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Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-15960
U.S. TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter.)
State of Delaware 73-1284747
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 Pennsylvania Avenue, Suite 675
Washington, DC 20006
(Address of principal executive offices.)
Registrant's telephone number, including area code: (202) 466-2100
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant at March 20, 2000 was approximately $ 72,582,000.
The number of shares outstanding of the Registrant's Common Stock, par value
$0.02 per share, at March 20, 2000 was 29,444,278 shares.
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Table of Contents
<TABLE>
PART I
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management 51
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 55
Signatures 56
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PART I
ITEM 1. BUSINESS
OVERVIEW
U.S. Technologies Inc. (the "Company"), is engaged directly and indirectly
through its wholly owned subsidiary, Labor-to-Industry Inc. ("LTI"), in the
operation of industrial facilities located within both private and state
prisons, which are staffed principally with inmate labor. These prison-based
operations are conducted under the guidelines of the 1979 Prison Industry
Enhancement (PIE) program. On February 22, 2000, the Company announced that it
reached a definitive agreement to acquire E2Enet, Inc. ("E2E"), a privately held
Internet incubator company, and on April 5, 2000, this agreement was amended so
the acquisition could qualify as a tax-free transaction. E2E has made early
stage investments in several development stage business-to-business (B2B) and
business-to-consumer (B2C) e-commerce businesses. The Company's acquisition of
E2E is expected to close in April once all closing conditions have been
satisfied.
The Company believes that its acquisition of E2E will provide the Company with
a platform to establish a position in the growing e-commerce industry. The
Company believes that the completion of the E2E Acquisition will enhance the
Company's opportunities for both investment in and creative development of
promising early stage B2B and B2C e-commerce ventures. Further investments in
this industry are intended primarily to comprise controlled subsidiaries
engaged in the development or operation of B2B business. The Company also is in
the process of expanding its management team to include technology and
e-commerce expertise.
E2E ACQUISITION
The terms and conditions for the Company's acquisition of E2E (the "E2E
Acquisition") are contained in the Stock Exchange Agreement, dated as of
February 21, 2000, entered into by the Company, E2E and certain stockholders of
E2E, as amended (the "E2E Acquisition Agreement"). The Company initially agreed
to acquire E2E by purchasing all of E2E's outstanding stock in exchange for
shares of a Series B Mandatorily Convertible Preferred Stock, par value $0.02
per share ("Series B Preferred Stock"), to be newly created by the Company.
However, in late March 2000, it became clear that if the E2E Acquisition
remained structured as a share exchange, the transaction would not qualify for
treatment as a tax-free exchange because certain stockholders of E2E would
receive consideration other than voting stock of the Company. To preserve the
tax-free nature of the E2E Acquisition, the Company, E2E and certain
stockholders of E2E agreed on April 5, 2000 to change the structure of the E2E
Acquisition from a share exchange to a merger between E2E and a wholly-owned
subsidiary of the Company, U.S. Technologies Acquisition Sub, Inc. ("U.S.
Technologies Acquisition"). Accordingly, the Company proposes to acquire E2E by
causing U.S. Technologies Acquisition to merge with and into E2E. U.S.
Technologies Acquisition will be the surviving corporation of this merger, and
upon the consummation of this merger, U.S. Technologies Acquisition will change
its name to E2E Net, Inc. As a result, upon the completion of the E2E
Acquisition, E2E will become a wholly owned subsidiary of the Company.
When the E2E Acquisition closes, E2E's stockholders will be issued shares of
Series B Preferred Stock, which will have a stated liquidation preference
aggregating approximately $11,200,000, and certain minority stockholders of E2E
will also receive options to purchase shares of the Company's common stock, par
value $0.02 ("Common Stock"). Upon their mandatory conversion as described
below, these shares of Series B Preferred Stock will be converted into
approximately 56,000,000 shares of Common Stock.
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the
closing of the E2E Acquisition. To raise these funds, the Company recently
commenced the private placement sale of $1,250,000 of additional shares of its
Series A Convertible Preferred Stock, par value $0.02 (the "Series A Preferred
Stock"), to USV Partners, LLC ("USV"), a limited liability company controlled
by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer,
which is the Company's largest shareholder, and at least $5,000,000 and up to
$8,750,000 of its newly created Series C Mandatorily Convertible Preferred
Stock, par value $0.02 ("Series C Preferred Stock"), to accredited investors.
The Company has thus far received subscriptions or indications of interest for
the purchase of approximately $5,200,000
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of its Series C Preferred Stock, of which approximately $3,000,000 consists of
subscriptions by USV. In connection with the private placements of the Series A
Preferred Stock and the Series C Preferred Stock, the Company has received to
date subscriptions for a total of approximately $6,450,000. The Series C
Preferred Stock would be convertible into shares of Common Stock at a conversion
price per share ranging from $0.90 to $2.00, which will be determined based on
the closing sale price for a share of Common Stock on the closing date of the
E2E Acquisition, as quoted on the OTC Bulletin Board. The proceeds of these
offerings will be used primarily to finance additional investments in new and
existing Internet businesses that focus on B2B and B2C e-commerce, the payment
of costs incurred and liabilities assumed in connection with the E2E Acquisition
and related business transactions and ongoing working capital needs.
The Company intends, and is required by the E2E Acquisition Agreement to call a
meeting of its stockholders for the purpose of amending the Company's Restated
Certificate of Incorporation. The proposed amendment (the "Charter Amendment")
will increase the number of shares of Common Stock the Company is authorized to
issue to an amount sufficient to permit the conversion to Common Stock of all
of the Company's then-outstanding shares of all of its authorized and
designated series of convertible preferred stock, including the Company's
Series A Preferred Stock, the Series B Preferred Stock to be issued to E2E's
stockholders, and the Series C Preferred Stock. In addition to authorizing a
sufficient number of shares of Common Stock to permit conversion to Common
Stock of all of the Company's outstanding shares of convertible preferred
stock, the Charter Amendment's proposed increase to the number of shares the
Company is authorized to issue will also include an amount sufficient to permit
the conversion to Common Stock of any other then-outstanding securities or
options, which are convertible into or otherwise permit the holder thereof to
purchase or otherwise receive shares of Common Stock. Upon the acceptance of
the Charter Amendment by the Secretary of State of the State of Delaware, the
Series B Preferred Stock and the Series C Preferred Stock will automatically be
converted into shares of Common Stock. USV has also indicated its intention to
convert all of its shares of Series A Preferred Stock to Common Stock at that
time.
The Company also announced that it will expand its Board of Directors in
connection with the completion of the E2E Acquisition. The new directors will
also stand for election at the Company's next annual meeting, which also is
when the Company expects to present the Charter Amendment for Stockholder
approval. These new directors will be:
- General Alexander M. Haig, Jr., former Secretary of State and
White House Chief of Staff;
- The Honorable George J. Mitchell, former Senator from Maine
and Senate Majority Leader;
- The Honorable William H. Webster, former Director of both the
FBI and CIA;
- Rick Rickersten, partner at Thayer Capital, a leading
investment management firm headquartered in Washington, D.C.;
- Hal Wilson and Peter Schiff, Managing Directors of Northwood
Ventures LLC and Northwood Capital Partners LLC, venture
capital investment firms headquartered in New York; and
- Arthur Maxwell, President of Affordable Interior Systems,
Inc., one of the 25 largest commercial furniture
manufacturers in the United States.
E2E has various interests in several development stage Internet e-commerce
companies. These portfolio companies principally include:
- Buyline.net, Inc. ("Buyline"). Buyline is a developer of B2B
e-commerce applications, and is developing a proprietary
Internet software program designed to be a universal platform
for entry-level B2B e-commerce, linking buyers and sellers.
Buyline's application for RFP/RFQ technology (Request for
Proposal/Request for Quotation) will be used in a full range
of on-line advertising, on Internet based directories, and in
commercial web sites.
- VIPRO Corporation ("Vipro"). Vipro is an Internet surety
company, which provides repair guarantees against viruses
that harm computers. The Company has e-commerce relationships
with
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a leading Internet utility company, a credit card
association, one of the largest warranty claims
administrators in the world and over 170 Internet service
providers.
- Urban Box Office Network, Inc. ("UBO"). UBO is a developer of
networked multi-media web sites that will provide e-commerce
services to participants interested in urban culture,
information, entertainment and products.
- OneMade, Inc. ("OneMade"). OneMade is a developer of an
e-commerce community that will serve participants in the
arts, crafts, and hobby industries. OneMade intends to
connect wholesalers, retailers, consumers and artists in
these fields.
- bluemercury, Inc. ("bluemercury"). bluemercury operates an
e-commerce site for upscale cosmetic products and
accessories. It intends to pursue a "clicks and bricks"
strategy by also acquiring high-end cosmetic specialty
retailers.
- MEI Software Systems, Inc. ("MEI"). MEI provides customized
software systems to manage the databases of trade
associations, professional associations, fund-raising
organizations and chambers of commerce.
The Company intends to restructure some of E2E's investments in its portfolio
companies and provide these entities with additional working capital to
stimulate their further growth and expansion. E2E's initial investment in
Buyline will be restructured and increased so that Buyline becomes a controlled
operating subsidiary. On February 28, 2000, Buyline and the Company entered into
an Agreement in Principle (the "Buyline Agreement"), which provides that E2E
will invest $3,000,000 in Buyline and will receive in exchange shares of
Buyline's common stock. This investment will consist of (1) the conversion of
E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment
of in kind services already rendered, and (3) an additional $1,000,000 cash
investment. In addition, the two principal stockholders and creditors of E2E
will each invest $250,000 in Buyline. Simultaneous with entering into the
Buyline Agreement, the Company hired a technology executive who will become
Buyline's President and Chief Executive Officer.
The Company presently expects to complete definitive documentation for, and to
complete, the Buyline restructuring shortly after closing the E2E Acquisition.
Upon the consummation of the transactions contemplated by the Buyline Agreement,
the Company, through E2E, will be the controlling shareholder of Buyline, and
will designate and supervise the Buyline management team.
Also, on March 13, 2000, the Company reached an agreement with Vipro to invest
directly or indirectly through E2E an additional $1,000,000 in Vipro, on or
before April 12, 2000, in exchange for additional equity in the form of shares
of Vipro's Series B Convertible Preferred Stock. On the same day, one of the
principal creditors and stockholders of E2E that will become a stockholder of
the Company upon the completion of the E2E Acquisition invested $1,000,000 in
Vipro on terms identical to the Company's pending investment.
E2E has not been actively involved in the development of its portfolio
companies' business strategies, operations and management teams. Many of these
portfolio companies are now largely supported by later stage investors and
managed by executive groups independent of E2E. With the exception of Buyline,
it is anticipated that E2E will retain its minority equity position in these
original portfolio companies. It is anticipated that in the future the Company
principally will follow the investment precedent established by its proposed
restructuring of Buyline by seeking ownership positions, voting interests and
management roles in new portfolio companies that provide the Company, through
E2E, operating control of such portfolio company.
Further information about E2E, its investments in the existing portfolio
companies and the restructuring of Buyline will be included in future reports
by the Company after these transactions are complete. The proxy materials for
the Company's meeting of stockholders at which the Charter Amendment will be
presented for approval by holders of the Company's Common Stock and Series A
Preferred Stock (the terms of the Series B and Series C Preferred Stock do not
permit them to vote on this proposal, but otherwise permit them to vote as if
already converted to Common Stock) will provide both explanatory and financial
information.
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OUTSOURCING OPERATIONS
The Company is an "outsourcing company" soliciting manufacturing, assembly,
repair, kitting and fulfillment services from Fortune 1000 and other select
businesses. The Company performs its services utilizing prison labor under the
Prison Industry Enhancement Program ("PIE"). Congress created the PIE program
in 1979 to encourage states and local units of government to establish
employment opportunities for prisoners that approximate private sector work
opportunities. The program is designed to place inmates in a realistic working
environment, pay them the local prevailing wage for similar work, and enable
them to acquire marketable skills to increase their potential for successful
rehabilitation and meaningful employment upon release. The PIE Program has two
primary objectives:
To generate products and services that enable prisoners to make a
contribution to society, help offset the cost of their incarceration,
compensate crime victims, and provide inmate family support.
To provide a means of reducing prison idleness, increasing inmate job
skills, and improving the prospects for successful inmate transition
to the community upon release.
The Company, directly or indirectly through its wholly-owned operating
subsidiary LTI, employs a portion of the inmates at each prison facility
through a competitive process and designs the work environment to motivate and
train each participant in the specific job skills of the contracted work and
the general skills required to obtain and hold long-term employment as well as
how to advance in employment in a competitive work environment. This training
is crucial for many prisoners, who may have never held a job before their
conviction. The PIE program allows for up to 80% of the prisoners' wages to be
withheld for the purpose of paying restitution to victims, fines, reimbursing
the cost of incarceration, alimony, child support, taxes and a restricted
savings account. In this way, the PIE program aids in reducing costs to
taxpayers and is a savings vehicle to assist the former inmate's transition
back into society. Further, the program has been very successful in reducing
the rate of recidivism, within the participating inmate population, according
to the Federal Bureau of Justice and Assistance.
In August 1997, the Company entered into an agreement with Wackenhut
Corrections Corporation ("WCC") whereby WCC agreed to allow the Company to
operate as its "industry partner" in any correctional facility managed by WCC.
WCC also agreed to determine the products it purchases from third parties, and
to the extent possible, purchase such products from the Company. WCC operates
47 corrections facilities in the United States, Australia, England and Canada
and is the second largest manager of privatized correctional facilities in the
United States. In February 1998, the Company reached an agreement with the
states of California and Florida to expand its operations into corrections
facilities managed by those states.
LTI operates an electronics manufacturing plant at WCC's Lockhart, Texas
corrections facility. The Company currently operates a furniture manufacturing
plant in a California Department of Corrections facility located in Blythe,
California. The Company's customer call center operation, which had been
located in a Utah Department of Corrections facility located in Draper, Utah,
ceased operations during the first quarter of 1999 and has not reopened. The
Company is currently awaiting the completion of the construction of a motorcycle
parts operation, which is located in a WCC facility in South Bay, Florida.
The Company was incorporated on September 9, 1986. The Company's principal
executive offices are located at 2001 Pennsylvania Avenue, NW, Suite 675 in
Washington, DC 20006, and its phone number is (202) 466-2100.
BUSINESS STRATEGY. The Company's strategy is to establish itself as a national
leader in the employment of prison labor in a variety of business sectors. To
that end, the Company utilizes the PIE program to perform its services by using
a low-cost, but highly-motivated labor pool, in modern, clean and efficient
facilities. The Company intends to operate the business in a simple and
straight-forward manner by maintaining corporate overhead at its present level
during the Company's expansion. The Company's strategy also includes the
following:
Utilize existing expertise in electronics manufacturing to seek new
business opportunities and to fully utilize all of LTI's electronic
assembly facility in Lockhart, Texas;
Provide ancillary services such as the assembly of kits (kitting) and
installation of parts associated with the primary electronics
manufacturing process;
Expand the Company's furniture manufacturing operations by increasing
its modular furniture production capabilities and introducing other
furniture products; and
Evaluate the Company's ability to provide fulfillment services.
Management believes that additional capacity can be added, beyond the existing
facilities, without significant additional corporate overhead.
GROWTH STRATEGY. The Company has established a sound working relationship with
WCC and seeks to expand that relationship by going into additional WCC
facilities with available industry workspace to establish successful
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PIE programs. The Company is also working with state-run (non-privatized)
correctional facilities where industry work space is available to establish PIE
work programs. In addition to LTI's successful electronics manufacturing
facility in Lockhart, Texas, the Company will open a motorcycle parts
manufacturing and assembly facility in a WCC facility located in South Bay,
Florida during the second quarter of 2000 and continue to seek additional
customers for its furniture manufacturing facility located in Blythe,
California. The Company is evaluating several options regarding its
opportunities for entry into the fulfillment industry. The Company is also
evaluating the strategic acquisition of successfully run companies whose
services and products would be suitable for expansion into a prison industry
work program.
SALE OF GWP, INC. On October 5, 1998, the Company's wholly-owned subsidiary,
GWP, Inc. ("GWP"), purchased 51% of the outstanding voting capital stock of
Technology Manufacturing and Design, Inc. ("TMD"), an EMP located in Austin,
Texas. GWP paid cash of $730,000 for this equity interest in TMD, an amount that
was loaned by the Company to GWP for the express purpose consummating this
acquisition. Between the date of the purchase of TMD's shares and February 11,
1999, the Company contributed, through GWP, an approximately additional
$1,206,000 to TMD for working capital purposes. On February 15 1999, as part of
a severance agreement, the Company sold GWP to Kenneth H. Smith, the former
President and Chief Executive Officer of the Company, for approximately the
total amount invested by the Company in GWP and TMD. See "Certain Relationships
and Related Transactions."
PRODUCTS AND SERVICES
Through LTI, the Company's operations have been primarily focused in two
industries, electronics manufacturing (EM) and furniture manufacturing. The EM
industry has been characterized by rapid growth and aggressive competition
based on improving technology and decreasing cost. In 1998, the Company entered
the furniture manufacturing and the customer call center industries. The
Company ceased its call center operations during the first quarter of 1999.
During 2000, the Company is scheduled to open a facility, which will provide
parts manufacture and assembly services to a motorcycle manufacturer.
Electronics Manufacturing. As a member of the electronics manufacturing
provider ("EMP") industry the Company, through LTI, provides several services
including contract manufacturing, cable and wire harness assembly and printed
circuit board assembly. Given the emergence of new technologies and the
proliferation of electronics into virtually all segments of the world economy,
management believes the Company is poised for significant sustainable growth in
the years ahead.
Original equipment manufacturers ("OEM") such as Cisco, Hewlett-Packard, IBM,
Lucent, Texas Instruments and many others are increasingly relying on EMPs for
assembly and other value-added services. Many OEMs have begun to view
outsourcing as a strategic tool which allows them to focus their efforts on
resources and core competencies resulting in improved flexibility and
responsiveness in all segments of their business. The benefits of outsourcing
by the OEM include: improved time to market since new products can be turned on
quickly by an EMP without the cost and time required for the OEM to re-tool;
access to state of the art manufacturing facilities and technologies without
the need for the OEM to invest in facilities capital equipment; and lower
production and procurement costs since EMP's can efficiently purchase many
generic components. Finally, EMP's typically do not bear the same overhead and
benefit burdens typically incurred by OEMs.
Furniture Manufacturing. Through its furniture manufacturing facility, the
Company manufactures panels and associated parts for use in the office
workstation industry. The Company's automated facility is capable of producing
a high quality panel comparable to those produced and sold by Herman Miller and
Steelcase. The Company's product is designed to be interchangeable with several
manufacturers of office furniture.
Motorcycle Manufacturing. The Company's motorcycle parts manufacturing and
assembly facility, which will be located in a WCC facility in South Bay,
Florida, is scheduled to begin operations in the second quarter of 2000.
Initially, the facility will be manufacturing, painting and polishing various
motorcycle body parts with the intention of eventually accomplishing complete
parts manufacture and assembly of motorcycles.
CUSTOMERS AND MARKETS
Within the EMP industry the Company promotes its services primarily in the
Southwest region of the United States. The market for its EM services is the
multi-billion dollar electronics industry. LTI specializes in production of
circuit boards which are ordered in shorter production runs and therefore do
not have to compete with the larger companies in the industry who have invested
millions of dollars in high speed production equipment capable of continuous
production runs creating hundreds of thousands of boards. LTI's customer base
consists of over 200 customers, none of whom accounted for more than 15% of the
Company's 1999 sales volume.
The major market served by the Company's furniture manufacturing facility is
the replacement workstation market. This market is dominated by a few large
companies who offer alternatives to purchasing the higher priced products of
Herman Miller and Steelcase. These companies offer finished products which are
interchangeable with the more
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expensive products, but at a considerably lower price. In November 1999, the
Company's contract with Affordable Interior Systems, the only customer of
Blythe, was cancelled. The Company has since contracted with another
manufacturer and started producing their panels in January 2000. This
manufacturer requires approximately one-shift of the operating capabilities of
the Blythe facility. The Company is actively seeking other customers to
increase the plant's output.
The Company's motorcycle assembly plant will, initially, have only one
customer, American Quantum Motorcycles ("American Quantum"). However, the
Company will explore other customer opportunities in conjunction with American
Quantum. The contract with American Quantum involves marking up the Company's
labor component of the facility while passing through and being reimbursed in
full for all other costs incurred to operate the facility.
The Company is dependent upon certain customers for a major portion of its
sales. High End (a customer of the LTI segment) accounted for 15% of sales for
the years ended December 31, 1999. The sales of services to IBM represented
approximately 43% and 66% for the years ended December 31, 1998 and 1997,
respectively. Texas Instruments accounted for approximately 7% and 19% of total
sales for the years ended December 31, 1998 and 1997, respectively. Amounts due
from three customers, Dell, Vektronix (customers of the LTI segment) and AIS (a
customer of the LTI - Blythe segment), constituted 87% of the Company's
accounts receivable at December 31, 1999. IBM and Texas Instruments, along with
other customers, High End Systems and Wyle EMG, comprised approximately 16% of
net accounts receivable at December 31, 1998. The Company generally does not
require collateral on its trade accounts receivable.
SUPPLIERS AND RAW MATERIALS
The raw materials used in each of the Company's industry segments are widely
available from numerous suppliers. The Company does not anticipate any
difficulty in obtaining sufficient quantity and quality of raw materials to
satisfy the requirements of its customers.
COMPETITION
The competition in the Company's EM and furniture manufacturing segments
consists of numerous small, regional companies and a significantly smaller
group of large national companies. The Company competes directly with the
smaller regional companies and avoids the markets dominated by the national
companies. When competing with smaller regional companies, the Company has a
distinct cost advantage created through the use of provided manufacturing
facilities and not having to provide the same benefits, (medical, dental, etc.)
to prison inmates as companies that rely exclusively on free-world employees.
In the case of the motorcycle parts facility, the Company has no direct
competition, as the Company has a contract to produce the manufacturing
requirements of American Quantum. However, the Company's revenues will be
directly effected by the competitive market conditions in the road bike
industry where American Quantum competes in an industry dominated by Harley
Davidson, Honda and to a lesser extent, BMW.
REGULATION OF THE PIE PROGRAM
Congress created the PIE Program in 1979 to encourage state and local
governments to establish employment opportunities for prisoners that
approximate private sector work opportunities and conditions. The program is
designed to place inmates in a realistic working environment, pay them the
state or Federal minimum or prevailing wage for similar work (whichever is
greater), and enable them to acquire marketable skills and work habits to
increase their potential for successful rehabilitation and meaningful
employment upon release. The U. S. Department of Justice's Bureau of Justice
Assistance administers the PIE Program through its Corrections Branch. Each
certified PIE Program must be determined to meet certain statutory and
guideline requirements so as to safeguard free world labor and industry and to
protect free enterprise. Mandatory criteria for participation in the PIE
Program are as follows: (a) inmates must be paid the prevailing local wage or
state or Federal minimum wage, whichever is greater, to protect private
business from unfair competition that would otherwise stem from the flow of
low-cost, prison made goods into the marketplace; (b) workers compensation and
unemployment compensation benefits must be provided; (c) inmate participation
in the program must be voluntary and in writing; (d) organized labor and local
private industry must be consulted prior to the initiation of a new PIE
industry; (e) participating companies must have written assurances from the
appropriate state agency that the new PIE industry will not result in the
displacement of workers employed prior to the program's implementation, does
not occur in occupations in which there is a surplus of labor in the locality,
and does not impair existing contracts for services; (f) deductions (not to
exceed 80%) must be made from the inmates pay for taxes, reasonable charges for
room and board, family support, victims compensation fund, and a mandatory
savings account for the inmate, the proceeds of which are available upon
release. In addition, each prison is also subject to laws and regulations
concerning the operation, management and supervision of prisoner employees,
which affects the operation of each of the Company's facilities. The Company's
PIE operations are also subject to all governmental workplace regulations
commonly associated with a service or manufacturing enterprise.
EMPLOYEES. The Company employs approximately 100 persons, 88 of whom are
inmates, nine (9) of whom are production, clerical and bookkeeping staff who
support manufacturing operations and three (3) of whom are members of executive
management. None of the Company's employees are represented by a union. The
Company believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
LEASES AND FACILITIES
The Company's wholly-owned subsidiary, LTI operates in a minimum security
prison under an agreement with WCC, the Texas Department of Criminal Justice
("TDCJ"), the Division of Pardons and Parole (the "Division") and the City of
Lockhart, Texas. The lease on the Lockhart facility provides approximately
27,800 square feet of manufacturing and office space through January 21, 2001,
and provides an automatic three year extension unless
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notification is given by either party at least 6 months prior to the expiration
date of the current term not to renew. The amount of square footage may be
increased or decreased depending upon the number of prisoners employed. The
lease also provides for annual rental rates of $1 per year for the primary term
and the first renewal term thereafter. Occupancy fees for successive renewal
terms shall be negotiated by written agreement of the parties. It is expected
that similar operating leases will be executed at other WCC facilities.
LTI also operates in a minimum-security prison at Chuckawalla Valley State
Prison located in Blythe, California. The lease on the Blythe facility provides
approximately 36,300 square feet of manufacturing and office space through
August 31, 2003. The lease also provides for monthly payments of $726.
The facility, which the Company's motorcycle parts operation will occupy, is
located in a WCC minimum security prison located in South Bay, Florida. The
lease on the South Bay facility provides approximately 20,500 square feet of
manufacturing and office space through October of 2006. The lease provides for
annual rental payments of $1.00.
The Company's executive office is currently co-located in the offices of USV in
Washington, DC. The Company does not have a lease on the space it occupies and
does not pay rent to USV. The Company is in the process of locating
approximately 5-7,000 square feet of office space in Washington, DC, to serve
as its executive offices. As of the date of this report, suitable space has not
been located and leased.
The Company's operations and accounting center is currently co-located in the
offices of The Spear Group in Norcross, Georgia. James V. Warren, the
Co-Chairman of the Company's Board of Directors and the Co-Chief Executive
Officer, is the co-founder and President of The Spear Group. The Company is
negotiating a management services agreement with The Spear Group to provide
operating, accounting and administrative services to the Company's prison
facilities. The Company does not currently have a lease on the space it
occupies at The Spear Group and does not pay rent to The Spear Group. The
management agreement with The Spear Group, when executed, will include
occupancy costs. See "Certain Relationships and Related Transactions".
ITEM 3. LEGAL PROCEEDINGS.
On July 16, 1995 the Company was served with a citation in Texas Industrial
Services vs. U.S. Technologies Inc., County Court at Law No. 2 of Travis
County, Texas. The suit alleges that the Company is liable for certain debts of
a former subsidiary, American Microelectronics, Inc., ("AMI") on the theory
that the Company was doing business as AMI. The petition seeks damages totaling
approximately $54,000. The Company has asserted a defense and no activity has
taken place on the suit since September 1995.
On October 31, 1996 a consent order was signed by Mr. William Meehan, the
Company's former president, in the case of Environmental Protection Agency v.
Senson Corp, LTD., Docket No. TSCA-09-96-0002, agreeing among other things to
pay a civil penalty. The penalty was never paid and is estimated to be
approximately $7,000.
On May 6, 1997 Mr. Meehan filed a lawsuit in the 98th Judicial District Court
for Travis County, Texas seeking payment of certain wages and other benefits
totaling approximately $330,000. The Company believes the claim is without merit
and intends to defend its position vigorously.
On July 14, 1997, Ryan Corley sued the Company, in the case styled Ryan Corley
vs. U.S. Technologies, case No. 97-08065, in the 250th Judicial District of
Travis County, Texas, alleging that he is entitled to four months severance pay
in the approximate amount of $30,000. This case is being vigorously defended by
the Company.
On January 13, 1999, in the case styled St. John vs. Labor-To-Industry, Inc.,
et al, (U.S. District Court, Western District of Texas, Austin Division), Dale
St. John sued LTI, WCC and others. Mr. St. John alleges that he was denied
continued employment because he missed work as a result of being subpoenaed to
court. He sued for back wages in an unspecified amount. On May 17, 1999, the
Court dismissed this lawsuit in its entirety without prejudice.
On February 16, 1999, in the case styled Fidelity Funding vs. Ken Smith, et al,
in the 14th Judicial District of Dallas County, Texas, Fidelity Funding, Inc.
(Fidelity) sued Mr. Smith and the Company in the amount of $839,449, the amount
allegedly owed by Technology Manufacturing and Design, Inc., ("TMD") to
Fidelity under a secured credit facility extended by Fidelity to TMD in
November of 1998. The suit resulted after the Company sold its wholly owned
subsidiary, GWP, which owned a 51% interest in TMD to Mr. Smith and after TMD
filed bankruptcy. The suit sought to enforce a payment guaranty of the Company
with respect to the balance of principal and accrued interest owed by TMD to
Fidelity under this secured credit facility. The bankruptcy court for the
Western District of Texas permitted Fidelity to collect the remaining principal
and interest due under this credit facility from the accounts receivable
securing this credit facility. As a result, Fidelity decided not to pursue its
action against the Company and on June 17, 1999, filed a nonsuit, dismissing
this lawsuit.
On December 15, 1999, in the case styled Affordable Interior Systems, Inc.
("AIS") vs. U. S. Technologies, Inc., et al, (U.S. District Court, District of
Massachusetts), AIS sued the Company alleging breach of contract, breach of
covenant of good faith and fair dealing and a violation of the Massachusetts
unfair trade practices statute. AIS claimed that the Company violated its
exclusive supplier agreement with AIS by raising the price of panel blanks the
Company had agreed to manufacture for and sell to AIS in connection with AIS's
office furniture systems business. As a result, AIS alleged that it had to pay
the increased amounts while it established an alternative source, and that it
was entitled to a refund of those additional payments and the cost of
establishing its own source. AIS also claimed that it was entitled to be
reimbursed for certain expenses and fees incurred during the time period that
the Company was considering purchasing AIS from its corporate owner, U.S. Office
Products, which purchase did not occur. AIS sought in excess of approximately
$1,400,000 in compensatory damages. AIS also sought treble damages under the
Massachusetts unfair trade practices statute. The Company generally denied the
claims asserted by AIS and raised certain affirmative defenses. The Company also
asserted a counterclaim against AIS in the amount of approximately $200,467 plus
interest for AIS' failure to pay for panel blanks the Company manufactured for
AIS and delivered to it. On or about March 6, 2000, the Company and AIS reached
an oral agreement under which both the claims and counterclaims asserted in this
case would be dismissed and that mutual releases would be executed. On March 30,
2000, AIS and the Company executed and filed a Joint Stipulation of Dismissal
Without Prejudice. During the second quarter 2000, the Company anticipates that
it and AIS will execute mutual written releases relinquishing their respective
claims against each other.
7
<PAGE> 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31, 1999 to a
vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the OTC Bulletin Board under the symbol
"USXX".
The following table sets forth the high and low bid prices of the Company's
Common Stock in the over-the-counter market for the years ended December 31,
1999 and 1998. Prices are as quoted on the OTC Bulletin Board System.
Quotations reflect inter-dealer prices without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid
High Low
-----------------------
<S> <C> <C> <C>
1999
4th Quarter $.2500 $.1000
3rd Quarter $.4000 $.2100
2nd Quarter $.4700 $.2800
1st Quarter $.5900 $.3400
1998
4th Quarter $.6300 $.3800
3rd Quarter $.7100 $.4200
2nd Quarter $.9000 $.6400
1st Quarter $.9200 $.4400
</TABLE>
On March 20, 2000, the closing bid price of the Company's Common Stock, as
quoted on the OTC Bulletin Board system, was $4.2500.
HOLDERS OF COMMON STOCK
As of March 20, 2000, there were 447 holders of record of the Company's Common
Stock. This number is exclusive of beneficial owners whose securities are held
in street name.
DIVIDENDS
The Company has not declared or paid any cash dividend on its Common Stock. The
policy of the Board of Directors of the Company is to retain earnings for the
expansion and development of the Company's business. Future dividend policy and
the payment of dividends, if any, will be determined by the Board of Directors
in light of circumstances then existing, including the Company's earnings,
financial condition and other factors deemed relevant by the Board of
Directors.
