in several development stage technology companies at the time of the acquisition as follows: - - Buyline was a developer of B2B e-commerce applications, and was 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) was to be used in a full range of on-line advertising, on Internet based directories, and in commercial web sites. As of the date of the E2E acquisition, the Company had a $747,500 note receivable from Buyline. - - Promisemark Corporation ("Promisemark"). Promisemark (formerly known as Vipro Corporation) is an Internet surety company, which provides repair guarantees against viruses that harm computers. Promisemark has e-commerce relationships with one of the leading Internet utility companies, a credit card association, one of the largest warranty claims administrators in the world and over 170 Internet service providers. As of the date of the E2E acquisition, the Company owned 10.38% of Promisemark. - - Urban Box Office Network, Inc. ("UBO"). UBO was a developer of networked multi-media web sites that were to provide e-commerce services to participants interested in urban culture, information, entertainment and products. As of the date of the E2E acquisition, the Company owned 8.03% of UBO. - - 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. As of the date of the E2E acquisition, the Company owned 16.16% of OneMade. F-14 72 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - 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. As of the date of the E2E acquisition, the Company owned 29.05% of Bluemercury. - - 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. As of the date of the E2E acquisition, the Company owned 5.65% of MEI. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with the acquisition: Investments in associated companies: OneMade $ 3,073,000 UBO 3,014,000 Promisemark 1,820,000 MEI 546,000 Bluemercury 500,000 Note receivable - Buyline 748,000 Goodwill 4,989,000 Other assets 490,000 Accounts payable (1,370,000) Accrued expenses (610,000) Accrued put obligation (2,000,000) ------------ $ 11,200,000 ------------
In connection with the E2E acquisition, the Company agreed to assume the obligation of a former E2E shareholder under a put agreement with the shareholders of a former E2E Associated Company. This put option was exercised following the closing of the E2E acquisition, and the Company recorded a liability in the amount of $2,000,010, equal to the number of shares covered by the put option multiplied by the option's strike price. This obligation was settled in cash during April 2001. The following unaudited pro-forma condensed consolidated financial data assume that the acquisition of E2E, as described above, occurred at the beginning of each fiscal year presented. This data has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future.
2000 1999 ------------- ------------- Revenues $ 2,671,378 $ 3,764,785 Net loss applicable to common shareholders (34,443,024) (43,060,833) Basic and diluted net loss per common share (1.17) (1.50)
F-15 73 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has restructured some of E2E's Associated Companies and provided these entities with additional working capital. E2E's initial investment in Buyline was increased so that Buyline became a controlled operating subsidiary on April 26, 2000, as a result of the Company acquiring 20,700,005 shares of Buyline's common stock. The Buyline shares were issued to the Company in exchange for (1) the conversion to Buyline's common stock of USXX's and E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment of in-kind services already rendered by E2E, and (3) approximately $1,000,000 cash invested by the Company. On April 26, 2000, the Company issued 23,008 shares of its common stock to Buyline's founder in exchange for 634,699 shares of Buyline's common stock. As a result of these transactions, the Company became the controlling shareholder of Buyline. On September 8, 2000, Buyline entered into a Portal Development and Joint Marketing Agreement ("PDJMA") with the Museum Store Association (MSA). The PDJMA provided a plan for the development of B2B e-commerce applications designed to provide a universal platform for entry-level B2B e-commerce, linking buyers and sellers through Internet trading zones. This plan was expected to assist Buyline in becoming fully operational and in developing a viable revenue stream using certain proprietary Internet software specifically developed for B2B applications. Effective October 1, 2000, the staff and CEO of Buyline resigned and went to work for a competitor. Following these resignations, Buyline was unable to hire sufficient personnel to carry out the terms of the PDJMA, and on December 1, 2000, MSA withdrew from the agreement with Buyline. At that time, Buyline abandoned its software, ceased operations and stopped pursuing the project further. On December 28, 2000, the Company and Buyline settled a liability of Buyline's through the issuance of equity securities. In settlement of a payable to a vendor for software consulting and other services, the Company issued 1,552.5 shares of Series D Mandatorily Convertible Preferred Stock ("Series D Preferred Stock") and Buyline issued 2,589,794 shares of common stock to the vendor. The Company received from Buyline in consideration for their role in this transaction 5,025,819 additional shares of Buyline common stock. As of December 31, 2000, the Company's ownership percentage of Buyline was approximately 64%. During the year ended December 31, 2000, losses in the amount of $707,740 were allocated to Buyline's minority shareholders. In connection with the Company's ongoing evaluation of its operations, management determined during the fourth quarter of 2000 that future expected undiscounted cash flows from the E2E operations were not sufficient to support the recorded amount of goodwill. This evaluation included changes in the conditions of the market for technology company funding during 2000 and the fact that all of the former employees of E2E had left the Company prior to December 31, 2000. Accordingly, the Company recorded a loss on impairment in the amount of approximately $3,866,000, which was included in the E2E segment during 2000. As a result of the events discussed above, management determined during the fourth quarter of 2000 that the recorded goodwill and certain other long-lived assets related to the Buyline operation was permanently impaired. The Company realized an impairment loss of approximately $1,817,000 which is included in the E2E segment during 2000. On June 30, 2001, the Company sold its investment in Buyline to a Company controlled by the Chairman of USXX (see Note 19). F-16 74 GWP, Inc. As described in Note 1, the Company acquired GWP and its 51% interest in TMD from Mr. Smith for $730,000 in October 1998 and subsequently sold GWP and its 51% interest in TMD back to Mr. Smith in February 1999. The following table summarizes the fair values of the assets acquired and liabilities assumed in connection with the acquisition: Accounts receivable $ 718,215 Inventory 519,097 Property and equipment 2,096,196 Net assets held for sale 275,000 Goodwill 2,312,863 Other assets 169,603 Accounts payable (1,782,548) Accrued expenses (926,600) Notes payable (2,011,450) Other liabilities (640,376) ------------ $ 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. 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 during 1999, unaudited pro forma results of operations 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 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. On February 12, 1999, TMD filed for bankruptcy protection. 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 initially 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 F-17 75 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 Chairman of the Company's Board of Directors and 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 were sold to USV. In payment of the $1,050,000 sale price, USV executed a 30-day promissory note in favor of the Company. This promissory note was secured by USV's pledge of the 3,000,000 shares 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 promissory note has not been repaid. As of December 31, 2000 and 1999, the Company has recorded a valuation allowance equal to the amount outstanding. 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 Company continues to be subject to the guarantee of the future purchase of the 49% minority interest in TMD. However, in conjunction with the sale, the Company obtained a pledge from GWP of its 51% interest in TMD and Mr. Smith's personal guarantee. Management believes that the amount needed to satisfy the guarantee of the future purchase of the 49% minority interest in TMD, if any, would be insignificant due to the apparent ceasing of operations of TMD subsequent to their bankruptcy filing. F-18 76 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. INVESTMENTS IN ASSOCIATED COMPANIES AND IMPAIRMENT OF LONG-LIVED ASSETS The following summarizes the Company's ownership interests in Associated Companies accounted for under the equity method or cost method of accounting. The ownership interests are classified according to applicable accounting methods at December 31, 2000. Cost method (prior to impairment losses): OneMade $ 3,072,500 UBO 3,014,000 Promisemark 2,770,000 Gomembers 545,500 Final Arrangements 156,957 ----------- 9,558,957 Impairment losses (6,319,500) ----------- Total cost method $ 3,239,457 =========== Equity method (prior to impairment losses): Bluemercury $ 301,911 Portris 194,760 ----------- 496,671 Impairment losses (301,911) ----------- Total equity method $ 194,760 ===========
On April 12, 2000, the Company closed an agreement with Promisemark to invest an additional $1,000,000 in Promisemark, another E2E Associated Company, for additional equity in the form of shares of Promisemark Series B Convertible Preferred Stock. On July 5, 2000, the Company completed the acquisition of approximately a 37% interest in WebMilestones.com, LLC ("WebMilestones"), an Internet services company that provided a site for publishing obituary notices that can be accessed through the Internet's World Wide Web. The Company invested $400,000 in WebMilestones, of which $100,000 was in the form of equity and $300,000 in a note. On December 27, 2000, all of the membership interests of WebMilestones were exchanged for membership interests in Final Arrangements, LLC ("Final Arrangements"), the largest publisher of online obituaries and a provider of software to manage funeral homes. The Company received a .1267% ownership interest in Final Arrangements in connection with this transaction. On October 16, 2000, the Company completed the acquisition of a 30.4% equity interest in Portris, Inc. ("Portris"). Portris is a software company that is developing an information management system that facilitates performance of interactive team oriented projects over the internet. Under the terms of the agreement, the Company received a 30.4% equity interest in Portris for an aggregate of $380,000, by canceling $250,000 of debt and providing additional cash to Portris. On November 3, 2000, all of the common and preferred shares of MEI were exchanged for common stock of gomembers.com, Inc. ("gomembers"), a provider of software solutions for member-based organizations. The Company received a .47% ownership interest in gomembers in connection with this transaction. F-19 77 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On November 3, 2000, UBO filed for bankruptcy protection. The Company recorded approximately $794,000 in excess investment over its share of the underlying equity in the net assets of companies acquired during the year ended December 31, 2000, accounted for under the equity method of accounting. Amortization expense of approximately $259,000 is included in "equity in losses of associated companies" in the accompanying consolidated statement of operations for the year ended December 31, 2000. This excess was being amortized over a three-year period. In connection with the Company's ongoing evaluation of its Associated Companies, management determined that during the fourth quarter of 2000 several of the Company's Associated Companies had suffered permanent declines in value and, accordingly, recorded a loss on impairment of approximately $6,622,000. Management has determined that the Company's investment in two Associated Companies, UBO and Bluemercury, had no value at December 31, 2000. As discussed above, UBO filed for bankruptcy protection on November 3, 2000. Based on financial information received, management also believes that the value of its investment in Bluemercury is nominal. During the fourth quarter of 2000, management determined that its investment in Bluemercury would most likely not return any cash, and at that time the impairment loss was recognized. On February 10, 2001, the assets of Bluemercury were contributed to 29th Street Partners, Inc. ("29th Street Partners"), a cosmetic specialty retailer. The Company received a 9.12% ownership interest in 29th Street Partners in connection with this transaction. Management has determined that the Company's investment in three additional Associated Companies, Gomembers, OneMade and Promisemark, were impaired as of December 31, 2000. This evaluation was based upon management's knowledge of financing or merger transactions entered into by each of these Associated Companies either during the fourth quarter of 2000 or shortly thereafter, and financial and other operational information received regarding each Associated Company. The following summarized unaudited financial information for Portris which is accounted for under the equity method of accounting at December 31, 2000 has been compiled from Portris' financial statements. Information regarding the balance sheet of Portris is presented as of December 31, 2000. Information regarding the results of operations of Portris is included from the acquisition date on October 16, 2000. Balance sheet Current assets $ 2,089 Non-current assets 55,349 ------------ Total assets $ 57,438 ============ Current liabilities $ 442,003 Stockholders' deficit (384,565) ------------ Total liabilities and stockholders' deficit $ 57,438 ============ Results of operations: Revenue $ -- ============ Net loss $ (628,785) ============
F-20 78 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarized financial information for OneMade and Promisemark, which are accounted for under the cost method, at December 31, 2000 have been derived from the unaudited financial statements of OneMade and the financial statements of Promisemark. Information regarding each balance sheet is presented as of December 31, 2000. Information regarding the results of operations are for the year ended December 31, 2000.
OneMade Promisemark ----------- ----------- Balance sheets Current assets $ 2,651,894 $ 1,299,370 Non-current assets 1,812,297 301,546 ----------- ----------- Total assets $ 4,464,191 $ 1,600,916 =========== =========== Current liabilities $ 473,643 $ 495,679 Non-current liabilities -- 14,100 Stockholders' equity 3,990,548 1,091,137 ----------- ----------- Total liabilities and stockholders' equity $ 4,464,191 $ 1,600,916 =========== =========== Results of operations Revenue $ 8,888 $ 114,425 =========== =========== Net loss $(2,422,605) $(2,607,696) =========== ===========
5. INVENTORIES At December 31, inventories consisted of the following:
2000 1999 --------- -------- Raw material $ 231,177 $217,348 Work in progress 18,272 42,180 Finished goods 385 1,047 --------- -------- 249,834 260,575 Reserve for obsolescence (80,000) -- --------- -------- $ 169,834 $260,575 ========= ========
The Company provided a reserve for obsolete raw materials which was charged to operations of $80,000, $0, and $0, during the years ended December 31, 2000, 1999 and 1998, respectively. F-21 79 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. PROPERTY AND EQUIPMENT At December 31, property and equipment consisted of the following:
2000 1999 ----------- ----------- Equipment $ 1,414,387 $ 1,419,825 Furniture and fixtures 502,614 315,465 Leasehold improvements 213,331 166,081 ----------- ----------- 2,130,332 1,901,371 Less accumulated depreciation (1,473,512) (1,329,988) ----------- ----------- $ 656,820 $ 571,383 =========== ===========
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was $142,697, $178,230 and $68,573, respectively. 7. NOTE RECEIVABLE The Company has an unsecured $90,000 note receivable from Portris which bears interest at the Prime Rate (9.0% at December 31, 2000). The note was converted into Portris common equity during May 2001. 8. ACCRUED EXPENSES At December 31, accrued expenses consisted of the following:
2000 1999 -------- -------- Compensation and benefits $118,879 $200,873 Property taxes 43,726 24,793 Other 128,380 41,921 -------- -------- $290,985 $267,587 ======== ========
F-22 80 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. LINE OF CREDIT LTI has a $250,000 revolving line of credit with a financial institution payable on demand. Interest is payable semi-monthly at the Prime Rate plus 3%, plus a monthly service charge of 1.75% of the average daily outstanding loan balance. The line of credit is collateralized by accounts receivable, inventory and equipment of LTI, and is guaranteed by USXX. In January 2001 the line of credit was increased to the lesser of $350,000 or 80% of the company's eligible accounts receivable as defined. Net borrowings on the line of credit were $197,392 during the year ended December 31, 2000. During June 2001 this line was repaid, and subsequently the line expired. 10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION Notes payable and capital lease obligation consisted of the following at December 31:
2000 1999 ---------- ---------- Buyline.net, Inc. note payable, original principal $650,000 payable $18,000 per month, accelerated under certain conditions; interest accrues at Prime Rate; in payment default at December 31, 2000. Collateralized by the Company's investment in Buyline $ 587,071 $ -- Unsecured note payable to an insurance company payable in monthly installments of $7,793 plus interest at 7.49% maturing in July 2001 52,889 -- Unsecured, non interest-bearing notes payable to related parties upon demand 21,300 -- 5% unsecured note payable; in default at December 31, 2000; requiring an 18% default interest rate 8,745 7,764 Capital lease obligation, with monthly payments of $778 and imputed interest of 9% 15,856 21,540 9% unsecured note payable; repaid during 2000 -- 11,760 ---------- ---------- 685,861 41,064 Less current maturities (685,861) (27,270) ---------- ---------- $ -- $ 13,794 ========== ==========
The Buyline note is secured by a stock pledge agreement between E2E and LightMedia Interactive Corporation. The capital lease obligation is secured by certain equipment. F-23 81 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Annual maturities of notes payable and capital lease obligation are as follows:
Notes Capital December 31, Payable Lease Total --------- -------- --------- 2001 $ 670,005 $ 11,670 $ 681,675 2002 - 5,446 5,446 --------- -------- --------- Subtotal 670,005 17,116 687,121 Less amounts representing interest - (1,260) (1,260) --------- -------- --------- $ 670,005 $ 15,856 $ 685,861 ========= ========= =========
During 1998, the holders converted $224,277 in aggregate principal of 4% convertible subordinated debentures into 563,000 shares of the Company's stock. 11. INCOME TAXES Provisions for federal and state income taxes consist of the following:
Years ending December 31, 2000 1999 1998 ----------- ----------- ----------- Deferred Federal $(6,040,000) $ (887,000) $ (585,000) State (1,066,000) (157,000) (103,000) ----------- ----------- ----------- (7,106,000) (1,044,000) (688,000) Change in deferred tax asset valuation allowance, net of change due to acquisition of net operating loss carryforwards in E2E acquisition 7,106,000 1,044,000 688,000 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
The Company incurred taxable losses for each of the three years ended December 31, 2000. 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, 2000 and 1999 are as follows:
2000 1999 ------------- ------------ Deferred tax assets Current assets and liabilities $ 295,000 $ 283,000 Impairment losses 4,476,000 -- Net operating loss carryforwards (Federal and state) 9,576,000 5,169,000 Valuation allowance (14,347,000) (5,452,000) ------------- ------------ $ -- $ -- ============= ============
F-24 82 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2000, the Company acquired net operating losses in the E2E acquisition. This resulted in an increase of $1,789,000 in both the gross deferred tax asset and the valuation allowance. At December 31, 2000, the Company has net operating loss carryforwards of approximately $26,274,000 for federal income tax purposes that expire in years 2004 through 2015. The Company's utilization of losses prior to December 28, 2000 to offset future taxable income is limited to approximately $176,000 per year as a result of a change in control of the Company, in accordance with Internal Revenue Code Section 382. In connection with the Yazam acquisition on March 27, 2001 (see Note 19), a change in control occurred which will also result in the limitation of the utilization of losses generated prior to that date. Utilization of the losses and other deferred tax assets may be further limited by alternative minimum tax provisions. The reconciliation of income tax computed at the United States federal statutory tax rate (34 percent) to income tax benefit is as follows:
2000 1999 1998 ----------- ----------- --------- Benefit at United States statutory rate $(6,341,000) $ (872,000) $(872,000) State tax benefit (746,000) (154,000) 154,000 Permanent differences (19,000) (18,000) 30,000 Change in deferred tax asset valuation allowance, net of change due to acquisition of net operating loss carryforwards in E2E acquisition 7,106,000 1,044,000 688,000 ----------- ----------- --------- $ -- $ -- $ -- =========== =========== =========
12. 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, 2000. The following table reconciles the number of shares shown as outstanding on the balance sheets with the weighted-average shares used for computing earnings per share ("EPS") for the years ended December 31:
2000 1999 1998 ---------- ---------- ---------- Common shares outstanding at December 31, 29,610,786 29,195,278 29,195,278 Effect of using weighted-average common shares outstanding (202,723) (400,000) (198,671) ---------- ---------- ---------- Shares used in computing earnings per share 29,408,063 28,795,278 28,996,607 ========== ========== ==========
Diluted EPS have not been presented due to convertible preferred stock, stock options and warrants which comprised common stock equivalents totalling 122,365,470, 51,887,158 convertible preferred stock, and 267,400 for the years ended December 31, 2000, 1999 and 1998, respectively, being anti-dilutive. F-25 83 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1996, the holders 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. During 1998, the holders converted $224,277 in aggregate principal of 4% convertible subordinated debentures into 563,215 shares of the Company's stock. 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. During 2000, warrants to acquire 137,500 shares of Common Stock were exercised. At December 31, 2000, warrants to acquire 137,500 shares of Common Stock remain outstanding. Series A Convertible Preferred Stock During 1998 and 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 Chairman of the Company's Board of Directors and the 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 modified to cancel the right of the holders to receive an annual dividend and to change the conversion price to $0.122. The amended Certificate of Designations, Preferences and rights of the Series A Preferred Stock setting forth this change was filed with the Delaware Secretary of State on December 31, 1999. The Company may not issue any stock with the same or senior preferences or priorities to this series without the consent of the majority of this series' shareholders. USV had the right to convert its shares of Series A Preferred Stock to Common Stock at any time. Likewise, the Earls Family Limited Partnership had 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 51,729,508 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 41,568,852 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 F-26 84 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. September 20, 2000 Gregory Earls and the Earls Family Limited Partnership entered into a similar agreement with the Company. On April 12, 2000, the Company sold an additional 125,000 shares of Series A Preferred Stock to USV for $1,250,000 (see Note 3). Based on the conversion terms of the Series A Preferred Stock and the market price of the Company's common stock on the date of issuance of the Series A Preferred Stock, the Company recognized the existence of a beneficial conversion feature in the amount of $1,250,000. This amount was recorded as a non-cash deemed dividend during 2000, resulting in an increase in the net loss applicable to common shareholders. Series B Mandatorily Convertible Preferred Stock In conjunction with the acquisition of E2E, the Company issued 112,000 shares of $.02 par value Series B Mandatorily Convertible Preferred Stock ("Series B Preferred Stock") to former E2E stockholders. The Series B Preferred Stock has a stated liquidation preference upon dissolution aggregating approximately $11,200,000. 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. Based on the conversion terms of the Series B Preferred Stock and the market price of the Company's common stock on the date of issuance of the Series B Preferred Stock, the Company recognized the existence of a beneficial conversion feature in the amount of $11,200,000. This amount was recorded as a non-cash deemed dividend during 2000, resulting in an increase in the net loss applicable to common shareholders. The Company may not issue any stock with the same or senior preferences or priorities to this series without the consent of the majority of this series' shareholders. Series C Mandatorily Convertible Preferred Stock On April 12, 2000, the Company sold 4,534 shares of its Series C Mandatorily Convertible Preferred Stock ("Series C Preferred Stock"), to accredited investors for net proceeds of $4,337,914 (see Note 3). The Series C Preferred Stock will be convertible into 3,126,895 shares of Common Stock at a conversion price per share of $1.45. Based on the conversion terms of the Series C Preferred Stock and the market price of the Company's common stock on the date of issuance of the Series C Preferred Stock, the Company recognized the existence of a beneficial conversion feature in the amount of $2,307,650. This amount was recorded as a non-cash deemed dividend during 2000, resulting in an increase in the net loss applicable to common shareholders. Series D Mandatorily Convertible Preferred Stock On December 28, 2000, the Company issued 1,552.5 shares of $.02 par value Series D Preferred Stock (see Note 3). Upon their mandatory conversion as described below, the shares of Series D Preferred Stock will be converted into 1,552,500 shares of Common Stock at $1.10 per share. F-27 85 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Series E Mandatorily Convertible Preferred Stock During 2000, the Company received $1,199,200 of cash for shares of a new class of preferred stock that will be designated as the Series E Mandatorily Convertible Preferred Stock ("Series E Preferred Stock") from a limited number of accredited investors. The terms under which the Series E Preferred Stock will be converted and other terms will be determined prior to the closing of the sale of such stock and will be filed in a Certificate of Designations with the Secretary of State of Delaware. It is currently the intention of the Company to issue such shares with a conversion price equal to $0.2031 per common share. Based on the conversion terms of the Series E Preferred Stock and the market price of the Company's common stock on the date of issuance of the Series E Preferred Stock, the Company may recognize the existence of a beneficial conversion feature at the time of issuance. The amount of this beneficial conversion feature and any resultant deemed dividend may be significant, and will result in an increase in the net loss applicable to common shareholders. Series F Redeemable Convertible Preferred Stock In conjunction with the acquisition of Yazam.com Inc. ("Yazam") subsequent to year end (see Note 19), the Company issued 27,374 shares of $.02 par value Series F Convertible Preferred Stock ("Series F Preferred Stock") to former Yazam stockholders. The Series F Redeemable Preferred Stock has a stated liquidation preference aggregating approximately $6,000,000. Upon their conversion, these shares of Series F Preferred Stock will be converted into approximately 27,374,000 shares of Common Stock at $0.22 per share. Based on the conversion terms of the Series F Preferred Stock and the market price of the Company's common stock on the date of issuance of the Series F Preferred Stock, the Company recognized the existence of a beneficial conversion feature in the amount of $6,022,280. This amount will be recorded as a non-cash deemed dividend during 2001, resulting in an increase in the net loss applicable to common shareholders. Beginning on the second anniversary of the date of the first issuance of shares of Series F Preferred Stock, and for a period of 90 days thereafter, each holder of shares of Series F Preferred Stock shall have the right to require the Company to redeem such holder's shares at a purchase price of $100 per share (as adjusted for any combinations, consolidations, stock distributions or stock dividends or similar events with respect to such shares); provided, however, that the Company shall not be obligated to effect such a redemption unless certificates evidencing such shares of Series F Preferred Stock being redeemed are either delivered to the Company or its transfer agent or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. Registration Rights The Company and certain holders of the Company's Series A, B and C Preferred Stock entered into an agreement regarding registration rights for the Series A, Series B, and Series C Preferred Stock and Common Stock into which they are to be converted. Collectively, the stockholders party to the agreement have the right to compel the Company to register their respective shares at the expense of the Company at certain times (no earlier than six months subsequent to conversion of such shares to Common Stock) and rights on other occasions to have such registration effected at the expense of the holders. This request must be made by one third of the shares covered by this agreement. These stockholders also have unlimited registration rights to be combined, at the Company's expense, with certain registrations of any equity securities by the Company (Piggyback Rights), subject to restrictions F-28 86 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS which might be imposed by an underwriter for the sale of such shares. The holders of these registration rights must approve prior to the Company granting registration rights superior to those in place. The holders of the Company's Series F Preferred Stock have been granted similar registration rights with respect to their shares. Preferred Stock Voting Rights The terms of the Series A Preferred Stock permits them to vote as if the Series A Preferred Stock was already converted to Common Stock. The terms of the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series F Preferred Stock and the Series E Preferred Stock (when issued) do not permit the holders thereof to vote on the Charter Amendment, but otherwise permit them to vote as if the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series F Preferred Stock and the Series E Preferred Stock (when issued) were already converted to Common Stock. Accordingly, the Charter Amendment will be presented for approval by the holders of outstanding shares of Common Stock and Series A Preferred Stock, voting together as a single class. Proposed Charter Amendment The Company intends, and is obligated 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, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock. The Charter Amendment's proposed increase of 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, the Series C Preferred Stock and the Series D Preferred Stock will automatically be converted into shares of Common Stock. USV has also indicated its current intention to convert all shares of Series A Preferred Stock held by it to Common Stock at that time. Management has obtained agreements from stockholders representing a majority of shares entitled to vote on the charter amendment to vote in favor of such amendment. 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 F-29 87 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS officers, other key employees, directors and consultants. The option plan was amended in 2000 and 2001. 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. Subject to stockholder approval, the maximum number of shares that can be reserved under this plan as amended is 30,000,000, provided, however, that the options are not exercisable with respect to more than 8,000,000 shares of common stock unless and until the Company's charter is amended to authorize the issuance of at least 200,000,000 common shares. 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 2000 and 1999 (no options were granted during 1998).