RECENT SALES OF UNREGISTERED SECURITIES
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing
of the E2E Acquisition. To raise these funds, the Company recently commenced the
private placement sale of $1,250,000 of additional shares of its Series A
Preferred Stock to USV, a limited liability company controlled by Gregory Earls,
the Company's Co-Chairman and Co-Chief Executive Officer, which is the Company's
largest shareholder, and at least $5,000,000 and up to $8,750,000 of its newly
created Series C Preferred Stock, to accredited investors. The Company has thus
far received subscriptions or indications of interest for the purchase of
approximately $5,200,000 of its Series C Preferred Stock, of which approximately
$3,000,000 consists of subscriptions by USV. The Series C Preferred Stock would
be convertible into shares of Common Stock at a conversion price per share
ranging from $0.90 to $2.00, which will be determined based on the closing sale
price for a share of Common Stock on the closing date of the E2E Acquisition as
quoted on the OTC Bulletin Board. In connection with the private placement of
the Series A Preferred Stock and the Series C Preferred Stock, the Company has
received to date subscriptions for a total of approximately $6,450,000. The
proceeds of these offerings will be used primarily to finance additional
investments in new and existing Internet businesses that focus on B2B and B2C
e-commerce, the payment of costs incurred and
8
<PAGE> 11
liabilities assumed in connection with the E2E Acquisition and related business
transactions and ongoing working capital needs. Upon the acceptance of the
Charter Amendment by the Secretary of State of the State of Delaware, the
Series B Preferred Stock and the Series C Preferred Stock will be automatically
converted into shares of Common Stock. USV has also indicated its intention to
convert all of its shares of Series A Preferred Stock to Common Stock at that
time. See "Business - E2E Acquisition."
When the E2E Acquisition closes, E2E's stockholders will be issued shares
of Series B Preferred Stock, which will have a total liquidation preference
aggregating approximately $11,200,000. Upon their mandatory conversion, these
shares of Series B Preferred Stock will be converted into approximately
56,000,000 shares of Common Stock. See "Business -- E2E Acquisition."
Commencing on July 9, 1998 and continuing through May 11, 1999, the Company
received $5,000,000 of a total commitment of $5,000,000 under an agreement
with USV which provided that the Company would issue to USV warrants to
purchase 500,000 shares of Common Stock (the "Warrants") and shares of its
Series A Preferred Stock pursuant to Regulation "D" promulgated under the
Securities Act of 1933. Of the $5,000,000, amounts received during 1999 and
1998 were $1,300,000 and $3,700,000, respectively. The shares of Series A
Preferred Stock and the Warrants were issued to USV on May 11, 1999. The net
proceeds to the Company of approximately $4,850,000, after legal and other
costs, were used to provide working capital to support the Company's 1999 and
1998 operations and fund the 1998 purchase of a controlling interest in TMD by
the Company's wholly owned subsidiary, GWP. The Earls Family Limited
Partnership made a contribution of approximately $400,000 to USV, which
allowed USV to complete the payment of the $5,000,000 purchase price for the
Warrants and the Series A Preferred Stock to the Company. The Earls Family
Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of the
Company's Board of Directors and the Co-Chief Executive Officer of the
Company, controls both USV and the Earls Family Limited Partnership. Promptly
after USV was issued the Warrants, USV transferred the Warrants to the Earls
Family Limited Partnership. On November 29, 1999, the terms of the Series A
Preferred Stock were amended to cancel the right of the holders of the Series
A Preferred Stock to receive an annual dividend and to change the conversion
price for the Series A Preferred Stock to $0.122. The amended Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock setting
forth these changes was filed with the Delaware Secretary of State on December
31, 1999.
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership has the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of the Series A Preferred Stock were converted and the
Warrants were exercised in full, the holders of such securities would be
entitled to receive 48,149,758 shares of Common Stock. Each Warrant is
exercisable for one share of Common Stock at a price of $1.00 per share. If all
of USV's shares of Series A Preferred Stock were converted, USV would be
entitled to receive 47,649,758 shares of Common Stock. Because that amount
exceeds the number of shares of Common Stock available for issuance under the
Company's Restated Certificate of Incorporation, USV and the Company entered
into an agreement, dated March 1, 2000, whereby USV waived its right to convert
its shares of Series A Preferred Stock until an appropriate amendment to the
Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State. See "Business - E2E Acquisition."
On January 12, 1998, the Company issued 4% convertible subordinated debentures
and common stock purchase warrants to purchase 275,000 shares of Common Stock
exercisable at $1.00 per share, through a private placement to certain foreign
investors pursuant to a claim of exemption under Regulation "S" promulgated by
the Securities and Exchange Commission under the Securities Act of 1933. The
net proceeds to the Company, after legal and other costs, were $247,500, which
was used to liquidate certain 1996 liabilities and provide working capital to
support the Company's operations. On March 16, 2000, a holder of the common
stock purchase warrants exercised its right to purchase 137,500 shares of
Common Stock. As of March 20, 2000, the holders of these common stock purchase
warrants have the right to purchase a total of 138,000 shares of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth for the years ended December 31, 1999,
1998, 1997, 1996 and 1995 is derived from the Company's audited financial
statements. This information should be read in conjunction with the financial
statements for 1999, 1998 and 1997 and notes thereto included elsewhere herein
and "Management's Discussion and Analyses of Financial Condition and Results of
Operations" included in ITEM 7., which are incorporated herein by reference.
9
<PAGE> 12
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 3,764,785 $ 6,107,244 $ 4,166,626 $ 1,410,498 $ 1,951,487
Operating costs and expenses:
Cost of sales 4,458,881 5,349,459 3,424,313 2,513,672 1,764,121
Selling expenses 43,658 313,283 70,869 245,232 270,906
General and administrative expenses 1,988,113 2,788,104 1,118,310 961,195 1,777,934
Impairment of long-lived assets -- -- 1,408,839 -- --
Restructuring charge -- 90,000 196,903 -- --
Other - litigation -- -- 252,256 -- --
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses 6,490,652 8,540,846 6,471,490 3,720,099 3,812,961
------------ ------------ ------------ ------------ ------------
Loss from operations (2,725,867) (2,433,602) (2,304,864) (2,309,601) (1,861,474)
Other expense (income)
Gain on sale of asset (642,764) -- -- -- --
Interest (28,893) 112,325 25,191 20,277 112,387
Other 202,271 18,782 (87,310) 253,134 (112,773)
------------ ------------ ------------ ------------ ------------
Total other (469,386) 131,107 (62,119) 273,411 (386)
------------ ------------ ------------ ------------ ------------
Net loss $ (2,256,481) $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088)
Preferred stock dividend 525,114 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss available to common
shareholders $ (2,781,595) $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088)
------------ ------------ ------------ ------------ ------------
Basic and diluted loss per common
share $ (0.10) $ (0.09) $ (0.08) $ (0.14) $ (0.12)
Weighted average shares outstanding 28,795,278 28,996,607 26,793,999 18,555,439 14,997,532
BALANCE SHEET DATA:
Working capital $ (794,439) $ (312,828) $ (849,592) $ (707,467) $ 574,146
Total assets 1,092,096 2,367,533 869,742 2,652,682 3,326,537
Total debt(1) 41,064 47,912 54,821 144,000 840,435
Stockholders' equity (capital deficit) (220,792) 724,042 (419,911) 1,088,520 1,859,785
</TABLE>
(1) Includes long-term debt, current maturity of long-term debt, capital
lease obligations and notes payable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) included
under ITEM 8.
RESIGNATION OF KENNETH H. SMITH; SALE OF GWP
On February 11, 1999, Kenneth H. Smith resigned as President and Chief
Executive Officer of and as a director of the Company. Subsequent to Mr.
Smith's resignation, the Board of Directors of the Company appointed Gregory
Earls, a director of the Company since April 1998, as the Chief Executive
Officer of the Company. Since November 29, 1999, Mr. Earls has served as the
Co-Chairman of the Board of Directors and Co-Chief Executive Officer of the
Company with James V. Warren. See "Appointment of New Management Team".
Pursuant to the severance agreement entered into between the Company and Mr.
Smith, the Company sold its wholly owned subsidiary, GWP, to Mr. Smith. The sole
asset of GWP was an ownership interest in an amount of capital stock of TMD,
which represented a controlling interest in TMD. This majority interest in TMD
was acquired by GWP in early October 1998 for $730,000, which was contributed
by the Company to GWP for the express purpose of purchasing TMD stock. In
addition to contributing to GWP the funds necessary to complete the purchase of
a controlling interest in TMD, from early October 1998 through February 11,
1999, the Company, through GWP, also contributed approximately $1,337,000 in
working capital funds to TMD. The Company also guaranteed certain existing
obligations of TMD, including the repayment of TMD's Fidelity Funding Inc.
loan,
10
<PAGE> 13
pursuant to the Loan and Security Agreement between TMD and Fidelity
Funding, Inc., dated as of November 30, 1998.
The sale of GWP was concluded on February 15, 1999. The total purchase price
for GWP was approximately $2,451,000. This amount represented the Company's
estimate of its investment in TMD through February 11, 1999 and certain legal
and other transactional costs Mr. Smith agreed to assume.
A portion of the purchase price for GWP was paid in the form of a promissory
note executed by Mr. Smith in the principal amount of $1,234,832 bearing
interest annually at the Wall Street Journal's prime rate of interest plus two
percent (2%). The principal amount of Mr. Smith's promissory note and any
accrued unpaid interest were due and payable in three (3) equal annual payments
commencing February 15, 2000 and ending on February 15, 2002. Mr. Smith and TMD
also agreed to guarantee any of TMD's obligations for which the Company was a
guarantor. Repayment of the promissory note and the performance of Mr. Smith's
guaranty obligations to the Company were secured by Mr. Smith's pledge to the
Company of his 3,000,000 shares of the Company's Common Stock. The performance
of GWP's guaranty obligations to the Company was secured by GWP's pledge to the
Company of all of its stock holdings in TMD.
The remaining balance of the purchase price for GWP was paid through Mr.
Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability
company controlled by Gregory Earls, the Co-Chairman of the Company's Board of
Directors and Co-Chief Executive Officer of the Company. The aggregate purchase
price of these shares was approximately $1,076,000. USV paid this purchase
price directly to the Company, which applied such funds toward the amount
payable by Mr. Smith to the Company in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that date
for a share of Common Stock, as quoted on the OTC Bulletin Board. The closing
sale price on April 1, 1999 was $0.35 per share, for a total sale price of
$1,050,000. The aggregate sale price of $1,050,000, less the expenses associated
with the sale, was applied in reduction of Mr. Smith's indebtedness to the
Company. The 3,000,000 shares of Common Stock were sold to USV. In payment of
the $1,050,000 sale price, USV executed a promissory note in favor of the
Company. This promissory note was secured by USV's pledge of the 3,000,000
shares of Common Stock it purchased on April 1, 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse
judgment is rendered against the Company by any court of competent jurisdiction
in connection with its guaranty obligations of TMD, or (iii) any new default
under Mr. Smith's promissory note. See "Certain Relationships and Related
Transactions."
APPOINTMENT OF NEW MANAGEMENT TEAM
On November 29, 1999, the Company, James V. Warren and J.L. (Skip) Moore
entered into a Management Agreement (the "Management Agreement"). Under the
terms of the Management Agreement, Mr. Warren was elected a Director,
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer
of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer
of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman
and Chief Executive Officer of the Company were modified to include Mr. Warren.
Also, under the terms of the Management Agreement, Mr. Moore was elected to
serve as the Company's Executive Vice-President and Chief Operating Officer.
The accounting functions of the Company have also been moved from the Company's
manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance
with the terms of the Management Agreement. See "Certain Relationships and
Related Transactions."
RESIGNATION AND TERMINATION OF EXECUTIVE OFFICERS
On February 15, 1999, James C. Melton resigned as Executive Vice President of
and as a director of the Company. Effective January 31, 2000, the Company
terminated the employment of John P. Brocard. Mr. Brocard was the Senior Vice
President and General Counsel of the Company.
11
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations expressed as
a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales 100% 100% 100% 100%
Operating costs and expenses:
Cost of sales 118% 88% 82% 178%
Selling expenses 1% 5% 2% 17%
General and administrative expenses 53% 46% 27% 68%
Impairment of long-lived assets -- -- 34% --
Restructuring charge -- 1% 5% --
Other - litigation -- -- 6% --
------ ------ ------ ------
Total operating costs and expenses 172% 140% 155% 264%
------ ------ ------ ------
Loss from operations (72)% (40)% (55)% (164)%
Gain on sale of asset (17)% -- -- --
Interest (1)% 2% 1% 1%
Other 5% 0% (2)% 18%
------ ------ ------ ------
Total other (13)% 2% (1)% 19%
------ ------ ------ ------
Net loss (59)% (42)% (54)% (183)%
====== ====== ====== ======
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
During the year ended December 31, 1999 the Company had net loss of $2,781,595
or $0.10 per weighted-average share, on net sales of $3,764,785 as compared to
a net loss of $2,564,709 or $0.09 per weighted-average share on net sales of
$6,107,244 for the year ended December 31, 1998. The net sales decrease of 38%
was primarily the result of an approximate $2,000,000 sales decline at the
Company's Lockhart facility due to management changes and a reorganization of
the facility. Additionally, 1999 included approximately six weeks of sales for
TMD ($948,000) while 1998 included thirteen weeks sales for TMD ($2,119,000).
The Company's ownership interest in TMD was purchased in October 1998 and sold
in mid-February 1999.
Cost of sales, in the amount of $4,458,881, increased as a percentage of net
sales to 118% for the year ended December 31, 1999 from $5,349,459, which
represented 88% of net sales, for the year ended December 31, 1998. The increase
in the cost of sales percentage is primarily due to; Lockhart's cost of sales
exceeding its sales as a result of uneconomical material purchases and
inefficient use of labor, start up costs at other locations, during the period
of management change and reorganization.
Selling expenses in the amount of $43,658 represented 1% of net sales during
the year ended December 31, 1999 compared to $313,283 representing 5% of net
sales for the year ended December 31, 1998. The decrease in the selling
expenses percentage is primarily due the sale of TMD which accounted for
approximately $186,000 in selling expense in 1998, but only $8,000 in 1999. The
balance of the change was attributable to sales at Lockhart being produced from
in-house operations personnel rather than outside commission sales people.
General and administrative expenses totaled $1,988,113 for the year ended
December 31, 1999 which represented 53% of net sales, compared to $2,788,104
which represented 46% of net sales for the year ended December 31, 1998.
Included in general and administrative expense for the year ended December 31,
1999 were; severance expenses of approximately $228,000, related to the former
President and former Senior Vice President of the Company, approximately
$196,000 of compensation expense recorded as the result of the grant of stock
options, approximately $178,000 of operating expenses related to a temporary
manufacturing facility used by the Company until the Company's Blythe,
California, facility was fully operational, bad debt expense of $140,000 and
$116,000 in legal and accounting costs related to the attempted acquisition of
AIS. These expenses equaled 23% of net sales.
12
<PAGE> 15
During the year ended December 31, 1998 the Company recorded restructuring
charges of $90,000 to account for primarily payroll cost associated with
reorganizations of the Company's management staff.
During the year ended December 31, 1999, the Company recorded a gain on the
sale GWP and its 51% interest in TMD in the amount of $642,764. This gain was
net of the write off of approximately $526,000, which represented the full
value of the note receivable resulting from the sale of GWP. There were no
comparable gain recorded during the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recorded other expense of
$202,271. A significant part of this was $154,641, which represented legal and
accounting expenses incurred to secure the $5,000,000 subscription for the
Company's convertible preferred stock. There was no comparable expense during
the year ended December 31, 1998.
During the year ended December 31, 1999, the Company recorded a charge of
$525,114, for dividends paid on the Company's convertible preferred stock. Under
an agreement reached with the preferred stock holder in November 1999, no
further dividends will be paid on the preferred stock in exchange for the
Company's reducing the conversion price for each share of the Company's common
stock from $0.410 per share to $0.122 per share. There was no comparable expense
during the year ended December 31, 1998.
Due to the continuing losses by the Company, the 100% reserve against the
Company's $5,452,000 net deferred tax asset continues to be recognized at
December 31, 1999. Additionally, as a result of the series of transactions
through which the Company's new management gained control, in 1999, the Company
is limited in the utilization of prior accumulated net operating losses and
anticipates that approximately $574,000 per year of net operating losses are
available to offset future annual taxable income.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
During the year ended December 31, 1998 the Company had net loss of $2,564,709
or $0.09 per weighted-average share, on net sales of $6,107,244 as compared to
a net loss of $2,242,745 or $0.08 per weighted-average share on net sales of
$4,166,626 for the year ended December 31, 1997. The net sales increase of 47%
was primarily the result of additional sales associated with TMD.
Cost of sales, in the amount of $5,349,459, increased as a percentage of net
sales to 88% for the year ended December 31, 1998 from $3,424,313, which
represented 82% of net sales, for the year ended December 31, 1997. These
amounts include charges to write-off obsolete inventory in the amount of $0 in
1998, and $306,888 in 1997. Excluding the write-off of obsolete inventory, cost
of sales would have represented approximately 88% and 75% of net sales for the
years ended December 31, 1998 and 1997 respectively. The increase in the cost of
sales percentage is primarily due to TMD's cost of sales exceeding its sales as
a result of uneconomical material purchases and inefficient use of labor.
Excluding the operating results of TMD, cost of sales is approximately 78% of
net sales for the year ended December 31, 1998.
Selling expenses in the amount of $313,283 represented 5% of net sales during
the year ended December 31, 1998 compared to $70,869 representing 2% of net
sales for the year ended December 31, 1997. The increase in the selling
expenses percentage is primarily due to the cost of TMD's sales staff.
Excluding the operating results of TMD, selling expenses are approximately 3%
of net sales.
General and administrative expenses totaled $2,788,104 for the year ended
December 31, 1998 which represented 46% of net sales, compared to $1,118,310
which represented 27% of net sales for the year ended December 31, 1997. The
increase in general and administrative expenses is attributable to the
increased costs of management staffing, start-up expenses, travel and legal
costs associated with opening new locations and acquiring TMD.
During the year ended December 31, 1998 and 1997, the company recorded
restructuring charges of $90,000 and $196,903, respectively, to account for
primarily payroll cost associated with reorganizations of the Company's
management staff.
Due to the continuing losses by the Company, the 100% reserve against the
Company's $4,408,000 net deferred tax asset continues to be recognized at
December 31, 1998. Additionally, as a result of the series of transactions
through which the Company's new management gained control, in 1997, the Company
is limited in the utilization of prior accumulated net operating losses and
anticipates that approximately $574,000 per year of net operating losses are
available to offset future annual taxable income. The Company expects to pay
taxes for 1999 in accordance with the provisions of the alternative minimum tax
and various state income taxes.
Liquidity and Capital Resources.
During the three years ended December 31, 1999, 1998, and 1997 the Company
experienced negative operating cash flows of $2,660,402, $2,870,611 and
$560,302, respectively. Negative cash flows from operations resulted
principally from operating losses incurred during these years. The primary
operating uses of cash during 1999 were
13
<PAGE> 16
to fund net losses of $2,256,481, net of a gain on the sale of TMD of $642,764.
Net cash used in 1999 operating activities was favorably impacted by
depreciation of $178,230 and decreases in inventories and accounts receivable
of $325,280 and $311,612, respectively, reduced by declines in accrued expenses
of $203,965. The primary operating uses of cash during 1998 were to fund
operating losses of $2,564,709, which included a $972,892 loss from the
operations of TMD. The 1998 net cash used in operating activities was adversely
effected by increases in accounts receivable and inventories of $510,922 and
$353,648, respectively and a decrease in accrued expenses of $501,951, while
being favorably impacted by a $747,196 increase in accounts payable. The
$2,242,745 operating losses in 1997 were largely offset by non-cash reductions
of (1) $1,408,839 for impairment of long-lived assets (2) $306,888 for an
increase in inventory valuation allowance and (3) $179,194 for depreciation and
amortization. The primary uses of operating cash during 1997 were to fund the
reduction of accounts payable of $238,363 and the increase in accounts
receivable of $120,680 due to increased sales volume.
During the year ended December 31, 1999, investing activities provided a net
amount of $400,653. This amount was negatively impacted by equipment purchases
of $475,347. The sale of TMD in 1999 resulted in the collection of $1,076,000
proceeds from the sale. During the year ended December 31, 1998, investing
activities used $658,104. The 1998 activity was unfavorably impacted by the
purchase of GWP and its interest in TMD for $730,000, and equipment purchases of
$431,298. The 1998 activity was favorably impacted by collections on notes
receivable of $385,194 and proceeds from the sale of assets of $118,000. Net
cash used for investing activities of $58,942 during the year ended December 31,
1997 was for the purchase of equipment.
Cash provided by financing activities of $2,159,060, $3,638,366 and $618,185
during 1999, 1998 and 1997, respectively, were primarily the net proceeds of
preferred stock, common stock and debt issuances.
Commencing on July 9, 1998 and continuing through May 11, 1999, the Company
received $5,000,000 of a total commitment of $5,000,000 under an agreement with
USV which provided that the Company would issue to USV Warrants to purchase
500,000 shares of Common Stock and shares of its Series A Preferred Stock
pursuant to Regulation "D" promulgated under the Securities Act of 1933. Of the
$5,000,000, amounts received during 1999 and 1998 were $1,300,000 and
$3,700,000, respectively. The shares of Series A Preferred Stock and the
Warrants were issued to USV on May 11, 1999. The net proceeds to the Company of
approximately $4,850,000, after legal and other costs, were used to provide
working capital to support the Company's 1999 and 1998 operations and fund the
1998 purchase of a controlling interest in TMD by the Company's wholly owned
subsidiary, GWP. The Earls Family Limited Partnership made a contribution of
approximately $400,000 to USV, which allowed USV to complete the payment of the
$5,000,000 purchase price for the Warrants and the Series A Preferred Stock to
the Company. The Earls Family Limited Partnership is a member of USV. Gregory
Earls, the Co-Chairman of the Company's Board of Directors and the Co-Chief
Executive Officer of the Company, controls both USV and the Earls Family Limited
Partnership. Promptly after USV was issued the Warrants, USV transferred the
Warrants to the Earls Family Limited Partnership. On November 29, 1999, the
terms of the Series A Preferred Stock were amended to cancel the right of the
holders of the Series A Preferred Stock to receive an annual dividend and to
change the conversion price for the Series A Preferred Stock to $0.122. The
amended Certificate of Designations, Preferences and Rights of the Series A
Preferred Stock setting forth these changes was filed with the Delaware
Secretary of State on December 31, 1999.
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership has the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of Series A Preferred Stock were converted and the Warrants
were exercised in full, the holders of such securities would be entitled to
receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one
share of Common Stock at a price of $1.00 per share. If all of USV's shares of
Series A Preferred Stock were converted, USV would be entitled to receive
47,649,758 shares of Common Stock. Because that amount exceeds the number of
shares of Common Stock available for issuance under the Company's Restated
Certificate of Incorporation, USV and the Company entered into an agreement,
dated March 1, 2000, whereby USV waived its right to convert its shares of
Series A Preferred Stock until an appropriate amendment to the Company's
Restated Certificate of Incorporation is filed with the Delaware Secretary of
State. See "Business - E2E Acquisition."
In 1997, as a result of the acquisition of the Company by the investor group
led by Mr. Smith and Mr. Warren, and the resulting issuance of 6,000,000 shares
of the Company's common stock, $536,613 was contributed to working
14
<PAGE> 17
capital. This contribution significantly improved the Company's financial
condition thus improving the Company's relationships with vendors and allowing
the Company to finance significant increases in sales volume.
Working capital decreased by $481,611 from a negative $312,828 as of December
31, 1998, to a negative $794,439 as of December 31, 1999. Gross accounts
receivable decreased by $311,612 to $401,353, representing approximately 51 days
sales, at December 31, 1999, from $712,975, representing approximately 52 days
sales as of December 31, 1998. Inventory decreased by $325,280 to $260,575 at
December 31, 1999 from $585,855 at December 31, 1998 primarily as a result of
decreased sales at the LTI facility in Lockhart, Texas. During the year ended
December 31, 1999, accounts payable increased by $160,064 to $1,004,237,
including $318,490 resulting from manufacturing activities which represented 47
days cost of sales, from $844,173, including $577,359 resulting from
manufacturing activities which represented 89 days cost of sales in the year
ended December 31, 1998.
Working capital increased by $536,764 from a negative $849,592 as of December
31, 1997, to a negative $312,828 as of December 31, 1998. Accounts receivable
increased by $353,648 to $712,975, representing approximately 52 days sales, at
December 31, 1998, from $341,327, representing approximately 30 days sales as
of December 31, 1997. Inventory increased by $510,922 to $585,855 at December
31, 1998 from $74,933 at December 31, 1997 primarily as a result of a change in
the customer mix at the LTI facility in Lockhart, Texas which resulted in the
use of more purchased inventory instead of customer supplied inventory. For the
year ended December 31, 1998, accounts payable increased by $467,342 to
$844,173, representing approximately 89 days cost of sales, from $376,831,
representing approximately 66 days cost of sales for the year ended December
31, 1997. This increase was the result of increased working capital needs to
fund inventory, accounts receivable and operating losses.
The company took several steps, during 1999, to improve the performance of its
operating facilities:
- The Spear Group, a company experienced in the management of
manufacturing facilities and labor intensive businesses, was
employed to provide operational, accounting and
administrative support to the Company's operating facilities.
- The Company engaged additional contract sales personnel to
increase sales at the Company's Lockhart, Texas, electronics
manufacturing facility.
- An experienced plant manager was hired to operate the
Company's Lockhart, Texas, electronics manufacturing
facility.
- The Company purchased approximately $400,000 of equipment to
improve operating efficiencies at its manufacturing
facilities.
The Company's growth plans for 2000 include maximization of revenue potential
at the two existing facilities, Lockhart and Blythe, the opening of a
motorcycle parts manufacturing facility at a WCC facility located in South Bay,
Florida and possible acquisitions. Capital required to improve the South Bay
facility is being provided by WCC.
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the closing
of the E2E Acquisition. To raise these funds, the Company recently commenced the
private placement sale of $1,250,000 of additional shares of its Series A
Preferred Stock, to USV, a limited liability company controlled by Gregory
Earls, the Company's Co-Chairman and Co-Chief Executive Officer, which is the
Company's largest shareholder, and at least $5,000,000 and up to $8,750,000 of
its newly created Series C Preferred Stock, to accredited investors. The Company
has thus far received subscriptions or indications of interest for the purchase
of approximately $5,200,000 of its Series C Preferred Stock, of which
approximately $3,000,000 consists of subscriptions by USV. The Series C
Preferred Stock would be convertible into shares of the Company's Common Stock
at a conversion price per share ranging from $0.90 to $2.00, which will be
determined based on the closing sale price for a share of Common Stock on the
closing date of the E2E Acquisition, as quoted on the OTC Bulletin Board. In
connection with the private placements of the Series A Preferred Stock and the
Series C Preferred Stock, the Company has received to date subscriptions for a
total of approximately $6,450,000. The proceeds of these offerings will be used
primarily to finance additional investments in new and existing Internet
businesses that focus on B2B and B2C e-commerce, the payment of costs incurred
and liabilities assumed in connection with the E2E Acquisition and related
business transactions and ongoing working capital needs. See "Business - E2E
Acquisition."
15
<PAGE> 18
Effect of Inflation.
Inflation has not had a material impact on the Company's operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," "believe," "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology,
and are made on the basis of management's plans and current analyses of the
Company, its business and the industry as a whole. These forward-looking
statements are subject to risks and uncertainties, including, but not limited
to, economic conditions, competition, interest rate sensitivity and exposure to
regulatory and legislative changes. The above factors, in some cases, have
affected, and in the future could affect, the Company's financial performance
and could cause actual results for 1999 and beyond to differ materially from
those expressed or implied in such forward-looking statements, even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
This Form 10-K also contains forward-looking statements concerning prospective
future acquisitions and investments, and prospects for such acquisitions and
investments. The Company cautions that the actual developments and results of
the Company's prospective future acquisitions and investments may differ from
its expectations for such prospective future events. There can be no assurance
that the conditions necessary to completing any prospective acquisition,
investment or related financing transaction will be satisfied, or that any such
prospective event will occur. Additional investments by the Company or an
unrelated person in any entity that is a part of E2E's investment portfolio or
E2E provide no assurance that such portfolio company of E2E or E2E will succeed
or that the Company's or E2E's investments will be recovered or profitable. The
Company's assets and operations, including results of operations, would be
affected materially by the extent to which the Company, E2E and E2E's portfolio
companies continue to have access to financing sources on reasonable terms in
order to pursue its and their business plans, by the success or failure of the
business plans of the Company, E2E and E2E's portfolio companies, by economic
conditions generally and particularly in the developing e-commerce market, by
competition and technological changes in the Company's, E2E's and E2E's
portfolio companies industries and businesses, and by the results of the
Company's, E2E's and E2E's portfolio companies' operations if and when
operating. In addition, the occurrence of any of the foregoing events or the
failure of any of the foregoing events to occur would materially affect the
Company's assets, operations and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
16
<PAGE> 19
U.S. TECHNOLOGIES INC.
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 20
Statements of operations 21
Statements of changes in stockholders' equity (capital deficit) 22
Statements of cash flows 23
Notes to financial statements 24-45
</TABLE>
18
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
U.S. Technologies Inc.
Marietta, Georgia
We have audited the accompanying consolidated balance sheets of U.S.
Technologies Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity (capital
deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Technologies
Inc. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
March 17, 2000, except for Note 18,
which is as of April 5, 2000
19
<PAGE> 21
U.S. Technologies Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 9,451 $ 110,140
Trade accounts receivable, net of reserves
of $206,000 and $140,000 195,289 572,975
Inventory, net 260,575 585,855
Prepaid expenses 39,340 29,831
------------ ------------
Total current assets 504,655 1,298,801
------------ ------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation 571,383 499,749
------------ ------------
OTHER ASSETS
Net investment in and advances to subsidiary held for sale -- 524,558
Other assets 16,058 44,425
------------ ------------
Total other assets 16,058 568,983
------------ ------------
Total assets $ 1,092,096 $ 2,367,533
============ ============
Current liabilities
Accounts payable $ 1,004,237 $ 1,124,027
Accrued expenses 267,587 471,552
Current portion of long-term debt and capital lease obligation 27,270 16,050
------------ ------------
Total current liabilities 1,299,094 1,611,629
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION,
less current portion 13,794 31,862
------------ ------------
Total liabilities 1,312,888 1,643,491
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series A convertible preferred stock;
$0.02 par value; 10,000,000 shares
authorized; 500,000 issued and
outstanding at December 31, 1999 5,000,000 --
Series A convertible preferred stock
subscribed but unissued 289,703 3,648,682
Common stock; $0.02 par value; 40,000,000 shares
authorized; 29,195,278 shares issued and outstanding 583,906 583,906
Additional paid-in capital 12,275,655 12,605,029
Accumulated deficit (17,992,167) (15,735,686)
Stock receivable (150,205) (150,205)
Treasury stock, at cost (227,684) (227,684)
------------ ------------
Total stockholders' equity (capital deficit) (220,792) 724,042
------------ ------------
Total liabilities and capital deficit $ 1,092,096 $ 2,367,533
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 3,764,785 $ 6,107,244 $ 4,166,626
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 4,458,881 5,349,459 3,424,313
Selling expense 43,658 313,283 70,869
General and administrative expense 1,988,113 2,788,104 1,118,310
Impairment of long-lived assets -- -- 1,408,839
Restructuring charge -- 90,000 196,903
Other - litigation -- -- 252,256
------------ ------------ ------------
Total operating costs and expenses 6,490,652 8,540,846 6,471,490
------------ ------------ ------------
Loss from operations (2,725,867) (2,433,602) (2,304,864)
------------ ------------ ------------
OTHER EXPENSE (INCOME)
Interest, net (28,893) 112,325 25,191
Other, net 202,271 18,782 (87,310)
Gain on sale of subsidiary (642,764) -- --
------------ ------------ ------------
Total other expense (income) (469,386) 131,107 (62,119)
------------ ------------ ------------
NET LOSS (2,256,481) (2,564,709) (2,242,745)
Preferred stock dividends 525,114 -- --
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,781,595) $ (2,564,709) $ (2,242,745)
============ ============ ============
Basic and diluted loss per common share $ (0.10) $ (0.09) $ (0.08)
============ ============ ============
Weighted average common shares outstanding 28,795,278 28,996,607 26,793,999
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
<TABLE>
<CAPTION>
SERIES A PREFERRED
COMMON TREASURY CONVERTIBLE COMMON TREASURY STOCK
STOCK STOCK PREFERRED STOCK STOCK STOCK SUBSCRIBED
---------- ---------- --------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 21,857,263 -- $ -- $437,146 $ -- $ --
Stock issued, change in
control 5,507,130 -- -- 110,143 -- --
Note receivable - stockholder -- -- -- -- -- --
Stock options exercised 50,000 -- -- 1,000 -- --
Stock issued to retire debt 583,800 -- -- 11,676 -- --
Stock receivable 633,870 -- -- 12,677 -- --
Accrued interest on note
receivable - stockholder -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- -------- ----------- -----------
BALANCE, December 31, 1997 28,632,063 -- -- 572,642 -- --
Stock issued to retire debt 563,215 -- -- 11,264 -- --
Purchase of treasury shares -- (400,000) -- -- (227,684) --
Proceeds from convertible
preferred stock issuable -- -- -- -- -- 3,648,682
Advance to stockholder -- -- -- -- -- --
Accrued interest on note
receivable - stockholder -- -- -- -- -- --
Transfer to subsidiary to be
sold -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- -------- ---------- -----------
BALANCE, December 31, 1998 29,195,278 (400,000) -- 583,906 (227,684) 3,648,682
Redemption of shares -- (3,000,000) -- -- (1,050,000) --
Sale of treasury stock -- 3,000,000 -- -- 1,050,000 --
Proceeds from convertible
preferred stock issuable -- -- -- -- -- 1,641,021
Issuance of preferred stock -- -- 5,000,000 -- -- (5,000,000)
Compensatory stock option grants -- -- -- -- -- --
Net loss -- -- -- -- -- --
Cash dividends on
Series A preferred stock -- -- -- -- -- --
---------- -------- ---------- -------- ---------- -----------
BALANCE, December 31, 1999 29,195,278 (400,000) $5,000,000 $583,906 $ (227,684) $ 289,703
========== ======== ========== ======== ========== ===========
<CAPTION>
ADDITIONAL NOTE
PAID-IN ACCUMULATED RECEIVABLE- STOCK
CAPITAL DEFICIT STOCKHOLDER RECEIVABLE TOTAL
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $ 11,729,811 $(10,928,232) $ -- $(150,205) $ 1,088,520
Stock issued, change in
control 516,431 -- -- -- 626,574
Note receivable - stockholder -- -- (270,000) -- (270,000)
Stock options exercised 11,500 -- -- -- 12,500
Stock issued to retire debt 134,274 -- -- -- 145,950
Stock receivable -- -- (63,387) -- (50,710)
Accrued interest on note
receivable - stockholder -- -- (26,305) -- (26,305)
Net loss -- (2,242,745) -- -- (2,242,745)
------------ ------------ --------- --------- -----------
BALANCE, December 31, 1997 12,392,016 (13,170,977) (359,692) (150,205) (716,216)
Stock issued to retire debt 213,013 -- -- -- 224,277
Purchase of treasury shares -- -- -- -- (227,684)
Proceeds from convertible
preferred stock issuable -- -- -- -- 3,648,682
Advance to stockholder -- -- (151,212) -- (151,212)
Accrued interest on note
receivable - stockholder -- -- (25,502) -- (25,502)
Transfer to subsidiary to be
sold -- -- 536,406 -- 536,406
Net loss -- (2,564,709) -- -- (2,564,709)
------------ ------------ --------- --------- -----------
BALANCE, December 31, 1998 12,605,029 (15,735,686) -- (150,205) 724,042
Redemption of shares -- -- -- -- (1,050,000)
Sale of treasury stock -- -- -- -- 1,050,000
Proceeds from convertible
preferred stock issuable -- -- -- -- 1,641,021
Issuance of preferred stock -- -- -- -- --
Compensatory stock option grants 195,740 -- -- -- 195,740
Net loss -- (2,256,481) -- -- (2,256,481)
Cash dividends on
Series A preferred stock (525,114) -- -- -- (525,114)
------------ ------------ --------- --------- -----------
BALANCE, December 31, 1999 $ 12,275,655 $(17,992,167) $ -- $(150,205) $ (220,792)
============ ============ ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
U.S. TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,256,481) $(2,564,709) $(2,242,745)
Adjustments to reconcile net loss to
net cash used in operating activities:
Net loss from activities of subsidiary held for sale -- 972,892 --
Gain on sale of subsidiary (642,764) -- --
Depreciation and amortization 178,230 68,573 179,194
Loss (gain) on disposal of assets 178,496 (118,000) --
Advances, net of deficit in operating results,
to subsidiary held for sale (711,682) (767,450) --
Impairment of long-lived assets -- -- 1,408,839
Restructuring costs -- 90,000 --
Inventory valuation allowance -- -- 306,888
Provision for bad debts 66,064 122,000 18,000
Compensatory stock option grants 195,740 -- --
Changes in assets and liabilities,
net of effects of acquisition
Receivables 311,612 (353,648) (120,680)
Inventory 325,280 (510,922) 90,406
Prepaid expenses (9,509) (25,587) (3,971)
Other assets 28,367 (29,005) (10,903)
Accounts payable (119,790) 747,196 (238,363)
Accrued expenses (203,965) (501,951) 53,033
----------- ----------- -----------
Net cash used in operating activities (2,660,402) (2,870,611) (560,302)
----------- ----------- -----------
INVESTING ACTIVITIES
Net proceeds from disposal of assets 1,076,000 118,000 --
Proceeds from collection of notes and
other receivables -- 385,194 --
Advances to former shareholder (200,000) -- --
Purchase of equipment (475,347) (431,298) (58,942)
Net cash paid for acquisition -- (730,000) --
----------- ----------- -----------
Net cash provided by (used in) investing activities 400,653 (658,104) (58,942)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from convertible preferred
stock issuable 1,641,021 3,648,682 --
Sale of treasury stock 1,050,000 -- --
Proceeds from issuance of long-term debt 11,760 -- 36,000
Principal payments on notes payable (18,607) (6,909) (6,179)
Preferred stock dividends paid (525,114) -- --
Proceeds from issuance of convertible debentures -- 224,277 --
Purchase of treasury stock -- (227,684) --
Issuance of common stock -- -- 588,364
----------- ----------- -----------
Net cash provided by financing activities 2,159,060 3,638,366 618,185
----------- ----------- -----------
Increase (decrease) in cash (100,689) 109,651 (1,059)
CASH, beginning of period 110,140 489 1,548
----------- ----------- -----------
CASH, end of period $ 9,451 $ 110,140 $ 489
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
U.S. Technologies Inc. (the "Company") performs labor and service intensive
"outsourcing" work for Fortune 1000 and other select companies. Currently, the
work is performed by inmates in detention facilities located in Texas and
California under the guidelines of a 1979 Federal Government Program known as
the Prison Industry Enhancement program ("PIE"). The Company performs
electronic and furniture assembly, manufacturing, enhancement, rework,
packaging and sorting of products.
The Company operates in privatized prisons under an exclusive agreement with
Wackenhut Corrections Corporation ("WCC"), a leading developer and manager of
privatized correctional and detention facilities in the United States, Canada,
the United Kingdom and Australia. The agreement with the WCC also permits the
Company to contract with state and federally operated facilities. WCC is the
second largest manager of privatized correctional facilities in the United
States. Currently WCC manages 35 detention facilities in the United States and
has begun construction on new industry buildings at certain of its sites for
use by the Company. WCC does not have an ownership interest in the Company.
The Company's wholly-owned subsidiaries include Labor-to-Industry Inc. ("LTI"),
Service-to-Industry Inc. ("STI") and through February 12, 1999, GWP, Inc.
("GWP"). LTI produces labor intensive tangible products and STI is a service
provider operating an inbound/outbound call center. GWP is a holding company
for a 51% interest in Technology Manufacturing and Design, Inc. ("TMD"). TMD is
a "free-world" (i.e., non-prison) contract manufacturer of electronic circuit
boards.
LTI operations included electronics-related assembly for all years presented,
furniture-related assembly commencing September 1998, and cut-and-sew operations
commencing May 1998. The cut-and-sew operations were discontinued in February
1999. STI operated the call center from June 1998 and temporarily suspended
operations in January 1999. The 51% interest in TMD was acquired effective
October 5, 1998. On February 15, 1999, GWP including its interest in TMD were
sold to Mr. Kenneth H. Smith, the former president of the Company as part of a
severance agreement (Notes 2 and 3).
The consolidated statements of operations, cash flows and changes in
stockholders' equity include the accounts of the Company and its subsidiaries,
including GWP and TMD, subsidiaries held for sale at December 31, 1998. Since
GWP and TMD were sold during 1999, the net assets as of December 31, 1998 are
recorded in the accompanying balance sheet as "Net investment in and advances
to subsidiary held for sale." All material intercompany accounts and
transactions are eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturity
dates of three months or less from the date of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined by the average cost
method, or market.
24
<PAGE> 26
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Impairment
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, requires that long-lived assets and certain intangibles to be held and used
by the Company be reviewed for impairment. The Company periodically assesses
whether there has been a permanent impairment of its long-lived assets, in
accordance with SFAS No. 121. A write-down of assets due to impairment was
required for the year-ended December 31, 1997, in the amount of approximately
$1.4 million (Note 4).
Property and Depreciation
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, renewals and improvements of property and equipment
are capitalized. Expenditures for repairs, maintenance and gains or losses on
disposals are included in operations. Depreciation is computed using the
straight-line method over the following estimated lives:
<TABLE>
<CAPTION>
ESTIMATED LIVES
---------------
<S> <C>
Equipment 5-7 years
Furniture and fixtures 7 years
Leasehold Improvements 6 years
</TABLE>
Revenue Recognition and Accounts Receivable
Revenue is recognized when the product is shipped. An allowance for doubtful
accounts is provided based on periodic review of the accounts.
Restructuring Costs
The Company records the costs of severance and lay-offs related to the
Company's employees in accordance with Emerging Issues Task Force ("EITF")
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring).
Income Taxes
The Company accounts for income taxes under the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates. The Company
provides a valuation allowance against its deferred tax assets to the extent
that management estimates that it is "more likely than not" that such deferred
tax assets will not realized.
25
<PAGE> 27
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Share
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
which is effective for fiscal years ending after December 15, 1997. Basic
earnings per common share are based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of convertible preferred stock, stock options and warrants. For
all periods presented diluted earnings per share have not been presented
because the impact of the assumed exercise of convertible preferred stock,
stock options and warrants would have been anti-dilutive. The impact of the
assumed exercise may have a dilutive effect in the future.
Stock Option Plans
Effective in 1997, the Company adopted the disclosure - only option of SFAS No.
123, Accounting for Stock Based Compensation. SFAS No. 123 requires that
companies that do not choose to account for stock based compensation as
prescribed by the statement shall disclose the pro forma effects on earnings
and earnings per share as if the expense recognition provisions of SFAS No. 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the effects
of SFAS No. 123. Compensation expense is computed for options granted to
non-employees using the Black-Scholes option pricing model.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates for many reasons including
risks and uncertainties. Potential risks and uncertainties include such factors
as the financial strength of the electronics manufacturing industry, sales in
the electronics manufacturing industry and competition.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets are not materially different from
their fair values.
26
<PAGE> 28
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 137 delayed the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2001, to affect its
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. RESTRUCTURINGS AND FUTURE OPERATIONS
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company incurred significant losses during each of the three years in the
period ended December 31, 1999, and had working capital deficiencies at
December 31, 1999 and 1998.
In January 1997, as part of the transaction through which control of the
Company passed to the new management team, the Company received a significant
infusion of equity capital of approximately $536,000. This capital infusion was
used to finance the expansion of the Company's operations. The new management
team took immediate steps to cut costs and improve production management,
product quality and customer service. All the steps resulted in an immediate
increase in revenues with existing customers and opportunities to serve new
customers. These steps also resulted in the recognition of a restructuring
charge to recognize the cost of severance and lay-off of excess personnel of
approximately $197,000.
The new management team also made a thorough evaluation of the value of the
assets acquired by prior management and took appropriate steps to write-off the
value of assets which would not be realized, totaling approximately $1,409,000,
and obsolete inventory, in the amount of approximately $307,000. The new
management team acted to resolve most of the outstanding litigation, inherited
from prior management, recognizing a charge of approximately $252,000. The
Company's new management also converted approximately $119,000 of the Company's
long-term debt and $27,000 of accrued interest into equity.
In 1998, further steps were taken to turn around the negative financial results
of the Company. These steps included raising capital from an issuance of
convertible debentures, entering into a $5 million preferred stock investment
agreement with USV Partners, LLC ("USV") and cost reductions from
termination of certain executive, management and inmate personnel.
27
<PAGE> 29
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional steps taken in 1999 included closing one unprofitable division
temporarily (the call center operators of STI) and another unprofitable
division indefinitely (the cut and sew operations of LTI), and obtaining the
resignations of Mr. Kenneth H. Smith, chairman of the board of directors,
president and chief executive officer, and Mr. James C. Melton, Sr., member of
the board of directors and executive vice president.
GWP acquired its interest in TMD during 1998. TMD was initially expected to
complement the Company's existing business operations. However, TMD continued to
generate significant operating losses and was sold subsequent to year-end to Mr.
Smith in conjunction with his severance agreement (see Note 3).
The Company has filled the vacancies left by Mr. Smith's resignation with Mr. C.
Gregory Earls. Mr. Earls is a substantial investor in the Company and a member
of the board of directors. Mr. Earls is also the sole member of USV Management,
LLC, the manager of USV. Through USVC, Mr. Earls has successfully assisted the
Company gain access to investment capital and has committed to generate
additional capital for the Company as necessary.
On November 29, 1999, the Company, James V. Warren and J.L. (Skip) Moore
entered into a Management Agreement (the "Management Agreement"). Under the
terms of the Management Agreement, Mr. Warren was elected a Director,
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer
of the Company. In his positions as Co-Chairman and Co-Chief Executive Officer
of the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman
and Chief Executive Officer of the Company were modified to include Mr. Warren.
Also, under the terms of the Management Agreement, Mr. Moore was elected to
serve as the Company's Executive Vice-President and Chief Operating Officer.
The accounting functions of the Company have also been moved from the Company's
manufacturing facility at Lockhart, Texas to Atlanta, Georgia in accordance
with the terms of the Management Agreement.
In connection with the Management Agreement, the Company issued stock options
for 1,500,000 shares to Mr. Warren and 400,000 shares to Mr. Moore. These
options have a fair market value in the aggregate of $195,740, which has been
included within general and administrative expense in the accompanying 1999
statement of operations.
Finally, as further discussed in Note 18, subsequent to December 31, 1999, the
Company has commenced private placements to raise between $6,250,000 and
$10,000,000.
The Company's continued existence is dependent upon its ability to continue to
resolve its liquidity problems and begin to generate positive earnings and cash
flow from operations. While there is no assurance that such problems can be
resolved, the Company believes there is a reasonable expectation of achieving
that goal through cash generated from operations (as a result of new management
of the company by individuals with significant industry experience), the
expansion of operations and the sale of additional stock through private
placements. Should the Company be unable to achieve its financial goals, the
Company may be required to significantly curtail its operations.
3. BUSINESS COMBINATION
As described in Note 1, GWP acquired a 51% interest in TMD for $730,000 in
October 1998 and subsequently sold GWP including its 51% interest in TMD to Mr.
Smith in February 1999.
28
<PAGE> 30
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarize the fair values of the assets acquired and
liabilities assumed in connection with the acquisition:
<TABLE>
<S> <C>
Current assets $ 1,237,312
Property and equipment 2,096,196
Net assets held for sale 275,000
Other assets, including goodwill 2,482,466
Current liabilities (2,709,148)
Other liabilities (2,651,826)
-----------
$ 730,000
===========
</TABLE>
Net assets held for sale represent a circuit board design operation of TMD,
sold in December 1998. Net operating results of the circuit board design
operation were not significant.
In conjunction with the acquisition, the Company guaranteed the future purchase
of the 49% minority interest of TMD. The purchase price of the minority
interest is based on a multiple of earnings before interest, taxes,
depreciation and amortization ("EBITDA"), to be completed between October 2000
and October 2001.
The accompanying statement of operations include net sales of approximately
$948,000 and $2,119,000, respectively, net loss of approximately $124,000 and
$973,000, respectively, and net loss per share of less than $0.01 and $0.03,
respectively, attributed to TMD for the years ended December 31, 1999 and 1998.
However, because of the sale of TMD subsequent to year-end, unaudited pro forma
results of operations for the years ended 1999, 1998 and 1997 are not
considered meaningful and have not been presented.
On February 11, 1999, Kenneth H. Smith resigned as President and Chief
Executive Officer of and as a director of the Company. Pursuant to the
severance agreement entered into between the Company and Mr. Smith, the Company
sold its wholly owned subsidiary, GWP to Mr. Smith. The sole asset of GWP was
an ownership interest in an amount of capital stock of TMD, which represented a
controlling interest in TMD. This majority interest in TMD was acquired by GWP
in early October 1998 for $730,000, which was contributed by the Company to GWP
for the express purpose of purchasing TMD stock. In addition to contributing to
GWP the funds necessary to complete the purchase of a controlling interest in
TMD, from early October, 1998 through February 11, 1999, the Company through
GWP also contributed
29
<PAGE> 31
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $1,337,000 in working capital funds to TMD. The Company also
guaranteed certain existing obligations of TMD, including the repayment of
TMD's Fidelity Funding Inc. loan, pursuant to the Loan and Security Agreement
between TMD and Fidelity Funding, Inc., dated as of November 30, 1998.
The net liabilities of GWP and its interest in TMD, and the Company's net
investment in and advances to GWP, TMD and Mr. Smith at December 31, 1998, are
summarized as follows:
<TABLE>
<S> <C>
Current assets $ 1,572,243
Property and equipment 1,848,503
Other assets, including goodwill 2,734,750
Current liabilities (4,357,782)
Notes payable (2,770,626)
-----------
Net liabilities (972,912)
Investments and advances 1,497,470
-----------
Net investments and advances $ 524,558
===========
</TABLE>
The sale of GWP was concluded on February 15, 1999. The total purchase price
for GWP was approximately $2,451,000. This amount represented the Company's
estimate of its investment in TMD through February 11, 1999 and certain legal
and other transactional costs Mr. Smith agreed to assume. A portion of the
purchase price for GWP was paid in the form of a promissory note executed by
Mr. Smith in the principal amount of $1,234,832 bearing interest annually at
the Wall Street Journal's prime rate of interest plus two percent (2%). The
principal amount of Mr. Smith's promissory note and any accrued unpaid interest
were due and payable in full on February 15, 2002. Mr. Smith and TMD also
agreed to guarantee any of TMD's obligations for which the Company was a
guarantor. Repayment of the promissory note and the performance of Mr. Smith's
guaranty obligations to the Company were secured by Mr. Smith's pledge to the
Company of his 3,000,000 shares of the Company's Common Stock. The performance
of GWP's guaranty obligations to the Company was secured by GWP's pledge to the
Company of all of its stock holdings in TMD.
A portion of the purchase price was paid through Mr. Smith's sale of 3,366,152
shares of Common Stock to USV, a limited liability company controlled by
Gregory Earls, the Co-Chairman of the Company's Board of Directors and Co-Chief
Executive Officer of the Company. The aggregate purchase price of these shares
was approximately $1,076,000. USV paid this purchase price directly to the
Company, which applied such funds toward the amount payable by Mr. Smith to the
Company in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that
date for a share of Common Stock, as quoted on the OTC Bulletin Board. The
closing sale price on April 1, 1999 was $0.35 per share, for a total sale price
of $1,050,000. The aggregate sale price of $1,050,000, less the expenses
associated with the sale, was applied in reduction of Mr. Smith's indebtedness
to the Company. The 3,000,000 shares of Common Stock were sold to USV. In
payment of the $1,050,000 sale price, USV executed a promissory note in favor
of the Company. This promissory note was secured by USV's pledge of the
3,000,000 shares of Common Stock it purchased on April 1, 1999 and was paid in
full by October 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse judgment
is rendered against the Company by any court of competent jurisdiction in
connection with its guaranty obligations of TMD, or (iii) any new default under
Mr. Smith's promissory note. The note amount of $525,000 was outstanding at
December 31, 1999. Due to the uncertainty related to the collection of this
note, the company fully reserved this amount.
30
<PAGE> 32
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company continues to be subject to the guarantee of the future purchase of
the 49% minority interest in TMD. Mr. Smith and TMD agreed to guarantee any of
TMD's obligations for which the Company was a guarantor.
4. IMPAIRMENT AND RESTRUCTURING CHARGE
As a result of changes in the Company's management in 1997, a thorough
evaluation of the Company's operations was undertaken, including, among other
things, the carrying value of long-lived assets in light of the recurring
operating losses and uncertainty regarding the recoverability of such assets.
Effective April 1, 1997, management determined that based on the current market
conditions and an analysis of the projected undiscounted future cash flows
calculated in accordance with the provisions of SFAS No. 121, the carrying
amount of its goodwill and investments in technology may not be recoverable. The
resultant impairment of these long-lived assets necessitated a write-down of
$1,408,839, comprised of unamortized goodwill and investments in technologies of
Newdat, Inc. and SensonCorp Limited, acquired in January 1995, and subsequently
administratively dissolved.
During 1997, management also evaluated personnel requirements in light of the
current level and mix of operating revenues. The evaluation resulted in
management, sales and administrative personnel being reduced from 16 to three,
and the number of inmate employees being reduced from approximately 125 to
approximately 75. Effective April 1, 1997, the Company recorded a restructuring
charge in the amount of $196,903 to record the costs of severance and lay-off
of excess personnel. The restructuring was completed as of June 30, 1997.
During 1998, the Company hired four management-level personnel to generate and
manage anticipated growth. Effective December 28, 1998, in light of actual
operations, three of these management-level personnel were terminated in
addition to one executive level officer. Total severance to be paid to these
individuals was approximately $49,000 plus an additional $41,000 in expenses,
which was recorded and accrued as restructuring charges as of their termination
date.
As described in Note 2, Messrs. Smith and Melton resigned effective February
11, 1999, and February 15, 1999, respectively. Total severance and other costs
related to their resignations of approximately $231,000 which was recognized by
the Company in the first quarter of 1999.
5. INVENTORIES
At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw material $217,348 $511,766
Work in progress 42,180 239,243
Finished goods 1,047 60,846
-------- --------
260,575 811,855
Reserve for obsolescence -- 226,000
-------- --------
$260,575 $585,855
======== ========
</TABLE>
The Company provided a reserve for obsolete raw materials which was charged to
operations of $0, $0 and
31
<PAGE> 33
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$306,888, during the years ended December 31, 1999, 1998 and 1997,
respectively.
6. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Equipment $1,419,825 $1,211,508
Furniture and fixtures 315,465 335,337
Leasehold improvements 166,081 161,895
---------- ----------
1,901,371 1,708,740
Less accumulated depreciation 1,329,988 1,208,991
---------- ----------
$ 571,383 $ 499,749
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$178,230, $68,573, and $90,072, respectively.
7. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Compensation $ 200,873 $ 292,905
Property taxes 24,793 17,111
Accrued restructuring cost -- 90,000
Travel -- 63,950
Other 41,921 7,586
---------- ----------
$ 267,587 $ 471,552
========== ==========
</TABLE>
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligation consisted of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Capital lease obligation, with monthly payments
of $778 through July, 2002 and
imputed interest of 9% $ 21,540 $ 28,834
5% unsecured note payable; due July 27, 2000 7,764 19,078
9% unsecured note payable; due October 1, 2000 11,760 --
---------- ----------
Total $ 41,064 $ 47,912
========== ==========
</TABLE>
32
<PAGE> 34
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Annual maturities of long-term debt and capital lease obligation are as
follows:
<TABLE>
<CAPTION>
CAPITAL
DECEMBER 31, NOTES LEASES TOTAL
-------------- ------------ -------------
<S> <C> <C> <C>
2000 $ 19,524 $ 9,336 $ 28,860
2001 - 9,336 9,336
2002 - 5,446 5,446
------------- ------------ ------------
Subtotal 19,524 24,118 43,642
Less amounts representing interest - 2,578 2,578
------------- ------------ ------------
$ 19,524 $ 21,540 $ 41,064
============= ============ ============
</TABLE>
During 1998, the Company converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,000 shares of the Company's stock.
9. LEASES
During 1997, the Company operated under a verbal lease and work program
agreement with WCC, The Texas Department of Criminal Justice, Division of
Pardons and Paroles ("TDCJ") and the City of Lockhart, Texas, for its LTI
operations to lease approximately 27,800 square feet of manufacturing and
office space. In 1998, WCC and the Company executed a written agreement
effective through January 31, 2001, which will include an automatic three-year
extension. The Company executed similar agreements with WCC and the California
Department of Corrections for its MacFarland, California facility and the State
of Utah, Department of Corrections, Division of Correctional Industries for its
Draper, Utah facility. The MacFarland agreement commenced on June 1, 1998 and
provides for 600 square feet with annual rentals of $1 per year through March
2001. The Draper agreement commenced in June 1998 and provides for 5,000 square
feet with annual rentals of $1 per year with renewal options through June 2004.
The Company entered into an agreement with the State of California, acting by
and through its Director of General Services, with the approval of the
Department of Corrections, to lease space in the Chuckawalla Valley State
Prison (CVSP) located in Blythe, California. The lease provides for
approximately 20,300 square feet of warehouse space, and approximately 16,000
square feet of office space for a total of 36,300 square feet, located within
the boundaries of CVSP. The lease commenced on September 1, 1998 and terminates
on August 31, 2003, with monthly payments of $726.
The Company leases approximately 3,000 square feet for its executive offices in
Marietta, Georgia, under a three-year operating lease expiring September 30,
2000. Monthly rentals under this lease are $4,287. The Company is obligated
under several operating leases for vehicles and office equipment.
33
<PAGE> 35
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rentals due under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
2000 $ 82,279
2001 20,701
2002 20,701
2003 16,798
-----------
$ 140,479
===========
</TABLE>
Rental expense for the years ended December 31, 1999 and 1998 and 1996 were
$84,994, $109,204, and $62,308, respectively.
10. INCOME TAXES
The Company incurred taxable losses for each of the three years ended December
31, 1999. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS
Current assets and liabilities $ 283,000 $ 190,000
Net operating loss carryforwards 5,169,000 4,218,000
Valuation allowance (5,452,000) (4,408,000)
------------- -------------
$ -- $ --
============= =============
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $13,602,000 for federal income tax purposes that expire in years
2004 through 2014. The Company's utilization of losses prior to 1997 to offset
future taxable income is limited to approximately $574,000 per year as a result
of a change in control of the Company, in accordance with Internal Revenue Code
Section 382. Utilization of the losses and other deferred tax assets may be
further limited by alternative minimum tax provisions.
34
<PAGE> 36
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of income tax computed at the United States federal
statutory tax rate (34 percent) to income tax benefit is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Benefit at United States statutory rate $ (872,000) $ (872,000) $ (763,000)
State tax benefit (154,000) 154,000 135,000
Permanent differences (18,000) 30,000 214,000
Change in deferred tax asset
valuation allowance 1,044,000 688,000 414,000
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
</TABLE>
11. STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Common Stock and Earnings Per Share
The Company had 40,000,000 authorized shares of $0.02 par value common stock
and 10,000,000 authorized shares of $0.02 par value preferred stock at December
31, 1999. Shares of common stock issued and outstanding were 29,195,278 at
December 31, 1999 and 1998.
Diluted EPS have not been presented due to stock options and warrants which
comprised common stock equivalents totalling 51,887,158, 267,400 and 267,400
for the years ended December 31, 1999, 1998 and 1997, respectively, being
anti-dilutive.
During 1996, the Company issued 1,845,300 shares of common stock to retire
outstanding notes payable of $571,237 to Carlton Technologies Ltd. At the time
the stock was issued to Carlton Technologies Ltd., only $421,032 of notes
payable was due; therefore a receivable of $150,205 has been recorded as a
reduction of stockholders' equity.
Effective January 1, 1997, a group of individuals entered into an agreement
with the then majority owners of the Company to acquire control of the Company.
The individuals were principally Mr. Smith and Mr. James V. Warren. Mr. Smith
served as the Company's Chairman of the Board of Directors, President and Chief
Executive Officer (CEO). As a part of the agreement, certain accounts
receivable, accrued expenses and notes payable arising from companies
controlled by former majority owners, Tintagel, Ltd., Laura Investments, Ltd.,
and Laura Technologies, Ltd., in the amount of $748,215 were contributed to
additional paid-in capital effective December 31, 1996. In 1997, in connection
with the foregoing acquisition, the Company issued 6,000,000 shares of the
Company's common stock in exchange for $536,613 and a note in
35
<PAGE> 37
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the principal amount of $63,387 from Mr. Smith. The note receivable from Mr.
Smith has been recorded as a reduction in stockholders' equity. In addition,
the investor group led by Mr. Smith and Mr. Warren acquired an additional
9,169,000 shares of the Company's common stock from companies owned or
controlled by Tintagel, Ltd., and Komen Holdings Pty, Ltd., another affiliate
of the former majority owners.
During 1997, the Company converted $119,000 in aggregate principal of certain
notes payable plus accrued interest of $26,950 into 583,800 shares of the
Company's common stock. Also during 1997, the Company issued 87,000 shares of
the Company's common stock to Mr. Melton, and 54,000 shares of the Company's
common stock to Mr. C. Ray Brumbeloe, a former officer of the Company, at the
current market price.
During 1998, the Company converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,215 shares of the Company's stock.
During 1999, the Company exercised its rights under the pledge agreement and
sold 3,000,000 shares pledged by Mr. Smith (See note 3).
Warrants
In conjunction with issuance of $275,000 convertible debentures in January
1998, the Company granted the placement agent warrants to acquire 275,000
shares of Common Stock for $1. The warrants are exercisable for five years. All
of the warrants remain outstanding at December 31, 1999.
Convertible Preferred Stock Issued with Warrants
Commencing on July 9, 1998 and continuing through May 11, 1999, the Company
received $5,000,000 under an agreement with USV which provided that the Company
would issue to USV warrants to purchase 500,000 shares of Common Stock (the
"Warrants") and shares of its Series A Preferred Stock pursuant to Regulation
"D" promulgated under the Securities Act of 1933. Of the $5,000,000, amounts
received during 1999 and 1998 were $1,300,000 and $3,700,000, respectively. The
shares of Series A Preferred Stock and the Warrants were issued to USV on May
11, 1999. The net proceeds to the Company were used to provide working capital
to support the Company's 1999 and 1998 operations and fund the 1998 purchase of
a controlling interest in TMD by the Company's wholly owned subsidiary, GWP. The
Earls Family Limited Partnership made a contribution of approximately $400,000
to USV, which allowed USV to complete the payment of the $500,000 purchase price
for the Warrants and the Series A Preferred Stock to the Company. The Earls
Family Limited Partnership is a member of USV. Gregory Earls, the Co-Chairman of
the Company's Board of Directors and the Co-Chief Executive Officer of the
Company, controls both USV and the Earls Family Limited Partnership. Promptly
after USV was issued the Warrants, USV transferred the Warrants to the Earls
Family Limited Partnership. On November 29, 1999, the terms of the Series A
Preferred Stock were amended to cancel the right of the holders of the Series A
Preferred Stock to receive an annual dividend and to change the conversion price
for the Series A Preferred Stock to $0.122. The amended Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock setting
forth these changes was filed with the Delaware Secretary of State on December
31, 1999.
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earls Family Limited Partnership has the right
to exercise its Warrants to purchase Common Stock at any time. If all of the
outstanding shares of Series A Preferred Stock were converted and the Warrants
were exercised in full, the holders of such securities would be entitled to
receive 48,149,758 shares of Common Stock. Each Warrant is exercisable for one
share of Common Stock at a price of $1.00 per share. If all of USV's shares of
Series A Preferred Stock were converted, USV would be
36
<PAGE> 38
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entitled to receive 47,649,758 shares of Common Stock. Because that amount
exceeds the number of shares of Common Stock available for issuance under the
Company's Restated Certificate of Incorporation, USV and the Company entered
into an agreement, dated March 1, 2000, whereby USV waived its right to convert
its shares of Series A Preferred Stock until an appropriate amendment to the
Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State.
Stock Compensation Plans
Prior to 1997, the Company created three qualified and four nonqualified stock
options plans that provide for the granting of incentive and nonqualified
options to purchase the Company's Common Stock to selected officers, other key
employees, directors and consultants. General terms provide for three-year
vesting beginning one year from date of grant, with an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after the employee's termination, or ten years from the date of
grant. The qualified and nonqualified option plans have 531,600 and 290,000,
shares, respectively, available for grant.
During 1999, the Company created the U.S. Technologies, Inc. 1999 Stock Option
Plan to provide for the granting of incentive and nonqualified options to
purchase the Company's Common Stock to selected officers, other key employees,
directors and consultants. General terms provide for an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after the employees terminations, or ten years from the date of
grant. The maximum number of shares that can be reserved under this plan is
3,115,000.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock Based Compensation, effective for the Company
beginning January 1, 1996. SFAS No. 123 defines a "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. If a company elects to use the intrinsic
value method, then pro forma disclosures of earnings and earnings per share are
required as if the fair value method of accounting was applied. The effects of
applying SFAS No. 123 in the pro forma disclosures are not necessarily
indicative of future amounts because the pro forma disclosures do not take into
account the amortization of the fair value of awards prior to 1995.
Additionally, the Company is expected to grant additional awards in future
years.
The Company has elected to account for its stock options under the intrinsic
value method outlined in APB No. 25. The fair value method requires use of
option valuation models, such as The Black-Scholes option valuation model, to
value employee stock options, upon which a compensation expense is based. The
Black-Scholes option valuation model was not developed for use in valuing
employee stock options. Instead, this model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock pride volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, it is
management's opinion that the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options. Under the
intrinsic value method, compensation expense is only recognized if the exercise
price of the employee stock option is less than the market price of the
underlying stock on the date of grant.