2000 1999 ---- ---- Risk-free interest rate 6.5% 5.4% Dividend yield 0.0% 0.0% Volatility factor 70.0% 75.0% Weighted-average expected life (in years) 7.0 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:
2000 1999 1998 ------------- ------------ ------------ Net loss applicable to common shareholders As reported $ (33,408,747) $ (2,781,595) $ (2,564,709) Pro forma (34,487,862) (2,939,384) (2,564,709) Earnings per share As reported (1.14) (0.10) (0.09) Pro forma (1.18) (0.10) (0.09)
The grant date weighted-average fair value of options granted during 2000 was $7,677,851, of which $6,911,620 related to options issued at exercise prices equal to the market price of USXX stock on the respective grant dates and $766,231 related to options issued at an exercise price less than the market price of USXX stock on the grant date. Compensation expense recognized during 2000 related to the Company's option plans was $746,614 and is included in general and administrative expense. F-30 88 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of stock option activity, and related information for the years 2000 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 December 31, 1997 and 1998 17,400 $ 0.54 -- $ -- Granted 1,495,000 0.13 1,975,000 0.12 Exercised -- -- -- -- Forfeited or canceled -- -- -- -- ---------- ------- ---------- ------- Outstanding at December 31, 1999 1,512,400 0.13 1,975,000 0.12 Granted -- -- 6,861,667 1.17 Exercised (585,000) 0.13 (70,000) 0.13 Forfeited or canceled (17,400) 0.54 (600,000) 1.16 ---------- ------- ---------- ------- Outstanding at December 31, 2000 910,000 $ 0.13 8,166,667 $ 0.92 ========== ======= ========== ======= Options exercisable at: December 31, 1998 17,400 0.54 -- -- December 31, 1999 1,512,400 0.14 175,000 0.12 December 31, 2000 910,000 0.13 2,005,000 0.63
The table above includes 3,420,000 non-qualified plan options which were granted during 2000 that may not be exercised (subject to other vesting and expiration terms) until the proposed charter amendment is approved. During 2000, the Company modified options to purchase an aggregate of 750,000 shares held by two employees to accelerate vesting. These options had no intrinsic value as of the date of the modification, therefore, no expense was recognized as a result of this modification. Variable accounting will not be applied prospectively for these options. 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. Consequently, these options are not included in the above summary of Stock Option activity. The Company is evaluating the status of these options and will take appropriate actions based on that determination. As of December 31, 2000 and 1999, 100,000 of the $0.50 options and all of the $0.125 options remain outstanding; however, the Company has not reflected these options in the Company's financial statements due to the fact that they are not deemed valid and have expired. F-31 89 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------- Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average Exercisable Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Prices 2000 Life Price 2000 Price - --------------- -------------- ----------- -------- ------------ -------- $0.12 - $0.13 2,805,000 8.89 $ 0.12 2,805,000 $ 0.12 0.50 - 0.56 80,000 3.74 0.52 80,000 0.52 0.76 - 0.98 3,371,667 9.11 0.90 30,000 0.76 1.34 - 1.56 2,820,000 9.42 1.51 -- -- ---------- ---- ------ ---------- ------ 9,076,667 9.09 $ 0.84 2,915,000 $ 0.14 ========== ==== ====== ========= ======
13. RESTRUCTURING CHARGE 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. 14. OPERATING 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 with an automatic three-year extension clause that was exercised on January 31, 2001. 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 8,200 square feet for its executive offices in Washington, DC, under a fifty-four month operating lease expiring December 31, 2004. Monthly rentals under this lease are approximately $24,000. The Company is also obligated under several other operating leases for various vehicles and office equipment. F-32 90 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum rentals due under non-cancellable operating leases are as follows:
Year Amount ---- ------------ 2001 $ 310,000 2002 318,000 2003 318,000 2004 314,000 ------------ $ 1,260,000 ============
Rental expense for the years ended December 31, 2000, 1999 and 1998 was approximately $213,000, $85,000 and $109,000, respectively. 15. BUSINESS AND CREDIT CONCENTRATION The Company is dependent upon certain customers for a major portion of its sales. Dell Computer, Uni-Source Office Furniture and Vant Electronix accounted for approximately 18%, 17% and 14%, respectively, of the Company's sales (LTI Segment) for the year ended December 31, 2000. High End (a customer of the LTI segment) accounted for approximately 15% of sales for the year ended December 31, 1999. Sales to IBM represented approximately 43% of revenues for the year ended December 31, 1998. Texas Instruments accounted for approximately 7% of total sales for the year ended December 31, 1998. Amounts due from three customers, HDL Research Lab, Uni-Source Office Furniture and Vant Electronix (customers of the LTI segment) constituted 67% of the Company's accounts receivable at December 31, 2000. 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. The Company generally does not require collateral on its trade accounts receivable. During all years presented, the Company's prison-based operations were primarily in electronics manufacturing. Until such time as the Company successfully expands into 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 1, above. 16. 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 TMD from the Company, Mr. Smith paid $875,000 to the Company and executed a three-year note for approximately $1.2 million in connection with the purchase of TMD (Note 3). During 2000, the Company paid approximately $97,000 to The Spear Group, a company controlled by a co-chairman of USXX for certain accounting and administrative support functions. F-33 91 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2000, the Company received consulting revenues of approximately $21,000 from two of its Associated Companies for capital raising assistance. During 2000, the Company received approximately $115,000 from Portris, OneMade and Webmilestones for management and facilities fees. Such amount has been included as a reduction of general and administrative expense in the consolidated statement of operations. 17. 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 five reportable segments. The five reportable segments are USXX (Washington, D.C.), E2E (includes Buyline), LTI (Lockhart, Texas), TMD (Georgetown, Texas) and STI (Draper, Utah). USXX is the corporate office, E2E represents the technology operations of the Company, LTI is a prison-based manufacturer of computer circuit boards, TMD is a freeworld manufacturer of computer circuit boards and STI was a prison-based inbound/outbound call center. 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. 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. F-34 92 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary information by segment follows (in thousands):
2000 USXX E2E LTI STI(2) TOTAL - --------------- --------- ---------- -------- ----- ---------- Revenues $ 21 $ -- $ 2,671 $ -- $ 2,692 Operating loss (3,733) (14,814) (413) -- (18,960) Depreciation and amortization 430 1,318 2 -- 1,750 Total segment assets $ 2,791 $ 3,434 $ 865 $ -- $ 7,090 ========= ========== ======== ===== ==========
1999 USXX LTI(1) TMD STI OTHER TOTAL - ------------------- --------- --------- ------ ------ ------ --------- Revenues $ -- $ 2,777 $ 948 $ 22 $ 18 $ 3,765 Operating loss (1,461) (1,080) (66) (67) (52) (2,726) Depreciation and amortization 8 96 50 22 2 178 Total segment assets $ 2,887 $ 922 $ -- $ 115 $ -- $ 3,924 ========= ========= ====== ====== ====== =========
1998 USXX LTI TMD STI OTHER TOTAL - ------------------- --------- -------- -------- ------- ------- --------- Revenues $ -- $ 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 Total segment assets $ 4,386 $ 1,031 $ 657 $ 337 $ 215 $ 6,626 ========= ======== ======== ======= ======= =========
(1) Includes operations previously reported as "LTI" and "LTI-Blythe" Segments. (2) Dormant in 2000 F-35 93 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of total segment assets to the Company's consolidated total assets follows:
December 31, -------------------------------------------------- 2000 1999 1998 --------- --------- --------- Assets Total segment assets $ 7,090 $ 3,924 $ 6,626 Intercompany eliminations (2,249) (2,832) (4,258) --------- --------- --------- $ 4,841 $ 1,092 $ 2,368 ========= ========= =========
18. COMMITMENTS AND 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. Prior to the date of these financial statements, this matter was settled resulting in no payment being made by the Company. From time to time the Company is subject to claims and suits that arise in the ordinary course of its business. While it is not possible to predict the ultimate outcome of these matters, the Company believes that any losses associated with any of such matters will not have a material effect on the Company's business, financial condition or results of operations. If prior to September 1, 2001, the Company is unable to hold a shareholders meeting and approve an increase in the Company's number of authorized common shares adequate to issue sufficient shares of its common stock to allow the conversion of the Series F Preferred Stock and the exercise of the warrants issued to the former Yazam shareholders, these former Yazam shareholders have the right to require the Company to repurchase their Series F Preferred Stock for a price equal to the greater of $250 per share or the average price of USXX's common stock for 20 days prior to the required repurchase multiplied by 1,000. The minimum amount that the Company would need to pay to the former Yazam stockholders should this repurchase be required is approximately $6,844,000. The Company has subsequently entered into transactions with certain holders of Series F Preferred Stock modifying their respective rights (see Note 19(d)). F-36 94 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. SUBSEQUENT EVENTS (a) Acquisition of Yazam On March 27, 2001, the Company acquired Yazam, an international company previously providing seed-stage funding and business development services to emerging Internet and technology start-ups, for approximately $22 million in cash plus 27,374 shares of Series F Preferred Stock (which will convert into 27,374,000 shares of USXX common stock) and warrants to purchase 8,000,000 shares of USXX stock for $0.34 per share. Based on the conversion terms of the Series F Preferred Stock and the market price of the Company's common stock on the date of issuance of the Series F Preferred Stock, the Company recognized the existence of a beneficial conversion feature in the amount of $6,022,280. This amount will be recorded as a deemed dividend during the first quarter of 2001, resulting in an increase in the net loss applicable to common shareholders. This acquisition will be accounted for as a purchase, and the Company will include the results of operations of Yazam from the date of the acquisition forward. Since inception and during 2000, based on unaudited internal financial statements, Yazam suffered significant operating losses. The following unaudited pro-forma condensed consolidated financial data assume that the acquisition of Yazam, as described above, occurred at the beginning of each fiscal year presented. This data has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future.
2000 1999 -------------- ------------- Revenues $ 6,949,885 $ 3,957,908 Net loss applicable to common shareholders (72,568,320) (8,334,781) Basic and diluted net loss per common share (2.47) (0.29)
The Company presently has inadequate authorized, unissued shares to convert the Series F Preferred Stock. If prior to September 1, 2001, the Company is unable to hold a shareholders meeting and approve an increase in the Company's number of authorized common shares adequate to issue sufficient shares of its common stock to allow the conversion of the Series F Preferred Stock and the exercise of the warrants issued to the former Yazam shareholders, these former Yazam shareholders have the right to require the Company to repurchase their Series F Preferred Stock for a price equal to the greater of $250 per share or the average price of USXX's common stock for 20 days prior to the required repurchase multiplied by 1,000. The minimum amount that the Company would need to pay to the former Yazam stockholders should this repurchase be required is approximately $6,844,000. The Company will record an accretive dividend over the period from the date of acquisition to the earliest redemption date which will increase the net loss applicable to common shareholders in an amount equal to the difference between the recorded value of the Series F Preferred Stock and its redemption value. The Company has subsequently entered into transactions with certain holders of Series F Preferred Stock modifying their respective rights (see Note 19(d)). (b) Additional Investments in Associated Companies During 2001 the Company purchased shares of Portris' Series A-1 convertible preferred stock. In return for cancellation of $370,000 in promissory notes and accrued interest, services rendered to Portris and $185,000 in cash the Company increased its equity interest in Portris to approximately 42%. F-37 95 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2001 the Company purchased shares of PromiseMark's Series C preferred stock and warrants to purchase shares of PromiseMark's Series C-1 preferred stock as part of a financing by which PromiseMark raised an additional $1.5 million to fund continuing operations. As a result of this financing the Company had an approximately 16% equity interest in PromiseMark. (c) Sale of Investment in Buyline On June 30, 2001, the Company sold its investment in Buyline to a company controlled by the Chairman of USXX. In exchange for the stock of Buyline the Company received a non-recourse note (except to the extent of the stock pledge) with a face value of $100,000. The note bears interest at 7% and is payable only to the extent of dividend distributions paid by Buyline to the buyer or cash proceeds received by the buyer related to the sale of Buyline stock. The Company has a right to repurchase the Buyline shares sold under this agreement for $250,000 on or prior to June 30, 2004. A portion of the Buyline shares continue to be collateral for a Buyline note payable (See Note 10). (d) Transactions Involving Holders of Series F Preferred Stock On July 19, 2001, the Company entered into an agreement with a holder of 7,826 shares of Series F Preferred Stock. Under this agreement the holder waived its right to require the Company to repurchase its shares on or after September 1, 2001 and their redemption rights as stated in the certificate of designations (see Note 12). The holder received in consideration the right to require the Company to repurchase its Series F Preferred Stock for $300 per share for a ninety-day period beginning on September 30, 2002. The Company also agreed to not purchase the Series F Preferred Stock held by a certain holder without prior written consent. The amount of the accretive dividend described in Note 19(a) above will change to reflect the higher redemption price but it will be recorded over a longer period reflecting the change in the earliest date before which the stock may be redeemed. On July 20, 2001, USV agreed to purchase 10,119.77 shares of Series F Preferred Stock from a group of current holders of such stock. USV then entered into an agreement with the Company and waived its right to require the Company to repurchase its shares on or after September 1, 2001 and their redemption rights as stated in the certificate of designations (see Note 12). USV received in consideration the right to require the Company to repurchase its Series F Preferred Stock for $300 per share for a ninety-day period beginning on September 30, 2002. The amount of the accretive dividend described in Note 19(a) above will change to reflect the higher redemption price but it will be recorded over a longer period reflecting the change in the earliest date before which the stock may be redeemed. 20. QUARTERLY DATA (UNAUDITED) The following table sets forth, for the fiscal periods indicated, selected consolidated financial data and information regarding the market price per share of the Company's common stock. The prices represent the reported high and low closing sale prices. F-38 96 U.S. TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 ------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ----------- --------------- ------------ -------------- (As amended)(1) Revenues $ 476,526 $ 713,745 $ 918,870 $ 583,237 Gross profit (loss) (150,751) 37,805 22,588 (119,708) Net loss applicable to common stockholders (360,676) (15,606,189) (1,868,394) (15,573,488) Loss per common share Basic $ (0.01) $ (0.54) $ (0.06) $ (0.53)
1999 -------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------- ----------- ----------- Revenues $ 1,870,284 $ 820,470 $ 600,232 $ 473,799 Gross profit (loss) (166,357) (385,822) (70,678) (71,239) Net income (loss) applicable to common stockholders 62,313 (1,562,956) (310,999) (969,953) Net income (loss) per common share Basic $ 0.00 $ (0.05) $ (0.01) $ (0.03)
(1) The Company recorded a non-cash adjustment related to the second quarter of 2000 for the beneficial conversion feature of the Series A, B and C preferred stock (see Note 12). This resulted in an increase of $14,757,650 (or $0.50 per share) to the net loss applicable to common stockholders. The Company will file an amended Form 10-Q for each of the quarters ended June 30, 2000 and September 30, 2000 to reflect these changes. Significant adjustments increasing the fourth quarter loss in 2000, 1999 and 1998 are indicated below.
2000 1999 1998 ------------ ---------- ---------- Impairment of long-lived assets $ 12,305,000 $ -- $ -- Increase of allowance on note from former officer -- 288,000 -- Increase of allowance for doubtful accounts -- -- 140,000 Accrued expenses -- -- 90,000 ------------ ---------- ---------- Aggregate adjustments $ 12,305,000 $ 288,000 $ 230,000 ============ ========== ========== Aggregate adjustment per common share $ 0.42 $ 0.01 $ 0.01 ============ ========== ==========
F-39 97 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 BEGINNING CHARGED TO COST AND CHARGED TO OTHER BALANCE AT END OF CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------------------------------------------------------------------------------------------------------ 2000 Accounts receivable - $206,000 $158,000 $206,000 $158,000 bad debt reserve Inventory Obsolescence $ -- $ 80,000 $ -- $ 80,000 1999 Accounts receivable - $140,000 $ 66,000 $ -- $206,000 bad debt reserve Inventory Obsolescence $211,000 $ -- $211,000 $ -- Note receivable officer $ -- $526,000 $ -- $526,000 - - uncollectible reserve 1998 Accounts receivable - $ 18,000 $136,000 $ 14,000 $140,000 bad debt reserve Inventory Obsolescence $834,000 $ -- $623,000 $211,000
NOTE: These valuation and qualifying accounts were deducted from the assets to which they apply. F-40 98 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. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed February 26, 2000, and incorporated herein by reference.) 2.2 Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by and among the Company, US Technologies Acquisition Sub, Inc., E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan Ledecky and certain other stockholders of E2Enet, Inc. (Filed as Exhibit 2.5 to the Company's Annual Report on Form 10-K filed April 10, 2000, and incorporated herein by reference.) 2.3 Voting Agreement, dated April 12, 2000, by and among U.S. Technologies Inc., USV Partners, LLC, James V. Warren, Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J. Ledecky. (Filed as Exhibit 2.3 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by reference.) 2.4 Voting Agreement and Proxy, dated April 12, 2000, by and among USV Partners, LLC, James V. Warren, and Gregory Earls for the benefit of the holders of the Registrant's Series B Preferred Stock. (Filed as Exhibit 2.4 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by reference.) 2.5 Amended and Restated Registration Rights Agreement, dated April 12, 2000, by and among U.S. Technologies Inc., USV Partners, LLC, Northwood Capital Partners LLC, Northwood Ventures LLC, Jonathan J. Ledecky and certain other stockholders of U.S. Technologies Inc. (Filed as Exhibit 2.5 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by reference.) 2.6 Purchase Agreement, dated April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan J. Ledecky and Buyline.net Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) 2.7 Stock Exchange Agreement, dated April 26, 2000, entered into by and among U.S. Technologies Inc., E2Enet, Inc., and Lawrence Silverman. (Filed as Exhibit 2.2 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) 2.8 WebMilestones.com, LLC Purchase Agreement, dated as of July 5, 2000, by and among WebMilestones.com, LLC, and its members as of that date, including E2Enet, Inc. and Charles D. Weiss. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed July 20, 2000, and incorporated herein by reference.)
99
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.9 Agreement and Plan of Merger, dated September 27, 2000, by and among U.S. Technologies Inc., USXX Acquisition Corp. and On-Site Sourcing, Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed October 4, 2000, and incorporated herein by reference.) 2.10 Agreement and Plan of Merger, dated February 28, 2001, by and among U.S. Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed March 1, 2001, and incorporated herein by reference.) 2.11 First Amendment to the Agreement and Plan of Merger, dated as of March 22, 2001, by and among U.S. Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed April 11, 2001, and incorporated herein by reference.) *2.12 Registration Rights Agreement, dated as of March 27, 2001, by and among U.S. Technologies Inc. and Certain Other Shareholders of U.S. Technologies 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 Bylaws 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.) 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 on Form 8-K, 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. (Filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 4.6 Waiver Agreement between USV Partners, LLC and the Company, dated March 1, 2000. (Filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.)
100
EXHIBIT NO. DESCRIPTION ----------- ----------- *4.6(a) Waiver Agreement between The Earls Family Limited Partnership and Gregory Earls, dated September 20, 2000. 4.7 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of U.S. Technologies Inc., dated April 7, 2000. (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated April 27, 2000, and incorporated herein by reference.) 4.8 Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of U.S. Technologies Inc., dated April 7, 2000. (Filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, dated April 27, 2000, and incorporated herein by reference.) 4.9 Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of U.S. Technologies Inc., dated December 26, 2000. (Filed as Exhibit 4 to the Company's Current Report on Form 8-K, dated January 22, 2001, and incorporated herein by reference.) *4.10 Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of U.S. Technologies Inc., dated March 27, 2001. *4.11 Form of U.S. Technologies Inc. Common Stock Purchase Warrant, dated as of March 27, 2001. *10.1 1999 Stock Option Plan, as amended. (Filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K, for the year ended December 31, 2000, and incorporated herein by reference.) *10.2 1999 Stock Option Plan, as further amended, as of April 27, 2001. 10.3 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.) 10.4 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 reference.) 10.5 Industry Work Program Agreement between the Wackenhut Corrections Corporation and Labor-to-Industry Inc., dated as of April 22, 1998. (Filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.6 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.) 10.7 Lease Agreement by and between the State of California and Labor-to-Industry, Inc., dated as of August 1, 1998. (Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.)
101
EXHIBIT NO. DESCRIPTION ----------- ----------- *10.7A Amendment No. 1 to Lease Agreement by and between the State of California and Labor-to-Industry, Inc., dated as of March 24, 1999. *10.7B Amendment No. 2 to Lease Agreement by and between the State of California and Labor-to-Industry, Inc., dated as of May 7, 2001. 10.8 Industry Work Program Agreement by and between Wackenhut Corrections Corporation, American Quantum Cycles, Inc. and the Company, dated as of October 19, 1999. (Filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.9 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.) 10.10 Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures LLC, Northwood Capital Partners LLC and the Company, dated March 13, 1999. (Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.12 Voting Agreement, dated as of April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan J. Ledecky, Silverman Trust and Lawrence Silverman. (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) 10.13 On-Site Sourcing, Inc. Voting Agreement, dated as of April 26, 2000, by and among On-Site Sourcing, Inc., Gregory Earls, James V. Warren, Jonathan J. Ledecky, Northwood Ventures LLC, and Northwood Capital Partners LLC. (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed October 4, 2000, and incorporated herein by reference.) 10.14 Side Letter Voting Agreement and Buyline Stock Transfer, dated as of April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J. Ledecky. (Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) *10.15 Yazam Voting Agreement dated as of February 28, 2001 by and between Yazam.com Inc. and Gregory Earls *10.16 Waiver and Replacement Agreement by and between the Company and CEVP Investment I LP, dated July 19, 2001. *10.17 Securities Purchase Agreement by and between USV Partners, L.L.C. and the TPG entities, dated July 20, 2001. *10.18 Waiver and Replacement Agreement by and between the Company and USV Partners, L.L.C., dated July 20, 2001. *21.1 Subsidiaries of the Registrant *23.1 Consent of BDO Seidman, LLP
* To be provided herewith. 102 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. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed February 26, 2000, and incorporated herein by reference.) 2.2 Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by and among the Company, US Technologies Acquisition Sub, Inc., E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan Ledecky and certain other stockholders of E2Enet, Inc. (Filed as Exhibit 2.5 to the Company's Annual Report on Form 10-K filed April 10, 2000, and incorporated herein by reference.) 2.3 Voting Agreement, dated April 12, 2000, by and among U.S. Technologies Inc., USV Partners, LLC, James V. Warren, Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J. Ledecky. (Filed as Exhibit 2.3 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by reference.) 2.4 Voting Agreement and Proxy, dated April 12, 2000, by and among USV Partners, LLC, James V. Warren, and Gregory Earls for the benefit of the holders of the Registrant's Series B Preferred Stock. (Filed as Exhibit 2.4 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by reference.) 2.5 Amended and Restated Registration Rights Agreement, dated April 12, 2000, by and among U.S. Technologies Inc., USV Partners, LLC, Northwood Capital Partners LLC, Northwood Ventures LLC, Jonathan J. Ledecky and certain other stockholders of U.S. Technologies Inc. (Filed as Exhibit 2.5 to the Company's Current Report on Form 8-K, filed April 27, 2000, and incorporated herein by reference.) 2.6 Purchase Agreement, dated April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan J. Ledecky and Buyline.net Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) 2.7 Stock Exchange Agreement, dated April 26, 2000, entered into by and among U.S. Technologies Inc., E2Enet, Inc., and Lawrence Silverman. (Filed as Exhibit 2.2 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) 2.8 WebMilestones.com, LLC Purchase Agreement, dated as of July 5, 2000, by and among WebMilestones.com, LLC, and its members as of that date, including E2Enet, Inc. and Charles D. Weiss. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed July 20, 2000, and incorporated herein by reference.)
103 2.9 Agreement and Plan of Merger, dated September 27, 2000, by and among U.S. Technologies Inc., USXX Acquisition Corp. and On-Site Sourcing, Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed October 4, 2000, and incorporated herein by reference.) 2.10 Agreement and Plan of Merger, dated February 28, 2001, by and among U.S. Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed March 1, 2001, and incorporated herein by reference.) 2.11 First Amendment to the Agreement and Plan of Merger, dated as of March 22, 2001, by and among U.S. Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, filed April 11, 2001, and incorporated herein by reference.) *2.12 Registration Rights Agreement, dated as of March 27, 2001, by and among U.S. Technologies Inc. and Certain Other Shareholders of U.S. Technologies 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 Bylaws 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.) 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 on Form 8-K, 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. (Filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 4.6 Waiver Agreement between USV Partners, LLC and the Company, dated March 1, 2000. (Filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) *4.6(a) Waiver Agreement between The Earls Family Limited Partnership and Gregory Earls, dated September 20, 2000.
104 4.7 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of U.S. Technologies Inc., dated April 7, 2000. (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated April 27, 2000, and incorporated herein by reference.) 4.8 Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of U.S. Technologies Inc., dated April 7, 2000. (Filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, dated April 27, 2000, and incorporated herein by reference.) 4.9 Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of U.S. Technologies Inc., dated December 26, 2000. (Filed as Exhibit 4 to the Company's Current Report on Form 8-K, dated January 22, 2001, and incorporated herein by reference.) *4.10 Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of U.S. Technologies Inc., dated March 27, 2001. *4.11 Form of U.S. Technologies Inc. Common Stock Purchase Warrant, dated as of March 27, 2001. 10.1 1999 Stock Option Plan, as amended. (Filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K, for the year ended December 31, 1999, and incorporated herein by reference.) *10.2 1999 Stock Option Plan, as further amended, as of April 27, 2001. 10.3 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.) 10.4 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 reference.) 10.5 Industry Work Program Agreement between the Wackenhut Corrections Corporation and Labor-to-Industry Inc., dated as of April 22, 1998. (Filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.6 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.) 10.7 Lease Agreement by and between the State of California and Labor-to-Industry, Inc., dated as of August 1, 1998. (Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.7A Amendment No. 1 to Lease Agreement by and between the State of California and Labor-to-Industry dated March 24, 1999. 10.7B Amendment No. 2 to Lease Agreement by and between the State of California and Labor-to-Industry, Inc., dated as of May 7, 2001.