37
<PAGE> 39
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with SFAS No. 123, the fair value for the Company's employee
stock options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the year
ended 1999 (no options were granted during 1997 or 1998).
<TABLE>
<S> <C>
Risk-free interest rate 5.4%
Dividend yield -%
Volatility factor 75.0%
Weighted-average expected life (in years) 5.0
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common shareholders
As reported $(2,781,595) $(2,564,709) $(2,242,745)
Pro forma (2,939,384) (2,564,709) (2,242,745)
Earnings per share
As reported (0.10) (0.09) (0.08)
Pro forma (0.10) (0.09) (0.08)
</TABLE>
A summary of stock option activity, and related information for the years 1997,
1998 and 1999 follows. (There was no activity in 1998):
<TABLE>
<CAPTION>
QUALIFIED PLANS NONQUALIFIED PLANS
--------------------------------- -----------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 113,580 2.50 -- --
Granted -- -- -- --
Exercised (50,000) 0.25 -- --
Forfeited or canceled (46,180) 4.27 -- --
--------- ----- --------- -----
Outstanding at December 31, 1997
and 1998 17,400 0.54 -- --
Granted 1,495,000 0.12 1,975,000 0.12
Exercised -- -- -- --
Forfeited or canceled -- -- -- --
--------- ----- --------- -----
Outstanding at December 31, 1999 1,512,400 0.13 -- --
========= ===== ========= =====
Options exercisable at:
December 31, 1997 and 1998 17,400 0.54 -- --
December 31, 1999 1,512,400 0.14 1,975,000 0.12
</TABLE>
The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1999 is $0.10 per share.
38
<PAGE> 40
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company granted options, outside the option plans described
above, to four other parties to purchase 200,000 shares of the Company's Rule
144 stock at $0.50 per share exercisable at various times through May 17, 2001.
The Company also granted to a former board member the option to purchase
150,000 shares at $0.125 per share through May 25, 1999. The validity of the
options granted to the former board member has been questioned by the Company
based on several factors. The Company is evaluating the status of these options
and will take appropriate actions based on that determination. As of December
31, 1998 and 1999, 100,000 of the $0.50 options and all of the $0.125 options
remain outstanding.
The range of exercise prices of all outstanding and exercisable options at
December 31, 1999, is $0.125 - $0.84375, with a weighted average exercise price
of $0.15. The options have remaining contractual lives of 0.4 - 9.8 years, with
a weighted average contractual life of 9.7 years.
12. BUSINESS AND CREDIT CONCENTRATION
The Company is dependent upon certain customers for a major portion of its
sales. High End (a customer of the LTI segment) accounted for 15% of sales for
the years ended December 31, 1999. The sales of services to IBM represented
approximately 43% and 66% for the years ended December 31, 1998 and 1997,
respectively. Texas Instruments accounted for approximately 7% and 19% of total
sales for the years ended December 31, 1998 and 1997, respectively. Amounts due
from three customers, Dell, Vektronix (customers of the LTI segment) and AIS (a
customer of the LTI - Blythe segment) , constituted 87% of the Company's
accounts receivable at December 31, 1999. IBM and Texas Instruments, along with
other customers, High End Systems and Wyle EMG, comprised approximately 16% of
net accounts receivable at December 31, 1998. The Company generally does not
require collateral on its trade accounts receivable.
During all years presented, the Company's operations were primarily in
electronics manufacturing. Until such time as the Company successfully expands
into the call center, furniture manufacturing, and other industries, the
Company will be economically dependent on the health of the electronics
manufacturing industry and the niche in which it provides products and
services.
The Company is also dependent on WCC since the operations of its primary
operating facility is subject to the work program agreement described in Note
9, above.
13. RELATED PARTIES
As of December 31, 1998, the Company had notes and interest receivable from Mr.
Smith aggregating approximately $536,000 in the accompanying balance sheet under
the caption "Net investments in and advances to subsidiary held for sale." In
early 1999, in connection with Mr. Smith's resignation and his purchase of GWP
from the Company, Mr. Smith paid the amount of proceeds of the sale of 3,366,152
shares of Common Stock to USV and executed a three-year note for approximately
$1.2 million in connection with the purchase of GWP (Note 3).
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $38,000, $11,000 and $17,000 for 1999,
1998 and 1997, respectively. During 1998, the Company converted $275,000 of
debentures and accrued interest into 563,215 shares of common stock.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that
date for a share of Common Stock, as quoted on the OTC Bulletin Board. The
closing sale price on April 1, 1999 was $0.35 per share, for a total sale price
of $1,050,000. The aggregate sale price of $1,050,000, less the expenses
associated with the sale, was applied in reduction of Mr. Smith's indebtedness
to the Company. The 3,000,000 shares of Common Stock were sold to USV. In
payment of the $1,050,000 sale price, USV executed a promissory note in favor
of the Company.
39
<PAGE> 41
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FOURTH QUARTER ADJUSTMENTS
Significant adjustments increasing the fourth quarter loss in 1999 and 1998 are
indicated below. There were no significant adjustments increasing the fourth
quarter loss in 1997.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Increase of allowance on note from former officer $288,000 $ --
Increase of allowance for doubtful accounts -- 140,000
Accrued expenses -- 90,000
-------- --------
Aggregate adjustment $288,000 $230,000
======== ========
Aggregate adjustment per common share $ 0.01 $ 0.01
======== ========
</TABLE>
16. SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing the performance. The
Company's chief operating decision makers aggregate operating segments based on
the location of the segment and whether it is prison-based or free-world. Based
on the quantitative thresholds specified in SFAS 131, the Company has determined
that it has four reportable segments. The five reportable segments are USXX
(Marietta, Georgia), LTI (Lockhart, Texas), TMD (Georgetown, Texas) and STI
(Draper, Utah) and LTI Blythe (Blythe, California). USXX is the corporate
office, LTI is a prison-based manufacturer of computer circuit boards, TMD is a
freeworld manufacturer of computer circuit boards, STI is a prison-based
inbound/outbound call center and LTI Blythe is a prison-based furniture
manufacturer. Other segments include manufacturing of modular office furniture
components and cut-and-sew operations.
The accounting policies of the operating segments are the same as those
described in Note 1, Summary of Significant Accounting Policies. Segment
amounts disclosed are prior to any elimination entries made in the
consolidation. The chief operating decision-makers evaluate performance of the
segments based on operating results and EBITDA. EBITDA represents earnings
before interest expense, provision (benefit) for income taxes, depreciation and
amortization, restructuring and special charges. EBITDA is not a measurement in
accordance with generally accepted accounting principles ("GAAP") and should
not be considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
profitability or liquidity. All companies do not calculate EBITDA in the same
manner and, accordingly, EBITDA may not be comparable with other companies.
40
<PAGE> 42
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information by segment follows (in thousands):
<TABLE>
<CAPTION>
LTI
1999 USXX LTI TMD STI BLYTHE OTHER TOTAL
- ----------------- -------- ------- ----- ------ ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ 1,901 $ 948 $ 22 $ 876 $ 18 $ 3,765
Operating profit
(loss) (1,461) (837) (66) (67) (243) (52) (2,726)
Depreciation
and
amortization 8 53 50 22 43 2 178
EBITDA (1,809) (67) (112) (61) (344) (57) (2,450)
Total assets $ 2,887 $ 576 $ -- $ 115 $ 346 $ -- $ 3,924
======= ======= ===== ===== ===== ==== =======
<CAPTION>
1998 USXX LTI TMD STI OTHER TOTAL
- ----------------- -------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $3,918 $ 2,119 $ 13 $ 57 $ 6,107
Operating profit
(loss) (1,552) 212 (660) (262) (172) (2,434)
Depreciation
and
amortization 1 9 33 14 12 69
EBITDA (1,503) 394 (698) (181) (91) (2,079)
Total assets $ 4,386 $1,031 $ 657 $ 337 $ 215 $ 6,626
======= ====== ===== ===== ===== =======
<CAPTION>
1997 USXX LTI TMD STI OTHER TOTAL
- ----------------- -------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $4,167 $ -- $ -- $ -- $ 4,167
Operating profit
(loss) (1,706) 152 -- -- (751) (2,305)
Depreciation
and
amortization 1 67 -- -- 111 179
EBITDA (578) 397 -- -- -- (181)
Total assets $ 2,956 $ 532 $ -- $ -- $ -- $ 3,488
======= ====== ===== ===== ===== =======
</TABLE>
41
<PAGE> 43
U.S. TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Assets
Total segment assets $ 3,924 $ 6,626
Eliminations (2,832) (4,258)
------------ ------------
Reported total assets $ 1,092 $ 2,368
============ ============
</TABLE>
17. CONTINGENCIES
The Company had guaranteed certain liabilities, of up to $2.5 million, and the
purchase of the minority interest in TMD, based on a multiple of earnings
before interest, taxes, depreciation and amortization (Note 3). On February 16,
1999, in the case styled Fidelity Funding vs. Ken Smith, et al, in the 14th
Judicial District of Dallas County, Texas, Fidelity Funding, Inc. (Fidelity)
sued Mr. Smith and the Company in the amount of $839,449, the amount allegedly
owed by Technology Manufacturing and Design, Inc., ("TMD") to Fidelity under a
secured credit facility extended by Fidelity to TMD in November of 1998. The
suit resulted after the Company sold its 51% interest in TMD to Mr. Smith and
after TMD filed bankruptcy. The suit seeks to enforce a payment guaranty of the
Company with respect to the balance of principal and accrued interest owed by
TMD to Fidelity under this secured credit facility. The bankruptcy court for
the Western District of Texas has permitted Fidelity to collect the remaining
principal and interest due under this credit facility from the accounts
receivable securing this credit facility. As a result, Fidelity decided not to
pursue its action against the Company and on June 17, 1999, filed a nonsuit,
dismissing this lawsuit.
The Company is involved in several lawsuits related to prior management and
claims against companies acquired or controlled by prior management. One of
these suits claim that the Company is liable as a successor-in-interest for
amounts owned by entities whose assets were acquired by the Company. The
aggregate amount claimed under this lawsuit, including interest and attorney
fees, is approximately $54,000. Management believes the claim is without merit,
and accordingly is vigorously defending the lawsuit.
The Company is involved in two lawsuits brought by former management employees
who claim to be entitled to certain severance benefits and back pay. The
aggregate amount claimed under these lawsuits, including interest and attorney
fees, is approximately $360,000. Management is vigorously defending these
lawsuits.
Effective April 1, 1997 the Company accrued a charge in the amount of $252,256
to recognize the costs which were deemed to be "probable" under SFAS No. 5,
Accounting for Contingencies, to resolve outstanding litigation. As of December
31, 1999 and 1998, the remaining balance of this accrual to resolve outstanding
litigation was $28,000.
18. SUBSEQUENT EVENTS
On February 21, 2000, the Company entered into an agreement ("E2E Acquisition
Agreement") to acquire all of the outstanding stock of E2Enet, Inc. ("E2E").
The Company initially agreed to acquire E2E by purchasing all of E2E's
outstanding stock in exchange for shares of a Series B Mandatorily Convertible
42
<PAGE> 44
Preferred Stock, par value $0.02 per share ("Series B Preferred Stock"), to be
newly created by the Company. However, in late March 2000, it became clear that
if the E2E Acquisition remained structured as a share exchange, the transaction
would not qualify for treatment as a tax-free exchange because certain
stockholders of E2E would receive consideration other than voting stock of the
Company. To preserve the tax-free nature of the E2E Acquisition, the Company,
E2E and certain stockholders of E2E agreed on April 5, 2000 to change the
structure of the E2E Acquisition from a share exchange to a merger between E2E
and a wholly-owned subsidiary of the Company, U.S. Technologies Acquisition
Sub, Inc. ("U.S. Technologies Acquisition"). Accordingly, the Company proposes
to acquire E2E by causing U.S. Technologies Acquisition to merge with and into
E2E. U.S. Technologies Acquisition will be the surviving corporation of this
merger, and upon the consummation of this merger, U.S. Technologies Acquisition
will change its name to E2E Net, Inc. As a result, upon the completion of the
E2E Acquisition, E2E will become a wholly owned subsidiary of the Company.
When the E2E Acquisition closes, E2E's stockholders will be issued shares of
Series B Preferred Stock, which will have a stated liquidation preference
aggregating approximately $11,200,000, and certain minority stockholders of E2E
will also receive options to purchase shares of the Company's common stock, par
value $0.02 ("Common Stock"). Upon their mandatory conversion as described
below, these shares of Series B Preferred Stock will be converted into
approximately 56,000,000 shares of Common Stock.
The Company agreed, under the E2E Acquisition Agreement, to raise at least
$6,250,000 and up to $10,000,000 of new capital funds at or prior to the
closing of the E2E Acquisition. To raise these funds, the Company recently
commenced the private placement sale of $1,250,000 of additional shares of its
Series A Convertible Preferred Stock, par value $0.02 (the "Series A Preferred
Stock"), to USV Partners, LLC ("USV"), a limited liability company controlled
by Gregory Earls, the Company's Co-Chairman and Co-Chief Executive Officer,
which is the Company's largest shareholder, and at least $5,000,000 and up to
$8,750,000 of its newly created Series C Mandatorily Convertible Preferred
Stock, par value $0.02 ("Series C Preferred Stock"), to accredited investors.
The Company has thus far received subscriptions or indications of interest for
the purchase of approximately $5,200,000 of its Series C Preferred Stock, of
which approximately $3,000,000 consists of subscriptions by USV. In connection
with the private placements of the Series A Preferred Stock and the Series C
Preferred Stock, the Company has received to date subscriptions for a total of
approximately $6,450,000. The Series C Preferred Stock would be convertible
into shares of Common Stock at a conversion price per share ranging from $0.90
to $2.00, which will be determined based on the closing sale price for a share
of Common Stock on the closing date of the E2E Acquisition, as quoted on the OTC
Bulletin Board. The proceeds of these offerings will be used primarily to
finance additional investments in new and existing Internet businesses that
focus on B2B and B2C e-commerce, the payment of costs incurred and liabilities
assumed in connection with the E2E Acquisition and related business
transactions and ongoing working capital needs.
The Company intends, and is required by the E2E Acquisition Agreement to call a
meeting of its stockholders for the purpose of amending the Company's Restated
Certificate of Incorporation. The proposed amendment (the "Charter Amendment")
will increase the number of shares of Common Stock the Company is authorized to
issue to an amount sufficient to permit the conversion to Common Stock of all
of the Company's then-outstanding shares of all of its authorized and
designated series of convertible preferred stock, including the Company's
Series A Preferred Stock, the Series B Preferred Stock to be issued to E2E's
stockholders, and the Series C Preferred Stock. In addition to authorizing a
sufficient number of shares of Common Stock to permit conversion to Common
Stock of all of the Company's outstanding shares of convertible preferred
stock, the Charter Amendment's proposed increase to the number of shares the
Company is authorized to issue will also include an amount sufficient to permit
the conversion to Common Stock of any other then-outstanding securities or
options, which are convertible into or otherwise permit the holder thereof to
purchase or otherwise receive shares of Common Stock. Upon the acceptance of
the Charter Amendment by the Secretary of State of the State of Delaware, the
Series B Preferred Stock and the Series C Preferred Stock will automatically be
converted into shares of Common Stock. USV has also indicated its intention to
convert all of its shares of Series A Preferred Stock to Common Stock at that
time.
The Company also announced that it will expand its Board of Directors in
connection with the completion of the E2E Acquisition. The new directors will
also stand for election at the Company's next annual meeting, which also is
when the Company expects to present the Charter Amendment for Stockholder
approval.
43
<PAGE> 45
E2E has various interests in several development stage Internet e-commerce
companies. These portfolio companies principally include:
- Buyline.net, Inc. ("Buyline"). Buyline is a developer of B2B
e-commerce applications, and is developing a proprietary
Internet software program designed to be a universal platform
for entry-level B2B e-commerce, linking buyers and sellers.
Buyline's application for RFP/RFQ technology (Request for
Proposal/Request for Quotation) will be used in a full range
of on-line advertising, on Internet based directories, and in
commercial web sites.
- VIPRO Corporation ("Vipro"). Vipro is an Internet surety
company, which provides repair guarantees against viruses that
harm computers. The Company has e-commerce relationships with
a leading Internet utility company, a credit card association,
one of the largest warranty claims administrators in the world
and over 170 Internet service providers.
- Urban Box Office Network, Inc. ("UBO"). UBO is a developer of
networked multi-media web sites that will provide e-commerce
services to participants interested in urban culture,
information, entertainment and products.
- OneMade, Inc. ("OneMade"). OneMade is a developer of an
e-commerce community that will serve participants in the
arts, crafts, and hobby industries. OneMade intends to
connect wholesalers, retailers, consumers and artists in
these fields.
- bluemercury, Inc. ("bluemercury"). bluemercury operates an
e-commerce site for upscale cosmetic products and
accessories. It intends to pursue a "clicks and bricks"
strategy by also acquiring high-end cosmetic specialty
retailers.
- MEI Software Systems, Inc. ("MEI"). MEI provides customized
software systems to manage the databases of trade
associations, professional associations, fund-raising
organizations and chambers of commerce.
The Company intends to restructure some of E2E's investments in its portfolio
companies and provide these entities with additional working capital to
stimulate their further growth and expansion. E2E's initial investment in
Buyline will be restructured and increased so that Buyline becomes a controlled
operating subsidiary. On February 28, 2000, Buyline and the Company entered into
an Agreement in Principle (the "Buyline Agreement"), which provides that E2E
will invest $3,000,000 in Buyline and will receive in exchange shares of
Buyline's common stock. This investment will consist of (1) the conversion of
E2E's existing loans to Buyline (including accrued interest), (2) acknowledgment
of in kind services already rendered, and (3) an additional $1,000,000 cash
investment. In addition, the two principal stockholders and creditors of E2E
will each invest $250,000 in Buyline. Simultaneous with entering into the
Buyline Agreement, the Company hired a technology executive who will become
Buyline's President and Chief Executive Officer.
The Company presently expects to complete definitive documentation for, and to
complete, the Buyline restructuring shortly after closing the E2E Acquisition.
Upon the consummation of the transactions contemplated by the Buyline Agreement,
the Company, through E2E, will be the controlling shareholder of Buyline, and
will designate and supervise the Buyline management team.
44
<PAGE> 46
Also, on March 13, 2000, the Company reached an agreement with Vipro to invest
directly or indirectly through E2E an additional $1,000,000 in Vipro, on or
before April 12, 2000, in exchange for additional equity in the form of shares
of Vipro's Series B Convertible Preferred Stock. On the same day, one of the
principal creditors and stockholders of E2E that will become a stockholder of
the Company upon the completion of the E2E Acquisition invested $1,000,000 in
Vipro on terms identical to the Company's pending investment.
E2E has not been actively involved in the development of its portfolio
companies' business strategies, operations and management teams. Many of these
portfolio companies are now largely supported by later stage investors and
managed by executive groups independent of E2E. With the exception of Buyline,
it is anticipated that E2E will retain its minority equity position in these
original portfolio companies. It is anticipated that in the future the Company
principally will follow the investment precedent established by its proposed
restructuring of Buyline by seeking ownership positions, voting interests and
management roles in new portfolio companies that provide the Company, through
E2E, operating control of such portfolio company.
45
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
46
<PAGE> 48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Gregory Earls (1)(2) 53 Co-Chairman and Co-Chief Executive Officer
James V. Warren (2) 55 Co-Chairman and Co-Chief Executive Officer
J. L. (Skip) Moore (3) 45 Executive Vice-President and Chief Operating Officer
</TABLE>
(1) On February 11, 1999, Mr. Earls was elected to the positions of Chairman
of the Company's Board of Directors and Chief Executive Officer. Since
November 29, 1999, Mr. Earls has served as the Co-Chairman of the Board of
Directors and the Co-Chief Executive Officer with James V. Warren.
(2) On November 29, 1999, Mr. Warren was elected a Director, Co-Chairman of
the Company's Board of Directors and Co-Chief Executive Officer of the
Company. In his positions as Co-Chairman and Co-Chief Executive Officer of
the Company, Mr. Warren serves with Mr. Earls, whose positions as Chairman
and Chief Executive Officer of the Company were modified to include Mr.
Warren. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Appointment of New Management Team."
(3) On November 29, 1999, Mr. Moore was elected to serve as the Executive Vice-
President and Chief Operating Officer of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Appointment of New Management Team."
DIRECTORS AND EXECUTIVE OFFICERS
The Company's By-Laws provide that the Board of Directors shall consist of not
less than one nor more than 15 members. Each member of the Board of Directors
is elected for a one-year term and until his or her successor is elected and
qualified. The Company intends to expand its Board of Directors in connection
with its completion of the E2E Acquisition. The new directors will also stand
for election at the Company's next annual meeting. See "Business - E2E
Acquisition." The Company's current directors and executive officers are as
follows:
Gregory Earls has served as Director of the Company since April, 1998. On
February 11, 1999, he was elected to the positions of Chairman of the Board
and Chief Executive Officer of the Company. Since November 29, 1999, Mr. Earls
has served as the Co-Chairman and Co-Chief Executive Officer with James V.
Warren. Mr. Earls is also the President and a Director of U.S. Viewing
Corporation, an investment management company he founded in 1986. Mr. Earls
also serves as President and a Director of Equitable Production Funding of
Canada, Inc., a communications holding company. From 1992 to 1996, he served as
Chairman of the Board of Directors of Health and Sciences Television Network,
Inc., a distributor of educational programming. In addition, Mr. Earls has also
served as a member of the Board of Directors of Jayhawk Acceptance Corporation,
a finance company of which he was a founder in 1994. Mr. Earls graduated from
the University of Virginia in 1967.
James V. Warren has served as a Director of the Company since November 29, 1999
and has been a significant shareholder of the Company for several years. At the
same time as his appointment as a Director he also began, along with Mr. Earls,
sharing responsibilities as the Company's Co-Chairman of the Board and Co-Chief
Executive Officer. Mr. Warren is co-founder and President of The Spear Group, a
global professional management company, located in Atlanta, Georgia, which
develops and implements solutions for managing personnel and human resources.
Mr. Warren has over 35 years experience in a broad range of management, sales
and marketing and project management positions.
J. L. (Skip) Moore has served as Executive Vice-President and Chief Operating
Officer of the Company since November 29, 1999. Mr. Moore is responsible for
all operating activities of the Company's prison based
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<PAGE> 49
outsourcing facilities. Most recently Mr. Moore served as Chief Operating
Officer of The Spear Group. Previously he was Chief Executive Officer of
Med-Quip, Inc., a medical products distribution company located in Atlanta,
Georgia. Since receiving his B.A. Degree from Elon College in 1977, Mr. Moore
has held a series of progressively responsible management and executive
positions with various companies.
KEY EMPLOYEES AND CONSULTANTS
Larry C. Cobb, a consultant who assists the Company in meeting its public filing
requirements, has been providing services to the Company since May 1998. Mr.
Cobb's experience includes over 25 years of financial and accounting management
with private and public companies in the manufacturing, construction, retail and
service industries. Since 1994, Mr. Cobb has been an independent consultant
specializing in turn-arounds, reorganizations and start-ups. Mr. Cobb received
his BS degree in accounting from Mississippi State University in 1972 and a
Master of Professional Accountancy degree from Georgia State University in 1978.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain officers and persons who own more than 10% of the
outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Company's Common
Stock held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under Section 16(a). Except as set forth below, to the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company and representations that no other reports were required, during
1999, the Company has complied with all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% shareholders.
Certain holders of more than 10% of the Company's outstanding Common Stock and
directors and officers of the Company failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934. For each such
stockholder, director or officer, the number of late reports and number of
transactions that were not reported on a timely basis are set forth below:
- J.L. (Skip) Moore, the Company's Executive Vice President and
Chief Operating Officer, inadvertently failed to file on a
timely basis a Form 3 under Section 16(a), which was required
to report Mr. Moore's appointment as an executive officer of
the Company on November 29, 1999.
- USV, a beneficial owner of more than 10% of the Company's
outstanding Common Stock, inadvertently failed to file on a
timely basis a Form 4 under Section 16(a), which was required
to report changes in USV's beneficial ownership of Common
Stock on November 29, 1999.
- Gregory Earls, the Company's Co-Chairman and Co-Chief
Executive Officer, inadvertently failed to file on a timely
basis a Form 4 under Section 16(a), which was required to
report changes in Mr. Earls' beneficial ownership on November
29, 1999. Mr. Earls also inadvertently failed to file, on a
timely basis, a Form 5, which was required to report changes
in Mr. Earls' beneficial ownership during fiscal year 1999
attributable to the issuance to Mr. Earls on November 5, 1999
of presently exercisable options under the Company's 1999
Stock Option Plan to purchase 850,000 shares of Common Stock.
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<PAGE> 50
ITEM 11. EXECUTIVE COMPENSATION.
The table below sets forth all cash and cash equivalent remuneration paid by
the Company and its subsidiaries during the years ended December 31, 1999, 1998
and 1997 to each Co-Chief Executive Officer of the Company and the only other
executive officer of the Company whose compensation for 1999 exceeded $100,000
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------- ------------------------------------------------
Restricted All
Stock Options/ LTIP Other
Fiscal Salary Bonus Other Award(s) SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($)
Gregory Earls (1)
Co-Chairman of the Board 1999 99,918 0 0 0 850,000 0 0
President and 1998 0 0 0 0 0 0 0
Co-Chief Executive Officer 1997 0 0 0 0 0 0 0
James V. Warren (2)
Co-Chairman of the Board 1999 0 0 0 0 1,500,000 0 0
President and 1998 0 0 0 0 0 0 0
Co-Chief Executive Officer 1997 0 0 0 0 0 0 0
John P. Brocard (3)
Senior Vice-President and 1999 113,750 0 0 0 175,000 0 0
General Counsel 1998 110,000 0 0 0 0 0 0
1997 37,500 0 0 0 0 0 0
</TABLE>
(1) Mr. Earls was appointed to the position of Chief Executive Officer of the
Company on February 11, 1999. Since November 29, 1999, Mr. Earls has
served as the Co-Chief Executive Officer with James V. Warren.
(2) Mr. Warren was appointed to the position of Co-Chief Executive Officer of
the Company on November 29, 1999.
(3) Effective January 31, 2000, the Company terminated Mr. Brocard's employment
with the Company.
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for travel expenses incurred in serving
on the board of directors. Directors do not receive any compensation for
attendance at meetings of the board of directors.
STOCK OPTION PLANS
The Company's Employee Incentive Stock Option Plans of 1990 and 1996 (the
"Plans") were adopted by the Board of Directors and approved by the Company's
stockholders on June 8, 1990 and July 25, 1996, respectively. The purpose of
the Plans is to attract and retain qualified personnel. The Plans provide that
the aggregate fair market value of the shares of Common Stock for which any
participant may be granted incentive stock options in any calendar year shall
not exceed $100,000 plus any "unused limited carryover" as determined under
Section 422A(c) of the Internal Revenue Code of 1954, as amended. No options
may be granted under the Plans after October 5, 1999 and April 29, 2006,
respectively.
The Plans are administered by the Board of Directors of the Company who
determine, subject to the provisions of the Plans, to whom options are granted
and the number of shares of the common stock subject to option. The exercise
price of such options granted under the Plans must equal at least 100% of the
fair market value of the Common Stock on the date the option is granted.
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<PAGE> 51
The Plans also provide that no option shall be exercisable more than three
months after termination of an option holder's employment with the Company,
unless such termination of employment occurs by reason of death or permanent
and total disability. In the event of the death or disability of an option
holder while an employee of the Company, the options which were otherwise
exercisable by the option holder or his legal representative or beneficiary of
his estate, may at any time within one year from the date of the option
holder's death or disability be exercised. In no event, however, shall an
option be exercisable after 10 years from the date it was granted.
On May 4, 1993 and September 3, 1993, the Company adopted the 1993 and 1993A
Nonqualified Stock Option Plans, respectively. These plans reserved 500,000 and
800,000 shares respectively, of Common Stock to be granted to non-employees,
directors, and/or other persons associated with the Company whose services have
benefited the Company.
On April 14, 1994, the Company adopted the 1994 Nonqualified Stock Option Plan.
This plan reserved 800,000 shares of Common Stock to be granted and issued to
its officers, directors, employees and/or consultants whose services have
benefited the Company.
During November 1996, the Company adopted the 1996 Nonqualified Stock Option
Plan. The plan reserved 800,000 shares of Common Stock to be granted and issued
to its officers, directors, employees and/or consultants whose services have
benefited the Company.
During 1996, the Company's prior management granted options, outside the option
plans described above, to four other parties to purchase 200,000 shares of the
Company's Rule 144 stock at $0.50 per share exercisable at various times
through May 17, 2001.
During the year ended December 31, 1998, no options were issued or exercised
under the terms of the previously referenced option plans.
On November 1, 1999, the Board of Directors of the Company adopted the 1999
Stock Option Plan (the "1999 Stock Option Plan"). The 1999 Stock Option Plan
reserved 3,115,000 shares of Common Stock to be issued to officers, directors
and key employees of the Company and its subsidiaries and affiliates. On
February 21, 2000, the Board of Directors of the Company approved amendments to
the 1999 Stock Option Plan, which included, among other things, the
authorization to make option grants under such plan to consultants and an
increase in the amount of shares of Common Stock available for sale under the
1999 Stock Option Plan to 22,500,000, subject to certain conditions including
the effectiveness of the Charter Amendment. See "Business - E2E Acquisition."
In early November 1999, the Company granted 1,510,000 options under the 1999
Stock Option Plan to a total of thirteen employees and consultants. These
options carried an exercise price of $0.125 per share, based on the closing sale
price of the Common Stock on November 5, 1999. These options were fully vested
at the time of grant. On November 29, 1999, the Company issued 1,900,000 options
under the 1999 Stock Option Plan to two newly appointed executive officers of
the Company. Pursuant to a Management Agreement executed by these two
individuals and the Company on November 29, 1999, these options carried an
exercise price of $0.122 per share and were fully vested at the time of grant.
See "Certain Relationships and Related Transactions."
BONUS PLAN
On July 14, 1989, the Company's Board of Directors adopted a bonus plan that
sets aside 1%, 2%, and 3% of sales as long as the Company maintains a pre-tax
income of 10%, 15%, and 20% of sales, respectively. The performance standards
will be based on quarterly operating periods. Bonuses are accrued quarterly and
allocated as of the end of each calendar year. No employees have vested rights
in the bonus plan. The Board of Directors of the Company acts as a committee to
determine who participates and the actual amount of the individual bonuses. No
bonuses were paid during 1999, 1998 or 1997 under this plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 20, 2000 with
respect to the beneficial ownership of the Company's Common Stock, by (i) each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each Named Executive Officer and (iii) each
director and executive officer of the Company, and (iv) the directors and
executive officers of the Company as a group.
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<PAGE> 52
<TABLE>
<CAPTION>
Shares of
Common Stock Percentage of
Beneficial Owner Beneficially Owned (1) Outstanding Shares (2)
- ----------------- ---------------------- ----------------------
<S> <C> <C>
Gregory Earls (3) 49,214,758 62.74%
Co-Chairman, President and
Co-Chief Executive Officer
USV Partners LLC (4) 47,649,758 61.81%
James. V. Warren (5) 7,857,152 25.39%
Co-Chairman and
Co-Chief Executive Officer
J. L. (Skip) Moore (6) 442,000 1.48%
Executive Vice-President and
Chief Operating Officer
John P. Brocard (7) 95,000 *
Former Senior Vice-President and
General Counsel
All Officers and Directors as a 57,608,910 71.70%
Group (4 individuals)
</TABLE>
* Indicates less than one percent (1%)
(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares, or has the right within 60 days to have or share,
voting or investment power or both. Beneficial ownership as reported in the
above table has been determined in accordance with Rule 13d-3 of the Exchange
Act.
(2) The percentage of ownership reported for each person, entity or group
appearing on the foregoing table is based on the 29,444,278 shares of Common
Stock outstanding as of March 20, 2000 plus any shares of Common Stock such
person, entity or group is entitled to receive upon the conversion of
convertible securities or exercise of options that presently are or within
sixty (60) days of March 20, 2000 will be convertible or exercisable.
(3) The amount shown includes 850,000 shares Mr. Earls is entitled to purchase
upon the exercise of presently exercisable stock options issued to Mr. Earls
under the Company's 1999 Stock Option Plan (the "1999 Stock Option Plan"). The
amount shown also includes 47,649,758 shares of Common Stock issuable to USV
upon the conversion of the 500,000 shares of the Company's Series A Preferred
Stock held directly by USV. Further, of the amount shown, 500,000 shares
represent shares of Common Stock issuable to The Earls Family Limited
Partnership upon the exercise of Warrants held directly by the Earls Family
Limited Partnership. 6,366,152 shares of Common Stock held directly by USV are
also included in the amount shown. Mr. Earls, the Co-Chairman and Co-Chief
Executive Officer of the Company, is the sole member of USV Management, LLC,
the manager of USV and is the President of the General Partner of the Earls
Family Limited Partnership, Kandax Corporation. The power of USV to vote and
dispose of the shares of Common Stock it directly owns and would directly own
upon the conversion of the Series A Preferred Stock it owns is exercised
through Mr. Earls. The power of the Earls Family Limited Partnership to vote
and dispose of the shares of Common Stock it would directly own upon the
exercise of the Warrants it owns is exercised through Mr. Earls. Additionally,
of the amount shown, 315,000 shares are owned directly by Equitable Production
Funding, Inc. By virtue of his majority ownership of the outstanding shares of
Equitable Production Funding, Inc., Mr. Earls beneficially owns the shares of
Common Stock directly held by Equitable Production Funding, Inc.