105 10.8 Industry Work Program Agreement by and between Wackenhut Corrections Corporation, American Quantum Cycles, Inc. and the Company, dated as of October 19, 1999. (Filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.9 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.) 10.10 Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures LLC, Northwood Capital Partners LLC and the Company, dated March 13, 1999. (Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.) 10.12 Voting Agreement, dated as of April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC, Jonathan J. Ledecky, Silverman Trust and Lawrence Silverman. (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) 10.13 On-Site Sourcing, Inc. Voting Agreement, dated as of April 26, 2000, by and among On-Site Sourcing, Inc., Gregory Earls, James V. Warren, Jonathan J. Ledecky, Northwood Ventures LLC, and Northwood Capital Partners LLC. (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed October 4, 2000, and incorporated herein by reference.) 10.14 Side Letter Voting Agreement and Buyline Stock Transfer, dated as of April 26, 2000, by and among E2Enet, Inc., Northwood Ventures LLC, Northwood Capital Partners LLC and Jonathan J. Ledecky. (Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K, filed May 11, 2000, and incorporated herein by reference.) *10.15 Yazam Voting Agreement dated as of February 28, 2001 by and between Yazam.com Inc. and Gregory Earls *10.16 Sublease Agreement between the Company and the Association for Health Services Research, Inc. effective June 14, 2000. *10.17 Waiver and Replacement Agreement by and between the Company and CEVP Investment I LP, dated July 19, 2001. *10.18 Securities Purchase Agreement by and between USV Partners, L.L.C. and the TPG entities dated July 20, 2001. *10.19 Waiver and Replacement Agreement by and between the Company and USV Partners, L.L.C., dated July 20, 2001. *21.1 Subsidiaries of the Registrant *23.1 Consent of BDO Seidman, LLP * To be provided herewith.
EX-2.12 3 g70507ex2-12.txt REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 2.12 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of this 27th day of March, 2001, by and among U.S. Technologies Inc., a Delaware corporation (the "Company"), and the certain holders of shares of the capital stock or other securities of the Company that are parties hereto, including those that are added as parties by joinder (the "Yazam Holders"). W I T N E S S E T H : WHEREAS, the Company has entered into an Agreement and Plan of Merger dated as of February 28, 2001 (the "Merger Agreement"), with U.S. Technologies Acquisition Co., and Yazam.com Inc. ("Yazam") whereby pursuant thereto the Yazam Holders shall receive, among other things, an aggregate of 27,374 shares of the Company's Series F Convertible Preferred Stock, par value $0.02 per share (the "Series F Convertible Preferred Stock") which are convertible into shares of the Company's Common Stock, par value $0.02 per share (the "Common Stock") at a conversion ratio of 1,000 to 1, and warrants (the "Warrants") to purchase 8,000,000 shares (subject to adjustment pursuant to the terms thereof) of the Common Stock; WHEREAS, in connection with the Company's execution of the Merger Agreement and the transactions contemplated thereby and as a condition to the Closing thereof, the Company and the Yazam Holders have agreed to enter into this Registration Rights Agreement, and the Company has agreed, on the terms and conditions set forth herein, to register shares of Common Stock as set forth below. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: ARTICLE I. DEFINITIONS 1.1 Definitions. As used herein, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Action or Proceeding" means any action, suit, arbitration, proceeding or Governmental Authority investigation or audit. "Advice" has the meaning given it in Section 3.2 of this Agreement. "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Applicable Securities Authority" means the Commission or any other Governmental Authority with which a registration statement or similar form must be filed to issue securities under the Applicable Securities Laws. Exhibit 2.12 Page 1 2 "Applicable Securities Law" means each Law applicable to the purchase and sale of securities of the Company, including, without limitation, the Securities Act, the Exchange Act and "Blue Sky" laws and the rules and regulations promulgated thereunder. "Blocking Notice" has the meaning given it in Section 3.2 of this Agreement. "Business Day" means any Day other than a Saturday, Sunday or public holiday or the equivalent for banks under the laws of Washington, DC. "Commission" means the United States Securities and Exchange Commission or any other U.S. federal agency at the time administering the Securities Act. "Common Stock" has the meaning given it in the recitals. "Company Registration Notice" means a request to include Registrable Securities in a registration initiated by the Company pursuant to Section 2.3 hereof (a) made in writing, (b) by a Holder of Registrable Securities, and (c) specifying the number of Registrable Securities to be offered for sale pursuant to such registration (which may be any or all of the Registrable Securities owned by such Holder). "Day" means a calendar day. "Demand Registration" means a registration pursuant to Section 2.1 hereof and sale pursuant to such registration, under the Applicable Securities Laws, of all or substantially all of the Registrable Securities that are the subject of a Qualifying Request, which sale shall be made pursuant to a firm commitment underwritten secondary offering arranged for by the Company, unless the requirement of a firm commitment underwriting is waived in writing by the Holders of a majority of the Registrable Securities that are the subject of such Qualifying Request. For the purposes of a Demand Registration hereunder, "Registrable Securities" shall not include shares of Common Stock issued pursuant to the exercise of Warrants. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any court, panel, judge, board, bureau, commission, agency or other entity, body or other Person exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to such government. "Holder" means any Yazam Holder and any Transferee that has become a Party to this Agreement by executing a joinder agreement in the form attached hereto as Exhibit A. "Indemnified Party" has the meaning given it in Section 5.3 of this Agreement. "Indemnifying Party" has the meaning given it in Section 5.3 of this Agreement. "Laws" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law in any country, or any state, province, county, city or other political subdivision thereof. "Merger Agreement" has the meaning given it in the recitals. Exhibit 2.12 Page 2 3 "Order" means any writ, judgment, decree, injunction or similar order of any Governmental Authority (in each case whether preliminary or final). "Party" means a party to this Agreement. "Person" means and includes any individual, partnership, joint venture, corporation, trust, limited liability Company, joint stock Company, unincorporated organization, association or other entity and includes any Governmental Authority. "Piggyback Notice" means a request to include Registrable Securities in a registration pursuant to Section 2.2 hereof (a) made in writing, (b) by a Holder of Registrable Securities, and (c) specifying the number of Registrable Securities to be offered for sale pursuant to such registration (which may be any or all of the Registrable Securities owned by such Holder) and the intended disposition thereof. "Qualifying Request" means a request for a Demand Registration (a) made in writing, (b) by the Holder or Holders of Registrable Securities constituting one half (1/2) of all Registrable Securities, (c) specifying the number of Registrable Securities to be offered for sale pursuant to the Demand Registration (the aggregate value of which shall not be less than $2,000,000, so long as the aggregate value of the outstanding Registrable Securities is greater than $2,000,000), and (d) specifying whether the Company is to arrange for a public sale in a firm commitment underwritten secondary offering of the Registrable Securities that are the subject of such request. "Registering Shareholder" has the meaning given it in Section 2.2(a) of this Agreement. "Registrable Security" means each share of Common Stock (a) into which a Series F Share is convertible, (b) for which a Warrant is exercisable, , and (c) received with respect to a Series F Share or Warrant pursuant to any stock dividend, stock split, recapitalization or similar event; provided, however, that (i) a Holder of Series F Shares or of a Warrant shall be deemed to be the Holder of the Registrable Securities attributable to such Series F Shares or Warrant; and (ii) any Registrable Security will cease to be a Registrable Security when (A) such Registrable Security has been transferred pursuant to an effective registration statement or Rule 144 under the Securities Act or any comparable Applicable Securities Law covering such Registrable Security (but not including any transfer exempt from registration under any Applicable Securities Law), (B) such Registrable Security is no longer held of record by a Holder, or (C) such Registrable Security has ceased to be outstanding. "Registration Statement" has the meaning given it in Section 3.1(a). "Requesting Holder" has the meaning given it in Section 2.3(a) of this Agreement. "Requesting Piggyback Holder" has the meaning given it in Section 2.2(a) of this Agreement. "Securities Act" means the United States Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Series F Convertible Preferred Stock" has the meaning given it in the recitals. "Series F Shares" means the shares of Series F Convertible Preferred Stock received by the Yazam Holders and any additional or replacement shares of preferred or Common Stock issued with respect to Series F Shares upon any stock dividend, stock split, recapitalization or similar event. Exhibit 2.12 Page 3 4 "Shareholder" means any holder of equity securities of the Company. "Transfer" means, as applicable, (i) a sale, transfer, assignment, pledge, hypothecation or other disposition or encumbrance of capital stock or an interest therein, or (ii) to sell, transfer, assign, pledge, hypothecate or otherwise dispose or encumber capital stock or an interest therein. "Transferee" means any Person to which Registrable Securities are Transferred by a Holder, in each case in accordance with the terms of such securities or the certificate of designations, purchase agreement or other document designating, evidencing or otherwise relating to such securities, as the case may be. "Warrants" has the meaning given it in the recitals. 1.2 Interpretation. Unless otherwise expressly provided herein, (a) defined terms in the singular include the plural and vice versa, and the masculine, feminine and neuter gender include all genders; (b) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement; (c) the words "include," "includes," and "including" mean include, includes and including "without limitation" and "without limitation by specification"; (d) references to any Person shall be construed as a reference to such Person and any permitted successors or assigns of such Person; (e) references to "consent" shall mean prior consent evidenced in writing; (f) terms such as "satisfactory to ______," "acceptable to _________," "in such manner as ______ may determine," "to ______'s satisfaction," and phrases of similar import authorize and permit such Party to approve, disapprove, act or decline to act, unless otherwise specified herein, in its reasonable discretion without unreasonable delay or condition; and (g) references to Sections refer to Sections of this Agreement. ARTICLE II. REGISTRATION RIGHTS 2.1 Demand Registrations. For the purpose of this Section 2.1, the term "Registrable Securities" shall not include shares of Common Stock issued pursuant to the exercise of Warrants. For the avoidance of doubt, holders of Warrants who exercise same and receive shares of Common Stock shall not be entitled to Demand Registrations hereunder. (a) Following the authorization by the Company of the number of shares of Common Stock sufficient for the conversion of the Series F Shares and for the exercise of the Warrants, the Holders of Registrable Securities shall be entitled to require the Company to effect from time to time Demand Registration of the Registrable Securities pursuant to Qualifying Requests. If a Qualifying Request is made by fewer than all Holders of Registrable Securities, copies of the Qualifying Request shall be distributed by the Company to all Holders who are not Parties to such Qualifying Request within five Business Days after it is received by the Company. Each such Holder shall be entitled to join in the Qualifying Request by delivering written notice to the Company within ten Business Days after its receipt of a copy of the Qualifying Request from the Company. Such notice shall specify the number of Registrable Securities that each such Holder elects to include in the Qualifying Request and, if the Qualifying Request does not already include such a requirement, whether such Holder requires the Company to arrange for public sale in a firm commitment underwritten secondary offering of the Registrable Securities that are the subject of the Qualifying Request. (b) Within 60 Days after receiving a Qualifying Request from any Holder of Registrable Securities, the Company shall (i) prepare and file a registration statement under the Applicable Securities Laws covering the Registrable Securities which are the subject of such request, (ii) use its best efforts to cause such registration statement to become effective promptly thereafter and (iii) take appropriate steps to Exhibit 2.12 Page 4 5 complete all other requirements for registration or qualification of the Registrable Securities under the Applicable Securities Laws. (c) The Company shall use its best efforts to arrange for public sale in a firm commitment underwritten secondary offering of the Registrable Securities that are the subject of a Qualifying Request delivered pursuant to Section 2.1(a), unless the requirement of a firm commitment underwriting is waived in writing by a majority of the Holders of the Registrable Securities that are subject to such Qualifying Request. The Holders of a majority of the Registrable Securities that are the subject of such Qualifying Request shall have the right to designate the managing underwriter(s) of any such offering, subject to the consent of the Company, which consent shall not be unreasonably withheld. Except as the Holders having delivered or joined in a Qualifying Request may consent in writing, the Company will not file with the Applicable Securities Authority any other registration statement with respect to its Common Stock (other than a registration effected on Form S-4, Form S-8 or any successor forms thereto), whether for its own account or that of other stockholders, from the date of receipt of the Qualifying Request until the completion of the period of distribution of the Registrable Securities contemplated thereby. (d) If the Company grants any demand registration rights to another Person, the Company shall include within such demand registration rights an obligation on behalf of such Person to notify the Company in writing of its intent to exercise its demand registration rights at least 30 Days prior to such exercise. Immediately after receipt of such notice but in no event later than three Days after receipt thereof, the Company shall deliver a copy of such notice to the Holders. If the Holders exercise their demand registration rights hereunder prior to the exercise of the demand registration rights held by the Person providing such notice, the Registrable Securities sought to be registered by the Holders shall be included in the registration statement and any associated offering prior to the securities sought to be registered by such other Person. 2.2 "Piggyback" Registrations. (a) If at any time the Company proposes or agrees to register any of its securities (other than securities registered on Form S-4 or Form S-8 or any successor forms thereto) for the account of any Shareholder (each a "Registering Shareholder"), then in each such case the Company shall, not later than five Days after deciding or agreeing to register such shares, give written notice thereof to each Holder of Registrable Securities (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities). If, within 30 Days of the receipt by the Holders of any such written notice, any Holder (each a "Requesting Piggyback Holder") delivers to the Company a Piggyback Notice, subject to Section 2.4 hereof, the Company shall include in such registration statement the Registrable Securities specified in such Piggyback Notice. The Company shall have the right to designate the managing underwriter(s) of any such offering, subject to the consent of the Registering Shareholders and the Requesting Piggyback Holders, which consents shall not be unreasonably withheld. (b) If, at any time prior to the filing of a registration statement in connection with a registration described in Section 2.2(a) above, the Registering Shareholders withdraw their request for registration or the Company determines for any reason either not to register any securities or to delay registration of such securities, the Company may, at its election, give written notice of such withdrawal by the Registering Shareholders or determination by the Company to each Requesting Piggyback Holder and, thereupon, in the case of a withdrawal by the Registering Shareholders or a determination not to register by the Company, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. No registration effected under this Section 2.2 shall relieve the Company of its obligations to effect any registration upon request under Section 2.1, nor shall any registration hereunder be deemed to have been effected pursuant to Section 2.1. Exhibit 2.12 Page 5 6 2.3 Company Registration. (a) If, at any time or from time to time, the Company shall determine to register any of its securities for its own account, the Company will promptly give the Holders of Registrable Securities written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities). If, within 30 Days of the receipt by the Holders of any such written notice, any Holder (each a "Requesting Holder") delivers to the Company a Company Registration Notice, subject to Section 2.4 hereof, the Company shall include in such registration statement the Registrable Securities specified in such Company Registration Notice. (b) If, at any time after giving written notice of its intention to register any securities and prior to filing of a registration statement in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Requesting Holder and, thereupon, in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. No registration effected under this Section 2.3 shall relieve the Company of its obligations to effect any registration upon request under Section 2.1, nor shall any registration hereunder be deemed to have been effected pursuant to Section 2.1. 2.4 Managing Underwriter Cut-Backs. If any registration pursuant to this Section 2 contemplates an underwritten offering and the managing underwriter(s) advise the Company and the Holders requesting that the Company register Registrable Securities pursuant to this Section 2 in writing that the inclusion in the registration statement of some or all of the Registrable Securities sought to be registered by such Holders creates a significant risk that the price per share that such Holders and the Company will derive from such registration will be adversely affected or that the number of shares or securities sought to be registered is too large a number to be reasonably sold, the Company will include in such registration statement such number of shares or securities as the Company and such Holders are so advised in writing can be sold in such offering without such an effect, as follows and in the following order of priority: (a) with respect to registrations pursuant to Section 2.1, first, the Registrable Securities of each Holder that delivered or joined in a Qualifying Request on a pro rata basis in proportion to the number of Registrable Securities sought to be registered; (b) with respect to registrations pursuant to Section 2.2, first, the securities sought to be registered by the Registering Shareholders; second, on a pro rata basis in proportion to the number of Registrable Securities sought to be registered, the Registrable Securities of each of the Requesting Piggyback Holders; and (c) with respect to registrations pursuant to Section 2.3, first, the number of shares or securities sought to be registered by the Company; and second, on a pro rata basis in proportion to the number of Registrable Securities sought to be registered, the Registrable Securities of each of the Requesting Holders. 2.5 Other Registration Rights. The Company shall not enter into any agreement offering registration rights that are superior to the rights set forth in Sections 2.1, 2.2 and 2.3 without the prior written consent of the Holders of a majority of the Registrable Securities, which consent shall not be unreasonably withheld. For the purpose of this Section 2.5, the term "Registrable Securities" shall not include shares of Common Stock issued pursuant to the exercise of Warrants. 2.6 Conversion of Registrable Securities. The Series F Shares and Warrants shall be deemed automatically converted into or exercised for their corresponding Registrable Securities immediately before the sale of such Registrable Securities pursuant to a Registration Statement. Any unpaid portion or Exhibit 2.12 Page 6 7 the exercise price for Registrable Securities attributable to the Warrants or any other warrants shall be deducted from the proceeds of the sale and paid to the Company at the closing of such sale. Upon such automatic conversion, such converted or exercised Series F Shares and Warrants shall be deemed to be canceled and shall cease to be outstanding. ARTICLE III. REGISTRATION PROCEDURES 3.1 Company Obligations. Whenever the Holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company will: (a) prepare and furnish to the Holders drafts of each registration statement to an Applicable Securities Authority pertaining to any securities of the Company (each a "Registration Statement"), any prospectus, amendment or supplement thereto and any document incorporated by reference therein, which documents will be subject to the review and comments of each Holder as to matters regarding such Holder; file each Registration Statement and use its best efforts to cause such Registration Statement to become effective; notify each Holder of Registrable Securities of the effectiveness of each Registration Statement; and furnish to the Holders such number of copies of such Registration Statement, each amendment and supplement thereto (including any exhibits thereto), the prospectus included in such Registration Statement (including each preliminary prospectus), the documents incorporated by reference therein and such other documents as any Holder may reasonably request; (b) use its best efforts to maintain the effectiveness of each registration statement filed pursuant to this Agreement, and take such other steps as are required by Applicable Securities Laws to maintain the registration or qualification in effect either (i) until such time as all Registrable Securities registered pursuant to the registration statement have been sold or (ii) for a period of 180 days, whichever is shorter. Each Holder shall provide written notice to the Company within 15 Days after it has sold all of its Registrable Securities registered pursuant to this Agreement; (c) notify the Holders in writing of the occurrence of an event requiring the preparation of a supplement or amendment to a prospectus and promptly prepare and file with the Applicable Securities Authority any such supplement or amendment; (d) use its best efforts to register or qualify the Registrable Securities registered pursuant to a Registration Statement under such other Applicable Securities Laws as any Holder may reasonably request and do any and all other acts which may be reasonably necessary or advisable to enable any such Holder to consummate the disposition of its Registrable Securities under such Applicable Securities Laws, except that the Company shall not be required to qualify to do business as a foreign corporation, subject itself to taxation or consent to general service of process in any jurisdiction where it is not currently obligated to be so qualified, in accordance with and subject to the terms and conditions contained herein; (e) cause all such Registrable Securities to be listed or quoted on each securities exchange or market on which similar securities issued by the Company are then listed; (f) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of the applicable Registration Statement; (g) enter into such customary agreements (including underwriting agreements in customary form) in order to expedite or facilitate the disposition of such Registrable Securities; (h) make available for inspection by any underwriter participating in any disposition pursuant to a Registration Statement, and any attorney, accountant or other agent retained by any such Exhibit 2.12 Page 7 8 underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such underwriter, attorney, accountant or agent in connection with such Registration Statement; and (i) otherwise use its best efforts to comply with all Applicable Securities Laws. 3.2 Suspension of Effectiveness. At least five Business Days prior to any disposition of Registrable Securities, a Holder shall advise the Company of the dates on which such disposition is expected to commence and terminate, the number of Registrable Securities expected to be sold, the method of disposition and such other information as the Company may reasonably request in order to supplement the related prospectus in accordance with the Applicable Securities Laws. The Company may suspend dispositions under the registration statement and notify the Holder that it may not sell the Registrable Securities pursuant to any registration statement or prospectus (a "Blocking Notice") if (a) the Company's management determines in its reasonable good faith judgment based on advice of its outside counsel that the Company's obligation to ensure that such registration statement and prospectus are current and complete would require the Company to take actions that might reasonably be expected to have a detrimental effect on any proposal, negotiations or plan by the Company or any of its subsidiaries to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer, reorganization or similar transaction or (b) the Company determines that the registration statement, the prospectus, any amendment or supplement thereto, or any document incorporated by reference therein contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or requires the making of any additions to or changes in the registration statement or the prospectus in order to make the statements therein not misleading; provided that such suspension may not exceed 60 days. Each Holder agrees by acquisition of the Registrable Securities that, upon receipt of a Blocking Notice from the Company, such Holder shall not dispose of, sell or offer for sale any Registrable Securities pursuant to a registration statement until such Holder receives (a) copies of the supplemented or amended prospectus, or a written determination from counsel for the Company that such disclosure is not required due to subsequent events, (b) notice in writing (the "Advice") from the Company that the use of the prospectus may be resumed and (c) copies of any additional or supplemental filings that are incorporated by reference in the prospectus. If so directed by the Company in connection with any Blocking Notice, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the prospectus covering such Registrable Securities that was current immediately prior to the time of receipt of such Blocking Notice. In the event the Company shall give any Blocking Notice, the time regarding the effectiveness of a registration statement set forth in Section 2.1 shall be extended by the number of Days during the period from and including the date of the giving of such Blocking Notice to and including the date when the Holder shall have received the copies of the supplemented or amended prospectus, the Advice and any additional or supplemental filings that are incorporated by reference in the prospectus or the supplemental prospectus, as the case may be. Delivery of a Blocking Notice and the related suspension of any registration statement in accordance with the terms of this Section 3.2 shall not constitute a default under this Agreement. ARTICLE IV. REGISTRATION EXPENSES; HOLDBACK 4.1 Company Expenses. Except as provided in Section 4.2, all fees and expenses incident to the Company's performance of, or compliance with, this Agreement shall be borne by the Company, including, without limitation, the following fees and expenses: (a) all Applicable Securities Authority, self-regulatory organization, stock exchange and other registration and filing fees and listing fees; (b) the fees and expenses of the Company's compliance with securities or "Blue Sky" laws (including reasonable fees and disbursements of counsel in connection with "Blue Sky" qualifications of the Registrable Exhibit 2.12 Page 8 9 Securities); (c) printing expenses; (d) all underwriting discounts and commissions not attributable to the sale of Registrable Securities; (e) the fees and disbursements of counsel for the Company and of one firm of counsel for the selling Holders, collectively, in each relevant jurisdiction; (f) the fees and expenses of independent certified public accountants; (g) the fees and expenses of underwriters and other persons retained by the Company in connection with a registration; (h) fees of transfer agents and registrars; and (i) messenger and delivery expenses; provided, however, in connection with Demand Registration pursuant to Section 2.1, the Company shall pay such fees and expenses only with respect to the first three (3) times such right is exercised (but provided that any registration at the Company's expense begun pursuant to Section 2.1 that is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities that are the subject of a Qualifying Request shall not count toward the three (3) Demand Registrations at the Company's expense if the Holders that delivered or joined in the Qualifying Request reimburse the Company for all out-of-pocket expenses incurred by the Company in connection with such withdrawn registration). In addition, the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance obtained by the Company, and the expenses and fees for listing or authorizing for quotation the securities to be registered on each securities exchange on which any Registrable Securities are then listed or quoted. 4.2 Holder Expenses. The selling Holders shall pay all underwriting discounts and commissions attributable to the sale of the Registrable Securities sold by them and all of the selling Holders' internal expenses incurred in connection with any offering (including, without limitation, all salaries and expenses of the selling Holders' officers and employees performing legal or accounting duties, but excluding fees and expenses of the selling Holders' counsel that are payable by the Company under Section 4.1). 4.3 Restrictions on Public Sale by Holder of Registrable Securities. To the extent not inconsistent with applicable Law, each Holder whose securities are included in a registration statement agrees not to effect any public sale or distribution of the issue being registered or a similar security of the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of such registration statement (except as part of such registration), if and to the extent requested by either the Company in the case of a non-underwritten public offering or if and to the extent requested by the managing underwriter(s) in the case of an underwritten public offering. 4.4 Restrictions on Public Sale by the Company and Others. The Company agrees not to effect any public sale or distribution of any securities similar to those being registered, or any securities convertible into or exchangeable for such securities (other than any such sale or distribution of such securities in connection with any merger or consolidation by either the Company or any subsidiary thereof or in connection with the sale of the capital stock or all or substantially all of the assets of any other Person or in connection with an employee stock option plan or benefit plan), during the 14 days prior to, and during the 90-day period beginning on, the effective date of any registration statement in which the Holders are participating or the commencement of a public distribution of the Registrable Securities. ARTICLE V. INDEMNIFICATION; CONTRIBUTION 5.1 Indemnification by the Company. The Company agrees to indemnify and hold harmless each Holder, each of such Holder's officers, directors, partners, employees and agents, and each Person controlling any such Persons and, if requested by any underwriter, such underwriter and each person who controls such underwriter from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation, any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, and Exhibit 2.12 Page 9 10 any of the foregoing incurred in settlement of any litigation, commenced or threatened) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus contained therein or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any violation by the Company of any Applicable Securities Law applicable to the Company and relating to action or inaction by the Company in connection with any registration, qualification or compliance required hereunder, or arising out of or based upon the Company's breach of any representation, warranty, covenant or agreement contained in this Agreement; provided, however, that the Company shall not be liable in any such case to the extent any of such losses, claims, damages, liabilities or expenses arise out of, or are based upon, any such untrue statement or omission or allegation thereof made in reliance on, and in conformity with, information relating to such Holder furnished in writing to the Company by such Holder expressly for use therein. In addition to any other information furnished in writing to the Company, expressly for use therein, by the Holder, the information in the registration statement under the caption "Selling Shareholders" (or any similarly captioned section containing the information required pursuant to Item 507 of Regulation S-K promulgated pursuant to the Securities Act) relating to such Holder shall be deemed information furnished in writing to the Company by the Holder; provided that the Company has complied with its obligations pursuant to Section 3.1(a). 5.2 Indemnification by Holders. Each Holder agrees severally to indemnify and hold harmless the Company, its directors and officers and each person, if any, who controls the Company and, if requested by any underwriter, such underwriter and each person who controls such underwriter to the same extent as the foregoing indemnity from the Company, but only with respect to misstatements or omissions made in reliance on, and in conformity with, information relating to such Holder furnished in writing by such Holder, or on its behalf, expressly for use in a Registration Statement or prospectus relating to Registrable Securities, any amendment or supplement thereto or any preliminary prospectus, and provided that the obligation of each Holder to indemnify will be several and not joint. Each Holder's indemnity obligations under this Section 5.2 and contribution obligations under Section 5.4 shall be limited, in the aggregate, to the net sales proceeds actually received by it in connection with the applicable offering. 5.3 Conduct of Indemnification Proceedings. If any Action or Proceeding (including any governmental investigation) shall be brought or asserted against any Person entitled to indemnification under Section 5.1 or 5.2 above (an "Indemnified Party") in respect of which indemnity may be sought from any Party who has agreed to provide such indemnification (an "Indemnifying Party") and the Indemnifying Party acknowledges in writing to the Indemnified Party that the Indemnified Party is entitled to indemnity by the Indemnifying Party hereunder, the Indemnifying Party shall assume the defense of such Action or Proceeding, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all expenses. Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (a) the Indemnifying Party has agreed to pay such fees and expenses, or (b) such Indemnified Party shall have been advised by counsel that there is an actual or potential material conflict of interest on the part of counsel employed by the Indemnifying Party to represent such Indemnified Party. If counsel advises the Indemnified Party of such a conflict of interest, or if the Indemnifying Party fails to acknowledge in writing that the Indemnified Party is entitled to indemnity hereunder, the Indemnifying Party shall not have the right to assume the defense of such Action or Proceeding on behalf of such Indemnified Party and, upon written notice to the Indemnifying Party, the Indemnified Party may employ separate counsel at the expense of the Indemnifying Party; it being understood, however, that the Indemnifying Party shall not, in connection with any one Action or Proceeding or separate but substantially similar or related Actions or Proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such Exhibit 2.12 Page 10 11 Indemnified Parties, which firm shall be designated in writing by such Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any such Action or Proceeding or any threatened Action or Proceeding effected without its written consent, but if settled with its written consent or if there be a final judgment for the plaintiff in any such Action or Proceeding, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. The failure of any Indemnified Party to give prompt notice of a claim for indemnification hereunder shall not limit the Indemnifying Party's obligations to indemnify under this Agreement, except to the extent such failure is prejudicial to the ability of the Indemnifying Party to defend the action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement unless (x) there is no finding or admission of any violation of any rights of any Person and no effect on any other claims that may be made against any Indemnified Party, (y) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (z) such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. 5.4 Contribution. If the indemnification provided for in this Article V is unavailable to any Indemnified Party in respect of any losses, claims, damages, liabilities or judgments referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall to the extent permitted by applicable Law contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities and judgments in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other, in connection with the matters which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of any Indemnifying Party on the one hand and of any Indemnified Party on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such Party, and the Parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of subsection 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 5.5 Survival. The indemnity and contribution agreements contained in this Article V shall remain operative and in full force and effect with respect to any sales of Registrable Securities made pursuant to a Registration Statement regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Indemnified Party or by or on behalf of the Company, and (c) the consummation of the sale or successive resale of the Registrable Securities. ARTICLE VI. MISCELLANEOUS 6.1 Rules 144 and 144A. The Company covenants that following the registration of Registrable Securities it will file any reports required to be filed by it under the Securities Act and the Exchange Act so as to enable Holders holding Registrable Securities to sell such Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rules 144 and 144A under the Securities Act, as each such Rule may be amended from time to time, or (b) any similar rule or rules hereafter adopted by the Commission. Upon the request of any such Holder, the Company will forthwith deliver to such Holder a written statement as to whether it has complied with its obligation pursuant to this Section 6.1 to file any reports required to be filed by it under the Securities Act and the Exchange Act. In connection with any transfer pursuant to this Section 6.1, upon the written request of the Company, the Holder shall furnish to the Company such information so that the Company may ensure that the Holder has complied with the limitations set forth in Rules 144 and 144A or any similar rule or rules hereafter adopted by the Commission. Exhibit 2.12 Page 11 12 6.2 Dispute Resolution. (a) All disputes, controversies, and claims directly or indirectly arising out of or in relation to this Agreement or the validity, interpretation, construction, performance, breach or enforceability of this Agreement shall be finally, exclusively and conclusively settled by binding arbitration, as provided in this Section 6.2, under the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") which are then in effect. (b) The arbitral tribunal shall be composed of three arbitrators, one or whom shall be appointed by the Company, one of whom shall be appointed by the Holders that are parties to the dispute, controversy or claim, and the third of whom shall be appointed by the two arbitrators designated by the parties. The arbitration proceedings shall be conducted in the English language, and all documents not in English submitted by any party must be accompanied by an English translation. The arbitration proceedings shall be conducted and any arbitral award shall be made in Washington, D.C. (c) The Parties agree: (i) that the arbitral tribunal shall have no authority to award punitive damages or any damages other than those recoverable in accordance with this Agreement (which may include reasonable attorneys' fees and other costs of arbitration); (ii) to be bound by any arbitral award or Order resulting from any arbitration conducted hereunder and that any such award or Order shall be a reasoned award, shall be in writing, shall specify the factual and legal basis for the award, and shall be final and binding; (iii) not to commence, procure, participate in, or otherwise be involved as a party in any claim, Action or Proceeding that might result in any Order concerning a dispute hereunder (except for initiating Actions or Proceedings to obtain a judgment recognizing or enforcing an arbitral award or Order and except for applications, claims, Actions or Proceedings by the Parties seeking interim, interlocutory or other provisional relief in any court having jurisdiction, but only on the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief); (iv) that any monetary award shall be made and payable in U.S. Dollars, in each case through a bank selected by the recipient of the award, together with interest thereon at the lesser of the one year London Interbank Offered Rate (LIBOR), as appearing in the Reuters screen, plus five percent, or the maximum interest rate permissible under applicable Law, from the date the award is granted to but excluding the date it is paid in full; and (v) that judgment on any arbitral award or Order resulting from an arbitration conducted under this Section 6.2 may be entered in any court of competent jurisdiction having jurisdiction thereof or having jurisdiction over any Party or any of its assets. (d) The Company and the Holders hereby irrevocably waive and exclude all rights of appeal, challenge, or recourse to any court from any arbitral award or Order resulting from any arbitration conducted under this Section 6.2 (except for initiating Actions or Proceedings to obtain a judgment recognizing or enforcing an arbitral award or Order and except for Actions or Proceedings seeking interim, interlocutory or other provisional relief in any court having jurisdiction, but only on the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief). Each of the Parties to this Agreement hereby consents to the non-exclusive jurisdiction of any court of competent jurisdiction in the State of Delaware for all Actions or Proceedings to obtain a judgment recognizing or enforcing an arbitral award or Order and waives any defense or opposition to such jurisdiction. (e) The arbitrators, in their discretion, may consolidate two or more arbitrations or claims between any of the Parties arising pursuant to this Agreement or any other agreement among the parties or to which the Holders or Shareholders are a party into one arbitration, may terminate any such consolidation and/or may establish other arbitration proceedings for different claims that may rise in any one arbitration. Notwithstanding the foregoing, the arbitrators shall consolidate arbitrations and/or claims if they determine Exhibit 2.12 Page 12 13 that it would be more efficient to consolidate such arbitrations and/or claims than to continue them separately and (i) there are matters of fact or law that are common to the arbitrations and/or claims to be consolidated, (ii) there are related payment and performance obligations considered in the arbitrations and/or claims to be consolidated, and/or (iii) there is a danger of inconsistent awards. (f) Each Party shall bear its own expenses in connection with the arbitration provided in this Section 6.2, except as specifically set forth herein, provided that the fees of the arbitrators shall be divided equally between the Parties. 6.3 Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, other than as mutually agreed upon in writing by the Company and the Holders. 6.4 Notices. Any notices or communications required or permitted hereunder shall be in writing and shall be delivered by facsimile, courier, hand or first class (registered or certified) mail to each Party at the address(es) indicated for such Party on the signature pages to this Agreement. Any Party may, upon written notice given in accordance with this Section 6.4 to the other Parties, designate another address or Person for receipt of notices hereunder. All notices, claims, demands and other communications hereunder shall be deemed given (a) in the case of a facsimile transmission, when received by recipient in legible form and sender has received an electronic confirmation of receipt of the transmission; (b) in the case of delivery by a standard overnight courier, upon the date of delivery indicated in the records of such courier; (c) in the case of delivery by hand, when delivered by hand; or (d) in the case of delivery by first class (registered or certified) mail, upon the expiration of five (5) Business Days after the Day when mailed (postage prepaid, return receipt requested). 6.5 Successors and Assigns; New Parties. A Holder may assign, without the Company's consent, and shall be deemed to have assigned, such Holder's rights and benefits with respect to the Registrable Securities that are transferred to a Transferee. A Transferee that becomes bound by the terms of this Agreement by its execution of a joinder agreement in the form attached hereto as Exhibit A shall retain the rights and benefits of the transferor and become a Holder under this Agreement. The Company may not assign any rights, benefits or obligations under this Agreement without prior written consent of two-thirds of the Holders. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of the Company and the Holders. 6.6 Counterparts; Facsimile. This Agreement may be executed in any number of identical counterparts and it shall not be necessary for each Party to execute each of such counterparts, but when each has executed and delivered one or more of such counterparts, the several parts, when taken together, shall be deemed to constitute one and the same instrument, enforceable against each Party in accordance with its terms. In making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart executed by the Party against whom enforcement of this Agreement is sought. Signatures transmitted by facsimile shall be binding as evidence of a Party's agreement to be bound by the terms and conditions hereof. 6.7 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 6.8 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to its principles of choice of law or conflict of laws. Exhibit 2.12 Page 13 14 6.9 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. 6.10 Entire Agreement. This Agreement is intended by the Parties as the final expression of their agreement and is intended to be a complete and exclusive statement of their agreement and understanding in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the Parties with respect to such subject matter. 6.11 Third Party Beneficiaries. Other than Indemnified Parties not a party hereto, this Agreement is intended for the benefit of the Company, the Holders and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 6.12 Obligations Several; Independent Nature of Each Holder's Rights. Each obligation of any Holder is several and no such Holder shall be responsible for the obligations of any other Holder. Nothing contained herein, and no action taken by any Holder pursuant hereto, shall be deemed to constitute any Holders as a partnership, an association, a joint venture or any other kind of entity. Each Holder shall be entitled to protect and enforce its rights arising out of this Agreement without notice to or the consent of any other Person, except as specifically provided herein, and it shall not be necessary for any other such Holder to be joined as an additional party in any proceeding for such purpose. 6.13 Nonwaiver. No course of dealing or delay or failure to exercise any right, power or remedy hereunder on the part of any Holder shall operate as a waiver of or otherwise prejudice such Holder's rights, powers or remedies. 6.14 Remedies. The Company and the Holders acknowledge that the remedies at law in the event of any default or threatened default in the performance of or compliance with any of the terms of this Agreement are not and will not be adequate and that, to the fullest extent permitted by law and equity, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise without requiring any bond or other security, unless otherwise required by applicable law (which cannot be waived). 6.15 New Parties. During the term of this Agreement (and except with respect to Tranferees, which shall be governed by Section 6.5 hereof), the Company may, upon the prior written consent of the Holders of a majority of the Registrable Securities, permit any additional Person to become a party to this Agreement by executing a joinder agreement in the form attached hereto as Exhibit A. 6.16 Termination. Except for Section 6.17 hereof, all rights granted hereunder shall expire and this Agreement shall terminate on the earlier of (i) the written consent of the Holders, and (ii) the sixth (6th) anniversary of the date hereof. 6.17 Board Seat. So long as at least one-third of the Series F Shares issued pursuant to the Merger Agreement at the Effective time remain outstanding, the holders of Series F Shares shall be entitled to elect one director of the Company who shall be reasonably acceptable to the Company. Exhibit 2.12 Page 14 15 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. U.S. TECHNOLOGIES INC. BY: /S/ GREGORY EARLS ------------------------------------------------ Name: Gregory Earls Title: Chairman and CEO Address: 1130 Connecticut Ave, NW, Suite 700 Washington, DC 20036 Phone: (202) 466.3100 Fax: (202) 466.4557 YAZAM SHAREHOLDER BY: /S/ NICHOLAS BENTON ------------------------------------------------ Name: Nicholas Benton Title: MD Address: 2677 Laruin Street San Francisco, California 94109 Phone: 415-577-8588 Fax: 415-707-2005 BY: /S/ ANTHONY R. WILBERT ------------------------------------------------ Name: Anthony R. Wilbert Title: Address: 70 Corte Dorado Coresnbrane, California 94904 Phone: 415-407-8669 Fax: 415-461-0543 BY: /S/ GARY SCHREIBER ------------------------------------------------ Name: Gary Schreiber Title: Manager Address: 4055 W. Main Street Skokie, Illinois 60076 Phone: 847-677-2977 Fax: 847-677-3063 BY: /S/ JOHN HUNT ------------------------------------------------ Name: John Hunt Title: Address: 1969 California Street San Francisco, California 94109 Phone: 415-990-7690 Fax: n/a Exhibit 2.12 Page 15 16 BY: /S/ JOSEPH S. VALENTI ------------------------------------------------ Name: Joseph S. Valenti Title: Vice President Address: 2 World Financial Center New York, New York 10281 Phone: 212-236-7200 Fax: 212-236-7584 BY: /S/ PERETZ BRONSTEIN ------------------------------------------------ Name: Peretz Bronstein Title: Director Address: 60 E. 42nd Street Suite 4600 New York, New York 10165 Phone: 212-697-6484 Fax: 212-697-0877 BY: /S/ ANDREA D. KLEIN ------------------------------------------------ Name: Andrea D. Klein Title: Address: c/o WIT 826 Broadway New York, New York 10003 Phone: 212-253-4401 Fax: 212-253-4650 BY: /S/ STEVEN SILESNI ------------------------------------------------ Name: Steven Silesni Title: President/Trustee of The Kernele LLC Address: 334 Elm Street West Hempstead, New York 11552 Phone: 516-481-2123 Fax: 212-269-2480 BY: /S/ STEVEN SILESNI ------------------------------------------------ Name: Steven Silesni Title: President/Trustee of Kenwrck, D.K. Address: 334 Elm Street West Hempstead, New York 11552 Phone: 516-481-2123 Fax: 212-269-2480 BY: /S/ AVIGDOR WILLENZ ------------------------------------------------ Name: Avigdor Willenz Title: Address: M.P. Bikat Beit Hakerem Kamun, 20112, Israel Phone: 011-972-4-9883331 Fax: 011-972-4-9884049 Exhibit 2.12 Page 16 17 BY: /S/ M. BERNARD SIGEL ------------------------------------------------ Name: M. Bernard Sigel Title: Address: 20 East 6th Street New York, New York 10063 Phone: Fax: BY: /S/ JONATHAN BULKELRY ------------------------------------------------ Name: Jonathan Bulkelry Title: Address: Phone: 212-831-8690 Fax: BY: /S/ LLOYD L. ROTHENBERG ------------------------------------------------ Name: Lloyd L. Rothenberg Title: President, DASH 1999 LLC Address: c/o LDEB & LSEB 345 Park Avenue New York, New York 10154 Phone: 212-407-4937 Fax: 212-407-4990 BY: /S/ REX SHERRY ------------------------------------------------ Name: Rex Sherry Title: Address: 171 Selby Lane Atherton, California 94027 Phone: 650-849-2148 Fax: 650-849-2106 BY: /S/ JOSEPH M. SCHELL ------------------------------------------------ Name: Joseph M. Schell Title: Address: 35 McCormick Lane Atherton, California 94027 Phone: 650-849-2210 Fax: 650-849-2105 BY: /S/ C. PRESTON BUTCHER ------------------------------------------------ Name: C. Preston Butcher Title: Trustee Address: 400 East Third Avenue Suite 600 Foster City, California 94404 Phone: 650-235-3000 Fax: 650-571-2231 BY: /S/ CLIFFORD M. SOBEL ------------------------------------------------ Name: Clifford M. Sobel Title: President Address: 40 Darison Drive Short Hills, New Jersey 07078 Phone: 973-564-5633 Fax: 973-564-8769 Exhibit 2.12 Page 17 18 BY: /S/ WALLACE ZUCKERMAN ------------------------------------------------ Name: Wallace Zuckerman Title: President, J2JK, Inc. Address: 2505 Black Rock Take Fairfield, Connecticut 06432-2408 Phone: 203-371-1124 Fax: 203-371-4829 BY: /S/ JALQUES J. GOLLIN ------------------------------------------------ Name: Jalques J. Gollin Title: Trustee, GAN, Inc. Address: 11707 Fulham Street Silver Spring, Maryland 20902 Phone: 301-649-1886 Fax: 301-619-5080 BY: /S/ YOSHINORI WARASHINA ------------------------------------------------ Name: Yoshinori Warashina Title: Senior Vice President Itochu international Inc. Address: 335 Madison Avenue New York, New York 10017 Phone: 212-818-8452 Fax: 212-818-8512 BY: /S/ STIVENTURES, N.V. ------------------------------------------------ Name: Stiventures, N.V. Title: Address: Hallenbergweg 379 1101 CR Amsterdam The Netherlands Phone: + 31-20-5640480 Fax: + 31-20-6915329 Exhibit 2.12 Page 18 19 BY: /S/ RUBIN BRECHER ------------------------------------------------ Name: Rubin Brecher Title: General Partner Brecher Family Partnership Address: 6 Meadow Lane Lawrence, New York 11559 Phone: 718-851-1186 Fax: 718-853-5239 BY: /S/ GLENN LESNICK ------------------------------------------------ Name: Glenn Lesnick Title: Trustee and Officer of SMART Inc. Address: 135 William Street New York, New York 10038 Phone: 212-732-5571 Fax: 212-732-6052 BY: /S/ FAYE LANDES ------------------------------------------------ Name: Faye Landes Title: Equity Analyst Address: Sanford C. Bernstein & Co. 767 Fifth Avenue New York, New York 10153 Phone: 212-756-4441 Fax: 212-756-0868 BY: /S/ SAMUEL H. SROCHI AND DINA K. SROCHI ------------------------------------------------ Name: Samuel H. Srochi and Dina K. Srochi Title: Address: 2980 Ridge Valley Road, NW Atlanta, Georgia 30327 Phone: 404-760-3196 Fax: 404-760-3002 BY: /S/ LLOYD L. ROTHENBERG ------------------------------------------------ Name: Lloyd L. Rothenberg Title: Vice President, Sprouting LLC Address: c/o LOEB & LDEB 345 Park Avenue New York, New York 10154 Phone: 212-407-4937 Fax: 212-407-4990 Exhibit 2.12 Page 19 20 BY: /S/ EQUITY TRUST (CURACAO) N.V. ------------------------------------------------ Name: Equity Trust (Curacao) N.V. Title: Managing Director Address: Scharlooweg 81 Curacao, NA Phone: 5999 461 62 61 Fax: 5999 461 78 79 BY: /S/ IAN MAUSNER ------------------------------------------------ Name: Ian Mausner Title: Trustee, Mansner Family 1997 Trust Address: 97 Isabella Avenue Atherton, California 94027 Phone: 415-627-2964 Fax: 415-913-5325 BY: /S/ NAOMI KALEV ------------------------------------------------ Name: Naomi Kalev Address: 54/2 Ha'Irit Ma'ale Adumim Israel 90610 Phone: 972-2-5353248 Fax: 972-2-5722243 BY: /S/ DANIEL CHERTOFF ------------------------------------------------ Name: Daniel Chertoff Address: 15 Netzer Yishai Street Efrat 90435 Israel Phone: 972-2-993-1974 Fax: 972-2-993-2202 BY: /S/ MARK DAVIES ------------------------------------------------ Name: Mark Davies Address: Flat 4, Horseshoe Wharf 6 Clink Street London SE19FE Phone: 917-922-5269 (US) Phone: 07957-138858 (UK) Exhibit 2.12 Page 20 21 BY: /S/ RAP MICHAEL ----------------------------------------- Name: RAP Michel Title: ____ of Jersey for Burkoy Ltd., Sole Corporate Director of Ensign Consulting Limited Address: Dubarry House Ollivier Street Alderney GY9 3DU Channel Islands United Kingdom Phone: 44-1481-822763 Fax: 44-1481-823390 BY: /S/ DARREL KRASNOFF ----------------------------------------- Name: Darrel Krasnoff Title: Director, Prendon Investments Address: 1999 Avenue of the Stars, Suite 2800 Los Angeles, CA 90067 Phone: 310-229-1535 BY: /S/ TERENCE WEILBROOKS ----------------------------------------- Name: Terence Weilbrooks Title: Director, Per Pro Apax Funds Nominees Limited Address: 15 Bishopsgate London EC2P 2AP England Phone: 0207-454-2119 Fax: 0207-454-2211 BY: /S/ BENNY T. HU ----------------------------------------- Name: Benny T. Hu Title: President, China Development Industrial Bank, Inc. Address: 125 Nanking East Road Section 5 Taipei, Taiwan Republic of China Phone: 8862-2763-8800 Fax: 8862-2756-7323 BY: /S/ DAVID C. NOCIFORA ----------------------------------------- Name: David C. Nocifora Title: VP/CFO, Christian & Timbers, Inc. Address: 25825 Science Park Drive #400 Cleveland, OH 44122 Phone: 216-464-8710 Fax: 216-464-6160 Exhibit 2.12 Page 21 22 BY: /S/ MEL E. LIFSHITZ, ESQ. ----------------------------------------- Name: Mel E. Lifshitz, Esq. Title: Trustee, The BL Squared Foundation, Inc. Address: 10 East 40th Street, 22nd Floor New York, NY 10016 Phone: 212-779-1414 Fax: 212-779-2774 BY: /S/ JAY WARD ----------------------------------------- Name: Jay Ward Address: 5251 Boyd Avenue Oakland, CA 94618 Phone: 510-923-0891 Fax: 510-923-8091 BY: /S/ BRYAN B. RUTBERG ----------------------------------------- Name: Bryan B. Rutberg Address: 638 Minna Street, Apt. 6 San Francisco, CA 94104 Phone: 415-551-0914 Fax: BY: /S/ RICHARD A. EKLEBERRY ----------------------------------------- FOF Partners III-B, L.P. By: TPG Genpar III, LP By: TPG Advisors III, Inc. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 BY: /S/ RICHARD A. EKLEBERRY ----------------------------------------- TPG Investors III, L.P. By: TPG Genpar III, LP By: TPG Advisors III, Inc. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 Exhibit 2.12 Page 22 23 BY: /S/ RICHARD A. EKLEBERRY ------------------------------------------- Dutch Parallel III-B, L.P. By: TPG Genpar III, LP By: TPG Advisors III, Inc. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 BY: /S/ RICHARD A. EKLEBERRY ------------------------------------------- T3 Partners, L.P. By: T3 Genpar, Inc. By: T3 Advisors, Inc. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 BY: /S/ RICHARD A. EKLEBERRY ------------------------------------------- T3 Parallel, L.P. By: T3 Genpar, Inc. By: T3 Advisors, Inc. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 BY: /S/ RICHARD A. EKLEBERRY ------------------------------------------- T3 Investors, L.P. By: T3 Genpar, Inc. By: T3 Advisors, Inc. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 BY: /S/ RICHARD A. EKLEBERRY ------------------------------------------- TPG Parallel III, L.P. By: TPG Genpar III, L.P. By: TPG Advisors III, L.P. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 Exhibit 2.12 Page 23 24 BY: /S/ RICHARD A. EKLEBERRY ------------------------------------------- TPG Partners III, L.P. By: TPG Genpar III, L.P. By: TPG Advisors III, L.P. Name: Richard A. Ekleberry Title: Vice President Address: 301 Commerce Street Suite 3300 Fort Worth, TX 76102 Phone: 817-871-4000 Fax: 817-871-4080 BY: /S/ DAN D'ANIELLO ------------------------------------------- Name: Dan D'Aniello Title: Director for and on behalf of CIPE, Ltd. as General Partner of CIPE General Partner, L.P. as General Partner of CIPE Investment I, L.P. Address: c/o Walkers Walker House P.O. Box 265GT George Town Grand Cayman Cayman Islands Phone: 345-949-0100 Fax: 345-949-7886 BY: /S/ EITAN WERTHEIMER ------------------------------------------- Name: Eitan Wertheimer Title: Director Address: P.O. Box 43 Tefen 24959 Israel Phone: 972-4-9970083 Fax: Exhibit 2.12 Page 24 25 EXHIBIT A TO REGISTRATION RIGHTS AGREEMENT FORM OF JOINDER AGREEMENT This Joinder Agreement (the "Joinder Agreement") is entered into as of the date written below among the undersigned (the "Joining Party") and the parties to the Registration Rights Agreement dated as of the day of , 2000 (the "Registration Rights Agreement"), among U.S. Technologies Inc., a Delaware corporation (the "Company"), and certain holders of the capital stock and other securities of the Company. Capitalized terms used but not defined herein shall have the meanings given such terms in the Registration Rights Agreement. The Joining Party hereby acknowledges, agrees and confirms that, by its execution of this Joinder Agreement, the Joining Party shall be deemed to be a party to the Registration Rights Agreement and shall have all of the rights and obligations of a "Holder" under the Registration Rights Agreement. The Joining Party hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Registration Rights Agreement. This Joinder Agreement may be executed by facsimile. IN WITNESS WHEREOF, the undersigned has executed this Joinder Agreement as of this ___ day of _______________, 2001. - ------------------------------- Name: Address: Telephone: Facsimile: Exhibit 2.12 Page 25 EX-4.6(A) 4 g70507ex4-6a.txt WAIVER AGREEMENT 1 EXHIBIT 4.6(A) September 20, 2000 U.S. Technologies Inc. 1130 Connecticut Avenue, N.W. Suite #700 Washington, DC 20036 Gentlemen: The Earls Family Limited Partnership (the "LIMITED PARTNERSHIP") and C. Gregory Earls ("EARLS", and together with the Limited Partnership, the "INVESTORS") have reached this agreement with U.S. Technologies Inc., a Delaware corporation ("US TECH"), in connection with US Tech's desire to amend its Restated Certificate of Incorporation (the "CHARTER AMENDMENT") in order to increase the number of authorized shares of US Tech's common stock, par value $.02 per share (the "COMMON STOCK"). As of the date hereof, the Limited Partnership owns warrants to purchase 500,000 shares of Common Stock (the "WARRANTS") and Earls owns 29,160 shares of US Tech's Series A Convertible Preferred Stock, $0.02 par value ("SERIES A PREFERRED"), which shares of Series A Preferred are convertible into 2,390,193 shares of Common Stock. The Investors acknowledge that if Earls converted his shares of Series A Preferred into Common Stock or if the Limited Partnership exercised its Warrants for Common Stock prior to the Charter Amendment, there is a significant risk that the number of shares of Common Stock that would be outstanding would exceed the minimum number of such shares that US Tech is authorized to issue under its Restated Certificate of Incorporation and thus not be validly issued. Therefore, notwithstanding the rights granted to Earls under the Series A Preferred and the rights granted to the Limited Partnership under the Warrants, the Investors make the following representations, warranties and covenants to US Tech: 1. Until US Tech's voting stockholders have approved the Charter Amendment authorizing US Tech 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 US Tech, which are convertible into or entitle the owner thereof to purchase or otherwise receive shares of Common Stock, and the Charter Amendment has been filed with and accepted by the Secretary of State of the State of Delaware, the Investors 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 Investors as of the date hereof that are convertible into or give the Investors 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 Investors will not exercise for or convert into Common Stock any Exhibit 4.6(A) Page 1 2 securities and options issued by US Tech, which are purchased or otherwise acquired by or issued or granted to the Investors after the date hereof and are convertible into or entitle the holder thereof to purchase or otherwise receive shares of Common Stock. The undersigned are authorized to act in regard to the matters set forth in this letter. EARLS FAMILY LIMITED PARTNERSHIP By: /s/ Gregory Earls ---------------------------------------------- By: /s/ Gregory Earls -------------------------------------- C. Gregory Earls President /s/ Gregory Earls ---------------------------------------------- C. Gregory Earls Acknowledged and Agreed to by U.S. TECHNOLOGIES INC. By: /s/ Gregory Earls ----------------------------------------- C. Gregory Earls, Co-Chairman and Co-CEO Exhibit 4.6(A) Page 2 EX-4.10 5 g70507ex4-10.txt CERTIFICATE OF DESIGNATIONS 1 EXHIBIT 4.10 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES F CONVERTIBLE PREFERRED STOCK OF U.S. TECHNOLOGIES INC. U.S. Technologies Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), by its Chief Executive Officer, DOES HEREBY CERTIFY: FIRST: That pursuant to authority expressly vested in the Board of Directors of the Corporation by the provisions of its Restated Certificate of Incorporation (the "Charter"), the Corporation's Board of Directors duly adopted on March 26, 2001, the following resolution providing for the designations and issuance of 27,374 shares of Series F Convertible Preferred Stock, par value $0.02 per share: RESOLVED, that this Board of Directors, pursuant to the authority expressly vested in it by the provisions of the Corporation's Restated Certificate of Incorporation and the General Corporation Law of the State of Delaware, hereby authorizes the issuance from time to time of a series of preferred stock, par value $0.02 per share, of the Corporation and hereby fixes the designation, voting powers, preferences and relative, participating, optional and other rights and the qualifications, limitations or restrictions thereof, in addition to those set forth in said Restated Certificate of Incorporation. 1. DESIGNATION AND AMOUNT This series of preferred stock shall be designated as "Series F Convertible Preferred Stock" and shall have a par value of $0.02 per share (the "Series F Preferred"). The number of authorized shares constituting the Series F Preferred shall be 27,374 shares. Shares of the Series F Preferred shall have a stated value of $219.19 per share (the "Stated Value"). The Corporation may issue fractional shares of the Series F Preferred. All equity securities of the Corporation ranking as to dividends or distributions of assets on Liquidation (as defined below) of the Corporation junior to the Series F Preferred, including the Corporation's Common Stock, par value $0.02 per share (the "Common Stock") and also including the Corporation's Series A Preferred Stock, the Corporation's Series B Preferred Stock, the Corporation's Series C Preferred Stock, the Corporation's Series D Preferred Stock, and the Corporation's Series E Preferred Stock, are sometimes hereinafter referred to as "Junior Securities." 2. LIQUIDATION PREFERENCE In the event of any bankruptcy, liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary (a "Liquidation"), each holder of the Series F Preferred (the "Preferred F Holder") at the time thereof shall be entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Corporation to the holders of the Common Stock or other Junior Securities by reason of their ownership of such stock, an amount per share of Series F Preferred equal to the lesser of (i) 1,000 times the price per share of the Common Stock as reported by the OTC BB, or other nationally recognized market quotation system, on __________________, 2001 [note: this will be the day before Closing] (as adjusted for any combinations, consolidations, stock distributions or stock dividends or similar events with respect to such shares), and (ii) the Stated Value (or such lesser amount required by Section 4 of the Corporation's Charter) (as adjusted for any combinations, consolidations, stock Exhibit 4.10 Page 1 2 distributions or stock dividends or similar events with respect to such shares). Subject to the rights of the holders of shares of any series or class or classes of stock (if any) ranking, as to Liquidation, senior to the Series F Preferred, upon Liquidation, after payment of the Liquidation preference of the Series F Preferred determined pursuant to this Section 2, the remaining assets of the Corporation legally available for distribution shall be distributed ratably to the holders of Junior Securities, including the Common Stock. 3. VOTING RIGHTS (a) Prior to the Conversion Date (as defined below), the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the shares of Series F Preferred then outstanding, voting as a single class after the date that the first share of Series F Preferred is issued, authorize or permit the Corporation or any of its subsidiaries to issue any stock of the Corporation with the same preference and priority as the Series F Preferred or with a preference or priority senior to the Series F Preferred. (b) Prior to the Conversion Date (as defined below), the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a two-thirds of the shares of Series F Preferred then outstanding, voting as a single class amend, repeal, modify or supplement or in any other manner affect or change the terms, designations, preferences or rights of the Series F Preferred set forth herein. Notwithstanding the foregoing, the Series F Preferred will not be entitled to vote or take action at a meeting of the Corporation's stockholders stockholders next held following the filing of the certificate hereof, the purpose of which includes the approval by the holders of Common Stock of an amendment to the Corporation's Charter ("Charter Amendment") to increase the number of shares of Common Stock the Corporation is authorized to issue to an amount sufficient to permit the conversion to Common Stock of all of the Corporation's then-outstanding shares of all of its authorized and designated series of convertible preferred stock, which includes the Series F Preferred, and any other then-outstanding securities and options or similar rights issued by the Corporation, which are convertible into or otherwise permit the holder thereof to purchase or otherwise receive shares of Common Stock. (c) Except as otherwise required by law, each Preferred F Holder shall be entitled to vote on all other matters together with the holders of shares of the Common Stock (including, for purposes of this Section 3(c), any other securities of the Corporation that are entitled to vote with the holders of shares of Common Stock) and not as a separate class, at any annual or special meeting of stockholders of the Corporation, and may act by written consent in the same manner as the Common Stock, in either case upon the following basis: each Preferred F Holder shall be entitled to such number of votes as shall be equal to the whole number of shares of Common Stock into which such holder's aggregate number of shares of Series F Preferred are then convertible (pursuant to Section 4 hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. 4. CONVERSION The holders of the Series F Preferred shall have conversion rights as follows: At any time or from time to time, any holder of outstanding shares of Series F Preferred shall have the right to convert any or all of his shares of Series F Preferred into fully paid and non-assessable shares of Common Stock at the Conversion Price (as defined below), subject to adjustment as provided herein. Shares of Series F Preferred shall be convertible into the number of shares of Common Stock that results from dividing the original Stated Value by the Conversion Price per share in effect at the time of conversion for each share of Series F Preferred being converted. The initial "Conversion Price" per share for the Series F Preferred shall be equal the original Stated Value divided by 1,000, and shall be subject to adjustment from time to time as provided herein. Exhibit 4.10 Page 2 3 Before any holder of Series F Preferred shall be entitled to voluntarily convert shares of Series F Preferred into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of its transfer agent, and shall give written notice to the Corporation at such office that such holder elects to convert the same and shall state therein the number of shares of Series F Preferred being converted. With respect to any certificate alleged to have been lost, stolen or destroyed, the owner(s) of such certificate shall be entitled to the Common Stock issuable upon conversion of the Series F Preferred upon delivery to the Corporation of an affidavit of such owner(s) setting forth such allegation and an indemnity agreement to indemnify the Corporation against any claims that may be made against them on account of such alleged loss, theft or destruction of any such certificate. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder of Series F Preferred certificate for the number of shares of Common Stock to which he shall be entitled, and a certificate for the remainder of his Series F Preferred, if any. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of shares of Series F Preferred to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the Corporation shall at any time or from time to time after the original issue date of the Series F Preferred effect a subdivision of the outstanding Common Stock (or reclassification, by the issue of a Common Stock dividend on Common Stock, or otherwise), the Conversion Price then in effect immediately before the subdivision shall be proportionately decreased, and conversely, if the Corporation shall at any time or from time to time after the original issue date of the Series F Preferred effect a combination of the outstanding Common Stock (by reclassification or otherwise), the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 4(D) shall become effective at the close of business on the date the subdivision or combination becomes effective. If the Common Stock issuable upon the conversion of the Series F Preferred shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares provided for above), then and in each such event the holder of each share of Series F Preferred shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by the holders of the number of shares of Common Stock into which such shares of Series F Preferred might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (1) If at any time or from time to time after the original issue date of the Series F Preferred, the Corporation shall issue or sell additional shares of Common Stock, other than as an adjustment as provided in Section 4(D) above, for a consideration per share less than the then-current Conversion Price, then and in each case the then-current Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying that Conversion Price by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (B) the number of shares of Common Stock that the aggregate consideration received by the Corporation for the total number of additional shares of Common Stock so issued would purchase at such Conversion Price, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance or sale plus the number of such additional shares of Common Stock so issued; provided, however, that for purposes of this Section 4(F)(1), the phrase "the number of shares of Common Stock outstanding immediately prior to such issuance or sale" shall include all shares of Common Stock issuable upon conversion of shares of Series F Preferred. Exhibit 4.10 Page 3 4 In case at any time the Corporation shall in any manner issue (whether directly or by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or grant any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange or such Convertible Securities (determined by dividing (a) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities) shall be less than the current Conversion Price, then the shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding. Except as otherwise provided herein, no adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. In case the Corporation shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (a) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (I) except as otherwise provided herein, no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and (II) if any such issue or sale of such Convertible Securities is made upon exercise of any Options to purchase any such Convertible Securities for which adjustments of the Conversion Price have been or are to be made pursuant to other provisions of this Section 4(F), no further adjustment of the Conversion Price shall be made by reason of such issue or sale. Notwithstanding any other provision hereof, the Corporation shall not be required to make any adjustment to the Conversion Price in the case of the issuance of shares of Common Stock or warrants or other rights to subscribe for or to purchase Common Stock or the grant of any options to purchase Common Stock pursuant to (i) any stock or stock option plan existing on the date of effectiveness of this Certificate or (ii) any other stock or stock option plan which is approved by the required holders of the Corporation's stock, or (iii) any strategic transaction approved by the Corporation's Board of Directors and by the holders of a majority of the then-outstanding Series F Preferred. Subject to amending the Charter as soon as possible after the date of the original issuance of the Series F Preferred, the Corporation shall at all times when Series F Preferred shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of Exhibit 4.10 Page 4 5 Series F Preferred, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series F Preferred. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and non-assessable, and free from all taxes, liens and charges with respect to the issue thereof. The Corporation further covenants that it will from time to time take all action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the Conversion Price in effect at that time. Shares of Series F Preferred which have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding, and all rights with respect to such shares shall immediately cease and terminate on the date of conversion applicable thereto, except the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Series F Preferred so converted shall be retired and canceled, and shall not be reissued. 5. REDEMPTION Beginning on the second anniversary of the date of the first issuance of shares of Series F Preferred, and for a period of 90 days thereafter, each holder of shares of Series F Preferred shall have the right to require the Corporation to redeem such holder's shares at a purchase price of $100.00 per share (as adjusted for any combinations, consolidations, stock distributions or stock dividends or similar events with respect to such shares); provided, however, that the Corporation shall not be obligated to effect such a redemption unless certificates evidencing such shares of Series F Preferred being redeemed are either delivered to the Corporation or its transfer agent or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. 6. DIVIDENDS No dividends shall accrue or be payable at any time with respect to the Series F Preferred. SECOND: That such determination of the designations, preferences and the relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, relating to the Series F Preferred was duly made by the Corporation's Board of Directors pursuant to the provisions of the Corporation's Charter, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, as amended. IN WITNESS WHEREOF, U.S. Technologies Inc. has caused this Certificate of Designations to be executed this 26th day of March, 2001. U.S. TECHNOLOGIES INC. By: /s/ Gregory Earls -------------------------------- Gregory Earls, Chief Executive Officer Exhibit 4.10 Page 5 EX-4.11 6 g70507ex4-11.txt COMMON STOCK PURCHASE WARRANT 1 EXHIBIT 4.11 Number of Shares: ---------- FORM OF U.S. TECHNOLOGIES INC. COMMON STOCK PURCHASE WARRANT THIS WARRANT AND THE SHARES PURCHASABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND, NOTWITHSTANDING ANY OTHER PROVISION OF THIS WARRANT, MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL), OR AN OPINION OF THE CORPORATION'S COUNSEL, STATING THAT SUCH SALE, TRANSFER, OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS. FOR VALUE RECEIVED, ______________________ or any successor in interest (the "Holder"), is entitled to purchase from US. Technologies Inc., a Delaware corporation (the "Corporation"), subject to the terms and conditions herein set forth, at any time after [the Closing Date of the Merger] (the "Commencement Date") and before 5:00 p.m. Eastern Standard Time on __________________, 2004 [3 years after the Closing Date of the Merger] (the "Expiration Date"), ____________ shares of duly authorized, validly issued, fully paid and nonassessable Common Stock of the Corporation, US$0.02 par value (the "Warrant Shares"), subject to adjustment of the number of shares constituting the Warrant Shares as hereinafter provided. The Holder is entitled to purchase the Warrant Shares for an exercise price of [the average price of the Corporation Common Stock as reported on the "Over the Counter Market" ("OTC BB"), or other nationally recognized market quotation system, for the 20 trading days immediately prior to the closing date of the Acquisition, but in any event not less than $0.25 per share] per share, subject to adjustment as hereinafter provided (the "Exercise Price"), and is entitled also to exercise the other appurtenant rights, powers, and privileges hereinafter set forth. Definitions. For all purposes of this Warrant, unless the context otherwise requires, the following terms have the following meanings: "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. For the purposes of this definition, a Person shall be deemed to control another Person if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through ownership of voting securities, by contract or otherwise. "Business Day" means any day other than a Saturday, Sunday or public holiday or the equivalent for banks under the laws of Washington, D.C.. "Closing Price" has the meaning ascribed to that term in Section 0. Exhibit 4.11 Page 1 2 "Commencement Date" has the meaning ascribed to that term in the forepart of this Agreement. "Common Stock" means the Corporation's authorized Common Stock, par value $0.02 per share. "Common Stock Equivalents" has the meaning ascribed to that term in Section 0. "Corporation" means U.S. Technologies Inc., a corporation organized and existing under the laws of the State of Delaware, and any successor corporation. "Current Market Price" "Current Market Price" means, for any date, the average of the daily Closing Prices per share of Common Stock for the 20 consecutive trading days immediately prior to such date. The "Closing Price" per share of Common Stock for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the "Over the Counter Market" ("OTC BB"), the NASDAQ National Market System, the New York Stock Exchange or the American Stock Exchange, as applicable. If on any such trading day or days such securities are not quoted by any such organization, such trading day or days shall be replaced for purposes of the foregoing calculation by the requisite trading day or days preceding the commencement of such 20 trading day period on which such securities are so quoted. If shares of Common Stock are not so listed or traded, the Current Market Price shall mean the fair value per share of Common Stock as determined in good faith by the Board of Directors, whose determination shall be described in a notice to the Holders, based on (a) the most recently completed arm's-length transaction between the Corporation and a Person other than an existing shareholder or other Affiliate of the Corporation, the closing of which occurred on such date or within the three-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such three-month period, the advice of an independent financial expert selected by the unanimous agreement of all Directors. "Current Market Price of this Warrant" means the Current Market Price of the Common Stock subject to this Warrant minus the Exercise Price of this Warrant established in accordance with Article 4. "Exercise Price" means the exercise price for the Warrant Shares established in accordance with Article 4. "Existing Stock" shall have the meaning ascribed to that term in Section 4.4 hereof. "Expiration Date" has the meaning ascribed to that term in the forepart of this Agreement. "Holder" means _________________________, and its successors or permitted assigns as holder of this Warrant. "1933 Act" means the Securities Act of 1933, as amended. "Person" means any natural person, sole proprietorship, general partnership, limited partnership, limited liability Company, joint venture, trust, unincorporated organization, association, corporation, institution, private or governmental entity, or party. Exhibit 4.11 Page 2 3 "Rights" has the meaning ascribed to that term in Section 0. "Subscription Notice" means a written notice to the Corporation of Holder's election to exercise its rights under the Warrant to purchase Common Stock, in substantially the form appearing at the end of this Warrant. "Warrant" means this Warrant and any warrants issued on or in substitution for this Warrant including warrants issued in exchange for this Warrant pursuant to Article 2 hereof. "Warrant Shares" means the shares of Common Stock or other securities acquired or to be acquired upon the exercise of the Warrant. Exercise of Warrant; Division of Warrant. Partial Exercise. This Warrant may be exercised, in whole or in part, on or after the Commencement Date and until and including the Expiration Date. In the event of a partial exercise, the Corporation shall execute and deliver to the Holder (or to such other Person as shall be designated in the Subscription Notice) a new Warrant covering the unexercised portion of the Warrant Shares. Procedure. To exercise this Warrant, the Holder shall deliver to the Corporation at its principal office at the address set forth in Section 8.2 hereof: - a written notice, in substantially the form of the Subscription Notice appearing at the end of this Warrant, of the Holder's election to exercise this Warrant; - a cashier's or certified check payable to the Corporation in the amount of the Exercise Price; and - this Warrant. The Corporation shall as promptly as practicable, and in any event within five Business Days after receipt of such notice, execute and deliver or cause to be executed and delivered one or more certificates representing the aggregate number of shares of Warrant Shares to which the Holder is entitled and, if this Warrant is exercised in part, a new Warrant as set forth in Section 0. Name and Effective Date. The stock certificate(s) so delivered shall be issued in the name of the Holder or such other name as shall be designated in the Subscription Notice. Such certificate(s) shall be deemed to have been issued and such Holder or any other Person so designated to be named therein shall be deemed for all purposes to have become a holder of record of such shares as of the date the Corporation actually receives the Subscription Notice. Expenses. The Corporation shall pay all expenses, taxes, and other charges payable in connection with the preparation, issue, and delivery of such stock certificate(s), except that, in case such stock certificate(s) shall be registered in a name or names other than the name of the Holder of this Warrant, stock transfer taxes that are payable upon the issuance of such stock certificate(s) shall be paid by the Holder hereof. Legal Requirements. The Warrant Shares issued upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable. Exhibit 4.11 Page 3 4 No Fractional Shares. The Corporation shall not be required to issue fractional shares of Warrant Shares upon exercise of this Warrant. At the Corporation's discretion, in the-event the Corporation determines not to issue fractional shares, in lieu of any fractional shares to which the Holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the Current Market Price. Registration: Exchange of Warrant. The Corporation will keep at its principal office a register in which the Corporation will provide for the registration and transfer of this Warrant. The Holder of this Warrant, or of any warrant substituted therefor pursuant to the provisions of this Section 0, may, at its option, in person or by duly authorized attorney, surrender the same for exchange at such principal office of the Corporation and, within a reasonable time thereafter and without expense (other than transfer taxes, if any), receive in exchange therefor one or more duly executed warrants each evidencing the right to receive one share of Common Stock of the Corporation or such other whole number of shares as may be designated by the Holder at the time of surrender. The Corporation covenants and agrees to take and cause to be taken all action necessary to effect such registrations, transfers and exchanges. The Corporation and any agent of the Corporation may treat the person in whose name a warrant is registered as the owner of the warrant for all purposes hereunder and neither the Corporation or such agent shall be affected by notice to the contrary. Cashless Exercise. Notwithstanding Section 0 of this Warrant or any other provision of this Warrant to the contrary, in addition to the Holder's rights under this Warrant, the Holder may, upon full exercise of this Warrant, at its election, pay the aggregate Exercise Price applicable to such exercise by delivering the Warrant to the Corporation and receiving from the Corporation in return therefor the number of shares of Common Stock having a Current Market Price on the date of exercise equal to the "Current Market Price of this Warrant" as established by Section 0. Transfer. Permitted Transfers. This Warrant shall be freely transferable, in whole or in part, subject to the limitations specified in Section 0 herein. Securities Laws. This Warrant shall not be transferable unless: - either a registration statement under the 1933 Act is in effect covering the Warrant or the Corporation has received an opinion from the Corporation's counsel to the effect that such registration is not required, or the Holder has furnished to the Corporation an opinion of Holder's counsel, which counsel shall be reasonably satisfactory to the Corporation, to the effect that such registration is not required; and - the proposed transfer complies with any applicable state securities laws. In the event Holder seeks an opinion from the Holder's counsel as to transfer without registration, the Corporation shall provide such factual information to Holder's counsel as Holder's counsel may reasonably request for the purpose of rendering such opinion, and such counsel may rely on the accuracy and completeness of such information in rendering such opinion. In the event the Corporation seeks an opinion from the Corporation's counsel as to transfer without registration, the Holder shall provide such factual information to the Corporation's counsel as Corporation's counsel way reasonably request for the Exhibit 4.11 Page 4 5 purpose of rendering such opinion, and such counsel may rely on the accuracy and completeness of such information in rendering such opinion. Procedure. Subject to the limitations set forth in Section 0, the Holder may transfer this Warrant on the books of the Corporation by surrendering at the principal office of the Corporation at the address set forth in Section 8.2 hereof: - this Warrant; - a written assignment of this Warrant, in substantially the form of the Assignment appearing at the end of this Warrant, naming the assignee and duly executed by the Holder; and - funds sufficient to pay any stock transfer taxes payable upon the making of such transfer. The Corporation shall thereupon execute and deliver a new Warrant in the name of the assignee specified in such instrument of assignment, and if this Warrant is transferred in part, the Corporation shall also execute and deliver in the name of the Holder a new Warrant covering the untransferred portion of this Warrant. Upon issuance of the new Warrant or Warrants, the Warrant surrendered for transfer shall be canceled by the Corporation. Expenses. The Corporation shall pay all expenses, taxes (other than transfer taxes) and other charges payable in connection with the preparation, issue and delivery of any new Warrant under this Article 3. Exercise Price and Adjustments. Initial Exercise Price. The initial Exercise Price for the Warrant Shares shall be [the average price of the Corporation Common Stock as reported on the "Over the Counter Market" ("OTC BB"), or other nationally recognized market quotation system, for the 20 trading days immediately prior to the closing date of the Acquisition, but in any event not less than $0.25 per share] per share of Common Stock, subject to adjustment as set forth in this Article 4. Stock Splits, Stock Dividends and Reverse Stock Splits. If at any time the Corporation shall subdivide (by reclassification, by the issuance of a Common Stock dividend on Common Stock, or otherwise) its outstanding shares of Common Stock into a greater number, the number of shares of Common Stock that may be purchased hereunder shall be increased proportionately and the Exercise Price per share of Common Stock shall be decreased proportionately as of the effective date of such action. The effective date of a stock dividend shall be the date on which the dividend is declared. Issuance of a Common Stock dividend shall be treated as a subdivision of the whole number of shares of Common Stock outstanding immediately before the record date for such dividend into