(4) See note (3) above. USV's address is 2001 Pennsylvania Avenue, N.W., Suite
675, Washington, D.C. 20006.
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<PAGE> 53
(5) The amount shown includes 1,500,000 shares Mr. Warren is entitled to
purchase upon the exercise of presently exercisable stock options issued to Mr.
Warren under the 1999 Stock Option Plan. In addition, of the amount shown,
38,500 shares are owned directly by Mr. Warren's wife, Jane G. Warren. Mr.
Warren shares the power to vote or to direct the vote of and dispose or direct
the disposition of the 38,500 shares of Common Stock directly owned by his wife.
(6) The amount shown includes 400,000 shares Mr. Moore is entitled to purchase
upon the exercise of presently exercisable stock options issued to Mr. Moore
under the 1999 Stock Option Plan.
(7) Effective January 31, 2000, the Company terminated Mr. Brocard's employment
with the Company.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realized Value at
Assumed Annual Alternative
Rates of Stock Price to (f) and (g)
Appreciation Grant Date
Individual Grants for Option Term Value
- --------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
% of
Number of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise Grant
SARs Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10%($) Value $
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory Berls 850,000 24,5% .122 November 2009 $244,800 $448,000 $103,700
James AV Warran 1,500,000 43,2% .122 November 2009 $432,000 $777,000 $183,000
Ken Smith -- -- -- -- -- -- --
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gregory Earls -- -- 850,000/0 $110,500/$0
James AV Warran -- -- 1,500,000/0 $195,000/$0
Ken Smith -- -- -- --
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On February 11, 1999, Kenneth H. Smith and the Company entered into a Severance
Agreement (the "Severance Agreement"). Under the terms of the Severance
Agreement, Mr. Smith resigned from his positions as the Company's President,
Chief Executive Officer and as a Director. The Company agreed to retain Mr.
Smith as an independent contractor for six (6) months and pay Mr. Smith
$125,000 in six (6) equal installments for such consulting services. In
addition, the Company agreed to pay Mr. Smith approximately $4,800, as
reimbursement for certain automobile expenses.
Pursuant to the Severance Agreement entered into between the Company and Mr.
Smith, the Company sold its wholly owned subsidiary, GWP, to Mr. Smith. The
sole asset of GWP was an ownership interest in an amount of capital stock of
TMD, which represented a controlling interest in TMD. This majority interest in
TMD was acquired by GWP in early October 1998 for $730,000, which was
contributed by the Company to GWP for the express purpose of purchasing TMD
stock. In addition to contributing to GWP the funds necessary to complete the
purchase of a controlling interest in TMD, from early October 1998 through
February 11, 1999, the Company, through GWP, also contributed approximately
$1,337,000 in working capital funds to TMD. The Company also guaranteed certain
existing obligations of TMD, including the repayment of TMD's Fidelity Funding
Inc. loan, pursuant to the Loan and Security Agreement between TMD and Fidelity
Funding, Inc., dated as of November 30, 1998.
The sale of GWP was concluded on February 15, 1999. The total purchase price
for GWP was approximately $2,451,000. This amount represented the Company's
estimate of its investment in TMD through February 11, 1999 and certain legal
and other transactional costs Mr. Smith agreed to assume.
A portion of the purchase price for GWP was paid in the form of a promissory
note executed by Mr. Smith in the principal amount of $1,234,832 bearing
interest annually at the Wall Street Journal's prime rate of interest plus two
percent (2%). The principal amount of Mr. Smith's promissory note and any
accrued unpaid interest were due and payable in full on February 15, 2002. Mr.
Smith and TMD also agreed to guarantee any of TMD's obligations for which the
Company was a guarantor. Repayment of the promissory note and the performance
of Mr. Smith's guaranty obligations to the Company were secured by Mr. Smith's
pledge to the Company of his 3,000,000 shares of the Company's Common Stock.
The performance of GWP's guaranty obligations to the Company was secured by
GWP's pledge to the Company of all of its stock holdings in GWP.
The remaining balance of the purchase price for GWP was paid through Mr.
Smith's sale of 3,366,152 shares of Common Stock to USV, a limited liability
company controlled by Gregory Earls, the Co-Chairman of the Company's Board of
Directors and Co-Chief Executive Officer of the Company. The aggregate purchase
price of these shares was approximately $1,076,000. USV paid this purchase
price directly to the Company, which applied such funds toward the amount
payable by Mr. Smith to the Company in connection with his purchase of GWP.
On April 1, 1999, following a default under Mr. Smith's promissory note, the
Company exercised its rights under the pledge agreement with Mr. Smith and sold
the 3,000,000 shares pledged by Mr. Smith at the closing sale price on that
date for a share of Common Stock, as quoted on the OTC Bulletin Board. The
closing sale price on April 1, 1999 was $0.35 per share, for a total sale price
of $1,050,000. The aggregate sale price of $1,050,000, less the expenses
associated with the sale, was applied in reduction of Mr. Smith's indebtedness
to the Company. The 3,000,000 shares of Common Stock were sold to USV. In
payment of the $1,050,000 sale price, USV executed a
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<PAGE> 54
promissory note in favor of the Company. This promissory note was secured by
USV's pledge of the 3,000,000 shares of Common Stock it purchased on April 1,
1999 and was paid in full by October 1999.
On April 15, 1999, the Company entered into a forbearance agreement with Mr.
Smith pursuant to which the parties agreed the amount outstanding under the
promissory note Mr. Smith executed in connection with the sale of GWP was equal
to $525,000. In addition, the Company agreed to refrain from taking any further
action with respect to a default under Mr. Smith's promissory note until the
earlier to occur of (i) June 4, 1999, (ii) the date on which an adverse
judgment is rendered against the Company by any court of competent jurisdiction
in connection with its guaranty obligations of TMD, or (iii) any new default
under Mr. Smith's promissory note.
On May 11, 1999, the Company issued 500,000 shares of its Series A Preferred
Stock to USV. The Company also issued Warrants to purchase 500,000 shares of the
Company's Common Stock to USV. The aggregate purchase price paid by USV for the
Series A Preferred Stock and the Warrants was $5,000,000. Promptly after USV was
issued the Warrants, USV transferred the Warrants to the Earls Family Limited
Partnership. Gregory Earls controls both USV and the Earls Family Limited
Partnership. On November 29, 1999, the terms of the Series A Preferred Stock
were amended to cancel the right of the holders of the Series A Preferred Stock
to receive an annual dividend and to change the conversion price for the Series
A Preferred Stock to $0.122. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources,"
and "Market for Registrant's Common Equity and Related Stockholder Matters -
Recent Sales of Unregistered Securities."
USV has the right to convert its shares of Series A Preferred Stock to Common
Stock at any time. Likewise, the Earl's Family Limited Partnership has the
right to exercise its Warrants to purchase Common Stock at any time. Each
Warrant is exercisable for one share of Common Stock at a price of $1.00 per
share. If all of the outstanding shares of Series A Preferred Stock were
converted and the Warrants were exercised in full, the holders of such
securities would be entitled to receive 48,149,758 shares of Common Stock. If
all of USV's shares of Series A Preferred Stock were converted, USV would be
entitled to receive 47,649,758 shares of Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." Because that amount exceeds the
number of shares of Common Stock available for issuance under the Company's
Restated Certificate of Incorporation, USV and the Company entered into an
agreement, dated March 1, 2000, whereby USV waived its right to convert its
shares of Series A Preferred Stock until an appropriate Amendment to the
Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State. See "Business-E2E Acquisition."
On November 29, 1999, the Company entered into a Management Agreement (the
"Management Agreement") with James V. Warren and J.L. (Skip) Moore. Under the
terms of the Management Agreement, Mr. Warren was elected a Director,
Co-Chairman and Co-Chief Executive Officer of the Company. In his positions as
Co-Chairman and Co-Chief Executive Officer of the Company, the Management
Agreement provides that Mr. Warren will serve together with Gregory Earls,
whose former positions as Chairman and Chief Executive Officer of the Company
were modified to include Mr. Warren. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Appointment of New Management
Team."
Also, under the terms of the Management Agreement, Mr. Moore was elected
Executive Vice President and Chief Operating Officer of the Company. The
Management Agreement further provided as follows:
- that the conversion price for the Series A Preferred Stock
will be changed to the average last sale price per share of
Common Stock for the 20 trading days immediately prior to the
execution date of the Management Agreement or a conversion
price of $0.122 per share;
- that USV will use its best efforts to sell at a price of ten
dollars ($10.00) per share in a private placement up to
300,000 shares of the Company's Series A Preferred Stock;
- that Mr. Warren be granted options under the Company's 1999
Stock Option Plan to purchase 1,500,000 shares of Common
Stock; and
- that Mr. Moore be granted options under the Company's 1999
Stock Option Plan to purchase 400,000 shares of Common Stock.
53
<PAGE> 55
To raise funds in connection with the E2E Acquisition, the Company recently
commenced the private placement sale of $1,250,000 of additional shares of its
Series A Preferred Stock to USV and at least $5,000,000 and up to $8,750,000 of
its newly created Series C Preferred Stock to accredited investors. The Company
has thus far received subscriptions or indications of interest for the purchase
of approximately $5,200,000 of its Series C Preferred Stock, of which
approximately $3,000,000 consists of subscriptions by USV. In connection with
the private placements of the Series A Preferred Stock and the Series C
Preferred Stock, the Company has received to date subscriptions for a total of
approximately $6,450,000. These shares of Series A Preferred Stock and Series C
Preferred Stock will be issued to USV concurrent with the completion of the E2E
Acquisition, which is expected to occur in April once all closing conditions
have been satisfied. The proceeds of these private placement sales will be used
primarily to finance additional investments in new and existing internet
businesses that focus on B2B and B2C e-commerce, the payment of costs incurred
and liabilities assumed in connection with the E2E Acquisition and related
business transactions and ongoing working capital needs. See "Business-E2E
Acquisition."
The Company's operations and accounting center is currently co-located in the
offices of The Spear Group in Norcross, Georgia. James V. Warren, the
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer,
is the co-founder and President of The Spear Group. The Company is negotiating
a management services agreement with The Spear Group to provide operating,
accounting and administrative services to the Company's prison facilities.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of financial statements, financial statement schedules and
exhibits.
Report of Independent Certified Public Accountants on financial
statement schedule
Schedule II - Valuation and Qualifying Accounts, Years Ended December
31, 1999, 1998, and 1997
(b) Reports on Form 8-K filed during the last quarter of the year ended
December 31, 1999.
On December 8, 1999, the Company filed a Current Report on Form 8-K
describing the terms of the Management Agreement and the appointment
of two new executive officers of the Company.
(c) Exhibits:
The exhibits required by Item 601 of Regulation S-K are filed herewith.
(See Index of Exhibits)
(d) Financial Statement Schedules:
The Financial Statement Schedules required by Regulation S-X are filed
herewith.
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<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated March 17, 2000, except for Note 18,
which is as of April 5, 2000, relating to the consolidated financial
statements of U.S. Technologies Inc., which is contained in Item 8 of this Form
10-K included the audit of the financial statement schedule listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in material
respects, the information set forth therein.
Atlanta, Georgia
March 17, 2000, except for Note 18,
which is as of April 5, 2000
55
<PAGE> 57
U.S. Technologies Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------
Additions
(1) (2)
Balance at Charged to Charged to Balance at
beginning cost and other end of
Classification of period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999:
Accounts receivable -
bad debt reserve $140,000 $ 66,000 $ -- $206,000
Inventory
Obsolescence $211,000 $ -- $211,000 $ --
Note receivable officer -
uncollectible reserve $ -- $526,000 $ -- $ -- $526,000
1998:
Accounts receivable -
bad debt reserve $ 18,000 $136,000 $ 14,000 $140,000
Inventory
Obsolescence $834,000 $ -- $623,000 $211,000
1997:
Accounts receivable -
bad debt reserve $ 90,953 $ 18,000 $ 90,953 $ 18,000
Inventory
Obsolescence $585,000 $306,888 $ 57,888 $834,000
</TABLE>
NOTE: These valuation and qualifying accounts were deducted
from the assets to which they apply.
56
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, U.S. Technologies Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 5th day of
April, 2000.
U.S. TECHNOLOGIES INC.
By: /s/ Gregory Earls
---------------------------------------
Gregory Earls
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gregory Earls Co-Chief Executive Officer April 5, 2000
- ---------------------- Co-Chairman of the Board of Directors -------------
Gregory Earls Acting Principal Accounting Officer
/s/ James V. Warren Co-Chief Executive Officer April 5, 2000
- ---------------------- Co-Chairman of the Board of Directors -------------
James V. Warren
</TABLE>
57
<PAGE> 59
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 - Stock Exchange Agreement among U.S. Technologies Inc., E2Enet, Inc. and certain
stockholders of E2Enet, Inc., dated as of February 21, 2000, as amended (Filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 28, 2000, and
incorporated herein by reference)
2.2 - Stock Purchase Agreement by and between U.S. Technologies Inc. and Kenneth Smith,
dated as of February 15, 1999 (Filed as Exhibit 2.6 to the Company's Current Report on
Form 8-K, dated February 26, 1999, and incorporated herein by reference)
2.3 - Severance Agreement by and between U.S. Technologies Inc. and Kenneth Smith, dated as of
February 11, 1999 (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February
26, 1998, and incorporated herein by reference)
2.4 - Amended and Restated Stock Purchase Agreement by and between Technology Manufacturing & Design, Inc.
and GWP, Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 20, 1998,
and incorporated herein by reference)
*2.5 - Amendment to the Stock Exchange Agreement, dated as of April 5, 2000, by and among the Company, US
Technologies Acquisition Sub, Inc., E2E Net, Inc., Northwood Ventures LLC, Northwood Capital Partners
LLC, Johnathan Ledecky and certain other stockholders of E2E Net, Inc.
3.1 - Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the
Company's Annual Report for the year ended December 31, 1997 and incorporated herein
by reference)
3.2 - Restated By-Laws of the Company (Filed as Exhibit 3.2 to the Company's Annual Report for the year
ended December 31, 1997 and incorporated herein by reference)
4.1 - Form of Certificate evidencing Common Stock of the Company (Filed as Exhibit 3.1 to
Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 33-11720) and
incorporated herein by reference)
4.2 - Revised form of certificate evidencing Common Stock of the Company reflecting the change of the
name to U.S. Technologies Inc. (Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
July 14, 1989, and incorporated herein by reference)
</TABLE>
58
<PAGE> 60
<TABLE>
<S> <C>
4.3 - Rights Agreement, dated as of October 31, 1997, between the Company and American Securities Transfer
& Trust, Inc., as Rights Agent (Filed as Exhibit 4 to the Company's Current Report, dated as of October
31, 1997, and incorporated herein by reference)
4.4 - Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
of U.S. Technologies Inc., dated February 24, 1999 (Filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, dated May 26, 1999, and incorporated herein by reference)
*4.5 - Amended Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock of U.S. Technologies Inc., dated November 29, 1999
*4.6 - Waiver Agreement between USV Partners, LLC and the Company, dated March 1, 2000
10.1 - 1988 Employee Stock Option Plan, as amended (Filed as Exhibit 10(e) to the Company's
Registration Statement on Form S-8 (No. 33-29048) and incorporated herein by reference)
10.2 - 1990 Employee Stock Option Plan, as amended (Filed as Exhibit 10 to the Company's
Registration Statement on Form S-8 (No. 33-29048) and incorporated herein by
reference)
10.3 - 1993 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 33-62686) and incorporated herein by
reference)
10.4 - 1993A Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 33-69200) and incorporated herein by
reference
10.5 - 1994 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 33-78892) and incorporated herein by
reference)
10.6 - 1995 Employee Stock Option Plan, as amended (Filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (No. 333-16199) and incorporated herein by
reference)
10.7 - 1996 Non-Qualified Stock Option Plan, as amended (Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-8 (No. 333-16199) and incorporated herein
by reference)
*10.8 - 1999 Stock Option Plan, as amended
</TABLE>
59
<PAGE> 61
<TABLE>
<S> <C>
10.9 - Agreement between the Company and Wackenhut Corrections Corporation, dated June 30, 1977 (Filed
as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference)
10.10 - Amendment to Agreement between the Company and Wackenhut Corrections Corporation,
dated January 28, 1998 (Filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by reference)
*10.11 - Industry Work Program Agreement between the Wackenhut Corrections Corporation and
Labor-to-Industry Inc., dated as of April 22, 1998
10.12 - Investment Agreement between the Company and USV Partners, LLC, dated as of July 16,
1998 (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 26,
1999, and incorporated herein by reference)
*10.13 - Lease Agreement by and between the State of California and Labor-to- Industry, Inc.,
dated as of August 1, 1998
10.14 - Promissory Note, dated February 15, 1999, executed by Kenneth H. Smith in favor of
the Company, as amended (Filed as Exhibit 2.2 to the Company's Current Report on Form
8-K, dated February 26, 1999, and incorporated herein by reference)
10.15 - Agreement of Non-Dilution between Technology Manufacturing & Design, Inc. and the
Company, dated February 15, 1999 (Filed as Exhibit 2.3 to the Company's Current Report
on Form 8-K, dated February 26, 1999, and incorporated herein by reference)
10.16 - Stock Pledge and Guaranty Agreement by and between GWP, Inc. and the Company, dated
February 15, 1999 (Filed as Exhibit 2.4 to the Company's Current Report on Form 8-K,
dated February 26, 1999, and incorporated herein by reference)
10.17 - Stock Pledge and Guaranty Agreement by and between Kenneth H. Smith and the Company,
dated February 15, 1999 (Filed as Exhibit 2.5 to the Company's Current Report on Form
8-K, dated February 26, 1999, and incorporated herein by reference)
*10.18 - Industry Work Program Agreement by and between Wackenhut Corrections Corporation,
American Quantum Cycles, Inc. and the Company, dated as of October 19, 1999
</TABLE>
60
<PAGE> 62
<TABLE>
<S> <C>
10.19 - Management Agreement by and between the Company, James V. Warren and J.L. (Skip)
Moore (Filed as Exhibit 5.1 to the Company's Current Report on Form 8-K, dated
December 8, 1999, and incorporated herein by reference)
*10.20 - Stock Purchase Agreement by and among VIPRO Corporation, Northwood Ventures, LLC, Northwood
Capital Partners, LLC and the Company, dated March 13, 1999
*21.1 - Subsidiaries of the Registrant
*23.1 - Consent of BDO Seidman, LLP
*27.1 - Financial Data Schedule (for SEC use only)
</TABLE>
- --------------
*To be provided herewith
61
<PAGE> 1
EXHIBIT 2.5
AMENDMENT TO STOCK EXCHANGE AGREEMENT
This Amendment to Stock Exchange Agreement (the "Amendment")
is made as of this 5th day of April, 2000, by and among U.S. Technologies Inc.,
a Delaware corporation (the "Company"), U.S. Technologies Acquisition Sub,
Inc., a Delaware corporation and wholly owned subsidiary of the Company
("Newco"), E2Enet, Inc., a Delaware corporation ("E2E"), Northwood Ventures
LLC, a New York limited liability company ("Northwood Ventures"), Northwood
Capital Partners LLC, a New York limited liability company ("Northwood Capital"
and, together with Northwood Ventures, "Northwood"), Jonathan J. Ledecky
("Ledecky") and the other E2E Stockholders (as defined below) (each of the
foregoing, individually, a "Party," and, collectively, the "Parties").
Capitalized terms used but not defined herein have the respective meanings
assigned to them in the Stock Exchange Agreement (as defined below).
RECITALS:
A. The Company, E2E and the E2E Stockholders entered
into a Stock Exchange Agreement dated as of February 21, 2000 (the "Stock
Exchange Agreement"), pursuant to which the Company agreed to acquire all of
the issued and outstanding shares of capital stock of E2E (the "E2E Shares")
from those persons who would own all of such shares as of the closing of the
acquisition contemplated therein (the "E2E Stockholders");
B. In exchange for all of the issued and outstanding
shares of E2E, the Company agreed to issue to the E2E Stockholders the
Preferred Shares; and
C. The Parties desire to amend the Stock Exchange
Agreement to provide for (i) the merger of E2E with and into Newco, with Newco
being the surviving corporation, and (ii) the conversion of the shares of
capital stock of E2E into the Preferred Shares, all upon the terms and
conditions set forth herein.
AGREEMENTS:
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Parties agree as follows:
1. Additional Party. Newco is added as a party to the Stock Exchange
Agreement, and all references to Members of the Company Group shall be deemed
to include Newco.
2. Amendment to Article I.
(a) The definition of "Investment Documents" in Article I of the
Stock Exchange Agreement is amended by replacing it in its entirety with the
following:
<PAGE> 2
"Investment Documents" shall mean this Agreement,
the Preferred Shares, the Certificate of Designations, the
Amended and Restated Registration Rights Agreement, the
Voting Agreement relating to the Board of Directors of the
Company and the Certificate of Merger (as defined below).
(b) The following definition is added to Article I of the Stock
Exchange Agreement:
"Certificate of Merger" has the meaning given to it
in Section 2.2.
(c) The definition of "Preferred Shares" in Article I of the
Stock Exchange Agreement is amended by replacing it in its entirety with the
following:
"Preferred Shares" means the duly authorized,
validly issued, fully paid and non-assessable shares of the
Series B Mandatorily Convertible Preferred Stock of the
Company with an aggregate stated value equal to $11,200,000,
mandatorily convertible into an aggregate of 56,000,000
shares of Common Stock as described in Section 3.1.
3. Amendment to Article II. Article II of the Stock Exchange Agreement is
amended by replacing it in its entirety with the following:
ARTICLE II. THE MERGER
2.1 Merger; Effects of Merger.
(a) Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as
defined below), (i) E2E shall be merged with and into Newco
(the "Merger"), (ii) the separate existence of E2E shall
thereupon cease, and (iii) the name of Newco, as the
surviving corporation in the Merger (the "Surviving
Corporation"), shall by virtue of the Merger be E2Enet, Inc.
(b) The Merger shall have the effects
set forth in the Delaware General Corporation Law (the
"DGCL"). Without limiting the generality of the foregoing, at
the Effective Time, all of the properties, rights,
privileges, powers and franchises of E2E and Newco shall vest
in the Surviving Corporation, and all of the debts,
liabilities and duties of E2E and Newco shall become the
debts, liabilities and duties of the Surviving Corporation.
2.2 Closing of Merger. Subject to the terms and
conditions of this Agreement, the closing of the Merger (the
"Closing") shall take place at the offices of Fleischman and
Walsh, L.L.P. at 10:00 a.m., local time, on a date
satisfactory to the Company, Newco and E2E which is no later
than the fifth Business Day after satisfaction (or waiver) of
the conditions to Closing set forth in
<PAGE> 3
Articles IV and V hereof (other than those conditions which
require the delivery of any documents or the taking of other
actions at the Closing) (the "Closing Date"). On the Closing
Date, the Parties agree to file with the Secretary of State
of the State of Delaware a certificate of merger (the
"Certificate of Merger") in the form required by, and
executed in accordance with, the relevant provisions of the
DGCL. The Merger will become effective upon filing of the
Certificate of Merger with the Secretary of State of the
State of Delaware (the "Effective Time").
2.3 Articles of Incorporation. The Articles of
Incorporation of Newco in effect at the time of the Merger
shall be the Articles of Incorporation of the Surviving
Corporation, until thereafter amended as provided thereunder
and under the DGCL.
2.4 Bylaws. The Bylaws of Newco in effect at
the time of the Merger shall be the Bylaws of the Surviving
Corporation, until thereafter altered, amended or repealed as
provided thereunder and under the Articles of Incorporation
of the Surviving Corporation and the DGCL.
2.5 Directors and Officers of Surviving
Corporation. The directors and officers of Newco immediately
prior to the Effective Time will be the directors and
officers of the Surviving Corporation, and each shall hold
office from the Closing Date until such time as his successor
is duly elected or appointed and qualified in the manner
provided in the Articles of Incorporation and Bylaws of the
Surviving Corporation, or as otherwise provided by law.
2.6 Conversion of Shares.
(a) E2E Shares. As of the Effective
Time, by virtue of the Merger and without any action on the
part of the E2E Stockholders, the E2E Shares held by each E2E
Stockholder shall be converted into such E2E Stockholder's
pro rata share of the Preferred Shares. As of the Closing
Date, all of the certificates which immediately prior to the
Closing represented E2E Shares shall be deemed for all
purposes to evidence ownership of and to represent the
Preferred Shares into which the E2E Shares formerly
represented by such certificates have been converted as
herein provided.
(b) Exchange of Certificates. On or
after the Closing Date, the E2E Stockholders shall surrender
to Fleischman and Walsh, L.L.P., as exchange agent (the
"Exchange Agent"), stock certificates representing their
respective E2E Shares, together with stock powers duly
executed in favor of the Company. Upon the surrender of any
such stock certificate by or on behalf of any E2E
Stockholder, the Company shall direct the Exchange Agent (1)
on behalf of the Surviving Corporation, to cancel such stock
certificate, and (2) on behalf of the
<PAGE> 4
Company, to issue to such E2E Stockholder certificates
representing the Preferred Shares into which the E2E Shares
held by such E2E Stockholder shall have been converted at the
Effective Time. The E2E Shares, when converted into the
Preferred Shares at the Effective Time, shall no longer be
outstanding and shall automatically be canceled and retired
and shall cease to exist. The Exchange Agent shall hold in
escrow stock certificates representing all of the Preferred
Shares issued in connection with the Merger until the earlier
of (i) written notice by the Company directing the Exchange
Agent to release such certificates; (ii) written notice by
the Company directing the Exchange Agent to release such
certificates following the Company's receipt of (x) a joinder
to the Agreement and a consent and joinder to the Amendment,
duly executed by each of the E2E Stockholders other than
Ledecky and Northwood, (y) releases in the form of the letter
from Hogan & Hartson L.L.P. to each E2E Stockholder dated
March 20, 2000, duly executed by each of the E2E Stockholders
other than Ledecky and Northwood, and (z) stock certificates
representing all of the E2E Shares, together with stock
powers duly executed in favor of the Company; or (iii)
approval of the Charter Amendment and the conversion of the
Preferred Shares into Common Stock as described in the
Agreement (provided, however, that, notwithstanding approval
of the Charter Amendment and the conversion of the Preferred
Shares into Common Stock, the Exchange Agent shall continue
to hold in escrow certificates representing shares of Common
Stock issued to those E2E Stockholders who have not executed
and delivered to the Company the documents described in
Section 2.6(b)(ii) until the Company receives such
documents).
(c) Newco Shares. Each share of common
stock, par value $0.01 per share, of Newco issued and
outstanding immediately prior to the Closing Date shall be
converted into and exchanged for one (1) validly issued,
fully paid and nonassessable share of common stock, par value
$0.01 per share, of the Surviving Corporation.
2.7 Tax-Free Merger. It is intended that the
Merger will constitute a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that this Agreement will constitute
a "plan of reorganization" within the meaning of the
regulations promulgated under such section of the Code.
4. Amendments to Article IV. Sections 4.2(b), 4.2(f) and 4.10 of the
Stock Exchange Agreement are deleted in their entirety.
5. Amendments to Article V. Sections 5.2(a), 5.2(d) and 5.3 of the Stock
Exchange Agreement are deleted in their entirety.
<PAGE> 5
6. Amendments to Article VII.
(a) Section 7.6 of the Stock Exchange Agreement is amended by
replacing it in its entirety with the following:
7.6 Governmental Approvals. No authorization,
consent, approval, License, exemption of or filing or
registration with any court or Government Entity is or will
be necessary for, or in connection with, the offer, issuance,
sale, execution or delivery by the Company of, or for the
performance by the Company of its obligations under, any of
the Investment Documents other than (i) under applicable
securities laws with respect to the Charter Amendment, (ii)
the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware, and (iii) under applicable
securities laws with respect to the transactions contemplated
by the registration rights set forth in the Amended and
Restated Registration Rights Agreement.
(b) Article VII of the Stock Exchange Agreement is amended by
adding the following Section 7.18:
7.18 Newco.
(a) Newco is a corporation duly
organized, validly existing and in good standing under the
Laws of the State of Delaware.
(b) Newco has all necessary corporate
power and authority to enter into the Investment Documents to
which it is a party and to carry out its obligations
thereunder. Newco has duly executed and delivered (or will
have, with respect to deliveries to be executed and delivered
by it at Closing) each of the Investment Documents, and each
is (or will be, with respect to deliveries to be executed and
delivered by it at Closing) a legal, valid and binding
obligation of Newco, enforceable against Newco in accordance
with its terms, except as enforcement thereof may be limited
by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting
creditors' rights generally and by general principles of
equity.
(c) The authorized capital stock of
Newco consists of 1,000 shares of common stock, par value
$0.01 per share, of which 100 shares are issued and
outstanding on the date hereof. Without limiting the
generality of the foregoing Section 7.4, all of the
outstanding shares of capital stock of Newco have been duly
authorized and validly issued, and are fully paid,
nonassessable and free and clear of all Liens. There are no
options, warrants or rights to purchase shares of capital
stock or other securities of Newco issued or outstanding, nor
is Newco obligated in any other manner to issue shares of its
capital stock or other securities.
(d) Other than the filing of the
Certificate of Merger, no authorization, consent, approval,
License, exemption of or filing or registration
<PAGE> 6
with any court or Government Entity is or will be necessary
for or in connection with the execution or delivery by Newco
of or the performance by Newco of its obligations under any
of the Investment Documents.
(c) Section 7.16 of the Stock Exchange Agreement is amended to
replace the reference to the "Exchange" with a reference to the "Merger."
7. Amendments to Article VIII.
(a) Section 8.2 of the Stock Exchange Agreement is amended such
that all references therein to the "Company" shall be deemed to be references
to the Company and Newco.
(b) Section 8.2 of the Stock Exchange Agreement is amended by
adding the following Section 8.2(h):
(h) Tax-Free Merger. The Company and
Newco agree that the Merger is intended to be a tax-free
reorganization under Section 368 of the Code and that this
Agreement is intended to be a "plan of reorganization" within
the meaning of the regulations promulgated under such section
of the Code. Neither the Company nor the Surviving
Corporation will take or fail to take any action which would
jeopardize the qualification of the Merger as such a
reorganization (other than such actions as may be legally
required).
8. Amendments to Article X.
(a) Section 10.1(a) of the Stock Exchange Agreement is amended by
replacing it in its entirety with the following:
(a) This Agreement may be terminated
and the Merger may be abandoned by (i) the mutual, written
agreement of the E2E Representatives and the Company, (ii) by
either the E2E Representatives or the Company if (x) the
Merger shall not have been consummated by 5:00 p.m. Eastern
Standard Time on April 11, 2000, provided that the party
seeking to terminate this Agreement pursuant to this clause
(ii) is not in breach of this Agreement (or in the case of
the E2E Representatives, neither they nor any of the other
E2E Stockholders are in breach of this Agreement), or (y) a
Government Entity shall have issued an Order or taken any
other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement
and such Order or other action shall have become final and
nonappealable; provided that the Party or Parties seeking to
terminate this Agreement pursuant to this clause (ii) (y)
shall have used all reasonable efforts to remove such Order.
(b) Section 10.1(c) of the Stock Exchange Agreement is amended
such that all references therein to the "Company" shall be deemed to be
references to the Company or Newco, as the case may be.
<PAGE> 7
9. Amendment to Article XI. Section 11.4 of the Stock Exchange Agreement
is amended to add the following address for Newco:
U.S. Technologies Acquisition Sub, Inc.
c/o U.S. Viewing Corporation
2001 Pennsylvania Avenue, NW
Suite 675
Washington, DC 20006
Attn: Gregory C. Earls
Telephone: 202-466-3100
Facsimile: 202-466-4557
with a copy to:
Fleischman and Walsh L.L.P.
1400 Sixteenth Street, N.W.
Washington, DC 20036
Attn: Stephen A. Bouchard
Telephone: 202-939-7945
Facsimile: 202-265-5706
10. Stock Exchange Agreement. Except as otherwise expressly provided in
this Amendment, the provisions of the Stock Exchange Agreement remain in full
force and effect.
11. Counterparts; Facsimile Signatures. This Amendment may be executed in
one or more counterparts, and executed signature pages sent by a Party to the
other Parties by facsimile shall be binding as evidence of such Party's
agreement hereto and acceptance hereof.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
<PAGE> 8
The parties hereto have executed this Amendment to Stock
Exchange Agreement as of the date first written above.