a number of shares equal to such whole number of shares so outstanding plus the number of shares issued as a stock dividend. If at any time the Corporation shall combine (by reclassification or otherwise) its outstanding number of shares of Common Stock into a lesser number, the number of shares of Common Stock that may be purchased hereunder shall be reduced proportionately and the Exercise Price per share of Common Stock shall be increased proportionately as of the effective date of such action. Exhibit 4.11 Page 5 6 Dividends Other than in Common Stock or Cash: Other Distributions. If at any time while this Warrant is outstanding the Corporation shall declare or make for the benefit of all holders of its Common Stock any dividend or distribution upon its Common Stock other than ordinary cash dividends or distributions to which Section 0 or 0 apply (whether payable in stock of any class or classes other than its Common Stock or payable in evidences of indebtedness or assets or in rights, options, or warrants or convertible or exchangeable securities), then in each such case the number of shares of Common Stock that may be purchased hereunder shall be determined by multiplying the number of shares of Common Stock theretofore comprising the Warrant Shares by a fraction, the numerator of which shall be the Current Market Price per share of the Common Stock determined in accordance with Section 0 as of the record date for such dividend or distribution and the denominator of which shall be the Current Market Price per share, as so determined, less the fair value as of such date, as reasonably determined by the Board of Directors of the Corporation, of the portion of such dividend or distribution applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive the distribution. In the event the Corporation determines that the adjustment provided for above is unduly difficult or expensive to effect because of difficulties of valuation, the Corporation may, at its option and as an alternative to the adjustment, distribute and place in escrow for the Holder that portion of such dividend or distribution which the Holder would have received had it exercised this Warrant before the declaration of the dividend or the making of the distribution. Upon exercise of this Warrant, the Holder shall receive its portion of the dividend, distribution or rights held is escrow. Issuance on Common Stock of Options, Warrants or Rights. If at any time while this Warrant is outstanding the Corporation shall grant to all holders of its Common Stock any rights, options or warrants (referred to in this Section 0 as "Rights") entitling them to purchase shares of Common Stock at a price per share that is lower at the record date for such issuance than the Current Market Price of the Common Stock on such date determined in accordance with Section 0, (i) the number of shares of Common Stock that may be purchased hereunder shall be adjusted by multiplying the number of Shares of Common Stock theretofore comprising the Warrant Shares by a fraction of which the numerator shall be the number of shares of Common Stock outstanding or subject to issuance other than pursuant to the Rights as of such record date (the "Existing Stock") plus the number of shares subject to issuance pursuant to the Rights and the denominator of which shall be the number of shares of Existing Stock plus the number of shares which the aggregate exercise price of the Rights would purchase at the then Current Market Price per share of Common Stock; and (ii) the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to such adjustment by a fraction, the numerator of which is equal to the number of shares of Common Stock that could be purchased hereunder immediately prior to the adjustment contemplated by Section 00(i) and the denominator of which is equal to the number of shares of Common Stock that can be purchased hereunder immediately following such adjustment. Such adjustments shall be made whenever Rights are issued and shall become effective retroactively immediately after the record date for the determination of shareholders entitled to receive such Rights. In the event the Corporation determines that the adjustments provided for above in this Section are unduly difficult or expensive to effect because of difficulties of valuation, the Corporation may, at its option and as an alternative to the adjustment, grant and convey to the Holder the Rights which the Holder would have received had it exercised this Warrant before issuance of the Rights. Exhibit 4.11 Page 6 7 On the expiration or termination of any of the Rights, the number of shares of Common Stock then purchasable upon the exercise of each Warrant and the Exercise Price then in effect shall be subject to readjustment and the number of shares of Common Stock subject to the Warrants shall forthwith be decreased and the Exercise Price under the Warrants shall forthwith be increased to that which would have been in effect at the time of such expiration or termination had such Rights, to the extent outstanding immediately prior to such expiration or termination, never been issued. Anti-dilution Adjustment. In case the Corporation shall at any time after the date of this Warrant issue for consideration any shares of Common Stock at a per-share price less than the Current Market Price, or any securities or rights (such other securities or rights herein called "Common Stock Equivalents") convertible into Common Stock or entitled to receive Common Stock or any other equity security entitled to participate with the Common Stock in the earnings or assets of the Corporation (but not any equity security entitled to a fixed preference in such earnings or assets rather than a participation therein) for a price per share (including both the purchase price of such Common Stock Equivalents and any additional amount required to be paid upon the exercise thereof) less than the per share Current Market Price (i) the Exercise Price shall forthwith be reduced by multiplying it by a fraction: The numerator of which is equal to the sum of (x) the total number of shares of Common Stock outstanding immediately prior to such issuance (including the Warrant Shares) multiplied by the Current Market Price of the Common Stock, (y) the total number of additional shares of Common Stock so sold multiplied by the price per share, if any, for which such shares are sold, and (z) the aggregate amount paid for the Common Stock Equivalents so sold plus the aggregate amount subsequently required to be paid upon the exercise of such Common Stock Equivalents to acquire the subject shares of Common Stock (for the purpose of this Section 4.5, the sum of (x), (y) and (z) to be referred to as the "Numerator"). and: The denominator of which is equal to the total number of shares of Common Stock (including the Warrant Shares) deemed to be outstanding immediately after the issuance of such additional shares of Common Stock or Common Stock Equivalents multiplied by the Current Market Price of the Common Stock (for the purpose of this Section 4.5, the "Denominator"). provided, however, that should the Numerator be equal to or greater than the Denominator, the Exercise Price shall remain unchanged for the purpose of this Section 4.5(a). (ii) The number of Warrant Shares shall be increased to an amount equal to the result obtained by (x) multiplying the number of Warrant Shares by the Exercise Price in effect immediately before the adjustments contemplated by this Section 0 and (y) dividing by the Exercise Price in effect immediately after the adjustment contemplated by this Section 0. Exhibit 4.11 Page 7 8 For purposes of clause (i) of Subsection 00, the total number of shares of Common Stock deemed to be outstanding shall include that number of shares of Common Stock actually outstanding plus that number of shares of Common Stock then issuable under this Warrant plus that number of shares of Common Stock then issuable pursuant to the terms of the Common Stock Equivalents. For purposes of this Section 0, the price per share for which additional shares of Common Stock and Common Stock Equivalents are issued or sold shall, to the extent such price consists of cash, be computed on the basis of the amount of cash received by the Corporation (and in the case of Common Stock Equivalents, such amount plus the amount of cash required to be paid to acquire additional shares of Common Stock), after deduction of any expenses payable by the Corporation and any underwriting or similar commissions, compensations or concessions paid or allowed by the Corporation in connection with such issue or sale. To the extent that the consideration for such additional shares and Common Stock Equivalents is property or services other than cash, the amount thereof shall be the value received by or required to be paid to the Corporation as fixed in good faith by the Board of Directors of the Corporation. Upon the expiration unexercised of the entitlement to receive shares of Common Stock under any Common Stock Equivalents the issuance of which resulted in an adjustment to the Exercise Price under this Section 0, then the Exercise Price shall thereupon be increased by the amount that the issuance or sale of such Common Stock Equivalent caused the Exercise Price to be decreased (subject to any applicable adjustment hereunder) and thereafter adjustments will be made to the Exercise Price in accordance with this Section 0. Reorganization and Reclassification. In case of any capital reorganization or any reclassification of the capital stock of the Corporation while this Warrant remains outstanding, the Holder of this Warrant shall thereafter be entitled to purchase pursuant to this Warrant (in lieu of the kind and number of shares of Common Stock comprising Warrant Shares that such Holder would have been entitled to purchase or acquire immediately before such reorganization or reclassification) the kind and number of shares of stock of any class or classes or other securities or property for or into which such shares of Common Stock would have been exchanged, converted, or reclassified if the Warrant Shares had been purchased immediately before such reorganization or reclassification. In case of any such reorganization or reclassification, appropriate provision (as determined by resolution of the Board of Directors of the Corporation) shall be made with respect to the rights and interest thereafter of the Holder of this Warrant, to the end that all the provisions of this Warrant (including adjustment provisions) shall thereafter be applicable, as nearly as reasonably practicable, in relation to such stock or other securities or property. When Adjustment Is Not Required. No adjustment in the Exercise Price or the numbers of Warrant Shares need be made under this Article 4 in connection with any of the following: A change in the par value of the Common Stock; provided, however, that in no event shall the Corporation increase the par value of the Common Stock to an amount greater than the Exercise Price that would be in effect subsequent to the transaction in which the par value would be increased. A grant of employee stock options or other stock awards or plans (i) which are exercisable at the current market price of the Common Stock at the date of such award (calculated in accordance with any such option plan) and (ii) which in the aggregate do not exceed 10% of the outstanding Common Stock of the Corporation, on a fully diluted basis. Any employee stock options granted Exhibit 4.11 Page 8 9 which exceed such percentage shall be considered in connection with the adjustments under Section 0. Statement of Adjustment of Warrant Shares. Whenever the number or kind of shares comprising the Warrant Shares or the Exercise Price is adjusted pursuant to this Article 4, the Corporation shall promptly give notice to the Holder of record of the outstanding Warrant, stating that such an adjustment has been effected and setting forth the number and kind of shares purchasable and the amount of the then-current Exercise Price, and stating in reasonable detail the facts requiring such adjustment and the calculation of such adjustment. No Other Adjustments. No adjustments in the number or kind or price of shares constituting Warrant Shares shall be made except as provided in this Article 4. Covenants of the Corporation. The Corporation covenants and agrees that: Adjustment of Par Value. Before taking any action that would cause an adjustment reducing the Exercise Price per share below the then par value of the shares of Warrant Shares issuable upon exercise of the Warrant, the Corporation will take any corporate action that may be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of such Warrant Shares at such adjusted price. Notice of Certain Significant Events. In case the Corporation proposes: - to pay any dividend, payable in stock (of any class or classes) or in convertible securities, upon its Common Stock or to make any distribution (other than ordinary cash dividends) to the holders of its Common Stock; or - to subdivide as a whole (by reclassification, by the issuance of a stock dividend on Common Stock, or otherwise) the number of shares of Common Stock then outstanding into a greater number of shares of Common Stock, with or without par value; or - to grant to the holders of its Common Stock generally any rights or options; or - to effect any capital reorganization or reclassification of capital stock of the Corporation; or - to consolidate with, or merge into, any other corporation or business or transfer its property as an entirety or substantially as an entirety; or - to effect the liquidation, dissolution or winding up of the Corporation; or - to make any other fundamental change in respect of which the Holder of this Warrant would have been entitled to vote, pursuant to voting rights which are required to be afforded to the Holder under the corporation law of Delaware, if this Warrant had been previously exercised; then the Corporation shall cause notice of any such intended action to be given to the Holder of record of this Warrant (i) not less than 60 days before the date on which the transfer books of the Corporation shall Exhibit 4.11 Page 9 10 close or a record be taken for such stock dividend, distribution, granting of rights or options or for determining rights to vote in respect of any fundamental change, including any capital reorganization, reclassification, consolidation, merger, transfer, liquidation, dissolution, winding up or any other fundamental change, and (ii) in the case of any such capital reorganization, reclassification, consolidation, merger, transfer, liquidation, dissolution, winding up, or other fundamental change, not less than 30 days before the same shall be effective. Limitation of Right or Liability. No provision of this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive dividends or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Corporation or any other matter whatsoever as a stockholder of the Corporation. In the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, no provision hereof shall give rise to any liability of such Holder for the purchase price or as a stockholder of the Corporation, whether such liability is asserted by the Corporation or by creditors of the Corporation. Certain Mergers: Liquidation. Continuation of Warrant. Except as provided in Section 0, in the event that the Corporation proposes to consolidate with, or merge into, any other corporation or business or to transfer its property as an entirety or substantially as an entirety, or to effect the liquidation, dissolution or winding up of the Corporation, or to change the Common Stock in any manner (other than to change its par value, subject to Sections 0 and 0 hereof), then after the Corporation causes notice of such proposed action to be given to the Holder of record as provided in Section 0, the Holder shall be entitled, on or before the effective date of such merger, consolidation, transfer, liquidation, dissolution, winding up, or change, to require the Corporation of the successor or purchasing entity, as the case may be, to (a) execute with the Holder an agreement providing that the Holder shall have the right thereafter and throughout the then remaining term of this Warrant, upon payment of the Exercise Price per Warrant Share in effect immediately prior to such action to purchase with respect to each share of Warrant Shares issuable upon exercise of this Warrant the kind and amount of shares of stock and other securities, property (including cash) or any combination thereof which the Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale, conveyance, or change had this Warrant been exercised with respect to such share of the Warrant Shares immediately prior to such action and (b) make effective provision in its Certificate of Incorporation or otherwise, if necessary, in order to effect such agreement. Such agreement shall provide for adjustments which shall be as nearly equivalent as practicable to the adjustments in Article 4 of this Warrant. The provisions of this Section 0 shall similarly apply to successive consolidations, mergers, sales, conveyances, or changes. Exception. Section 0 shall not apply to a consolidation or merger with a Person in which the Corporation is the surviving entity. Miscellaneous. Governing Law. The rights of the parties arising under this Warrant shall be construed and enforced under the laws of the State of Delaware without giving effect to any choice of law or conflict of law rules. Exhibit 4.11 Page 10 11 Notices. Any notice or other communication required or permitted to be given or delivered pursuant to this Warrant shall be in writing and shall be deemed effective as of the date of receipt if delivered personally or by facsimile transmission (if receipt is confirmed by the facsimile operator of the recipient), or delivered by overnight courier service or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address in the United States for a party as shall be specified by like notice; provided that notices of change of address shall be effective only upon receipt thereof): (i) to the Holder as follows: Attn: Facsimile No.: copies to: (ii) to the Corporation as follows: U.S. Technologies Inc. 1130 Connecticut Ave., NW Suite 700 Washington, DC 20036 Attn: Gregory Earls Facsimile Number: (202) 466-4557 with copies to: Shaw Pittman 2300 N Street, N.W. Washington, DC 20037 Attn: Gregory Feis, Esq. Facsimile Number: (202) 663-8007 Severability. If any provision of this Warrant shall be held invalid, such invalidity shall not affect any other provision of this Warrant that can be given effect without the invalid provision, and to this end, the provisions hereof are separable. Headings. The headings in this Warrant are for reference purposes only and shall not affect in any way the meaning or interpretation of this Warrant. Amendment. This Warrant cannot be amended or modified except by a written agreement executed by the Corporation and the Holder. Assignment. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns except that no party may assign or transfer its rights or obligations under this Warrant to the extent explicitly prohibited herein. Exhibit 4.11 Page 11 12 Entire Agreement. This Warrant, together with its attachments, contains the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. Exhibit 4.11 Page 12 13 IN WITNESS WHEREOF, the Corporation has caused this Warrant to be signed in its name by its President or a Vice President thereunto duly authorized. Dated: ----------------------------- U.S. TECHNOLOGIES INC. By: ------------------------------------- Gregory Earls Chairman and CEO Exhibit 4.11 Page 13 14 SUBSCRIPTION NOTICE The undersigned, the Holder of a Common Stock Purchase Warrant issued by U.S. Technologies Inc. pursuant to the Merger Agreement dated as of _____________, 2001 among U.S. Technologies Inc., Yazam.com Inc., and U.S. Technologies Acquisition Co., hereby elects to exercise purchase rights represented by such Warrant for, and to purchase thereunder, _______ shares of the Common Stock covered by such Warrant and herewith makes payment in full therefor of ___________ and requests that certificates for such shares (and any securities or the property issuable upon such exercise) be issued in the name of and delivered to ___________________________________________________________, whose address is - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------. If said number of shares of Common Stock is less than the number of shares of Warrant Shares purchasable hereunder, the undersigned requests that a new Warrant representing the balance of the Warrant Shares be registered in the name of and issued and delivered to ______________________________________________________________, whose address is - ----------------------------------------------------------------------- - -----------------------------------------------------------------------. The undersigned hereby agrees to pay any transfer taxes on the transfer of all or any portion of the Warrant or Warrant Shares requested herein that is issued to a Person other than the undersigned Holder. The undersigned agrees that, in the absence of an effective registration statement with respect to Common Stock issued upon this exercise, the undersigned is acquiring such Common Stock for investment and not with a view to distribution thereof and the certificate or certificates representing such Common Stock may bear a legend substantially as follows: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred except as provided in Article 3 of the Common Stock Purchase Warrant issued by U.S. Technologies Inc. on [______________, 2001], a copy of which is on file at the principal office of U.S. Technologies Inc." ---------------------------------------- Date: --------------------- Exhibit 4.11 Page 14 15 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto [Name and Address] the rights with respect to Warrant Shares ------------------ ------ represented by the foregoing Common Stock Purchase Warrant issued by U.S. Technologies Inc. on [date] , and appoints , its attorney to transfer ------ ----------- said rights on the books of said corporation, with full power of substitution in the premises. ---------------------------------------- Signature guaranteed: Date: ---------------------- Exhibit 4.11 Page 15 EX-10.2 7 g70507ex10-2.txt 1999 STOCK OPTION PLAN 1 EXHIBIT 10.2 U.S. TECHNOLOGIES INC. 1999 STOCK OPTION PLAN, AS FURTHER 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 or 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 assets, the result of which would be the occurrence of any event described in clause (a) or (b) above. Exhibit 10.2 Page 1 2 (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. (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. Exhibit 10.2 Page 2 3 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 30,000,000 provided, however, that such Shares shall be subject to the adjustments provided in Section 8(h); and provided further that, options shall not be exercisable with respect to more than 8,000,000 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, 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 Exhibit 10.2 Page 3 4 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. 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 Exhibit 10.2 Page 4 5 conform to the requirements of any applicable laws or regulations. Upon receipt of payment, the Company 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 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 Exhibit 10.2 Page 5 6 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 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 Exhibit 10.2 Page 6 7 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 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 changes 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. Exhibit 10.2 Page 7 8 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. Exhibit 10.2 Page 8 EX-10.7(A) 8 g70507ex10-7a.txt AMENDMENT NO. 1 TO LEASE AGREEMENT 1 EXHIBIT 10.7A AGENCY: CALIFORNIA DEPARTMENT OF CORRECTIONS LEASE #L-1724 PROJECT: CHUCKAWALLA VALLEY STATE PRISON AMENDMENT NO. 1 TO LEASE This Amendment to Lease, made and entered into this 24th day of March, 1999, by and between the STATE OF CALIFORNIA, acting by and through its Director of General Services, with the approval of the California Department of Corrections, hereinafter called "STATE" and Labor to Industry, Incorporated, hereinafter called "LESSEE". WITNESSETH WHEREAS, the parties hereto entered into that certain lease dated September 1, 1998, for 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 the Chuckawalla Valley State Prison, situated in the County of Riverside, State of California; and WHEREAS, the STATE desires to amend said lease to amend Paragraph #6, TERMINATION, of said lease to increase the notice time. NOW, THEREFORE, it is mutually agreed between the parties hereto as follows: 1. 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 ninety (90) days prior to the date when termination shall become effective. Notice must be given in accordance with the instructions contained in paragraph 14 herein. Except as expressly amended herein, all of the terms and conditions of said lease shall remain unchanged and in full force and effect. Exhibit 10.7A Page 1 2 IN WITNESS WHEREOF, this Amendment No. 1 to lease has been executed by the parties hereto on the date written below. STATE OF CALIFORNIA LESSEE: LABOR TO INDUSTRY, INC. DEPARTMENT OF GENERAL SERVICES REAL ESTATE SERVICES DIVISION BY: /S/ John P. Brocard ------------------------- JOHN P. BROCARD Approval Recommended: TITLE: Executive Vice President ------------------------- BY: /S/ Carolyn Momser DATE: May 7, 1999 ---------------------------- ------------------------- CAROLYN MOMSER TITLE: REAL ESTATE OFFICER TELEPHONE: 770-565-4311 ---------------------------- ------------------------- DATE: 6/17/1999 ---------------------------- DIRECTOR, DEPARTMENT OF GENERAL SERVICES: BY: /S/ Cheryl L. Allen ---------------------------- CHERYL L. ALLEN TITLE: Senior Real Estate Officer ---------------------------- DATE: 6/17/1999 ---------------------------- APPROVED: STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS BY: /S/ Judy Buckman ---------------------------- JUDY BUCKMAN CHIEF TITLE: BUSINESS MANAGEMENT BRANCH DATE: ---------------------------- STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS CHUCKAWALLA VALLEY STATE PRISON BY: /S/ Rick Butler ---------------------------- RICK BUTLER TITLE: WARDEN ---------------------------- DATE: 4/19/1999 ---------------------------- Exhibit 10.7A Page 2 EX-10.7(B) 9 g70507ex10-7b.txt AMENDMENT NO. 2 TO LEASE AGREEMENT 1 EXHIBIT 10.7B AGENCY: Department of Corrections LEASE No.: L-1724 PROJECT: Chuckawalla Valley State Prison AMENDMENT NO. 2 TO LEASE This Amendment to Lease, dated for reference purposes only, May 7, 2001, 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. WITNESSETH WHEREAS, the parties hereto entered into that certain Lease dated August 1, 1998, and as amended March 24, 1999, covering the Premises known as approximately 20,3000 square feet of warehouse space and 16,000 square feet of space on C Facility for a total of 36,300 square feet located within the boundaries of Chuckawalla Valley State Prison (CSVP), situated in the County of Riverside, State of California. WHEREAS, the parties hereto desire to amend said agreement to (1) reduce the square footage, (2) decrease the monthly rental rate, and (3) change the address for notices to the LESSEE and Department of General Services. NOW, THEREFORE, it is mutually agreed between the parties hereto as follows: 1. Paragraph 1, Description - Effective June 1, 2001, the square footage is reduced and the paragraph is changed to read as follows: STATE does hereby lease to LESSEE, and LESSEE hereby hires from STATE approximately 9,280 square feet of warehouse space and approximately 16,000 square feet of space on C Facility for a total of 25,280 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," amended "B-1" and "B-2" incorporated herein and by this reference made a part hereof. 2. Paragraph 3, Rent - Effective June 1, 2001, the monthly rental rate is reduced and shall be FIVE HUNDRED FIVE AND NO/100 DOLLARS ($505.00), payable monthly in advance. 3. Paragraph 14, Notices - The address for the LESSEE and the Department of General Services changed as follows: To the LESSEE: Labor-To-Industry, Inc Rick Legge, President Suite #107 780 Deltona Boulevard Deltona, Florida 32725 Exhibit 10.7A Page 1 2 To the STATE: Department of General Services Real Estate Services Division 1102 Q Street, Suite 6000 Sacramento, California 95814 4. Except as expressly amended herein, all of the terms and conditions of said Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, this Amendment No. 2 to Lease has been executed by the parties on the date written below. STATE OF CALIFORNIA DEPARTMENT OF GENERAL SERVICES REAL ESTATE SERVICES DIVISION By: /s/ Cheryl L. Allen --------------------------------------------- CHERYL L. ALLEN, Manager State Owned Leasing & Development EXECUTED DATE: 6/18/2001 ---------------------------------- LESSEE: LABOR-TO-INDUSTRY, INC. By: /s/ Rick Legge --------------------------------------------- RICK LEGGE, President APPROVED: DEPARTMENT OF CORRECTIONS By: /s/ Judy Buckman ----------------------------- JUDY BUCKMAN, Chief Business Management Branch CHUCKAWALLA VALLEY STATE PRISON By: /s/ D.K. Butler ------------------------------ D.K. BUTLER, Warden Exhibit 10.7A Page 2 EX-10.15 10 g70507ex10-15.txt VOTING AGREEMENT 1 EXHIBIT 10.15 VOTING AGREEMENT VOTING AGREEMENT (this "AGREEMENT"), dated as of February 28, 2001, by and between Yazam.com Inc., a Delaware corporation ("YAZAM"), and Gregory Earls, an individual (the "STOCKHOLDER"). WHEREAS, Yazam has entered into an Agreement and Plan of Merger as of the date hereof (the "MERGER AGREEMENT") with U.S. Technologies Inc., a Delaware corporation ("USXX") and U.S. Technologies Acquisition Co., a Delaware corporation and wholly owned subsidiary of USXX ("NEWCO"), pursuant to which Newco will merge with and into Yazam with Yazam surviving the merger (the "MERGER"); WHEREAS, pursuant to the Merger, certain stockholders of Yazam will receive shares of convertible preferred stock, par value $0.02 per share, of USXX (the "PREFERRED STOCK"), as more fully described in the Merger Agreement; WHEREAS, USXX intends to amend its certificate of incorporation (the "CHARTER AMENDMENT") to increase the authorized number of its Common Stock, par value $0.02 per share (the "COMMON STOCK"), in order to authorize and reserve a sufficient number of the Common Stock for the conversion of the Preferred Stock; WHEREAS, the Stockholder is the largest single stockholder of USXX and controls the voting power of the number of shares of capital stock of USXX required to approve the Charter Amendment in accordance with the provisions of the Delaware General Corporation Law (the "DGCL"); and WHEREAS, in consideration of Yazam entering into the Merger Agreement, the Stockholder has agreed to enter into this Agreement to vote his Shares (as defined herein), in favor of the Charter Amendment. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements contained herein, for other good and valuable consideration, the sufficiency of which is hereby acknowledged, and intending to be legally bound, and upon the terms and subject to the conditions hereinafter set forth, the parties hereby agree as follows. 1. Definitions. For purposes of this Agreement: "PERSON" shall mean an individual, corporation, association, partnership, limited liability Company, joint venture, organization, business, trust or any other entity or organization, including a government or any subdivision or agency thereof. "PERMITTED TRANSFEREE" shall mean any person who is (A) the spouse or former spouse of, or any lineal descendent of, or any spouse of such lineal descendent of, or the grandparent, parent, brother or sister of, or spouse of such brother or sister of, either the Stockholder or of a Permitted Transferee; (B) upon the death of the Stockholder or any Permitted Transferee of the Stockholder, the executors of the estate of the Stockholder or such Permitted Transferee, and any of the Stockholder's or such Permitted Transferee's heirs, testamentary trustees, devisees or legatees; (C) any trust for the benefit of the Stockholder or any Permitted Transferees; (D) upon the disability of either the Stockholder or such Permitted Transferee, any guardian or conservator of the Stockholder or such Permitted Transferee; provided, however, that in each case such transferee assumes and agrees to perform and becomes a party to Exhibit 10.15 Page 1 2 this Agreement. For purposes of this Agreement, when a Permitted Transferee has acquired Shares in accordance herewith, such person shall be deemed a "Stockholder" hereunder. "SHARES" shall mean the shares of capital stock of USXX and any right to acquire shares of capital stock of USXX owned by the Stockholder as of the date hereof and any shares of capital stock of USXX or rights to acquire shares of capital stock of USXX acquired by the Stockholder in any capacity after the date hereof and prior to the termination of this Agreement. In the event of a stock dividend or distribution, or any change in the capital stock of USXX by reason of any stock dividend, split-up, recapitalization, reclassification, combination, exchange of shares or the like, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed, reclassified or exchanged, and appropriate adjustments shall be made to the terms and provisions of this Agreement. 2. Agreements. (a) Voting Agreement. Subject to Section 4 below, the Stockholder hereby irrevocably and unconditionally agrees to vote all of the Shares owned or controlled by him at the time of the relevant stockholder vote (or action by written consent) in any circumstances upon which his vote, consent or other approval is sought in favor of the Charter Amendment. The Stockholder represents that he owns or controls the voting rights with respect to a sufficient number of Shares necessary to approve the Charter Amendment in accordance with the DGCL and any other applicable laws. (b) No Inconsistent Arrangements. The Stockholder hereby covenants and agrees that with respect to the Shares owned or controlled by him, he shall not (i) transfer (which term shall include, without limitation, any sale, gift, pledge or other disposition), or consent to any transfer of, any or all of the Shares to any Person who is not a Permitted Transferee (a "PROHIBITED TRANSFER"), (ii) enter into any contract, option or other agreement or understanding with respect to any Prohibited Transfer of any Shares, or any interest therein, (iii) deposit any Shares into a voting trust, grant any proxy, power-of-attorney or other authorization in or with respect to any Shares to any Person other than the Permitted Transferee, (iv) except for this Agreement or as permitted herein, enter into a voting agreement or arrangement with respect to any Shares, or (v) take any other action that would in any way restrict, limit or interfere with the performance of his obligations hereunder. (c) Actions as Director. Subject to the fiduciary duties as a director of USXX, the Stockholder agrees to recommend to the board of directors of USXX to approve and adopt the Charter Amendment, to vote in favor of the Charter Amendment as a director, to recommend the approval and adoption of the Charter Amendment to the stockholders of USXX and to use his best efforts to cause the Charter Amendment to be approved by the stockholders of USXX no later than [June 1, 2001]. 3. Representations and Warranties. (a) The Stockholder hereby represents and warrants to Yazam as follows: (i) Ownership of Securities. As of the date hereof, the Stockholder beneficially owns approximately 59,008,818 Shares and holds proxies or other rights to vote an additional approximately 56,055,000 Shares, the aggregate of which constitutes 71% of the outstanding capital stock of USXX as of the date hereof (the "CONTROLLED SHARES"). The Stockholder has sole voting power for all of the Controlled Shares with no contractual or ownership limitations, qualifications or restrictions on such rights that would interfere with the Stockholder's ability to perform his commitments herein, subject to applicable securities laws and the terms of this Agreement. Exhibit 10.15 Page 2 3 (ii) Power; Binding Agreement. The Stockholder has the requisite power and authority to enter into and perform all of his obligations under this Agreement. This Agreement has been duly and validly executed and delivered by the Stockholder and constitutes a valid and binding agreement of the Stockholder, enforceable against the Stockholder in accordance with its terms. 4. Termination. This Agreement and the covenants, representations and warranties and agreements contained herein or granted pursuant hereto shall terminate upon the earlier of the Merger or termination of the Merger Agreement. 5. Miscellaneous. (a) Specific Performance. The Stockholder recognizes and agrees that if, for any reason, any of the provisions of this Agreement are not performed by him in accordance with its specific terms or are otherwise breached, immediate and irreparable harm or injury would be caused to Yazam for which money damages would not be an adequate remedy. Accordingly, the Stockholder agrees that, in addition to any other available remedies, Yazam shall be entitled to an injunction restraining any violation or threatened violation of the provisions of this Agreement without the necessity of Yazam posting a bond or other form of security. In the event that any action should be brought in equity to enforce the provisions of this Agreement, the Stockholder will not allege, and hereby waives the defense, that there is an adequate remedy at law. (b) Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. Without limiting the foregoing, with respect to any provision of this Agreement, if it is determined by a court of competent jurisdiction to be excessive as to duration or scope, it is the parties' intention that such provision nevertheless be enforced to the fullest extent that it may be enforced. (c) GOVERNING LAW. THIS AGREEMENT AND ALL DISPUTES, CONTROVERSIES OR CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR A BREACH THEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. (d) Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all written and oral prior agreements and understandings, and all contemporaneous oral agreements and understandings, among the parties or any of them with respect to the subject matter hereof. (e) Amendment, Modification and Waiver. This Agreement may not be amended, modified or waived except by an instrument or instruments in writing signed by both parties hereto. (f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. YAZAM.COM INC. By: /s/ Bernie Siegel ------------------------------------- Name: Bernie Siegel Title: C. GREGORY EARLS /s/ Gregory Earls ----------------------------------------- EX-10.16 11 g70507ex10-16.txt SUBLEASE AGREEMENT BETWEEN THE COMPANY AND THE 1 EXHIBIT 10.16 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT, effective as of June 14, 2000, is between U.S. Technologies, Inc., a Washington, DC corporation ("Subtenant") and Association for Health Services Research, INC., a District of Columbia corporation aka Academy for Health Services Research and Health Policy, a District of Columbia corporation("Sublandlord"). 1. The Demised Premises. Sublandlord hereby subleases to Subtenant and Subtenant hereby subleases from Sublandlord, the floor area located on the 7th Floor of the building at 1130 Connecticut Avenue, Washington, D.C., and outlined on Exhibit B attached hereto and by reference made a part hereof ("Demised Premises") for a term to commence on the Sublease Commencement Date, as hereinafter defined, which shall be on or about June 19, 2000 (two weeks from the date the Landlord approves this sublease) (the "Sublease Commencement Date") and to end on December 31, 2004 (the "Term"). Subtenant shall have access to the Premises two (2) weeks prior to the Sublease Commencement Date for the purposes of installing telephone, voice and data systems, furnishings, etc. Sublandlord and Subtenant acknowledge and agree that for all purposes, the Demised Premises shall be deemed to contain 8,238 rentable square feet of floor area. 2. Lease. (a) It is understood that Sublandlord is a sublandlord and grants this sublease ("Sublease") under and by virtue of its rights under the Lease Agreement, dated July 21, 1994 between Sublandlord, as Tenant thereunder, and Acquiport Four Corporation, a Delaware corporation, as Landlord thereunder ("Landlord") (the Lease Agreement and all amendments thereto hereinafter entered into between Landlord and Sublandlord are collectively referred to herein as the "Lease"), and this Sublease is subordinate and subject to said Lease. A copy of said Lease Agreement is attached hereto as Exhibit A (as of the date hereof, there are no amendments to said Lease Agreement) and the provisions thereof, unless expressly excluded in this Sublease, are incorporated herein by reference, and made a part hereof, and restated in their entirety herein as if fully set forth word for word, with references in the Lease to "Landlord" deemed made to Sublandlord and references to "Tenant" deemed made to Subtenant; such incorporation by reference shall include each and every provision of the Lease (except as expressly otherwise set forth in this Sublease and except where the terms and provisions of this Sublease differ from the terms and provisions of the Lease), notwithstanding that only certain provisions or portions of certain provisions of the Lease may be restated below in this Sublease. Notwithstanding anything herein to the contrary, Subtenant agrees to be bound by all obligations and responsibilities of Sublandlord as Tenant under the Lease, except as expressly set forth in this Sublease. Sections 2.3, 3.1, 3.4, 4.1, the cure periods set forth in Section 20.1 and Section 28.5 and Exhibit B of the Lease are expressly superceded by this Sublease. Paragraph 17 (Parking) of the Lease as incorporated herein shall be deemed to refer to a maximum of six (6) parking permit contracts. Time is of the essence of this Sublease. Exhibit 10.16 Page 1 2 EXHIBIT 10.16 WAIVER AND REPLACEMENT AGREEMENT July 19, 2001 U.S. Technologies Inc. 1130 Connecticut Avenue, N.W. Suite 700 Washington, DC 20036 Attn: Gregory Earls, Chairman and Chief Executive Officer Dear Sir: Reference is made to: (i) the Agreement and Plan of Merger, dated as of February 28, 2001, among U.S. Technologies Inc. ("USXX"), U.S. Technologies Acquisition Co. and Yazam.com Inc., as amended March 22, 2001 (the "Merger Agreement") and (ii) the Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of USXX ("Series F Preferred Stock"), filed with the Secretary of State of Delaware on March 27, 2001 (the "Certificate of Designations"). The undersigned hereby irrevocably waives the following: (i) its rights contained in the fourth sentence of Section 5.06 of the Merger Agreement and (ii) its rights contained in Section 5 (Redemption) of the Certificate of Designations. By its execution below, USXX hereby agrees that beginning on September 30, 2002, and for a period of ninety (90) days thereafter, the undersigned shall have the right to require USXX to redeem the undersigned's shares of Series F Preferred Stock at a purchase price of $300.00 per share (as adjusted for any combinations, consolidations, stock distributions or stock dividends or similar events with respect to such shares); provided, however, that USXX shall not be obligated to effect such a redemption unless certificates evidencing such shares of Series F Preferred Stock being redeemed are either delivered to USXX or its transfer agent or the holder notifies USXX or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to USXX to indemnify USXX from any loss incurred by it in connection therewith. In the event that all of the holders of Series F Preferred Stock enter into waiver and replacement agreements with USXX on terms identical to those contained herein (other than the provision contained in the preceding paragraph), then USXX, if requested by the undersigned, shall use its best efforts to amend its Certificate of Designations in a manner consistent with the terms of this Waiver and Replacement Agreement (such amendment not to include the provision contained in the preceding paragraph). By its execution below, USXX or any direct or indirect subsidiaries hereby agree not to enter into any agreement (other than on the same terms and conditions as set forth above) to repurchase or redeem any shares of Series F Preferred Stock held by Texas Pacific Group or any of its direct or indirect subsidiaries without the prior written consent of the undersigned. Exhibit 10.16 Page 1 3 (b) During the term of this Sublease, Sublandlord shall promptly deliver to Subtenant copies of any and all notices of default of any kind or nature delivered to or received from Landlord, and Sublandlord shall not voluntarily amend or voluntarily terminate the Lease without the prior written consent of Subtenant, which consent shall not be unreasonably withheld, conditioned or delayed. (c) Sublandlord hereby warrants and represents to Subtenant as follows: (i) The Lease is in full force and effect and neither the Landlord nor Sublandlord has received any notice of default thereunder from the other which remains uncured as of the date hereof; (ii) The copy of the Lease attached hereto is a true and complete copy of the Lease and there are no amendments thereto; and (iii) The current Term of the Lease expires on December 31, 2004. The parties agree that the Term shall not be further extended. (d) Sublandlord agrees that during the term of this Sublease Sublandlord shall not voluntarily cause the termination of the Lease without first securing Subtenant's written consent, nor cause to be done any act to be done which would cause the Lease to be cancelled, terminated, forfeited or surrendered. If the Lease terminates or is terminated for any reason whatsoever, then this Sublease shall terminate simultaneously therewith. If the termination of the Lease is not caused by a default of the Sublandlord or Subtenant under the Sublease, then the termination of the Sublease shall be without liability between Sublandlord and Subtenant, except such liability theretofore accruing; however, if Subtenant is in default, the default provisions hereof shall control as to Subtenant's liability and if Sublandlord is in default (and such default was not caused directly or indirectly by Subtenant, Subtenant's employees, agents, officers, directors, visitors, invitees, contractors, servants, or licensees) Subtenant shall be entitled to recover all actual damages incurred by Subtenant by reason of such default (except for punitive or consequential damages, which are hereby expressly excluded). (e) Subtenant agrees that during the term of this Sublease Subtenant shall not cause to be done or knowingly suffer or permit any act to be done which would cause the Lease to be cancelled, terminated, forfeited or surrendered. (f) Subtenant acknowledges that Landlord has the right to consent to this Sublease under the Lease. Sublandlord agrees to submit this Sublease to Landlord for consent under the Lease promptly after Sublandlord has received a counterpart of this Sublease executed by both Sublandlord and Subtenant. This sublease will not be deemed to go into effect unless and until Landlord has consented to the sublease. (g) Within two (2) business days after receipt thereof by Sublandlord, Sublandlord shall deliver to Subtenant copies of written notices of default or claimed default received by Sublandlord from the Landlord. Exhibit 10.16 Page 2 4 3. Rent. (a) The basic rent (the "Basic Rent") due hereunder from Subtenant to Sublandlord in the manner provided below shall be Thirty-five and 00/100 Dollars ($35.00) per rentable square foot per annum, payable in equal monthly installments of Twenty-Four Thousand Twenty-seven and 50/100 Dollars ($24,027.50) per month, each such installment being payable in advance on or before the first of every month throughout the Term; provided, however that the Basic Rent shall increase (i) on the first anniversary of the Sublease Commencement Date to $35.87 per rentable square foot per annum; (ii) on the second anniversary of the Sublease Commencement Date to $36.77 per rentable square foot per annum; (iii) on the third anniversary of the Sublease Commencement Date to $37.69 per rentable square foot per annum; (iv) on the fourth anniversary of the Sublease Commencement Date to $38.63 per rentable square foot per annum; Subtenant shall pay Sublandlord an amount equal to one monthly installment of Basic Rent ($24,027.50) upon execution of this sublease, which shall be payment in advance of the first full month's installment of Basic Rent due under this Sublease. In the event the Term of the Sublease starts other than on the first day of a month, then, in addition to the advance payment of the first full month's installment of Basic Rent as set forth in the immediately preceding sentence, the rent for such partial month shall be prorated and calculated at a daily rate and paid on or before the first day of the Term. In the event the Term of the Sublease ends on other than the last day of a month, the rent for such partial month shall be prorated and calculated at a daily rate. Sublandlord will abate the first monthly rental payment. (b) Subtenant shall pay to Sublandlord 77.13% of Sublandlord's proportionate share of Operating Costs, including real estate taxes, (however the aforesaid may be defined in the Lease), commencing with the first anniversary of the Sublease Commencement Date and continuing thereafter during the Term, but only to the extent that such amount so payable by Sublandlord exceeds 77.13 percent of the amount payable by Sublandlord for the calendar year 2000. Such payments will be divided into twelve monthly installments and will be paid monthly. (For purposes of determining payments due monthly from Subtenant to Sublandlord, the amount due from Subtenant shall be the amount by which the monthly payment required of Sublandlord for such month under Paragraph 3.2 of the Lease exceeds one twelfth (1/12th) of the amount payable by Sublandlord for the calendar year 2000). For calendar year 2000, Sublandlord and not Subtenant shall be responsible for such portion, if any, of the retroactive payments under the last sentence of Paragraph 3.2(c) of the Lease attributable to the period prior to the first anniversary of the Sublease Commencement Dates. Said payment shall be due and payable by Subtenant hereunder to Sublandlord by not later than two (2) days prior to the date, from time to time, that such proportionate share is due from Sublandlord to Landlord as provided in the Lease; provided, however, that for the calendar year 2000, Subtenant's share of any adjustments (whether deficiency or overpayments) pursuant to Paragraph 3.2 of the Lease shall be a fraction, the numerator of which is the number of days from and including the Sublease Commencement Date to and including December 31, 2000, and the denominator of which is 365. Exhibit 10.16 Page 3 5 (c) All amounts due and payable by Subtenant under this Sublease collectively, shall be made payable to The Academy for Health Services Research and Health Policy, and delivered to Attention:, Ms. Deborah Edwards, 1801 K Street, NW; Suite 701L; Washington, DC 20006. Sublandlord may change the payee and the address to which such rent shall be sent by notice to Subtenant. All such rent shall be payable without notice, demand, deduction, counterclaim or offset. Notwithstanding any provision of this Sublease Agreement, Sublandlord shall continue to pay to Landlord all rent as and when due under the Lease (including, without limitation, for the Demised Premises under this Sublease). (d) If Subtenant fails to pay rent hereunder within five (5) days after such rent becomes due and payable, Subtenant shall pay to Sublandlord a late charge of five percent (5%) of the amount of such overdue rent. In addition, any such late rent payment shall bear interest from the date such rent became due and payable to the date of payment thereof by Subtenant at the rate (the "Default Rate") of 18% per annum. (e) Simultaneously with the execution of this Sublease, Subtenant shall deliver to Sublandlord an irrevocable, unconditional letter of credit in favor of Sublandlord as the beneficiary in the amount of $84,096.25, in a form acceptable to Sublandlord, issued by an "Approved Issuer" (as hereinafter defined), which letter of credit shall specify that Sublandlord, as beneficiary, may draw against the letter of credit, without documents other than the sight draft and certification set forth below, at any time and from time to time until the expiration thereof at one or more designated branches of the issuing bank in Washington, DC, or at one or more designated bank counters at designated offices of the issuing bank in Washington, D.C., in a single drawing for the full amount of such letter of credit, upon presentation of a sight draft and written certification from Sublandlord, as beneficiary, that Subtenant has defaulted or otherwise failed to comply with the terms of this Sublease and that Sublandlord has the right to draw against the letter of credit for the sum set forth in the sight draft under the provisions of this Paragraph 3(e). "Approved Issuer" shall mean a national banking association which Subtenant, in its discretion, may designate and which shall be approved by Sublandlord in its reasonable discretion, provided and for so long as such national banking association (A) shall maintain a banking office with banking counters in Washington, D.C., and (B) shall have and maintain a Moody's Bank Credit Report Service rating of P-1 (or, if Moody's subsequently uses a different scale, the rating which would be equivalent to the current P-1, or if Moody's dissolves or otherwise becomes defunct, the rating of another nationally recognized rating service which would be equivalent to the current P-1). Each letter of credit issued hereunder shall state that it is transferable by Sublandlord to the assigns of Sublandlord's interest in this Sublease upon notice from Sublandlord, the payment of the issuer's transfer charges as set forth in the letter of credit and compliance with the issuer's customary requirements relating to such transfers. The letter of credit shall be open and may be drawn upon for a period which is thirty (30) days longer than the end of the Term; provided however, that such letter of credit may be of a duration shorter than said period, so long as Subtenant replaces said letter of credit with a new letter of credit, on the same terms and conditions, and in the same amount, as the prior letter of credit, at least thirty (30) days prior to the expiration of the prior letter of credit. If Subtenant fails to replace a prior letter of credit within the period required herein, then Exhibit 10.16 Page 4 6 Sublandlord shall be immediately authorized and entitled to demand and receive payment under said letter of credit, and to apply and hold the proceeds therefrom as a security deposit under the terms and conditions of Paragraph 3(e) of this Sublease. If Subtenant defaults or otherwise fails to comply with the terms of this Sublease for any reason, Sublandlord may immediately draw upon and receive payment under said letter of credit, it being the express intent of Sublandlord and Subtenant that the letter of credit be held and used as a security deposit, securing the full and complete performance by Subtenant of Subtenant obligations under this Sublease. The Letter of Credit shall be reduced by twenty-five percent (25%) on the first anniversary of the Sublease Commencement Date and an additional twenty-five percent (25%) on the second anniversary of the Sublease Commencement Date. All fees, premiums and other sums charged by the issuing bank for each Letter of Credit shall be paid by Subtenant, and not Landlord and not Sublandlord. The failure of Subtenant, for any reason whatsoever, to maintain the letter of credit in full force and effect at all times required under this Paragraph 3(e) shall constitute an immediate event of default under this Sublease (no notice and right to cure period or grace period shall be a condition to such failure constituting an event of default notwithstanding the provisions of Paragraph 5 of this Sublease or of Paragraph 20 of the Lease) and, in addition to (and not in lieu of) all other rights and remedies available to Sublandlord under this Sublease or at law or in equity, Sublandlord shall have the right to sue Subtenant for specific performance of its obligation to deliver and maintain the letter of credit. The letter of credit and any proceeds thereof (the "Security Deposit") shall be held by Sublandlord without obligation for interest, as security, for the performance of Subtenant's obligations and covenants under this Sublease. It is expressly understood and agreed that neither the letter of credit nor the proceeds thereof are an advance rental deposit or a measure of Sublandlord's damages in case of an event of default. If an event of default shall occur or if Subtenant fails to surrender the Demised Premises in the condition required by this Sublease, Sublandlord shall have the right (but not the obligation), and without prejudice to any other remedy which Sublandlord may have on account thereof, to apply all or any portion of the Security Deposit to cure such default or to remedy the condition of the Demised Premises. If Sublandlord so applies the Security Deposit or any portion thereof before the expiration date or earlier termination of this Sublease, Subtenant shall deposit with Sublandlord, upon demand, the amount necessary to restore the Security Deposit to its original amount. Although the Security Deposit shall be deemed the property of Sublandlord, any remaining balance of the Security Deposit (or, if applicable and not drawn upon, the original then effective letter of credit) shall be returned to Subtenant at such time after the expiration date or earlier termination of this sublease that all of Subtenant's obligations under this Sublease have been fulfilled. Sublandlord shall conduct a "Post Move Out Inspection" of the Demised Premises within fifteen (15) days after the expiration date or earlier termination of this Lease. 4. Nature of Occupancy. Subtenant shall use and occupy the Demised Premises solely for the purpose of general office use and for no other purpose whatsoever. Subtenant shall use and occupy the Demised Premises at all times consistent with the terms of the Lease and the Rules and Regulations as defined therein. SUBTENANT HAS INSPECTED AND SHALL ACCEPT THE DEMISED PREMISES "AS IS" IN THEIR STATE AND PHYSICAL CONDITION ON Exhibit 10.16 Page 5 7 THE DATE ON WHICH SUBTENANT TAKES POSSESSION OF THE DEMISED PREMISES. SUBTENANT AGREES SUBLANDLORD MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO FITNESS, MERCHANTABILITY, USE OR CONDITION OF THE DEMISED PREMISES. Sublandlord shall have no obligations to perform any improvements to the Demised Premises. Subtenant shall have the right (after obtaining all consents of Landlord required under the Lease and of Sublandlord required under this Sublease), at Subtenant's cost and expense, to make such improvements to the Demised Premises as Subtenant desires (such improvements which have been consented to by Landlord and Sublandlord are called the "Subtenant Improvements"). Sublandlord shall have the right to approve of any improvement to the Demised Premises with respect to which Landlord has approval rights under the Lease. Subtenant will deliver to Sublandlord copies of all information and documents which are required to be delivered to Landlord under the Lease in order to obtain Landlord's approval for such improvements. Sublandlord will make best efforts to get such approval from Landlord in a timely manner. The entry by Subtenant and any of Subtenant's contractors, agents, employees, and subcontractors into the Demised Premises prior to the Sublease Commencement Date for or in connection with the construction or installation of the Subtenant Improvements shall be subject to all of the terms and conditions of this Sublease except the payment of monthly installments of rent. The Subtenant Improvements shall be constructed and installed in a first-class manner, using first-class quality materials, in accordance with all applicable laws, ordinances, codes and rules and regulations of governmental authorities. Subtenant shall promptly correct any of the Subtenant Improvements which are not in conformance therewith. Subtenant shall be responsible for removal, as needed, from the Demised Premises and the Building of all trash, rubbish, and surplus materials resulting from the construction and installation of Subtenant's Improvements. Sublandlord shall make available to Subtenant $24,714.00 (the "Subtenant Improvement Allowance") to be used solely for the direct, actual costs of constructing and installing the Subtenant Improvements (such costs include, without limitation, the costs of materials incorporated into and constituting a portion of the Subtenant Improvements, the costs of labor to construct and install the Subtenant Improvements, and the costs of preparing the construction drawings for the Subtenant Improvements; such costs do not include, without limitation, moving costs and furniture and personal property costs). After all Subtenant Improvements are complete, Subtenant shall submit to Sublandlord a detailed statement including paid invoices and lien waivers and releases from the contractor and all subcontractors showing the amounts paid by Subtenant for the Subtenant Improvements, and, within fifteen (15) days after receipt of such statement, invoices, waivers and releases, Sublandlord shall pay to Subtenant the lesser of the amounts shown by such statement or the Subtenant Improvement Allowance. The Landlord's reasonable costs for approval of plans and coordination of work will be paid by the subtenant. 