U.S. TECHNOLOGIES INC.
By: /s/ C. Gregory Earls
----------------------------------------
Name: C. Gregory Earls
Title: Co-Chairman and Co - CEO
U.S. TECHNOLOGIES ACQUISITION SUB, INC.
By: /s C. Gregory Earls
----------------------------------------
Name: C. Gregory Earls
Title: President
<PAGE> 9
[signature page to Amendment to Stock Exchange Agreement,
dated as of April 5, 2000]
E2ENET, INC.
By: /s/ Steven J. Quamme
----------------------------------------
Name: Steven J. Quamme
Title: Senior Vice President
NORTHWOOD CAPITAL PARTNERS LLC
By: /s/ Henry T. Wilson
----------------------------------------
Name: Henry T. Wilson
Title: Managing Director
NORTHWOOD VENTURES LLC
By: /s/ Henry T. Wilson
----------------------------------------
Name: Henry T. Wilson
Title: Managing Director
/s/ Jonathan J. Ledecky
--------------------------------------------
JONATHAN J. LEDECKY
<PAGE> 1
EXHIBIT 4.5
AMENDED CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
U.S. TECHNOLOGIES INC.
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
U.S. Technologies Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"),does hereby
certify that, pursuant to the authority contained in its Certificate of
Incorporation, as amended and restated, and in accordance with Section 151 of
the General Corporation Law of the State of Delaware, the following resolutions
amending the terms of the Series A Convertible Preferred Stock, $0.02 par
value, were duly adopted by the Board of Directors of the Corporation (the
"Board") as of November 29, 1999.
RESOLVED, subject to agreement of any holders of Series A Convertible Preferred
Stock, that the Board hereby amends the terms of the Corporation's 1,000,000
shares of Series A Convertible Preferred Stock, $0.02 par value, such that:
1. The Dividends as set forth in paragraph 2 of that certain
Amended Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock of U.S. Technologies
Inc. as approved and executed as of February 24, 1999 (the
"Certificate") are hereby waived and the right to receive
such dividends on the part of the holders of the Series A
Convertible Preferred Stock is canceled; and
2. As compensation to the holders of the Series A Convertible
Preferred Stock for the cancellation of these dividends, the
Conversion Price as established in paragraph 5(b)(i) of the
Certificate is hereby modified such that the Conversion Price
will be the average last sale price per share of Common Stock
of U.S. Technologies Inc. for the twenty (20) trading days
immediately prior to November 29, 1999 which price is $0.122
per share.
FURTHER RESOLVED, that the Directors and Officers of the Company be and hereby
are authorized and directed to take any and all further action that may be
necessary or desirable to accomplish the above resolutions and authorized
actions including but not limited to the execution and filing of all
instruments or documents that may be necessary to place these resolutions or
actions into effect.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed
in its name by the undersigned duly authorized officers of the Corporation,
this 29th day of November, 1999.
By:/s/ Gregory Earls By:/s/ James V. Warren
---------------------------------- ----------------------------------
Gregory Earls, Co-Chairman James V. Warren, Co-Chairman
Attest By:/s/ Dana Rochelle
----------------------------------
Dana Rochelle, Assistant Secretary
33
<PAGE> 1
EXHIBIT 4.6
USV PARTNERS, LLC
2001 PENNSYLVANIA AVENUE, N.W.
SUITE 675
WASHINGTON, D.C. 20006
(202) 466-4557
March 1, 2000
U.S. Technologies Inc.
6525 The Corners Parkway
Suite 300
Norcross, Georgia 30092
Gentlemen:
USV Partners, LLC, a Delaware limited liability company (the
"Company"), has reached this agreement with U.S. Technologies Inc., a Delaware
corporation ("US Tech"), in connection with US Tech's desire to file a
Registration Statement on Form S-8 (the "Registration Statement") under the
Securities Act of 1933, as amended, to register 3,115,000 shares of US Tech's
common stock, par value $.02 per share ("Common Stock"), to be issued by US
Tech pursuant to its 1999 Stock Option Plan, as amended (the "Plan").
As of the date hereof, the Company owns 500,000 shares of US Tech's
Series A Convertible Preferred Stock, $0.02 par value ("Series A Preferred").
The rights and preferences of the holders of the Series A Preferred are set
forth in (i) the Certificate of Designations, Preferences and Rights of the
Series A Preferred, dated as of July 16, 1998, (ii) the Amended Certificate of
Designations, Preferences and Rights of the Series A Preferred, dated as of
February 24, 1999, and (iii) the Amended Certificate of Designations,
Preferences and Rights of the Series A Preferred, dated as of November 29, 1999
(collectively, the "Certificate of Designations"). Pursuant to the Certificate
of Designations, the shares of Series A Preferred owned by the Company are
convertible into 47,649,758 shares of Common Stock. As of the date hereof, the
Company also owns warrants to purchase 500,000 shares of Common Stock (the
"Warrants").
The Company acknowledges that if it converted the Series A Preferred
and exercised the Warrants it owns into and for Common Stock prior to the
shares of Common Stock to be registered under the Registration Statement being
issued and delivered as contemplated by the Registration Statement and the
Plan, the number of shares of Common Stock that would be outstanding would
exceed the minimum of such shares that US Tech is authorized to issue under its
Restated Certificate of Incorporation, as amended (the "Charter"), and thus not
be validly issued.
As a significant stockholder of US Tech, the Company has a significant
interest in US Tech's growth and development. The Company recognizes that the
ability of US Tech to issue options under the Plan will enable US Tech to
attract and retain talented employees. As a result, the Company does not desire
to impede US Tech's efforts to register the Common Stock it
<PAGE> 2
intends to issue upon the exercise of options granted under the Plan. US Tech
has agreed to seek approval for and to effect a Charter Amendment as described
below. Accordingly, notwithstanding the rights granted to US Tech under the
Certificate of Designations and the Warrants, the Company hereby makes the
following representations, warranties and covenants to US Tech:
1. Until US Tech's voting stockholders have approved an Amendment to the
Charter (the "Charter Amendment"), authorizing the Company to issue an
amount of Common Stock sufficient to permit the conversion to Common
Stock of all of US Tech's then-outstanding shares of all of its
authorized and designated series of convertible preferred stock and
any other then-outstanding securities and options issued by the
Company, which are convertible into or entitle the holder thereof to
purchase or otherwise receive shares of Common Stock, including but
not limited to Series A Preferred, the Warrants and the options issued
under the Plan, and the Charter Amendment has been filed with and
accepted by the Secretary of State of the State of Delaware, the
Company will not exercise for or convert into Common Stock the
Warrants, the shares of the Series A Preferred Stock or any other
securities or options held by the Company as of the date hereof that
are convertible into or give the Company the right to purchase or
otherwise receive shares of Common Stock.
2. Until US Tech's voting stockholders have approved the Charter
Amendment and it has been filed with and accepted by the Secretary of
State of the State of Delaware, the Company will not exercise for or
convert into Common Stock any securities and options issued by US
Tech, which were purchased or otherwise acquired by or issued or
granted to the Company after the date hereof and are convertible into
or entitle the holder thereof to purchase or otherwise receive shares
of Common Stock.
The undersigned is authorized to act on behalf of the Company in
regard to the matters set forth in this letter.
USV Partners, LLC
By: USV Management, LLC, its Manager
By:/s/ C. Gregory Earls
--------------------
C. Gregory Earls,
Sole Member
Acknowledged and Agreed to
by U.S. Technologies Inc.
By:/s/ James V. Warren
-------------------
James V. Warren,
Co-Chairman and Co-CEO
<PAGE> 1
EXHIBIT 10.8
U.S. TECHNOLOGIES INC.
1999 STOCK OPTION PLAN, AS AMENDED
1. PURPOSE
The purpose of the U.S. Technologies Inc. 1999 Stock Option Plan (the
"Stock Option Plan") is to encourage and enable eligible directors, officers,
key employees and consultants of U.S. Technologies Inc. (the "Company") and its
subsidiaries to acquire proprietary interests in the Company, through the
ownership of Common Stock of the Company (the "Stock"). The Company believes
that directors, officers, key employees and consultants who participate in the
Stock Option Plan will have a closer identification with the Company by virtue
of their ability as shareholders to participate in the growth and earnings of
the Company. The Plan also is designated to provide motivation for
participating directors, officers, key employees and consultants to remain a
director, employee or consultant of the Company and its subsidiaries and to
give greater effort on behalf of the Company and its subsidiaries. It is the
intention of the Company that the Stock Option Plan provide for the award of
incentive stock options (the "Qualified Options") qualified under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations promulgated thereunder, as well as the award of nonqualified stock
options (the "Non-Qualified Options"). Accordingly, the provisions of the Stock
Option Plan related to the Qualified Options shall be construed so as to extend
and limit participation in a manner consistent with the requirements of Section
422 of the Code.
2. DEFINITIONS
The following words or terms shall have the following meanings:
(a) "Agreement" shall mean a stock option agreement between the
Company and an Eligible Employee or Eligible Participant pursuant to the terms
of this Plan.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Change in Control of the Company" shall mean if: (a) any
"person" (defined as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended) other than a "person" who together
with all members of such person's family as of November 29, 1999 was the
beneficial owner, directly or indirectly, of thirty-five percent (35%) or more
of the Company's Common Stock, is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing thirty-five percent (35%)
or more of the combined voting power of the Company's outstanding securities
then entitled to vote for the election of directors; (b) there is a change in
the composition of the Board over a period of twenty-four (24) consecutive
months of less such that a majority of the Board members (rounded up to the
next whole number) cease, by reason of one or more proxy contests for the
election of Board members, to be comprised of individuals who either (x) have
been Board members continuously since the beginning of such period or (y) have
been elected or nominated for election as Board members during such period by
at least two-thirds of the Board members described in clause (x) who were still
in office at the time such election or nomination was approved by the Board; or
(c) the shareholders shall approve the sale of all or substantially all of the
assets of the Company or any merger, consolidation, issuance of securities or
purchase of
36
<PAGE> 2
assets, the result of which would be the occurrence of any event described in
clause (a) or (b) above.
(d) "Committee" shall mean the committee by the Board of
Directors for the purpose of administering the Stock Option Plan, which
committee shall at all times consist of two or more Non-Employee Directors.
(e) "Company" shall mean U.S. Technologies Inc., a corporation
chartered under the laws of the State of Delaware.
(f) "Eligible Employee(s)" shall mean key employees regularly
employed by the Company or a Subsidiary (including officers, whether nor not
they are directors) as the Board of Directors or the Committee shall select
from time to time.
(g) "Eligible Participant(s)" shall mean an Eligible Employee, a
Non-Employee Director or consultants or advisors who are not employees of the
Company or a Subsidiary but who, in the sole discretion of the Board of
Directors or the Committee, are providing or are expected to provide benefits,
including actual services, to the Company or a Subsidiary.
(h) "Market Price" shall mean the fair market value of the
Company's Common Stock as determined by the Board of Directors or the
Committee, acting in good faith, under any method consistent with the Code, or
Treasury Regulations thereunder, which the Board of Directors or the Committee
shall in its discretion select and apply at the time of the grant of the option
concerned. Subject to the foregoing, the Board of Directors or the Committee,
in fixing the market price, shall have full authority and discretion and be
fully protected in doing so.
(i) "Non-Employee Director(s)" means a member of the Board of
Directors or a member of the board of directors of a Subsidiary, in each case,
who is not a regular salaried employee of the Company or one of its
Subsidiaries. As it relates to members of the Committee as such term is defined
in this Section 2, "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended
(including any successor statute, rule or regulation) and the meaning of an
"outside director" as set forth in Section 162(m) of the Code and the rules and
regulations thereunder (including any successor statute, rule or regulation).
(j) "Optionee" shall mean an Eligible Employee or Eligible
Participant having a right to purchase Common Stock pursuant to the Stock
Option Plan.
(k) "Option(s)" shall mean the right or rights granted to
Eligible Employees or Eligible Participants to purchase Common Stock under the
Stock Option Plan.
(l) "Permanent and total disability" shall be as defined in
Section 22(e)(3) of the Code.
(m) "Plan" shall mean this U.S. Technologies Inc. 1999 Stock
Option Plan.
(n) "Shares", "Stock" or "Common Stock" shall mean shares of the
$.02 par value common stock of the Company.
37
<PAGE> 3
(o) "Subsidiary" shall mean any corporation, if the Company owns
or controls, directly or indirectly, a majority of the voting stock of such
corporation.
(p) "Ten Percent Owner" shall mean an individual who, at the time
an Option is granted, owns directly or indirectly (under the ownership
attribution rules of Code Section 424(d)) more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or a
Subsidiary.
3. EFFECTIVE DATE
The effective date of the Stock Option Plan (the "Effective Date")
shall be the date the Stock Option Plan is adopted by the Board of Directors or
the date the Stock Option Plan is approved by the shareholders of the Company,
whichever is earlier. The Stock Option Plan must be approved by the affirmative
vote of not less than a majority of the Shares entitled to vote at a meeting at
which a quorum is present, which shareholder vote must be taken within twelve
months after the date the Stock Option Plan is adopted by the Board of
Directors. Such shareholder vote shall not alter the Effective Date of the
Stock Option Plan. In the event shareholder approval of the adoption of the
Stock Option Plan is not obtained within the aforesaid twelve-month period,
then any Options granted in the intervening period shall be nonqualified stock
options and not entitled to incentive stock option treatment under the
provisions of Section 422 of the Code.
4. SHARES RESERVED FOR PLAN
The Common Stock to be sold to Eligible Participants under the Stock
Option Plan may at the election of the Board of Directors or the Committee be
either treasury shares or Shares originally issued for such purpose. The
maximum number of Shares which shall be reserved and made available for sale
under the Stock Option Plan shall be 22,500,000; provided, however, that such
Shares shall be subject to the adjustments provided in Section 8(h); and
provided further that, options shall not be granted with respect to more than
5,500,000 Shares unless and until the Company's Restated Certificate of
Incorporation has been amended to authorize the issuance of at least
200,000,000 shares of common stock. Any Shares subject to an Option which for
any reason expires or is terminated unexercised may again be subject to an
Option under the Stock Option Plan.
5. ADMINISTRATION OF THE STOCK OPTION PLAN
The Stock Option Plan shall be administered by the Board of Directors
or the Committee.
Within the limitations described herein and except as otherwise
provided in the Stock Option Plan, the Board of Directors or the Committee
shall administer the Stock Option Plan, select the Eligible Participants to
whom Options will be granted, determine the number of shares of Stock to be
optioned to each Eligible Participant and interpret, construe and implement the
provisions of the Stock Option Plan. The Board of Directors or the Committee
shall also determine the price to be paid for the shares of Stock upon exercise
of each Option, the period within and the times at which (including vesting,
whether exercisable in whole or in part and the acceleration of any vesting)
each Option may be exercised, and the terms and conditions,
38
<PAGE> 4
consistent with the terms of the Stock Option Plan, of each Option granted
pursuant to the Stock Option Plan; provided that, unless otherwise expressly
set forth to the contrary in an Optionee's Agreement, in the event of a Change
in Control of the Company, all outstanding Options not then exercisable but
subject to vesting pursuant to such Optionee's Agreement shall be deemed vested
and shall immediately become exercisable.
The Board of Directors and the Committee, in connection with their
administration of the plan, may adopt or effect, or authorize the Company to
adopt or effect, procedures and practices with respect to the Stock Option Plan
and options awarded or exercised pursuant thereto so that actions, including
option exercises, are in compliance or satisfy, when appropriate, relevant
legal requirements, including under applicable securities and tax (including
withholding taxes) laws and related rules, regulations and policies. The Board
of Directors and Committee members shall be reimbursed for out-of-pocket
expenses reasonably incurred in the administration of the Stock Option Plan.
If the Stock Option Plan is administered by the Board of Directors, a
majority of the members of the Board of Directors shall constitute a quorum,
and the act of a majority of the members of the Board of Directors present at
any meeting at which a quorum is present, or acts approved in writing by all
members of the Board of Directors shall be the acts of the Board of Directors.
If the Stock Option Plan is administered by the Committee, a majority of the
members of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by all of the members of the Committee shall be the acts of
the Committee.
6. ELIGIBILITY
Options granted pursuant to Section 8 shall be granted only to
Eligible Employees. Options granted pursuant to Section 9 may be granted to
Eligible Participants.
39
<PAGE> 5
7. DURATION OF THE STOCK OPTION PLAN
The Stock Option Plan shall expire on the tenth anniversary of the
Effective Date, but with respect to Options granted hereunder prior to such
date, shall remain in effect until all Shares subject to or which may become
subject to the Stock Option Plan shall have been purchased pursuant to such
Options; provided that Options under the Stock Option Plan must be granted
within ten years from the Effective Date.
8. QUALIFIED INCENTIVE STOCK OPTIONS
It is intended that Options granted under this Section 8 shall be
"qualified incentive stock options" as defined under the provisions of Section
422 of the Code and the regulations thereunder or corresponding provisions of
subsequent revenue laws and regulations in effect at the time such Options are
granted. Such Options shall be evidenced by Agreements in such form and not
inconsistent with this Plan as the Committee or the Board of Directors shall
approve from time to time, which Agreements shall contain in substance the
following terms and conditions:
(a) Price. The purchase price for shares of Stock purchased upon
exercise will be equal to 100% of the Market Price on the day the Option is
granted, as determined by the Board of Directors or the Committee; provided
that the purchase price of Stock deliverable upon the exercise of a qualified
incentive stock option granted to a Ten Percent Owner shall be not less than
one hundred ten percent (110%) of the Market Price on the day the Option is
granted, as determined by the Board of Directors or the Committee, but in no
case less than the par value of such shares of Stock.
(b) Number of Shares. The Agreement shall specify the number of
shares of Stock which the Optionee may purchase under such Option.
(c) Exercise of Options. The Shares subject to the Option may be
purchased in whole or in part by the Optionee in accordance with the terms of
the Agreement, from time to time after shareholder approval of the Stock Option
Plan, but in no event later than ten years from the date of grant of the
Option. Notwithstanding the foregoing, shares of Stock subject to an Option
granted to a Ten Percent Owner shall be exercisable no later than five years
from the date of grant of the Option.
(d) Medium and Time of Payment. Shares of Stock purchased
pursuant to an Agreement shall be paid for in full at the time of purchase.
Payment of the purchase price shall be in cash; provided, however, that in lieu
of cash, an Optionee may, to the extent permitted by applicable law, exercise
an Option in whole or in part, by delivering to the Company shares of common
stock of the Company (in proper form for transfer and accompanied by all
requisite stock transfer tax stamps or cash in lieu thereof) owned by such
Optionee (including shares to be acquired pursuant to the Option being
exercised) having a fair market value equal to the aggregate purchase price of
the shares as to which the Option is being exercised. The fair market value of
the stock so delivered shall be determined as of the date immediately preceding
the date on which the Option is exercised, or as may be required in order to
comply with or to conform to the requirements of any applicable laws or
regulations. Upon receipt of payment, the Company
40
<PAGE> 6
shall, without transfer or issue tax, deliver to the Optionee (or other person
entitled to exercise the Option) a certificate or certificates for such shares
of Stock.
(e) Rights as a Shareholder. An Optionee shall have no rights as
a shareholder with respect to any shares of Stock covered by an Option until
the date of issuance of the stock certificate to the Optionee for such shares
of Stock. Except as otherwise expressly provided in the Stock Option Plan, no
adjustments shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued.
(f) Non-assignability of Option. No Option shall be assignable or
transferable by the Optionee except by will or by the laws of descent and
distribution. During the lifetime of the Optionee, the Option shall be
exercisable only by him or her.
(g) Effect of Termination of Employment or Death. In the event
that an Optionee during his or her lifetime ceases to be an employee of the
Company or of a Subsidiary for any reason (including retirement) other than
death or permanent and total disability, any Option or unexercised portion
thereof which was otherwise exercisable on the date of termination of
employment shall expire 90 days from the date of such termination, but in no
event after the term provided in the Optionee's Agreement; provided, however,
that if such Optionee is also a director of the Company, or a Subsidiary at the
time of cessation of employment, the termination of the employment of the
Optionee will be deemed to have occurred only upon the Optionee's resignation
or retirement as a director of the Company or Subsidiary. In the event that an
Optionee ceases to be an employee of the Company or a Subsidiary for any reason
(including retirement) other than death or permanent and total disability prior
to the time that an Option or portion thereof becomes exercisable, such Option
or portion thereof which is not then exercisable shall terminate and be null
and void. Whether authorized leave of absence for military or government
service shall constitute termination of employment for the purpose of this Plan
shall be determined by the Board of Directors or the Committee, which
determination shall be final and conclusive.
In the event that an Optionee ceases to be an employee of the Company
or a Subsidiary by reason of death or permanent and total disability, any
Option or unexercised portion thereof which was otherwise exercisable on the
date such Optionee ceased employment shall expire unless exercised within a
period of one year from the date on which the Optionee ceased to be an
employee, but in no event after the term provided in the Optionee's Agreement.
In the event that an Optionee ceases to be an employee of the Company or a
Subsidiary by reason of death or permanent and total disability, any Option or
portion thereof which was not exercisable on the date such Optionee ceased
employment shall become immediately exercisable for a period of one year from
the date on which the Optionee ceased to be an employee, but in no event after
the term provided in the Optionee's Agreement.
In the event of the death of an Optionee, the Option shall be
exercisable by his or her personal representatives, heirs or legatees, as
provided herein.
(h) Recapitalization. In the event that dividends are payable in
Common Stock of the Company or in the event there are splits, subdivisions or
combinations of the Common Stock, the number of shares of Stock available under
the Stock Option Plan shall be increased or decreased
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<PAGE> 7
proportionately, as the case may be, and the number of shares of Stock
deliverable upon the exercise thereafter of any Option theretofore granted
shall be increased or decreased proportionately, as the case may be.
(i) Reorganization. In case the Company is merged or consolidated
with another corporation and the Company is not in the surviving corporation,
or in case the property or stock of the Company is acquired by another
corporation, or in case of a separation, reorganization, recapitalization or
liquidation of the Company, the Board of Directors of the Company, or the Board
of Directors of any corporation assuming the obligations of the Company
hereunder, shall either (i) make appropriate provision for the protection of
any outstanding Options by the substitution on an equitable basis of
appropriate stock of the Company, or of the merged, consolidated or otherwise
reorganized corporation which will be issuable in respect to the Common Stock,
provided only that the excess of the aggregate fair market value of the shares
of Stock subject to Option immediately after such substitution over the
purchase price thereof is not more than the excess of the aggregate fair market
value of the shares of Stock subject to Option immediately before such
substitution over the purchase price thereof, or (ii) upon written notice to
the Optionee provide that the Option (subject to the second paragraph of
Section 5, including in the discretion of the Board of Directors any portion of
such Option which is not then exercisable) must be exercised within sixty days
of the date of such notice, or it will be either terminated or (including, in
the discretion of the Board of Directors, any portion of such Option which is
not then exercisable) deemed exercised based on the net value of such Option in
light of its then exercise price per share and the value of the consideration
to be received by holders of Common Stock as a result of such transaction or
event. If any adjustment under this Section 8(i) would create a fractional
share of Stock or a right to acquire a fractional share, such shall be
disregarded and the number of shares of Stock available under the Stock Option
Plan and the number of shares of Stock covered under any Options previously
granted pursuant to the Stock Option Plan shall be the next lower number of
shares of Stock, rounding al fractions downward. An adjustment made under this
Section 8(i) by the Board of Directors shall be conclusive and binding on all
affected persons.
Except as otherwise expressly provided in this Plan, the Optionee
shall have the no rights by reason of any subdivision or consolidation of
shares of stock of any class, or the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class, or by
reason of any dissolution, liquidation, merger, or consolidation or spin-off of
assets or stock of another corporation; and any issue by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number or prices of Common Stock subject to an Option.
The grant of an Option pursuant to the Stock Option Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
(j) Annual Limitation. The aggregate fair market value
(determined at the time the Option is granted) of the shares of Stock with
respect to which qualified incentive stock options are exercisable for the
first time by an Optionee during any calendar year (under all incentive stock
option plans of the Company) shall not exceed $100,000. Any excess over such
amount
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<PAGE> 8
shall be deemed to be related to and part of a nonqualified stock option
granted pursuant to Section 9 of the Stock Option Plan.
(k) General Restriction. Each Option shall be subject to the
requirement that if at any time the Board of Directors shall determine, in its
discretion, that the listing, registration or qualification of the shares of
Stock subject to such Option upon any securities exchange or under any state or
federal law, or the consent of approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting
of such Option or the issue or purchase of shares of Stock thereunder, such
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors.
Alternatively, such Options shall be issued and exercisable only upon such
terms and conditions and with such restrictions as shall be necessary or
appropriate to effect exemption from such listing, registration, or other
qualification requirement.
9. NONQUALIFIED STOCK OPTIONS
(a) Within the limitations described in Section 9(b), the Board
of Directors or the Committee may grant to Eligible Participants Options under
the Stock Option Plan which are not "qualified incentive stock options" as
defined under the provisions of Section 422 of the Code. Such nonqualified
stock options shall be evidenced by Agreements in such form and not
inconsistent with this Plan as the Board of Directors or the Committee shall
approve from time to time, which Agreements shall contain in substance the same
terms and conditions as set forth in Section 8 hereof with respect to qualified
incentive stock options (except that, with respect to Options awarded to
Non-Employee Directors, references to employment with the Company shall be
deemed to mean service on the Board of Directors and, with respect to
consultants, references to employment with the Company shall be deemed to mean
benefits being provided or expected to be provided, including actual services,
to the Company or a Subsidiary); provided, however, that the limitations set
forth in Sections 8(a) and 8(c) with respect to Ten Percent Owners shall not be
applicable to nonqualified stock options granted to any Ten Percent Owner, and
the limitation set forth in Section 8(j) with respect to the annual limitation
of incentive stock options shall not be applicable to nonqualified stock option
grants; provided further, that nonqualified stock options may be granted at a
purchase price equal to not less than 75% of the Market Price on the day the
Option is granted.
(b) With respect to Non-Employee Directors then serving on the
Committee, nonqualified stock options may be granted pursuant to Section 9(a)
of the Stock Option Plan to such Non-Employee Directors only upon authorization
and approval by the Board of Directors or the shareholders of the Company;
provided that, where the Board of Directors authorizes Option grants under this
Section 9(b), the Non-Employee Director to receive such Options shall not
participate in the Board of Director's authorization of such grant.
10. AMENDMENT OF THE STOCK OPTION PLAN
The Stock Option Plan may at any time or from time to time be
terminated, modified or amended by the affirmative vote of not less than a
majority of the shares present and voting thereon by the Company's shareholders
at the meeting of the shareholders at which a quorum is present. The Board of
Directors may at any time and from time to time modify or amend the
43
<PAGE> 9
Stock Option Plan in any respect, except that without shareholder approval the
Board of Directors may not (i) increase the maximum number of shares of Stock
for which Options may be granted under the Stock Option Plan (other than
increases due to changed in capitalization as referred to in Section 8(h)
hereof), or (ii) extend the maximum period during which Options may be granted
or exercised, or (iii) change the class of persons eligible for Options under
the Stock Option Plan, or (iv) otherwise materially modify the requirements as
to eligibility for participation in the Stock Option Plan. The termination or
any modification or amendment of the Stock Option Plan shall not, without the
written consent of an Optionee, affect his or her rights under an Option or
right previously granted to him or her. With the written consent of the
Optionee affected, the Board of Directors or the Committee may amend
outstanding Agreements in a manner not inconsistent with the Stock Option Plan.
Without employee consent, the Board of Directors or the Committee may at any
time and from time to time modify or amend outstanding Agreements in such
respects as it shall deem necessary in order that incentive stock options
granted hereunder shall comply with the appropriate provisions of the Code and
regulations thereunder which are in effect from time to time respecting
qualified incentive stock options. The Board of Directors may also suspend the
granting of Options pursuant to the Stock Option Plan at any time and may
terminate the Stock Option Plan at any time; provided, however, no such
suspension or termination unless (i) the affected participant consents in
writing to such modification or amendment or (ii) there is a dissolution or
liquidation of the Company.
11. BINDING EFFECT
All decisions of the Board of Directors or the Committee involving the
implementation, administration or operation of the Stock Option Plan or any
offering under the Stock Option Plan shall be binding on the Company and on all
persons eligible or who become eligible to participate in the Stock Option
Plan.
12. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of Common Stock
pursuant to Options exercised hereunder will be used for general working
capital.
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<PAGE> 1
EXHIBIT 10.11
INDUSTRY WORK PROGRAM AGREEMENT
This agreement is entered into effective this 22 day of April, 1998, by
and between The Wackenhut Corrections Corporation, 4200 Wackenhut Drive, Palm
Beach Gardens, Florida 33410 hereinafter OPERATOR, and Labor-to-Industry Inc.
whose principal office is located at 3901 Roswell Road, Suite 300, Marietta,
Georgia 30067, hereinafter "INDUSTRY CONTRACTOR," the Texas Department of
Criminal Justice, Parole Division, hereinafter DIVISION, and the City of
Lockhart, Texas, hereinafter referred to as "CITY".
WHEREAS, Subchapter C of Chapter 497 of the Government Code authorizes
the establishment and operation of a prison work program by a private facility
operator under subcontract to a city or county; and
WHEREAS, the City of Lockhart, Texas in conjunction with the Texas
Department of Criminal Justice, has built a five hundred (500) bed work program
facility pursuant to the above statutory authority and has in turn
subcontracted, responsibilities to OPERATOR; and
WHEREAS, OPERATOR desires to continue to provide a work program area
to the INDUSTRY CONTRACTOR for the purpose of establishing and maintaining a
resident (inmate) work program in accordance with all applicable laws and
regulations;
NOW, therefore, in consideration of mutual benefits and covenants
hereinafter set forth, the parties hereby agree as follows:
1. Initial Term
This agreement shall become effective upon its execution and delivery
and shall continue in full force and effect, for an initial term
ending January 31, 2001 unless earlier terminated pursuant to Section
11, below. In the event the contract between OPERATOR and the City of
Lockhart terminates or expires, this contract will terminate also.
2. Renewal Term
This agreement shall automatically be extended for successive
subsequent terms of three (3) years each, unless either OPERATOR or
INDUSTRY CONTRACTOR terminates this agreement by written notice to the
other at least six (6) months prior to the expiration date of the then
current term, or this agreement is otherwise earlier terminated,
pursuant to the provisions of Section II below.
3. Right of Occupancy/Occupancy Fee
A. OPERATOR hereby grants to the INDUSTRY CONTRACTOR a right of
occupancy in the designated Industries Building and agrees to provide
the INDUSTRY
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CONTRACTOR with approximately 28,700 sq. ft. for Work Program
activities, hereinafter referred to as the AREA.
B. During the this Term and the first renewal term thereafter,
INDUSTRY CONTRACTOR shall pay to OPERATOR the sum of One Dollar
($1.00) per year. Occupancy fees for the Renewal Term(s) shall be
negotiated and approved by written agreement of the parties hereto at
least one (1) year prior to the expiration of the then current term.
4. Occupancy Restrictions
Nothing herein shall be construed as creating either a rental
agreement or a lease; the INDUSTRY CONTRACTOR may not sublet,
sublease, assign, or transfer this agreement or any of its rights or
obligation hereunder, nor may INDUSTRY CONTRACTOR enter into any other
agreement regarding the occupancy herein granted, without the express
prior written agreement of OPERATOR. The occupancy of the AREA shall
at all times be consistent with the terms of this agreement regarding
work authorized and work hours. Work hours and type of industry shall
be subject to OPERATOR approval.
5. INDUSTRY CONTRACTOR Obligations
INDUSTRY CONTRACTOR hereby agrees:
A. To provide OPERATOR at their request, a description of the
product and/or services INDUSTRY CONTRACTOR intends to produce and/or
deliver, in the intended market for products and/or services.
B. Upon approval by OPERATOR of INDUSTRY CONTRACTOR'S submitted
plan, to make all required improvements and install all necessary
furnishings, equipment and fixtures, at INDUSTRY CONTRACTOR'S cost,
without damage to the AREA or surrounding property.
C. That all materials personal property, inventory items,
equipment, and/or fixtures or other property of any kind or
description whatsoever (exclusive of those items specified in Appendix
B) installed or brought into the AREA by INDUSTRY CONTRACTOR, it
agents or employees, shall be at INDUSTRY CONTRACTOR'S sole risk and
neither the STATE, OPERATOR, CITY OF LOCKHART, or any employees or
agents thereof, shall be liable for any damage or loss suffered thereto
except such damage or loss as may be caused by the intentional act or
gross negligence of the STATE, OPERATOR, CITY OF LOCKHART or any other
their agents or employees;
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D. That all permanent improvements or fixtures permanently
attached to the AREA shall become the property of the real
owner-in-interest of the building in which the AREA is located, unless
otherwise agreed in writing between all applicable parties.