5. Default, Remedies and Indemnification of Sublandlord. (a) If Subtenant defaults in the performance of any of the covenants, conditions or agreements contained in this Sublease or the Lease and fails to cure the same after three (3) days written notice from Sublandlord for monetary defaults provided, however, such notice and such grace period shall be required to be provided by Sublandlord and shall be accorded Subtenant, if necessary, only once during any twelve (12) consecutive month period of the Term, and an Event of Default shall be deemed to have immediately occurred upon the second Exhibit 10.16 Page 6 8 (2nd) failure by Subtenant to make a timely payment as aforesaid within any twelve (12) consecutive month period of the Term, it being intended by the parties hereto that such notice and such grace period shall protect against infrequent unforeseen clerical errors beyond the control of Subtenant, and shall not protect against Subtenant's lack of diligence or planning in connection with its obligations to make timely payment of Basic Rent and other amounts due hereunder) and after eight (8) days written notice for non-monetary defaults (unless such non-monetary default is incapable of being cured within eight (8) days, in which event Subtenant shall have a reasonable period of time if it diligently commences and proceeds to cure the same but not to exceed sixty (60) days, inclusive of the original eight days), Sublandlord shall be entitled to invoke against Subtenant the remedies which are available to Landlord under the Lease. Further, anything to the contrary notwithstanding, Subtenant shall indemnify and hold harmless Sublandlord from and against any and all losses, claims, damages, liabilities, actions, costs and expenses (including attorneys' fees) arising out of or related to this Sublease or the Demised Premises, unless caused by the intentional acts or negligence of Sublandlord, its agents or employees. This indemnification shall survive termination of this Sublease and shall be in addition to the indemnification provisions of the Lease (as to which the word "Subtenant" shall be substituted for "Tenant" and the word "Sublandlord" shall be substituted for "Landlord" therein). (b) If Subtenant causes or permits what Sublandlord reasonably deems to be a default under the Lease and it reasonably appears to Sublandlord that Subtenant will not cure such default within the applicable grace period under the Lease (and such default was not caused directly or indirectly by Sublandlord, Sublandlord's employees, agents, officers, directors, visitors, invitees, contractors, servants or licensees), Sublandlord may cure such default at Subtenant's cost. If Sublandlord at any time, by reason of such default pays any sum to cure such default, the sum so paid by Sublandlord shall be immediately due from Subtenant to Sublandlord on demand and evidence of payment, and shall bear interest at the "Default Rate" from the date paid by Sublandlord until Sublandlord shall have been reimbursed by Subtenant. (c) Subtenant hereby expressly waives any notice to quit or vacate which may be otherwise required by law. (d) In the event either party hereto brings or commences legal proceedings to enforce any of the terms of this Sublease, the successful party in such action shall then be entitled to receive and shall receive from the other of said parties, in every such action commenced, a reasonable sum as attorney's fees and costs, to be fixed by the court in the same action. If Subtenant shall fail to pay rent timely or shall otherwise default in its obligations under this Sublease, Sublandlord's reasonable attorney's fees and costs incurred in collecting such rent or in enforcing the terms of this Sublease shall be payable by Subtenant as additional rent whether or not legal proceedings are filed and shall incur interest at the Default Rate from the date such fees and costs are advanced by Sublandlord. 6. Improvements. Subtenant shall not make any improvements, alterations or installations to the Demised Premises without Sublandlord's and Landlord's prior written consent. Sublandlord agrees not to unreasonably withhold, condition or delay such consent of Exhibit 10.16 Page 7 9 Sublandlord with respect to non-structural alterations which do not affect any of the Building's systems. 7. Services. (a) The only services, repairs, restoration and maintenance to which Subtenant is entitled hereunder are those to which Sublandlord is entitled as Tenant under the Lease. Where services, repairs or rights are to be provided by Landlord under the terms of the Lease, Subtenant shall have no right to proceed directly against Landlord for the performance of such services, repairs or rights. It is understood that Sublandlord will not provide and does not guarantee the performance of any such services, repairs or rights; provided, nevertheless, that in the event of any default or failure of performance by Landlord, Sublandlord agrees, upon notice from Subtenant, to make demand upon Landlord to perform its obligations under the Lease and to enforce, at the sole cost and expense of Subtenant, Sublandlord's rights under the Lease. (b) Notwithstanding anything contained in this Sublease to the contrary, Subtenant shall comply at its expense with all governmental laws, ordinances and regulation unless expressly made the sole obligation of the Landlord in the Lease. 8. Notices. Notices required or permitted hereunder shall conform to Article 28.11 of the Lease, except as to the identities and addresses of the parties, which shall be as follows: Subtenant: To be provided Sublandlord: The Academy for Health Services Research and Health Policy aka Association for Health Services Research, Inc. Suite 701L 1801 K Street, N.W. Washington, DC 20006 A copy of all notices sent by Sublandlord or Subtenant shall also be sent to Landlord at the following address: Acquiport Four Corporation C/o Prentiss Properties Ltd., Inc. 1130 Connecticut Avenue, N.W. Washington, D.C. 20036 9. Insurance. (a) The Subtenant shall obtain and at all times during the Term hereof maintain, at its sole cost and expense, policies of insurance covering its fixtures, property and equipment installed and located in the Demised Premises, in such amounts as stated in the Lease. In addition to and not in limitation of the sentence immediately preceding this sentence, the Subtenant shall obtain and at all times during the Term hereof maintain, at its sole cost and expense, a fire and other casualty policy insuring its fixtures, property and equipment installed and located in the Demised Premises, against loss or damage by fire, theft, sprinkler leakage, Exhibit 10.16 Page 8 10 business interruption, and such other risks or hazards covered under an all-risk property policy complying with the provisions of the Lease. (b) The Subtenant shall provide and keep in force during the Term of this Sublease with a company or companies approved by the Sublandlord a comprehensive general liability insurance policy as set forth in the Lease. (c) All policies of insurance as aforesaid shall name the Sublandlord, Landlord, Landlord's management agent, and Landlord's mortgagee(s) as additional insureds, as their interests may appear and shall otherwise comply with Section 14 of the Lease. 10. Subordination. This Sublease is subject and subordinate to the Lease, to all ground and underlying leases, and to all mortgages and deeds of trust which may now or hereafter affect such leases, the leasehold estate or estates thereby created or the real property of which the Demised Premises form a part, and to any and all renewals, modifications, amendments, consolidations, replacements and extensions thereof, provided that the Sublandlord agrees not to effect any modification or amendment of the Lease which adversely affects the rights of the Subtenant hereunder without the written consent of the Subtenant in each case (which consent shall not be unreasonably withheld, conditioned or delayed). 11. Assignment and Further Subleases. The Subtenant agrees that it will not assign or encumber, or permit to be encumbered, its right or interests under this Sublease, nor sublet the whole or any part of the Demised Premises, without the prior written consent of the Sublandlord in each case, which consent shall not be unreasonably withheld (provided that Landlord's consent thereto is first obtained), and then only in accordance with the terms of the Lease. Provided and on the condition that Landlord executes the consent attached hereto, Sublandlord consents to the transfer of the Sublease from Subtenant to the Academy for Health Services Research and Health Policy, a D. C. corporation, the entity resulting from the merger of Alpha Center for Health Planning, Inc. and the Association of Health Services Research. 12. Surrender. Upon the date this Sublease shall expire or be earlier terminated, the Subtenant shall quit and surrender to the Sublandlord the Demised Premises and remove all of its furniture, furnishings, personal property, and all computer cabling and wiring installed by or on behalf of Subtenant, at Subtenant's expense, using a contractor approved in advance by Landlord in writing, and equipment in order to leave the Demised Premises broom clean and in as good order and condition as they were on the date the Term of this Sublease commenced, ordinary wear excepted. Subtenant's obligation to perform and observe this covenant shall survive the expiration or other termination of the Term of this Sublease. If the last day of this Sublease shall fall on a Sunday, this Sublease shall expire on the last business day preceding such last day. The obligations of the Subtenant as herein provided shall survive the termination of this Sublease. 13. Brokers. Sublandlord and Subtenant warrant and represent to each other and to Landlord that, other than Trammell Crow Company, with whom Subtenant has dealt, and Spaulding & Slye, with whom Sublandlord has dealt, no broker brought about this transaction or dealt with Sublandlord or Subtenant in connection herewith (as per written agreement between S&S and Exhibit 10.16 Page 9 11 Trammell Crow Company). The Landlord shall have no responsibility to pay any commission for this transaction, and, in consideration for Landlord's granting its consent to this Sublease, Sublandlord and Subtenant indemnify and hold harmless Landlord against and from any claim for brokerage commissions or other fees and all costs, expenses and liabilities in connection with this Sublease, including, without limitation, reasonable attorneys' fees and expenses, arising out of any dealings Sublandlord or Subtenant had with any broker, finder or other person. 14. General Provisions. (a) Benefit and Burden. The covenants, conditions, agreements, terms and provisions herein contained shall be binding upon, and shall inure to the benefit of, the parties hereto and each of their respective personal representatives, successors, heirs, executors, administrators and assigns. (b) Governing Law. It is the intention of the parties hereto that this Sublease (and the terms and provisions hereof) shall be construed and enforced in accordance with the laws of the District of Columbia. (c) Entire Agreement. This Sublease (including without limitation the Lease as incorporated herein) contains all of the covenants, agreements, terms, provisions, conditions, warranties and understandings comprising the final and entire agreement between the parties hereto, and they shall not be bound by any terms, statements, conditions or representations, oral or written, express or implied, not herein contained. No waiver or modification of any covenant, agreement, term provision or condition shall be deemed to have been made unless expressed in writing and signed by both parties. (d) Sublease and Lease. With respect to the relationship between Sublandlord and Subtenant, the terms and conditions of this Sublease shall take precedence with respect to any conflict between the terms and conditions contained herein and the terms and conditions of the Lease. Nothing herein shall be construed in any way to affect the rights and obligations of the Sublandlord and Landlord under the Lease. (e) Captions. The captions throughout this Sublease are for convenience of reference only and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of any provision of or the scope or intent of this Sublease, nor in any way affect this Sublease. (f) Singular and Plural. Wherever appropriate herein, the singular includes the plural and the plural includes the singular. (g) Counterpart. This Sublease may be executed in several counterparts, but all counterparts shall constitute but one and the same instrument. (h) Waiver of Jury Trial. Subtenant hereby waives trial by jury in any action, proceeding or counterclaim brought by Sublandlord or Landlord against Subtenant with respect Exhibit 10.16 Page 10 12 to any matter whatsoever arising out of or in any way connected with this Sublease, the relationship of Sublandlord and Subtenant hereunder or Subtenant's use or occupancy of the Demised Premises. In the event Sublandlord commences any proceedings for nonpayment of rent, Subtenant shall not interpose any counterclaims. This shall not, however, be construed as a waiver of Subtenant's right to assert such claims in any separate action brought by Subtenant. (i) Effectiveness. This Sublease shall be effective upon (A) execution by both Subtenant and Sublandlord, (B) obtaining the written consent of Sublandlord and Landlord, or its duly authorized agent(s), and (C) payment by Sublandlord to Landlord of reasonable attorney's fees incurred by Landlord, in connection with this Sublease and the transaction evidenced hereby, and it is hereby acknowledged by Sublandlord and Subtenant that Landlord's consent to this Sublease shall not make Landlord a party to this agreement, shall not create any contractual liability or duty on Landlord's part, and shall not in any manner increase, decrease or otherwise affect the rights and obligations under the Lease. IN WITNESS WHEREOF, Sublandlord and Subtenant have each executed this Sublease as of the day and year first hereinabove written. SUBLANDLORD: WITNESS: Association for Health Services Research, Inc., a District of Columbia Corporation By: /s/ N. David Helms -------------------------------------------------- Its: Chief Executive Officer ------------------------------------------------ SUBTENANT: WITNESS: U.S. TECHNOLOGIES, INC., a Washington, DC Corporation By: /s/ Gregory Earls ------------------------------------------------- Its: Chairman/CEO ------------------------------------------------ LANDLORD CONSENT The Landlord hereby consents to the attached sublease as of June 1, 2000. ACQUIPORT FOUR CORPORATION By: /s/ Vic Nuallalu -------------------------------------------------- Authorized Signatory Its Vice President Exhibit 10.16 Page 11 13 EXHIBIT A COPY OF THE LEASE Exhibit 10.16 Page 12 14 EXHIBIT B OUTLINE OF DEMISED PREMISES Exhibit 10.16 Page 13 EX-10.17 12 g70507ex10-17.txt WAVIER AND REPLACEMENT AGREEMENT 1 EXHIBIT 10.17 WAIVER AND REPLACEMENT AGREEMENT July 19, 2001 U.S. Technologies Inc. 1130 Connecticut Avenue, N.W. Suite 700 Washington, DC 20036 Attn: Gregory Earls, Chairman and Chief Executive Officer Dear Sir: Reference is made to: (i) the Agreement and Plan of Merger, dated as of February 28, 2001, among U.S. Technologies Inc. ("USXX"), U.S. Technologies Acquisition Co. and Yazam.com Inc., as amended March 22, 2001 (the "Merger Agreement") and (ii) the Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of USXX ("Series F Preferred Stock"), filed with the Secretary of State of Delaware on March 27, 2001 (the "Certificate of Designations"). The undersigned hereby irrevocably waives the following: (i) its rights contained in the fourth sentence of Section 5.06 of the Merger Agreement and (ii) its rights contained in Section 5 (Redemption) of the Certificate of Designations. By its execution below, USXX hereby agrees that beginning on September 30, 2002, and for a period of ninety (90) days thereafter, the undersigned shall have the right to require USXX to redeem the undersigned's shares of Series F Preferred Stock at a purchase price of $300.00 per share (as adjusted for any combinations, consolidations, stock distributions or stock dividends or similar events with respect to such shares); provided, however, that USXX shall not be obligated to effect such a redemption unless certificates evidencing such shares of Series F Preferred Stock being redeemed are either delivered to USXX or its transfer agent or the holder notifies USXX or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to USXX to indemnify USXX from any loss incurred by it in connection therewith. In the event that all of the holders of Series F Preferred Stock enter into waiver and replacement agreements with USXX on terms identical to those contained herein (other than the provision contained in the preceding paragraph), then USXX, if requested by the undersigned, shall use its best efforts to amend its Certificate of Designations in a manner consistent with the terms of this Waiver and Replacement Agreement (such amendment not to include the provision contained in the preceding paragraph). By its execution below, USXX or any direct or indirect subsidiaries hereby agree not to enter into any agreement (other than on the same terms and conditions as set forth above) to repurchase or redeem any shares of Series F Preferred Stock held by Texas Pacific Group or any of its direct or indirect subsidiaries without the prior written consent of the undersigned. Exhibit 10.17 Page 1 2 U.S. Technologies Inc. July 19, 2001 Page 2 The construction and performance of this Waiver and Replacement Agreement shall be governed by the laws of the State of Delaware without regard to its principles of conflict of laws, and the state and federal courts of Delaware shall have exclusive jurisdiction over any controversy or claim arising out of or relating to this Waiver and Replacement Agreement. The terms and conditions of this letter shall inure to the benefit of and be binding upon the respective successors and assigns of USXX and the undersigned. This Waiver and Replacement Agreement may be executed in one or more counterparts, each of which shall be an original and both of which, when taken together, shall constitute one and the same instrument. Sincerely, CEVP Investment I, LP For and on behalf of CEVP, Ltd., as general partner of CEVP General Partner, LP, as general partner of CEVP Investment I, LP By /s/ Daniel A. Daniello --------------------------------------------- Name: Daniel A. Daniello Title: Director AGREED TO AND ACKNOWLEDGED BY: U.S. TECHNOLOGIES INC. By: /s/ Gregory Earls ------------------------------------ Gregory Earls, Chairman and Chief Executive Officer Exhibit 10.17 Page 2 EX-10.18 13 g70507ex10-18.txt SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 10.18 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT is made and entered into as of July 20, 2001, by and between USV Partners, L.L.C., a Delaware limited liability company ("Buyer"), and each party listed as a Seller on Schedule 1 hereto (each a "Seller" and together "Sellers"). RECITALS Sellers own the shares of the issued and outstanding Series F Preferred Stock (the "Shares") of U.S. Technologies, Inc., a Delaware corporation (the "Company"), as indicated on Schedule 1 hereto (together, the "Securities"). Buyer desires to purchase from Sellers, and Sellers desire to sell to Buyer the Securities. AGREEMENTS In consideration of the premises and of the agreements set forth herein, and intending to be legally bound, the parties agree as follows: SECTION 1. PURCHASE AND SALE 1.1 Purchase and Sale of Securities. In consideration of the Purchase Price described below in Section 1.2, each Seller hereby agrees to sell, assign, convey and deliver all of the Securities owned by such Seller (together with and subject to any and all agreements associated therewith, including under or entered into as of the closing of the Agreement and Plan of Merger Among U.S. Technologies Inc., U.S. Technologies Acquisition Co. and Yazam.com, Inc., as amended March 22, 2001 (the "Merger Agreement"), to Buyer, free and clear of any claim, security interest, mortgage, pledge, lien or other encumbrance of any nature whatsoever (except the aforementioned agreements), and Buyer hereby agrees to purchase the Securities from the Sellers. 1.2 Purchase Price. The purchase price (the "Purchase Price") payable to a Seller for all of its Securities shall be $150.00 multiplied by the number of Shares it owns, as set forth on Schedule 1. 1.3 Closing. Closing for the purchase and sale of the Securities shall occur at 1:00 p.m. Eastern time on August 3, 2001, at the offices of Fleischman and Walsh, LLP, counsel for Buyer, or such other time or place as agreed to by the parties ("the Closing"). SECTION 2. DELIVERIES BY SELLERS AND BUYER 2.1 Deliveries by Seller. At Closing, each Seller shall deliver to Buyer (a) stock certificate(s) representing its Shares duly endorsed by such Seller (or accompanied by stock powers). 2.2 Deliveries by Buyer. At the Closing, Buyer shall deliver to each Seller the Purchase Price for such Seller's Securities by wire transfer of immediately available funds to a bank account indicated by such Seller by 1:00 p.m. on the business day before Closing. Exhibit 10.18 Page 1 2 SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to each Seller as follows: 3.1 Incorporation and Authority of Buyer. Buyer is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware and has all necessary power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby. Execution of this Agreement has been authorized by all necessary limited liability company action in accordance with the organizational documents of the Buyer and applicable law. 3.2 Enforceability of Agreement. This Agreement has been duly executed and delivered by Buyer and such execution and delivery, and the performance by Buyer of this Agreement and all transactions contemplated hereby, have been duly and validly authorized by any necessary action on the part of Buyer. This Agreement constitutes the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. 3.3 No Conflict. The execution, delivery and performance of this Agreement by Buyer do not: (a) violate or conflict with any term or provision of the organizational documents of Buyer; (b) conflict with or violate any law, rule, regulation, order, writ, judgment, injunction, decree, or other judicial or regulatory determination or award applicable to Buyer; (c) result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any lien, security interest, charge or other encumbrance on any of the assets or properties of Buyer pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit or other instrument relating to such assets or properties to which Buyer is a party or by which any of such assets or properties is bound or affected; or (d) require Buyer to make or obtain any consent, order, approval, authorization or other action by, or filing with or notification to, any federal, state or local governmental or regulatory authority or any other person or entity. SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER Each Seller, severally, hereby represents and warrants to Buyer as follows: 4.1 Organization and Authority. Seller is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, and has all necessary power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby. 4.2 Enforceability of Agreement. This Agreement has been duly executed and delivered by Seller and such execution and delivery, and the performance by Seller of this Agreement and all Exhibit 10.18 Page 2 3 transactions contemplated hereby, have been duly and validly authorized by any necessary action on the part of Seller. This Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms. 4.3 The Securities. Seller owns, legally and beneficially, and has good title to all of the Securities, free and clear of any claim, security interest, mortgage, pledge, lien or other encumbrance of any nature whatsoever other than as described in Section 1.1. 4.4 No conflict. The execution, delivery and performance of this Agreement by Seller do not: (a) violate or conflict with any term or provision of the articles of incorporation or bylaws of Seller; (b) conflict with or violate any law, rule, regulation, order, writ, judgment, injunction, decree, or other judicial or regulatory determination or award applicable to Seller; (c) require Seller to make or obtain any consent, order, approval, authorization or other action by, or filing with or notification to, any federal, state or local governmental or regulatory authority or any other person or entity; or (d) result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any lien, security interest, charge or other encumbrance on any of the assets or properties of Seller pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit or other instrument relating to such assets or properties to which Seller is a party or by which any of such assets or properties is bound or affected. SECTION 5. GENERAL PROVISIONS 5.1 Further Action. Each of the parties hereto shall execute and deliver such documents and other papers and take such further actions as may be reasonably required, or as may be reasonably requested by any other party, to carry out the provisions hereof and give effect to the transactions contemplated hereby. 5.2 Headings. The headings used in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of any term or provision of this Agreement. 5.3 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 5.4 Entire Agreement. (a) This Agreement represents the entire understanding of the parties with reference to the matters set forth herein. This Agreement supersedes all prior negotiations, discussions, correspondence, communications and prior agreements among the parties relating to the subject matter herein. Exhibit 10.18 Page 3 4 (b) The parties acknowledge that Section 6.13 of the Merger Agreement shall remain in effect as set forth therein. 5.5 Amendment and Waiver. This Agreement may not be amended or modified except by an instrument in writing signed by the parties hereto affected thereby. This Agreement may not be waived except by an instrument in writing signed by the party granting such waiver. 5.6 Assignment. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Notwithstanding the preceding sentence, neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by any party without the prior written consent of the other party. 5.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to its laws pertaining to conflicts of law. 5.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same agreement. THIS REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK Exhibit 10.18 Page 4 5 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this Stock Purchase Agreement as of the date first above written. USV PARTNERS, L.L.C., as Buyer By: USV Management, L.L.C. By: /s/ Gregory Earls --------------------------------- Gregory Earls, Managing Member TPG PARTNERS III, L.P., as a Seller T3 DUTCH PARALLEL, C.V., as a Seller By: /s/ Richard A. Ekleberry By: /s/ Richard A. Ekleberry -------------------------------------- --------------------------------- Name: Richard A. Ekleberry Name: Richard A. Ekleberry Title: Vice President Title: Vice President TPG PARALLEL III, L.P., as a Seller T3 PARTNERS, L.P., as a Seller By: /s/ Richard A. Ekleberry By: /s/ Richard A. Ekleberry -------------------------------------- ---------------------------------- Name: Richard A. Ekleberry Name: Richard A. Ekleberry Title: Vice President Title: Vice President TPG DUTCH PARALLEL III, C.V., as a Seller T3 PARALLEL, L.P., as a Seller By: /s/ Richard A. Ekleberry By: /s/ Richard A. Ekleberry -------------------------------------- --------------------------------- Name: Richard A. Ekleberry Name: Richard A. Ekleberry Title: Vice President Title: Vice President TPG INVESTOR III, L.P., as a Seller FOF PARTNERS III, L.P., as a Seller By: /s/ Richard A. Ekleberry By: /s/ Richard A. Ekleberry -------------------------------------- --------------------------------- Name: Richard A. Ekleberry Name: Richard A. Ekleberry Title: Vice President Title: Vice President T3 INVESTORS, L.P., as a Seller FOF PARTNERS III-B, L.P., as a Seller By: /s/ Richard A. Ekleberry By: /s/ Richard A. Ekleberry -------------------------------------- --------------------------------- Name: Richard A. Ekleberry Name: Richard A. Ekleberry Title: Vice President Title: Vice President Exhibit 10.18 Page 5 6 SCHEDULE 1
Name of Seller Series F Shares PURCHASE PRICE -------------- --------------- -------------- TPG Partners III, L.P. 5,608.18 $ 841,227.00 TPG Parallel III, L.P. 728.61 $ 109,291.50 TPG Dutch Parallel III, C.V 146.66 $ 21,999.00 TPG Investor III, L.P. 338.14 $ 50,721.00 T3 Partners, L.P. 2,599.83 $ 389,974.50 T3 Parallel, L.P. 196.38 $ 29,457.00 T3 Dutch Parallel, C.V 151.07 $ 22,660.50 T3 Investors, L.P. 145.58 $ 21,837.00 FOF Partners III, L.P. 8.84 $ 1,326.00 FOF Partners III-B, L.P. 196.48 $ 29,472.00 ------------- $1,517,965.50 =============
Exhibit 10.18 Page 6 EX-10.19 14 g70507ex10-19.txt WAIVER AND REPLACEMENT AGREEMENT 1 EXHIBIT 10.19 WAIVER AND REPLACEMENT AGREEMENT July 20, 2001 U.S. Technologies Inc. 1130 Connecticut Avenue, N.W. Suite 700 Washington, DC 20036 Attn: Gregory Earls, Chairman and Chief Executive Officer Dear Sir: Reference is made to: (i) the Agreement and Plan of Merger, dated as of February 28, 2001, among U.S. Technologies Inc. ("USXX"), U.S. Technologies Acquisition Co. and Yazam.com Inc., as amended March 22, 2001 (the "Merger Agreement"), (ii) the Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of USXX ("Series F Preferred Stock"), filed with the Secretary of State of Delaware on March 27, 2001 (the "Certificate of Designations") and (iii) the Securities Purchase Agreement between the TPG Entities, as Sellers, and USV Partners L.L.C., as Buyer, of even date herewith (the "Securities Purchase Agreement") with respect to 10,119.77 shares of USXX Series F Preferred Stock (the "Shares"). The undersigned, with respect to the Shares, hereby irrevocably waives the following: (i) its rights contained in the fourth sentence of Section 5.06 of the Merger Agreement and (ii) its rights contained in Section 5 (Redemption) of the Certificate of Designations. By its execution below, USXX hereby agrees that beginning on September 30, 2002, and for a period of ninety (90) days thereafter, the undersigned shall have the right to require USXX to redeem the undersigned's shares of Series F Preferred Stock at a purchase price of $300.00 per share (as adjusted for any combinations, consolidations, stock distributions or stock dividends or similar events with respect to such shares); provided, however, that USXX shall not be obligated to effect such a redemption unless certificates evidencing such shares of Series F Preferred Stock being redeemed are either delivered to USXX or its transfer agent or the holder notifies USXX or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to USXX to indemnify USXX from any loss incurred by it in connection therewith. In the event that all of the holders of Series F Preferred Stock enter into waiver and replacement agreements with USXX on terms identical to those contained herein (other than the provision contained in the preceding paragraph), then USXX, if requested by the undersigned, shall use its best efforts to amend its Certificate of Designations in a manner consistent with the terms of this Waiver and Replacement Agreement (such amendment not to include the provision contained in the preceding paragraph). Exhibit 10.19 Page 1 2 The construction and performance of this Waiver and Replacement Agreement shall be governed by the laws of the State of Delaware without regard to its principles of conflict of laws, and the state and federal courts of Delaware shall have exclusive jurisdiction over any controversy or claim arising out of or relating to this Waiver and Replacement Agreement. The terms and conditions of this letter shall inure to the benefit of and be binding upon the respective successors and assigns of USXX and the undersigned. This Waiver and Replacement Agreement may be executed in one or more counterparts, each of which shall be an original and both of which, when taken together, shall constitute one and the same instrument. Sincerely, USV PARTNERS, L.L.C. By: USV Management, L.L.C. By: /s/ Gregory Earls ------------------------------------------ Gregory Earls, Managing Member AGREED TO AND ACKNOWLEDGED BY: U.S. TECHNOLOGIES INC. By: /s/ Allyson Holland --------------------------------------- Allyson Holland, Vice President Controller and Chief Accounting Officer Exhibit 10.19 Page 2 EX-21.1 15 g70507ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT E2Enet, Inc. Service-to-Industry, Inc. Labor-to-Industry, Inc. Yazam.com, Inc. Yazam Ltd. (incorporated in Israel) Yazam Europe (incorporated in the United Kingdom) Yazam.com Capital Corp. Yazam.com Financial Advisors Inc. Gregory FCA Communications Inc. Each subsidiary of the Registrant has been organized and is a corporation existing under the laws of the State of Delaware, except where otherwise noted. Exhibit 21.1 Page 1 EX-23.1 16 g70507ex23-1.txt CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS U.S. Technologies Inc. Washington, D.C. We hereby consent to the incorporation by reference of our report dated May 9, 2001, except for Note 19(c), which is as of June 30, 2001, and Note 19(d), which is as of July 20, 2001, relating to the consolidated financial statements appearing in the Company's Form 10-K for the year ended December 31, 2000, 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. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP Atlanta, Georgia July 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----