E. That no additional alternations to the AREA may be made by
INDUSTRY CONTRACTOR without the prior written approval of OPERATOR,
which approval shall not be unreasonably withheld.
F. That INDUSTRY CONTRACTOR, its employees and agents will
comply with all OPERATOR policies and procedures as well as all
applicable federal, state, and local laws, ordinances, and
regulations, with particular emphasis on federal and state wage and
hour laws regarding payment for work and other rules and regulations
of the federal and state agencies having jurisdiction over employment
relations. The INDUSTRY CONTRACTOR warrant that the OPERATOR is not a
secondary employer. The INDUSTRY CONTRACTOR agrees that no goods
produced under this Agreement shall be placed in commerce in violation
of the laws of the State of Texas or the United States as they relate
to the utilization of prison labor and Prison Industry Certification
requirements.
G. That all deliveries, shipments, and employees are subject to
search before entering or leaving the Facility premises;
H. To keep the AREA clean, neat and orderly and to promptly
report any damage to the building structure, interior fixture(s), or
unsafe conditions to OPERATOR;
I. To properly maintain in safe working condition all INDUSTRY
CONTRACTOR installed equipment and fixtures;
J. That throughout the term of this agreement, INDUSTRY
CONTRACTOR shall be responsible for the cost of all utilities and
telephone service to INDUSTRY CONTRACTOR'S provided AREA, which
utilities shall be sub-metered and billed directly to INDUSTRY
CONTRACTOR;
K. That all INDUSTRY CONTRACTOR'S employees and agents assigned
to the AREA shall be subject to background security checks by
OPERATOR, and that OPERATOR shall have the right to deny entrance to
the AREA to any INDUSTRY CONTRACTOR employee or agent reasonably
deemed by OPERATOR to present a security risk;
L. That all INDUSTRY CONTRACTOR'S employees assigned to the AREA
shall be obligated to successfully complete the security training
provided by OPERATOR;
M. To interview, hire and train its Resident employees except as
otherwise provided herein;
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N. In the hiring of all Resident employees, to comply with all
requirements of federal, state, and local non-discrimination statutes
and/or regulations. The INDUSTRY CONTRACTOR shall provide the OPERATOR
with job descriptions and personnel procedures for all inmate jobs in
the industry work program.
O. To provide an on-site supervisor at all times Residents are
working in the AREA and to provide for job supervision and instruction
to all hired Resident employees;
P. To pay Resident employees at a rate prevailing in the area
for similar work; at no time shall the pay rate be less than the
Federal Minimum Wage.
Q. To make Resident employee wage payments to OPERATOR as
trustee of Resident pay accounts, with assurances that the withholding
for and the payment of applicable social security, income,
unemployment, or other taxes based on the wages and earnings of an
employee or otherwise will be timely made and paid in accordance with
applicable law. INDUSTRY CONTRACTOR shall provide OPERATOR with a
written earnings and wage distribution report on a monthly basis on
all resident employees. All Resident employee wage payments to
OPERATOR shall be made on a bi-weekly basis, unless otherwise agreed
to by OPERATOR;
R. That work hour schedules for all Resident employees assigned
to the industry work program shall be established by OPERATOR, through
the request of INDUSTRY CONTRACTOR. OPERATOR shall use its best
efforts to comply with INDUSTRY CONTRACTOR'S scheduling requests.
Overtime hours may be arranged, at the request of the INDUSTRY
CONTRACTOR, with prior approval of OPERATOR. If resident employees
work overtime, INDUSTRY CONTRACTOR will share in the expense of paying
OPERATOR employees overtime wages.
S. That INDUSTRY CONTRACTOR shall, effective ninety (90) days
after the execution of this agreement, employ not fewer than
one-hundred (125) Resident employees working a minimum of thirty-five
(35) hours per week on a continuing basis, unless otherwise agreed to
in writing by OPERATOR and subject to the availability of qualified
Resident employees within the facility. All work performed by
Residents shall be performed in accordance with the prevailing working
conditions within the CITY.
T. That the employment of Residents will not result in the
displacement of employed workers within the CITY, that the Residents
will not be employed as strikebreakers or in impairing existing
contracts at other industries wherever situated, and that the Resident
will not be exploited in any form which might adversely affect the
community, the Residents, or the DIVISION;
U. That the STATE, CITY OF LOCKHART, OPERATOR, and their
employees or agents shall not be held liable for any damage to
INDUSTRY CONTRACTOR or any
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third party arising from or related to any work stoppage or resident
lock downs regardless of the reasons therefor;
V. To protect, defend, indemnify and hold harmless the STATE,
CITY OF LOCKHART, OPERATOR, and their employees or agents, from any
liability claims and damages arising from or relating to this
agreement except such liability claims and damages arising from or
related to the actions or (when under an obligation to act) failure to
act of the STATE, CITY OF LOCKHART, OPERATOR or any of their employees
or agents;
W. To comply with all state and local license requirements and
pay all local personal property taxes.
X. The INDUSTRY CONTRACTOR shall maintain insurance coverage for
its equipment, supplies and materials located in the prison industries
building against casualty occurrences. Further the INDUSTRY CONTRACTOR
shall maintain liability insurance coverage on itself, its agents,
servants and employees in an amount no less than $250,000 per person
per claim, $500,000 aggregate. The INDUSTRY CONTRACTOR shall also
maintain workers' compensation insurance on its employees in
accordance with the laws of the State of Texas and the PIE
Certification requirements. The INDUSTRY CONTRACTOR shall deliver to
OPERATOR a duly authenticated certificate evidencing such insurance,
within seven (7) days of execution of this agreement, and upon each
insurance renewal date.
Y. INDUSTRY CONTRACTOR shall indemnify and hold harmless
OPERATOR, CITY, and DIVISION from any and all liability arising out of
or in connection with INDUSTRY CONTRACTOR'S use, production, storage,
or disposal of any "hazardous materials" or "hazardous waste"
hereinafter defined. OPERATOR shall have the right to inspect and
approve all storage and disposal procedures.
"HAZARDOUS MATERIAL" shall mean any substance which is or contains (i)
any "hazardous substance" as now or hereafter defined in 101(14) of
the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended ("CERCLA") (42 U.S.C. 9601 et seq.) or any
regulations promulgated under CERCLA; (ii) any "hazardous waste" as
now or hereafter defined in the Resource Conservation and Recovery Act
(42 U.S.C. 6901 et seq. ("RCRA") or regulations promulgated under
RCRA; (iii) any substance regulated by the Toxic Substances Control
Act (15 U.S.C. 2601 et seq.); (iv) gasoline, diesel fuel, or other
petroleum hydrocarbons; (v) asbestos and asbestos containing
materials, in any for, whether friable or non-friable; (vi)
polychlorinated biphenyls; (vii) radon gas; and any additional
substances or materials which are now or hereafter classified or
considered to be hazardous or toxic under Environmental Requirements
(as hereinafter defined) or the common law, or any other applicable
laws relating to the Property. "Hazardous waste" shall mean a solid
waste, or combination of solid wastes, which because of its quantity,
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concentration, or physical, chemical, or infectious characteristics
may (a) cause, or significantly contribute to an increase in mortality
or an increase in serious irreversible, or incapacitating reversible,
illness; or (b) pose a substantial present or potential hazard to
human health or the environment when improperly treated, stored,
transported, or disposed of, or otherwise managed. 42 U.S.C. 6903, as
amended. INDUSTRY CONTRACTOR shall be in compliance and current on all
changes to the above-referenced statutes and shall immediately comply
with any amendments to those sections or any statutes promulgated by
the State of Texas.
Z. Certificate of Good Standing. INDUSTRY CONTRACTOR shall, on an
annual basis, deliver to OPERATOR a Certificate of Good Standing from
the State of Texas Comptroller's Office that indicates that INDUSTRY
CONTRACTOR is current on all taxes due.
AA. ACA Assistance. Where ACA accreditation is being sought by
OPERATOR INDUSTRY CONTRACTOR shall comply with all ACA standards
applicable to the Industry Program and shall collect and maintain the
required documentation to assist OPERATOR to achieve and maintain
accreditation.
6. OPERATOR'S Obligations
OPERATOR agrees to:
A. Provide INDUSTRY CONTRACTOR with the AREA described in
Section 3, and provide for project management and supervision for all
improvements in the AREA.
B. Provide orientation training regarding OPERATOR security
procedures for INDUSTRY CONTRACTOR'S staff, employees, and/or agents
located at or regularly frequenting the AREA;
C. Provide security for the AREA and to provide other resident
custody support as determined by OPERATOR;
D. Provide INDUSTRY CONTRACTOR with resident employee referrals
through OPERATOR'S classification system in a timely manner;
E. Serve as Trustee of resident employee payroll accounts and to
apply the proceeds of such accounts in accordance with the terms of
all applicable State laws, regulations, and contract provisions;
F. Use its best efforts to assign this agreement to any
subsequent private or public OPERATOR;
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G. Provide a mutually agreeable Vocational/Educational training
tailored to INDUSTRY CONTRACTOR'S needs for initial pre-hire training
through the OPERATOR'S Vocational/Educational Program.
H. Assist in provision of Hazcom Training for residents and
INDUSTRY CONTRACTOR'S employees utilizing course materials to be
supplied by INDUSTRY CONTRACTOR. However, such assistance will not
reduce, diminish or otherwise waive any legal liabilities, properly
and legally the responsibility of INDUSTRY CONTRACTOR.
7. DIVISION Obligations
A. DIVISION agrees that in the event of the termination of
OPERATOR'S services prior to the expiration of the then
current INDUSTRY CONTRACTOR'S term, DIVISION, should it
become the OPERATOR of the project, will continue to meet the
OPERATOR'S obligations hereunder, including the ongoing
requirements of classification and assignment of appropriate
inmates to allow INDUSTRY CONTRACTOR to continue its Work
Program for the remainder of such then current term, either
through the services of another contracted private Operator,
or through direct DIVISION operation of the Facility.
Notwithstanding the foregoing provision, the DIVISION
reserves the right to terminate this agreement upon six (6)
months prior written notice to the parties hereto based upon
a determination by the Texas Board of Criminal Justice that
the Project shall no longer be dedicated to the Work Program
facility; provided however, that INDUSTRY CONTRACTOR shall be
allowed one extension of three (3) months prior to the
termination under this provision if INDUSTRY CONTRACTOR is, in
good faith, unable to obtain a new facility and relocate its
operations thereto in an orderly and business like manner in
such initial six (6) month period.
8. CITY Obligations
CITY agrees that in the event of the termination of OPERATOR'S
services prior to the expiration of the then current INDUSTRY
CONTRACTOR'S term, and CITY'S assumption of such Operator management
and operation duties and responsibilities, CITY will continue to meet
the OPERATOR'S obligations hereunder, including the ongoing assignment
of appropriate inmates to allow INDUSTRY CONTRACTOR to continue its
Work Program for the remainder of such then current term, either
through the services of another contracted private OPERATOR or through
direct CITY operation of the Facility.
9. DIVISION Rights
The parties hereto agree that the DIVISION shall have the right, in
its own name, to enforce the terms and provisions of this agreement.
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10. Contingencies and other Obligations
This agreement shall be subject to the contingencies and additional
obligations set forth in Appendix A, a copy of which is attached
hereto.
11. Termination
A. Either OPERATOR or INDUSTRY CONTRACTOR may terminate this
agreement upon one hundred (180) days prior written notice to the
other. Provided, however, that if this Agreement is terminated by
OPERATOR, that INDUSTRY CONTRACTOR shall be allowed one extension of
three (3) months prior to the termination under this provision if
INDUSTRY CONTRACTOR is, in good faith, unable to obtain a new facility
and relocate its operations thereto in an orderly and business like
manner in such initial six (6) month period. However, this agreement
may be terminated or suspended on an immediate basis by OPERATOR if in
its sole discretion its continuance would constitute a safety or
security risk to inmates, employees, third parties, or the public.
OPERATOR shall not unreasonably exercise this authority and shall
provide INDUSTRY CONTRACTOR a reasonable time, within the time limits
stated above, to relocate its operations.
B. The DIVISION may terminate this Agreement upon six (6) months
prior written notice to the parties hereto based upon a determination
by the Texas Board of Criminal Justice that the facility shall no
longer be dedicated to a Work Program Facility. Provided, however,
that if this Agreement is terminated by DIVISION, that INDUSTRY
CONTRACTOR shall be allowed one extension of three (3) months prior to
termination under this provision if INDUSTRY CONTRACTOR is in good
faith unable to obtain a new facility and relocate its operations
thereto in an orderly and business like manner in such initial six (6)
month period.
12. Default by INDUSTRY CONTRACTOR
A material failure to keep, perform, meet or comply with any covenant,
agreement, term or provision of this Agreement to be kept, observed,
met, performed, or complied with by INDUSTRY CONTRACTOR hereunder,
which such failure continues for a period of sixty (60) days after
INDUSTRY CONTRACTOR has written notice thereof, shall constitute an
Event of Default on the part of INDUSTRY CONTRACTOR.
13. Opportunity to Cure
In an Event of Default by INDUSTRY CONTRACTOR that INDUSTRY CONTRACTOR
reasonably believes (i) cannot be cured within the sixty (60) days
allowed to cure such Event of Default and (ii) that such Event of
Default can be cured through a diligent, on-going, and conscientious
effort on the part of INDUSTRY CONTRACTOR within a reasonable period
not to exceed six (6) months, unless extended by OPERATOR,
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then INDUSTRY CONTRACTOR may, within the sixty (60) day cure period,
submit a plan for curing the Event of Default to OPERATOR. Upon
receipt of any such plan for curing an Event of Default, OPERATOR
shall promptly review such plan and at its discretion, which must be
reasonable in the circumstances, may allow, or not allow, INDUSTRY
CONTRACTOR to pursue such plan of cure. The decision of OPERATOR will
be communicated in writing to INDUSTRY CONTRACTOR. OPERATOR agrees
that it will not exercise its remedies hereunder with respect to such
Event of Default for so long as INDUSTRY CONTRACTOR diligently,
conscientiously, and timely undertakes to cure the Event of Default in
accordance with the approved plan. If OPERATOR does not allow an
extension of the cure period, the sixty (60) day time period shall be
tolled during the period of time the request is pending before the
OPERATOR.
14. Use or Lose Space
In the event that the INDUSTRY CONTRACTOR does not utilize the AREA in
the most efficient manner to maximize work production and the number
of resident employees to be employed, the OPERATOR may, in its
discretion, remove from INDUSTRY CONTRACTOR'S use that amount of space
in the AREA not being utilized. In the event of this circumstance,
OPERATOR shall give INDUSTRY CONTRACTOR written notice of its
intention to reduce the work space made available to INDUSTRY
CONTRACTOR. INDUSTRY CONTRACTOR shall have ninety days after it has
received written notice thereof to more efficiently utilize the space
to be removed from it by OPERATOR, and at the same time, submit a plan
to OPERATOR as to how that space will be more efficiently utilized. If
after the ninety days, the INDUSTRY CONTRACTOR is still not utilizing
the space in the most efficient manner in accordance with OPERATOR'S
expectations, that space will be taken away from INDUSTRY CONTRACTOR
and, in the discretion of the OPERATOR, made available to itself or
other INDUSTRY CONTRACTORS. This provision of paragraph 14 shall apply
only in the event that the INDUSTRY CONTRACTOR is unable to comply
with paragraph 5(s), otherwise this paragraph 14 will not be
applicable.
15. Default by OPERATOR
A material failure to keep, perform, meet or comply with any covenant,
agreement, term or provision of this Agreement to be kept, observed,
met, performed, or complied with by OPERATOR hereunder, which such
failure continues for a period of sixty (60) days after OPERATOR has
written notice thereof, shall constitute an Event of Default on the
part of the OPERATOR.
16. Opportunity to Cure
In the Event of Default by OPERATOR that OPERATOR reasonably believes
(i) cannot be cured within the sixty (60) days allowed to cure such
Event of Default and (ii) that such
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Event of Default can be cured through a diligent, on-going, and
conscientious effort on the part of OPERATOR within a reasonable
period not to exceed six (6) months, unless extended by INDUSTRY
CONTRACTOR, then OPERATOR may, within the sixty (60) day cure period,
submit a plan for curing the Event of Default to INDUSTRY CONTRACTOR.
Upon receipt of any such plan for curing an Event of Default, INDUSTRY
CONTRACTOR shall promptly review such plan and at its discretion,
which must be reasonable in the circumstances, may allow, or not
allow, OPERATOR to pursue such plan of cure. The decision of INDUSTRY
CONTRACTOR will be communicated in writing to OPERATOR. INDUSTRY
CONTRACTOR agrees that it will not exercise its remedies hereunder
with respect to such Event of Default for so long as OPERATOR
diligently, conscientiously, and timely undertakes to cure the Event of
Default in accordance with the approved plan. If INDUSTRY CONTRACTOR
does not allow an extension of the cure period, the sixty (60) day
time period shall be tolled during the period of time the request is
pending before the INDUSTRY CONTRACTOR.
17. All parties agree that in the event of a non-appropriation of
funds by the Texas legislature for The Lockhart Work Program
Correctional Facility, this Agreement will terminate at such time as
appropriations are no longer available to operate this facility.
18. This Agreement may be executed in one or more separate
counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
19. Complete Agreement
This Agreement contains all of the terms and conditions agreed to by
the parties involved. No other understandings, oral or otherwise,
regarding the subject matter of this Agreement shall be deemed to
exist or to be binding upon any party hereto.
20. Modifications
This Agreement may not be modified, altered or amended except by
written agreement executed by all the parties hereto.
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IN WITNESS WHEREOF, the parties hereto affix their respective authorization
signatures effective the date first set forth above.
Wackenhut Corrections Corporation (OPERATOR):
By: /s/ Patricia McNair Persante
--------------------------------
Patricia McNair Persante
Sr. Vice President
U.S. Technologies Inc. (INDUSTRY CONTRACTOR)
By: /s/ K.H. Smith
--------------------------------
K.H. Smith, President
[Signatures continued on the following page]
Texas Department of Criminal Justice (STATE)
By:
--------------------------------
Melinda Hoyle Bozarth
Director of Parole Division
City of Lockhart (CITY)
By:
--------------------------------
John Allred
Mayor, City of Lockhart
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APPENDIX A
CONTINGENCIES AND OTHER OBLIGATIONS
OPERATOR shall provide INDUSTRY CONTRACTOR the following:
1. Three reserved parking spaces in close proximity to the main entrance,
to be marked as specified for INDUSTRY CONTRACTOR from time to time.
Additional parking will be made available for INDUSTRY CONTRACTOR'S
non resident employees.
2. OPERATOR'S medical staff shall be available to INDUSTRY CONTRACTOR for
emergencies incurred in the AREA to the same extent the staff would be
available to the OPERATORS employees.
3. OPERATOR will use its best efforts to assist INDUSTRY CONTRACTOR in
obtaining and maintaining a tax abatement from the CITY and from
Caldwell County.
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<PAGE> 1
EXHIBIT 10.13
STATE OF CALIFORNIA DEPARTMENT OF GENERAL SERVICES
REAL ESTATE SERVICES DIVISION
JOINT VENTURE BY-STATE LEASE AGREEMENT
LEASE COVERING PREMISES LOCATED AT LEASE NO.: L-1724
CHUCKAWALLA VALLEY STATE PRISON
19025 WILEYS WELL ROAD
BLYTHE,CA 92225
AGENCY
DEPARTMENT OF CORRECTIONS
This Lease, dated for reference purposes only, this first day of August 1998,
by and between the State of California, acting by and through its Director of
General Services, with the approval of the Department of Corrections
hereinafter called STATE, and Labor-to-Industry Inc., hereinafter called
LESSEE. The parties agree as follows:
WITNESSETH
The STATE, by virtue of Title 15, Article 9, Section 3480 of the California
Code of Regulations, has added the Joint Venture Program, which seeks to
contract with privately owned businesses in a unique cooperative venture to
produce goods or services.
Pursuant to Section 14672.16(a) of the Government Code, Proposition 139,
effective November 7, 1990, known as the "Prison Inmate Labor Initiative of
1990", the primary purposes of the Joint Venture Program are to establish
contracts that give priority to inmate employment which will retain or reclaim
jobs in California, support emerging California industries or create jobs for a
deficient labor market and further rehabilitation, provide vocational training,
develop job skills and qualify inmates for employment upon release from the
institution.
LESSEE agrees to enter into a cooperative venture with the STATE to manufacture
and produce goods at the Chuckawalla Valley State Prison (CVSP), utilizing and
hiring the services of inmates of the STATE in accordance with the terms and
conditions Stated in the Standard Agreement #CV98042, dated September 1, 1998,
between the California Department of Corrections (CDC) and the LESSEE.
DESCRIPTION 1. STATE does hereby lease to LESSEE, and
LESSEE hereby hires from STATE
approximately 20,300 (square feet) of
warehouse space, and approximately 16,000
(square feet) of space on C Facility for a
total of 36,300 square feet, located within
the boundaries of CVSP, situated in the
County of Riverside, State of California,
hereinafter called the Premises, as
outlined in red on Exhibits "A", "B-l" and
"B-2" incorporated herein and by this
reference, made a part hereof.
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<PAGE> 2
TERM 2. The term of the Lease shall be for a period
of five (5) years, commencing on
September 1, 1998 and terminating on
August 31, 2003, with such rights of
termination as may be hereinafter expressly
set forth.
This Lease may be renewed in writing by the
parties for additional successive five (5)
year terms, which shall not exceed fifty
(50) years total.
The provisions of each renewal shall be
negotiated between the parties and are
subject to the Department of General
Services approval.
RENT 3. Effective December 1, 1998, the monthly
rental rate shall be SEVEN HUNDRED TWENTY
SIX DOLLARS AND NO CENTS ($726.00), payable
monthly, in advance.
Payments shall be made as follows:
Department of General Services
Attn.: Receivable Unit, PAL (#L-1724)
P. O. Box 151
Sacramento, CA 95812-0151
UTILITIES 4. a. LESSEE agrees to pay all water, electric
and other utility charges in connection
with LESSEE's use of the Premises during
the term of this Lease. STATE assumes no
liability for the existence or
non-existence nor service connection to
said utilities. Direct billing by CVSP will
be charged each month in arrears, based
upon estimated use, beginning on the first
day of each month starting October 1, 1998.
Payment shall be made directly to CVSP, in
person or mailed to the address as shown in
Paragraph 14 herein.
b. LESSEE acknowledges the existence of an
interruptible power supply agreement with
Southern California Edison. In the event of
a power loss, the LESSEE shall have the
same rate of commercial power recovery as
CVSP.
c. Installation, monthly billing,
maintenance and removal of any telephone
systems will be the sole responsibility of
the LESSEE.
d. Trash removal shall be the sole
responsibility of the LESSEE.
RENTAL ADJUSTMENT 5. It is hereby mutually agreed that,
notwithstanding anything to the contrary
herein contained and in the event the costs
to the STATE to furnish space, maintenance
and administrative services increase in any
one year period during the term hereof, the
monthly rental rate shall, at the option of
the STATE, be adjusted to include such
increase in costs, effective upon
commencement of the next following annual
anniversary date of the Lease.
The LESSEE's monthly rate for utilities may
be adjusted to include any increase in the
cost to the STATE for furnishing utilities.
STATE will give LESSEE written notice of
any increase in the utility rate thirty
(30) days prior to such date when said
increase shall become effective.
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TERMINATION 6. The parties hereto agree that either party
may terminate this Lease at anytime during
the term hereof by giving notice to the
other party in writing thirty (30) days
prior to the date when termination shall
become effective. Notice must be given in
accordance with the instructions contained
in paragraph 14 herein.
USE 7. LESSEE agrees to use the Premises for the
purposes of manufacturing of office
furnishings only and for no other purposes.
LESSEE's activities will be conducted
hereunder only in a manner agreed upon by
the STATE and the event any operation or
person is determined objectionable by the
Warden of said institution, LESSEE agrees
to discontinue such operation or remove
such person after notice thereof.
CANCELLATION 8. Any violation of the terms of this Lease or
of the rules and regulations of CVSP shall
be grounds for immediate cancellation of
the Lease and removal of the LESSEE.
DEFINITION OF ADULT 9. Adult Offender (AO), as used in this Lease,
OFFENDER is anyone under the care, custody, and
control of CDC.
LEASE COORDINATOR 10. The Warden of CVSP, or designee, is
appointed as the "Lease Coordinator" for
the institution during the term of this
Lease.
LEASE REVIEW 11. This Lease shall be subject to an annual
review by the STATE, the Lease Coordinator
and the LESSEE, who shall assure the STATE
the original purpose of the Lease is being
carried out and determine what, if any,
adjustments should be made in the terms and
conditions of this Lease.
HOLDING OVER 12. Any holding over after expiration of the
term of this Lease with the consent of
STATE expressed or implied, shall be deemed
to be a tenancy only from month-to-month.
Said month-to-month tenancy shall be
subject otherwise to all the terms and
conditions of this Lease so far as
applicable.
RECOVERY OF LEGAL FEES 13. If action be brought by STATE for the
recovery of any rent due under the
provisions hereof or for any breach hereof,
or to restrain the breach of any agreement
contained herein, or for the recovery of
possession of said Premises, or to protect
any right given to STATE against LESSEE,
and if STATE shall prevail in such action,
LESSEE shall pay to STATE such amount of
all costs and expenses including attorney's
fees in said action as the court shall
determine to be reasonable, which shall be
fixed by the court as part of the costs of
said action.
3
<PAGE> 4
NOTICES 14. All notices herein provided to be given or
which may be given by either party to the
other, shall be deemed to have been fully
given when made in writing and deposited in
the United States mail, certified and
postage prepaid, and addressed as follows:
To the LESSEE: Labor-To-Industry Inc.
Chuckawalla Valley
U.S. Technologies Inc.
3901 Roswell Road, Suite 300
Marietta, GA 30062
To the STATE: Department of General
Services
Real Estate Services
Division
400 R Street, Suite 5000
Sacramento, CA 95814
To the STATE: Department of Corrections
(Institution) Chuckawalla Valley State
Prison
Attn.: Warden
P.O. Box 2289
Blythe, CA 92226
The address to which notices may be mailed
to either party may be changed by written
notice given by subject party to the other,
but nothing herein contained shall preclude
the giving of any such notice by personal
service.
RIGHT OF ENTRY 15. During continuance in force of this Lease,
there shall be and is hereby expressly
reserved to STATE and to any of its
agencies, contractor agents, employees,
representatives or licensees, the right at
any and all times, and any and all places,
to temporarily enter upon said Premises for
STATE purposes.
FAILURE TO PERFORM 16. In the event of the failure, neglect, or
refusal of LESSEE to do or perform work, or
any part thereof, or any act or thing in
this Lease provided to be done and
performed by LESSEE, STATE shall, as its
option, have the right to do and perform
the same, and LESSEE hereby covenants and
agrees to pay STATE the cost hereof on
demand.
4
<PAGE> 5
CONDITION OF PREMISES 17. LESSEE accepts the Premises as being in good
order, condition and repair, unless
otherwise specified herein, provided,
however, that LESSEE shall conduct a final
walk through of the Premises prior to
occupancy. LESSEE further agrees that on
the last day of the term, or sooner
termination of this Lease, to surrender up
to STATE, the Premises with any
appurtenances or improvements in the same
condition as when received, reasonable use
and wear thereof and damage by act of God
excepted.
LESSEE has inspected said Premises
and it is agreed that the area stated
herein and outlined on Exhibits "A", "B-1",
and "B-2" is only approximate and the STATE
does not hereby warrant or guarantee the
actual area included hereunder.
LESSEE accepts the air compressor located in
C Facility at CVSP as is, and will be
responsible for its repair, maintenance and
certification.
COMPLIANCE 18. LESSEE agrees to maintain said Premises in
compliance with the sanitation laws and
regulations of the State of California, and
in compliance with all other laws of the
STATE, and the rules and regulations of
CVSP.
LESSEE shall, at his sole cost and expense,
comply with all of the laws and
requirements of all Municipal, State, and
Federal authorities now in force including,
but not limited to, the Mojave Desert Air
Quality Management District or which may
hereinafter be in force pertaining to the
Premises and the use of the Premises as
provided in this Lease.
ABANDONMENT 19. If the LESSEE abandons, vacates, surrenders,
or is dispossessed by process of law from
the Premises, any personal property
belonging to LESSEE and left on the
Premises shall be deemed to be abandoned,
at the option of the STATE.
EASEMENTS AND 20. This Lease is subject to all existing
RIGHTS-OF-WAY easements and rights of way. STATE further
reserves the right to grant additional
public utility easements as may be
necessary and LESSEE hereby consents to the
granting of any such easement. The public
utility will be required to reimburse
LESSEE for any damages caused by the
construction work on the easement area.
MAINTENANCE 21. a. STATE shall maintain Premises in
reasonable functional condition during the
term of this Lease.
b. Janitorial services will be provided by
LESSEE during the term of this Lease.
ALTERATIONS/REPAIRS 22. LESSEE shall not construct improvements upon
the Premises or make alterations hereto,
either temporary or permanent without first
having obtained written approval of STATE.
All improvements and alterations shall be
in compliance with the Public Health and
Safety Codes and shall conform to the
California Occupational Safety and Health
Standards.
5
<PAGE> 6
SURRENDER OF PREMISES 23. Upon termination of this Lease for any
cause, the LESSEE shall remove any and all
equipment and improvements of the LESSEE
and restore the entire Premises to its
condition prior to the execution of this
Lease, except however, the STATE may
approve, in writing, any deviation from
this requirement.
MEDICAL 24. With the exception of AO's, no medical
support will be provided to LESSEE or
LESSEE's employees by CVSP or by the STATE,
unless for life threatening emergencies.
PROHIBITED ITEMS 25. a. Since the Premises are situated on the
grounds of CVSP, the LESSEE will comply
with all rules and regulations adopted by
said Institution. No article or material
which the STATE considers as being
contraband shall be brought on the
Premises. Said rules prohibit, but are not
limited to: beer, alcoholic beverages,
narcotics, the possession or use of
firearms, explosives or edged weapons, or
restricted controlled substances. Any
willful violation of said rules and
regulations or of the terms of this Lease
will be grounds for immediate cancellation
of this Lease and removal of the LESSEE.
b. No cellular phones or two-way radio
systems will be used on institutional
grounds by LESSEE or LESSEE's employees.
Cordless phones and pagers will be allowed
only with prior approval of the warden.
c. Smoking is not allowed in or upon the
Premises.
HOLD HARMLESS 26. This Lease is made upon the express
condition that the State of California is to
be free from all liability and claims for
damages by reason of any injury to any
person or persons, including LESSEE, or
property of any kind whatsoever and to
whomsoever belonging including LESSEE, from
any cause or causes whatsoever while in,
upon, or in any way connected with the
Premises during the term of this Lease or
any occupancy hereunder, except those
arising out of the sole negligence of the
STATE. LESSEE agrees to defend, indemnify,
and save harmless the State of California
from all liability, loss, cost or
obligation on account of or arising out of
any such injury or loss, however occurring.
LESSEE further agrees to provide necessary
Workers Compensation Insurance for all non
AO employees of LESSEE upon said Premises
at the LESSEE's own cost and expense.
DAMAGE TO PROPERTY 27. Notwithstanding any other language to
the contrary, the STATE, its agents or
employees shall not be liable or
responsible for any damage to property or
persons on the Premises pursuant to this
Lease caused by acts of the AOs of the
STATE or by employees of CVSP while in the
performance of their duties in respect to
the AOs. LESSEE understands that the
Premises are a part of a correctional
institution and such possible damage or
injury is one of the risks of occupancy.
CVSP reserves the right to go on the
Premises for search and to preserve law and
order, or to perform any other act or acts
necessary or advisable for the welfare of
such AOs.
6
<PAGE> 7
INSURANCE 28. LESSEE shall furnish a Certificate of
Insurance with the STATE's Lease Number
indicated on the face of said certificate,
issued to STATE with amounts of Commercial
General Liability of at least $1,000,000
per occurrence and Fire Legal Liability of
at least $100,000 naming the State of
California, its officers, agents and
employees as additional insureds. Said
certificate of insurance shall be issued by
an insurance company with a rating which is
acceptable to the Department of General
Services, Office of Risk and Insurance
Management.
It is agreed that STATE shall not be liable
for the payment of any premiums or
assessments on the insurance coverage
required by this paragraph. The Certificate
of Insurance shall provide that the insurer
will not cancel the insured's coverage
without thirty (30) days prior written
notice to STATE. LESSEE agrees that the
insurance herein provided for shall be in
effect at all times during the term of the
Lease. In the event said insurance coverage
expires at any time or times during the
term of this Lease, LESSEE agrees to
provide STATE, at least thirty (30) days
prior to said expiration date, a new
Certificate of Insurance, evidencing
insurance coverage as provided for herein
for not less than one (1) year. New
Certificates of Insurance are subject to
the approval of the Department of General
Services. In the event LESSEE fails to keep
in effect at all times, insurance coverage
as herein provided, STATE may, in addition
to any other remedies it may have,
terminate this Lease upon the occurrence of
such event.
LOSSES 29. The STATE will not be responsible for
losses, or damage to personal property,
equipment or material of the LESSEE or
LESSEE's employees or agents. All losses
shall be reported to the STATE immediately
upon discovery.
TAXES/ASSESSMENTS 30. LESSEE agrees to pay all lawful taxes,
assessments, or charges which at anytime
may be levied upon interest in this
agreement. It is understood that this Lease
may create a possessory interest subject to
property taxation and LESSEE may be subject
to the payment of property taxes levied on
such interest.
NON-DISCRIMINATION 31. LESSEE agrees that it will not discriminate
against any employee or applicant for
employment because of race, color, religion,
ancestry, national origin, sex, age or
physical handicap. LESSEE agrees to ensure
that applicants are employed and that
employees are treated during employment,
without regard to their race, color,
religion, ancestry, national origin, sex,
age or physical handicap. (See California
Government Code Sections 12920-12994 for
further details.)
DEBT LIABILITY 32. STATE will not be liable for any debts or
claims that arise from the DISCLAIMER
operation of this Lease.
PARTNERSHIP DISCLAIMER 33. LESSEE and any and all agents and employees
of LESSEE shall act in an independent
capacity and not as officers or employees
of the STATE. Nothing herein contained
shall be construed as constituting the
parties herein as partners.
7
<PAGE> 8
ENVIRONMENTAL 34. A. The LESSEE agrees to comply with all
COMPLIANCE applicable Federal, State and local
regulations pertaining to hazardous
materials' use, storage and disposal. The
LESSEE shall indemnify and hold harmless
the STATE and its agents and
representatives for any violation of
environmental and/or hazardous materials
law caused by LESSEE or LESSEE's
representatives. Furthermore, LESSEE shall
reimburse the STATE for any and all costs
related to investigation, clean up and/or
fines incurred by the STATE for
environmental regulation non-compliance by
the LESSEE or LESSEE's representative.
B. If the LESSEE is required to prepare a
Business Plan, as specified by Health and
Safety Code Section 25500 et seq., or a
Hazardous Waste Contingency Plan, as
specified in 22 CCR 66264.51 et seq., then
a copy of the plan shall be submitted first
to the Associate Warden, Business Services.
C. If LESSEE or LESSEE's representative
generates any regulated hazardous wastes on
the STATE's property, LESSEE agrees to
dispose of such wastes in accordance with
all applicable Federal, State and local
regulations. Copies of all hazardous waste
manifests or disposal certificates shall be
submitted to the Associate Warden, Business
Services.
D. Storage of hazardous waste shall comply
with 22 CCR 66264 et al., and all
applicable fire regulations. The LESSEE
shall not apply to become a "Permitted"
hazardous waste storage facility without
permission from the Associate Warden,
Business Services.
E. The STATE or its representatives
reserves the right to inspect all areas
which are Leased or rented by LESSEE, for
the purpose of verifying environmental
compliance.
F. The LESSEE shall provide copies of
Material Safety Data Sheets (MSDS) for all
hazardous materials used on STATE's
property to the Associate Warden, Business
Services.
G. Any violation in Federal, State or local
environmental law including but not limited
to the Mojave Desert Air Quality Management
District, deemed serious by the STATE will
be grounds for termination of Lease in
accordance with applicable sections herein.
Termination of Lease by either party or
evacuation of Leased property by LESSEE
shall not relieve LESSEE of environmental
or hazardous materials related liabilities
incurred by the STATE during LESSEE's
occupancy or incurred as a result of
LESSEE's actions.
PROTECTION OF PREMISES 35. LESSEE shall not commit or suffer to be
committed any waste or nuisance upon the
Premises and further agrees to exercise due
diligence in the protection of the Premises
against damage or destruction by fire or
other cause at all times.
There shall be no hunting on the Premises.
8
<PAGE> 9
MINERAL RIGHTS 36. LESSEE agrees not to interfere, in any way,
with the interests of any person or persons
that may presently, or in the future, hold
oil, gas, or other mineral rights upon or
under said Premises; nor shall LESSEE, in
any way, interfere with the rights of
ingress and egress of said interest
holders.
DESTRUCTION 37. If fire or other casualty totally
destroys the Premises, this Lease shall
terminate. If the building is not replaced
by the LESSEE's insurance company, any
monies received from LESSEE's insurance
policy for the building shall be conveyed
to the STATE. This applies to the building
only and does not include LESSEE's personal
property, equipment or material of the
LESSEE or LESSEE's employees or agents.
SUBLET 38. LESSEE shall not assign this Lease in any
event and shall not sublet the Premises or
any part thereof and will not permit the
use of the Premises by anyone other than
the LESSEE without prior written consent of
the STATE, including approval by the
Department of General Services, which may
be withheld for any reason.
MUTUAL CONSENT 39. Notwithstanding anything herein contained to
the contrary, this Lease may be terminated,
and the provisions of this Lease may be
altered, changed, or amended by mutual
consent in writing of the parties hereto.
Any amendment is subject to the approval by
the Department of General Services.
BINDING 40. The terms and provisions of this agreement
shall extend to and shall bind and inure to
the benefit of the heirs, representatives,
assigns, and successors in interest of the
parties hereto.
SECTION HEADINGS 41. All section headings contained herein are
for convenience of reference only and are
not intended to define or limit the scope
of any provision of this Lease.
ESSENCE OF TIME 42. Time is of the essence for each and all of
the provisions, covenants and conditions
of this agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, this Lease has been executed by the parties hereto as of
the date first hereinabove written.
STATE OF CALIFORNIA LESSEE: LABOR-TO-INDUSTRY INC.
DEPARTMENT OF GENERAL SERVICES
REAL ESTATE SERVICES DIVISION BY: /s/
Approval Recommended:
--------------------------------
BY: /s/ TITLE: President
-------------------------------- -------------------------
TITLE: Real Estate Officer TELEPHONE: 770-565-4311
----------------------------- -------------------------
APPROVED:
BY: /s/ Cheryl L. Allen
--------------------------------
TITLE: Senior Real Estate Officer
-----------------------------
DATE: 9/10/98
-----------------------------
APPROVED:
STATE OF CALIFORNIA
DEPARTMENT OF CORRECTIONS
BY: /s/ Judy Buckman
--------------------------------
Judy Buckman, Chief
TITLE: Business Management Branch
-----------------------------
STATE OF CALIFORNIA
DEPARTMENT OF CORRECTIONS
CHUCKAWALLA VALLEY STATE PRISON
BY: /s/
--------------------------------
TITLE: Warden
-----------------------------
TELEPHONE: (760) 922-5300 X5000
-------------------------
10
<PAGE> 11
[MAP]
11
<PAGE> 12
EXHIBIT B-1
Chuckawalla Valley State Prison
PIA WAREHOUSE
Approximately 20,295 sq. ft. of floor space
One 18 x 14 roll-up door
One 12 x 12 roll-up door with dock access
One access door off of dock
Approximately 476 sq. ft. of office space (including restrooms)
[MAP]
12
<PAGE> 13
EXHIBIT B-2
Chuckawalla Valley State Prison
[MAP]
Approximately 16,000 sq. ft. floor space PIA SEWING
One roll-up door accessing dock
<PAGE> 1
EXHIBIT 10.18
INDUSTRY WORK PROGRAM AGREEMENT
South Bay Correctional Facility and Moore Haven Correctional Facility
This agreement is entered into effective this 19 day of October, 1999,
by and between Wackenhut Corrections Corporation, 4200 Wackenhut Drive, Palm
Beach Gardens, Florida 33410, hereinafter referred to as the "OPERATOR", U.S.
Technologies Inc. 3901 Roswell Road, Suite 300, Marietta, Georgia 30067,
hereinafter referred to as the "INDUSTRY CONTRACTOR", and American Quantum
Cycles, 731 Washburn Road, Melbourne, Florida 32934, hereinafter referred to as
"AQ".
The "Prison Industry Enhancement Certification Program (PIE)", 18 USC
ss.1761(c) and "Inmate Labor and Correctional Work Programs, Chapter 946, F.S.
authorizes Adult Offenders (AO) to manufacture, repair and assemble products for
sale, or provide services pursuant to the contract with the public; and
The State's primary purpose of the PIE Program is to further the
State's effort in AO rehabilitation, provide vocational training under real
work settings, develop job skills and work habits and to qualify AOs for
employment upon release from the institution; and
The Correctional Privatization Commission (CPC) has entered into
Operations and Management Agreements with OPERATOR to provide correctional
services at the South Bay Correctional Facility (SBCF) and Moore Haven
Correctional Facility (MHCF). INDUSTRY CONTRACTOR is by this document, entering
into an agreement with OPERATOR to provide an industry work program at SBCF and
MHCF.
The INDUSTRY CONTRACTOR wishes to participate and enter into a
cooperative venture with the OPERATOR to assist the State in establishing an
industrial operations program at the SBCF and MHCF that can meet the objectives
of the PIE Program, and the State for AOs of the State.
Whereas, OPERATOR desires to train and employ AOs in a realistic
working environment and to provide a work program area to the Industry
Contractor for the purpose of establishing and maintaining a resident (inmate)
work program in accordance with all PIE Program and other applicable laws and
regulations.
<PAGE> 2
Now, therefore, in consideration of the mutual benefits and covenants
hereinafter set forth, the parties hereby agree as follows:
1. Initial Term
The term of this contract shall commence on October 19, 1999 and shall
be for a minimum of seven years or as long as the OPERATOR is
contractually permitted to occupy the SBCF and MHCF, unless earlier
terminated pursuant to Section 8, set forth below.
In the event that U.S. Technologies becomes unwilling or unable (as a
result of termination of this Agreement or otherwise) to perform its
obligations under this Agreement, then AQ, upon written notice to
OPERATOR, shall have the right to assume the rights and obligations of
INDUSTRY CONTRACTOR hereunder.
2. Renewal Term
This agreement will automatically be extended for successive terms of
one year each unless either OPERATOR, INDUSTRY CONTRACTOR OR AQ
terminates this agreement by written notice to the other at least
ninety (90) days prior to the expiration date of the then current term,
or this agreement is otherwise earlier terminated, pursuant to the
provisions of Section 8 below mentioned.
3. Right of Occupancy/Occupancy Fee
A. OPERATOR hereby grants to the INDUSTRY CONTRACTOR and
AQ the right of occupancy in the designated Industry Buildings
at SBCF and MHCF (the "Buildings") and agrees to provide the
INDUSTRY CONTRACTOR with approximately 20,500 square feet at
each facility for Work Program activities, hereinafter
referred to as the AREA. The OPERATOR represents and warrants
that the Buildings shall be modified in accordance with the
plans and specifications furnished to OPERATOR by INDUSTRY
CONTRACTOR and AQ not later than thirty (30) days after the
OPERATOR has taken delivery of the equipment and that the
Buildings will be designed and maintained to conduct safely
the activities described in Section 4B. OPERATOR agrees to
work with INDUSTRY CONTRACTOR to negotiate any agreement to
expand the AREA for work program activities when necessary for
further expansion.
B. During this Term and the first renewal term
thereafter, INDUSTRY CONTRACTOR shall pay to OPERATOR the sum
of One Dollar ($ 1.00) per year. Occupancy fees for the
Renewal Term(s) shall be negotiated and approved
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<PAGE> 3
by written agreement of the parties hereto at least one (1)
year prior to the expiration of the then Current term.
4. Occupancy Restriction
A. Nothing herein shall be construed as creating either
a rental agreement or a lease; the INDUSTRY CONTRACTOR may not
sublet, sublease, assign, or transfer this agreement or any of
its rights or obligations hereunder, nor may INDUSTRY
CONTRACTOR enter into any other agreement regarding the
occupancy herein granted, without the express prior written
agreement of OPERATOR. The occupancy of the AREA shall at all
times be consistent with the terms of this agreement regarding
work authorized and work hours.
B. The type of industry to be put into the AREA would
include, but not be limited to, polishing, painting,
fiberglass fabrication, assembly, inventory management and
quality control work associated with the production and
assembly of touring motorcycles for AQ. Work hours associated
with services shall be subject to OPERATOR approval.
5. INDUSTRY CONTRACTOR and AQ Obligations
INDUSTRY CONTRACTOR, AQ, hereby agree:
A. To employ AOs in various aspects of motorcycle
production and assembly as described in Section 4B above.
Specifically, the painting, polishing and fiberglass
fabrication will all take place at the SBCF (PHASE I) and all
assembly, in order to produce the finished product will take
place at the MHCF (PHASE II).
B. To provide and manage all of the labor force as well
as hire free-world employees to supervise the AOs working in
the PIE program at SBCF and MHCF.
C. That AQ shall provide supervisory and quality control
(QC) training and will also inspect the final product at the
MHCF before it is shipped to its ultimate destination.
D. That AQ shall repay OPERATOR for all of the capital
and other expenses, excluding build-out and installation
costs, but including freight if paid by OPERATOR, for PHASE I
equipment expenditures over seven years at an interest rate
of 11.0%. After OPERATOR has made all expenditures related
-3-
<PAGE> 4
to PHASE I, a payback schedule will be determined based upon
the aforementioned 11.0% interest rate and seven (7) year
term. OPERATOR will provide notice and itemization of all
expenditures as well as the payback schedule to AQ (but not
earlier than forty five (45) days after the AREA has become
operable). Payments will be made in quarterly installments,
with the first payment due forty five (45) days after
OPERATOR has provided expenditure and payback schedule
information to AQ. In the event of contract cancellation or
terminations prior to the end of the seven (7) year payback
period, all outstanding unpaid quarterly payments will become
due and must be paid to OPERATOR or assumed by AQ within
thirty (30) days of the date of contract cancellation or
termination. Title to the Equipment shall be taken in the
name of AQ, subject to the liens of OPERATOR, and OPERATOR's
lender to secure payment as above provided. The equipment for
PHASE I and its costs are set forth in Attachment A.
E. That upon successful implementation of PHASE I the
INDUSTRY CONTRACTOR shall contribute $175,000, OPERATOR shall
contribute $100,000, and AQ shall invest the balance of funds
for capital expenditures associated with Phase II. The capital
expenditures (including acquisition of equipment) required for
Phase II will be identified upon purchase. AQ agrees to repay
OPERATOR and INDUSTRY CONTRACTOR the sums of $100,000 and
$175,000 respectively, over seven years at an interest rate
11.0%. Payments will be made in quarterly installments, with
the first due thirty (30) days after notice of successful
completion of PHASE I and commencement of operations of Phase
II. In the event of contract cancellation or termination prior
to the end of the seven (7) year payback period, all
outstanding unpaid quarterly payments will become due and must
be paid to OPERATOR and INDUSTRY CONTRACTOR within thirty (30)
days of the date of contract cancellation or termination.
The financing will be secured by all equipment and leasehold
improvements acquired during Phases I and II.
F. That all materials, personal property, inventory
items, equipment, and/or fixtures or other property of any
kind or description whatsoever installed or brought into the
AREA by INDUSTRY CONTRACTOR, its agents or employees, shall be
at INDUSTRY CONTRACTOR's sole risk and neither the CPC,
OPERATOR, or any employees or agents thereof, shall be
liable for any damage or loss suffered thereto unless such
damage or loss arises out of the negligence, recklessness,
intentional or willful acts or misconduct of the CPC,
OPERATOR, or any of their agents or employees.
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<PAGE> 5
G. That all permanent improvements or fixtures
permanently attached to the AREA shall become the property of
the real owner-in-interest of the building in which the AREA
is located, unless otherwise agreed in writing between all
applicable parties. The parties acknowledge that all raw
materials, work in process and finished good inventory is
owned exclusively by AQ.
H. That no additional alternations to the AREA may be
made by INDUSTRY CONTRACTOR without the prior written approval
of OPERATOR, which approval shall not be unreasonably
withheld.
I. That INDUSTRY CONTRACTOR and AQ, their employees and
agents will comply with all OPERATOR written policies and
procedures, (which first shall be furnished to INDUSTRY
CONTRACTOR and AQ) as well as all applicable federal, state,
and local laws, ordinances, and regulations, with particular
emphasis on federal and state wage and hour laws regarding
payment for work and other rules and regulations of the
federal and state agencies having jurisdiction over employment
relations. The INDUSTRY CONTRACTOR warrants that the
OPERATOR is not a secondary employer. The INDUSTRY CONTRACTOR
agrees that no goods produced under this Agreement shall be
placed in commerce in violation of the laws of the State of
Florida or the United States as they relate to the utilization
of prison labor and Prison Industry Enhancement Certification
Program requirements.
J. That all deliveries, shipments, and employees are
subject to search before entering or leaving the Facility
premises.
K. To keep the AREA clean, neat and orderly and to
promptly report any damage to the building structure, interior
fixture(s), or unsafe conditions to OPERATOR.
L. To properly maintain in safe working condition all
INDUSTRY CONTRACTOR installed equipment and fixtures.
M. That throughout the term of this agreement, INDUSTRY
CONTRACTOR shall be responsible for the cost of all
utilities and telephone service to INDUSTRY CONTRACTOR's
provided AREA, which utilities shall be sub-metered and billed
directly to INDUSTRY CONTRACTOR;
N. That all INDUSTRY CONTRACTOR and AQ employees and
agents assigned to the Area shall be subject to background
security checks by
-5-
<PAGE> 6
OPERATOR, and that OPERATOR shall have the right to deny
entrance to the AREA to any INDUSTRY CONTRACTOR or AQ employee
or agent reasonably deemed by OPERATOR to present a security
risk;
O. That all INDUSTRY CONTRACTOR and AQ employees
assigned to the AREA shall be obligated to successfully
complete the security training provided by OPERATOR;
P. In the hiring of all AO employees, comply with all
requirements of federal, state, and local non-discrimination
statutes and/or regulations. The INDUSTRY CONTRACTOR shall
provide the OPERATOR with job descriptions and personnel
procedures for all inmate jobs in the industry work program.
Q. To provide a non-inmate on-site supervisor at all
times AOs are working in the AREA and to provide for job
supervision and instruction to all hired AO employees. At
least one non-inmate free-world employee shall be provided for
the first twenty or fewer AOs employed. If the number of AOs
exceeds twenty, INDUSTRY CONTRACTOR will provide additional
non-inmates employees at a ratio they deem necessary to
properly supervise the inmate population, after consulting
with the OPERATOR.
R. To pay AO employees in accordance with Employment
Development Department (EDD) guidelines as developed for this
contract; at no time shall the pay rate be less than the
Federal Minimum Wage, or Florida minimum wage, whichever is
greater.
S. INDUSTRY CONTRACTOR shall be responsible for all
payroll functions and all tax and other legal deductions. Wage
payments shall be made not less often than semi-monthly in the
name of Florida Department of Corrections (DOC) for (inmate
name and DOC Number), and delivered according to instructions
provided by Florida Statute.
T. Inmates will be paid only for actual hours worked,
after they have successfully completed vocational/technical
training and have received fourteen (14) days of actual
on-the-job training. AOs will not be paid while they are in
training. Employed inmates will work or be in training at
least four (4) hours per day. The work hour schedules for all
AO employees assigned to the Industry work program shall be
established by OPERATOR, after consultation with the
INDUSTRY CONTRACTOR, and AQ and OPERATOR shall use its best
efforts to comply with INDUSTRY CONTRACTOR's and AQ's
-6-
<PAGE> 7
scheduling requests Overtime hours may be arranged, at the
request of the INDUSTRY CONTRACTOR, and AQ with prior approval
of OPERATOR.
U. That INDUSTRY CONTRACTOR shall, effective ninety
(90) days after the training period has been completed, employ
not fewer than ten (10) AOs working a minimum of twenty (20)
hours per week on a continuing basis. Subject to the
availability of qualified AOs within the facilities and the
volume of business, INDUSTRY CONTRACTOR shall use its
reasonable efforts to employ at least the minimum number of
inmates as referenced in Attachment B. Notwithstanding
anything to the contrary in this Agreement, INDUSTRY
CONTRACTOR and AQ shall have the right to reject or terminate
any AO for any reasons which do not constitute a violation of
federal or state laws. INDUSTRY CONTRACTOR shall give notice
and reasons of any adverse personnel action involving AOs to
OPERATOR within fourteen (14) days of any such action.
Further, INDUSTRY CONTRACTOR and AQ may increase or decrease
work levels at the facilities to reflect fluctuations in
orders.
V. That the employment of AOs will not, to the knowledge
of the INDUSTRY CONTRACTOR, result in the displacement of
employed workers within South Central Florida, that the AOs
will not be employed as strikebreakers or impair existing
contracts at other industries wherever situated, and that the
AOs will not be exploited in any form which might adversely
affect the community, the AOs, CPC or the DOC.
W. That the CPC, DOC, OPERATOR, and their employees or
agents shall not be held liable for any damage to Industry
Contractor or any third party arising from or related to any
work stoppage or resident lock downs regardless of the reasons
therefor.
X. To protect, defend, indemnify and hold harmless the
CPC, DOC, OPERATOR, and their employees or agents, from any
liability claims and damages arising from or relating to this
agreement unless such liability arises out of the
negligence, recklessness, intentional or willful acts, or
misconduct of the CPC, DOC, OPERATOR, or any of their
employees or agents.
Y To comply with all state and local license
requirements and pay all local personal property taxes.
Z. The INDUSTRY CONTRACTOR shall maintain insurance
coverage for its equipment, supplies and materials located in
the industries building against
-7-
<PAGE> 8
casualty occurrences. Further the INDUSTRY CONTRACTOR shall
maintain liability insurance coverage on itself, its agents,
servants and employees in an amount no less than $1,000,000
per occurrence for bodily injury and property damage liability
combined. The INDUSTRY CONTRACTOR shall also maintain workers'
compensation insurance on its employees in accordance with the
laws of the State of Florida and the PIE Certification
requirements. The INDUSTRY CONTRACTOR shall deliver to
OPERATOR a duly authenticated certificate evidencing such
insurance within sixty (60) days of execution of this
agreement, and upon each insurance renewal date.
AA. INDUSTRY CONTRACTOR shall indemnify and hold harmless
OPERATOR and CPC from any and all liability arising out of or
in connection with INDUSTRY CONTRACTOR'S use, production,
storage, or disposal of any "hazardous materials" or
"hazardous waste" hereinafter defined. OPERATOR shall have the
right to inspect and approve all storage and disposal
procedures.
"HAZARDOUS MATERIAL" shall mean any substance which is or
contains (i) any "hazardous substance" as now or hereafter
defined in 101(14) of the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended
("CERCLA") (42 U.S.C. 9601 et seq.) or any regulations
promulgated under CERCLA; (ii) any "hazardous waste" as now or
hereafter defined in the Resource Conservation and Recovery
Act (42 U.S.C. 6901 et seq. ("RCRA") or regulations
promulgated under RCRA; (iii) any substance regulated by the
Toxic Substances Control Act (15 U.S.C. 2601 et seq.); (iv)
gasoline, diesel fuel, or other petroleum hydrocarbons; (v)
asbestos and asbestos containing materials, in any form,
whether friable or non-friable; (vi) polychlorinated
biphenyl's; (vii) radon gas: and any additional substances or
materials which are now or hereafter classified or considered
to be hazardous or toxic under Environmental Requirements (as
hereinafter defined) or the common law, or any other
applicable laws relating to the Property. "Hazardous waste"
shall mean a solid waste, or combination of solid wastes,
which because of its quantity, concentration, or physical,
chemical, or infectious characteristics may (a) cause, or
significantly contribute to an increase in mortality or an
increase in serious irreversible, or incapacitating
reversible, illness; or (b) pose a substantial present or
potential hazard to human health or the environment when
improperly treated, stored, transported, or disposed of, or
otherwise managed. 42 U.S.C. 6903, as amended. INDUSTRY
CONTRACTOR shall be in compliance and current on all changes
to the above-referenced statutes and shall immediately comply
with any
-8-
<PAGE> 9
amendments to those sections or any statutes promulgated by
the State of Florida.
BB. Certificate of Good Standing. INDUSTRY CONTRACTOR
shall, on an annual basis, deliver to OPERATOR a Certificate
of Good Standing from the State of Florida Comptroller's
Office that indicates that INDUSTRY CONTRACTOR is current on
all taxes due.
CC. ACA Assistance. Where ACA accreditation is being
sought by OPERATOR, INDUSTRY CONTRACTOR shall comply with all
ACA standards applicable to the Industry Program and shall
collect and maintain the required documentation to assist
OPERATOR to achieve and maintain accreditation.
6. OPERATOR'S OBLIGATIONS
OPERATOR agrees to:
A. Provide INDUSTRY CONTRACTOR with the AREA described
in Section 3, and provide for project management and
supervision for all improvements in the AREA and the
installation of equipment.
B. Provide orientation training regarding OPERATOR
security procedures for INDUSTRY CONTRACTOR's staff,
employees, and/or agents located at or regularly frequenting
the Area.
C. Provide all appropriate security for the AREA and
other resident custody support.
D. Use its best efforts, including making arrangement
with correctional authorities for the relocation of AOs so
that all available jobs are filled, to provide INDUSTRY
CONTRACTOR with AO employees through OPERATOR's classification
system in a timely manner.
E. Serve as Trustee of resident employee payroll
accounts and to apply the proceeds of such accounts in
accordance with the terms of all-applicable Florida State
laws, regulations, and contract provisions.
F. Provide a mutually agreeable Vocational/Educational
training tailored to INDUSTRY CONTRACTOR's and AQ's needs
for initial pre-hire training through the OPERATOR's
Vocational/Educational Program. After
-9-
<PAGE> 10
AO successfully completes the training, he will receive
fourteen (14) days of on-the-job training before becoming
eligible for hire.
G. Assist in Hazcom Training of residents and INDUSTRY
CONTRACTOR's employees utilizing course materials to be
supplied by INDUSTRY CONTRACTOR. However, such assistance will
not reduce, diminish or otherwise waive any legal liabilities,
properly and legally the responsibility of INDUSTRY
CONTRACTOR.
7. Contingencies and other Obligations
This agreement shall be subject to only contingencies and additional
obligations if agreed upon and in writing by OPERATOR and INDUSTRY
CONTRACTOR.
8. Termination
A. Either OPERATOR, INDUSTRY CONTRACTOR or AQ, in its
exclusive discretion, may terminate its obligations under this
agreement upon thirty (30) day's prior written notice to the
others, provided, however, that if this Agreement is
terminated by OPERATOR, that INDUSTRY CONTRACTOR and AQ shall
be allowed one extension of up to six (6) months prior to the
termination under this provision in order to obtain a new
facility and relocate its equipment and operations thereto in
an orderly and business-like manner.
B. This agreement may be terminated or suspended on an
immediate basis by OPERATOR if it shall have been advised by
the DOC that its continuance would constitute a safety or
security risk to inmates, employees, third parties, or the
public or if CPC or DOC shall terminate all agreements with
OPERATOR.
C. In the event OPERATOR is terminated from its
operations and management agreements with the DOC or the CPC
to provide correctional services at either SBCF or MHCF, it
will use its best efforts to assist INDUSTRY CONTRACTOR and AQ
with help reasonably necessary to continue their operations
with the DOC and the CPC.
-10-
<PAGE> 11
9. Default by INDUSTRY CONTRACTOR
A material failure to keep, perform, meet or comply with any covenant,
agreement, term or provision of this Agreement to be kept, observed,
met, performed, or complied with by INDUSTRY CONTRACTOR hereunder,
which such failure continues for a period of sixty (60) days after
INDUSTRY CONTRACTOR has written notice thereof shall constitute an
Event of Default on the part of INDUSTRY CONTRACTOR. INDUSTRY
CONTRACTOR shall indemnify OPERATOR for all losses incurred by reason
of not being able to conduct the contemplated activities at the
Buildings.
10. Space Usage
In the event that the INDUSTRY CONTRACTOR does not utilize the AREA in
the most efficient manner to maximize work production and the number of
resident employees to be employed, the OPERATOR may, in its discretion,
remove from INDUSTRY CONTRACTOR'S use that amount of space in the Area
not being utilized. In the event of this circumstance, OPERATOR shall
give INDUSTRY CONTRACTOR written notice of its intention to reduce the
workspace made available to INDUSTRY CONTRACTOR. INDUSTRY CONTRACTOR
shall have ninety days after it has received written notice thereof to
more efficiently utilize the space to be removed from it by OPERATOR,
and at the same time, submit a plan to OPERATOR as to how that space
will be more efficiently utilized. If after the ninety days, the
INDUSTRY CONTRACTOR is still not utilizing the space in the most
efficient manner in accordance with OPERATOR'S expectations, that space
will be taken away from INDUSTRY CONTRACTOR and, in the discretion of
the OPERATOR, made available to itself or other INDUSTRY CONTRACTORS.
This provision of paragraph 11 shall apply only in the event that the
INDUSTRY CONTRACTOR is unable to comply with Section 5; otherwise this
Section 11 will not be applicable.
11. Default by OPERATOR
A material failure to keep, perform, meet or comply with any covenant,
agreement, term or provision of this Agreement to be kept, observed,
met, performed, or complied with by OPERATOR hereunder, which such
failure continues for a period of ten (10) days after OPERATOR has
written notice thereof, shall constitute an Event of Default on the
part of the OPERATOR, provided, however, that OPERATOR shall not be in
default if it is taking all reasonable actions to comply with such
agreement and that such compliance can be obtained in not more than
thirty (30) days. OPERATOR shall indemnify INDUSTRY CONTRACTOR and AQ
for all losses incurred by reason of not being able to conduct the
contemplated activities at the Buildings.
-11-
<PAGE> 12
12. Original Agreement
This Agreement may be executed in one or more separate counterparts,
each of which shall be deemed an original, but all of which together
shall constitute but one and the same instrument.
13. Complete Agreement
This Agreement contains all of the terms and conditions agreed to by
the parties involved. No other understandings, oral or otherwise,
regarding the subject matter of this Agreement shall be deemed to exist
or to be binding upon any party hereto.
14. Modifications
This Agreement may not be modified, altered or amended except by
written agreement executed by all the parties hereto.
IN WITNESS WHEREOF, the parties hereto affix their respective
authorization signatures effective the date first set forth above.
Wackenhut Corrections Corporation U.S. Technologies Inc.
(OPERATOR) (INDUSTRY CONTRACTOR)
By: /s/ Patricia McNair Persante By: /s/ Greg Earls
---------------------------------- -------------------------------
Patricia McNair Persante Greg Earls
Senior Vice President, Contracts President, Chairman and CEO
Date: 10-19-99 Date: 10-21-99
-------------------------------- -----------------------------
American Quantum Cycles, Inc.
(AQ)
By: /s/ Gary W. Irving
--------------------------------
Gary W. Irving
Chief Operating Officer
Date: 10-20-99
-----------------------------
-12-
<PAGE> 13
ATTACHMENT A
EQUIPMENT LIST FOR PHASE I
<TABLE>
<CAPTION>
COST
--------------
<S> <C>
1. Special, Sidedraft, Pressurized, Dry Filter Automotive Paint Spray Booth $ 48,604.00
2. Paint Mix Room Special Non-Pressurized Dry Filter Industrial $ 6,186.00
3. Production Paint Spray Booth $ 5,865.00
4. Optional Air Make Up Unit for Production Booth $ 5,199.00
5. Super-Slave Gel-Coat Dispensing Equipment $ 7,128.00
6. Hankinson Refrigerated Air Dryer $ 1,252.00
7. Haz-Vault Hazardous Material Storage Locker $ 11,810.00
8. Haz-Vault Options $ 7,405.00
9. Spray Equipment $ 1,776.00
10. Installation of Items 1,2,3, and 4 $ 13,200.00
TOTAL INVESTMENT BASED ON QUOTE FROM LEE PATTERSON CO. $ 108,425.00
</TABLE>
EQUIPMENT REQUIRED FOR START-UP OF POLISHING STATION
<TABLE>
<CAPTION>
Description Part Nos.* Qty. Unit Price
- ----------- ---------- ---- ----------
<S> <C> <C> <C> <C>
Air Tools:
90 Degree Angle Die Grinder 3Y495 10 $ 381.00 $ 3,810.00
High-Speed Die Grinder 3Y489 10 $ 268.00 $ 2,680.00
Dual Action Orbital Sanders 52345 10 $ 263.00 $ 2,630.00
Belt Sanders 1/2 x 12 3Y493 5 $ 505.00 $ 2,525.00
Floor Mounted Polisher:
Polisher 2Z341 10 $ 209.00 $ 2,090.00
Stands 4Z154 10 $ 80.00 $ 800.00
Polishing/tembler/deburr:
18 Lbs. Tumbler 6A898 2 $ 190.00 $ 380.00
45 Lbs. Tumbler 6A899 2 $ 374.00 $ 748.00
*All part numbers are out of Grainger
TOTAL POLISHING INVESTMENT $ 15,663.00
GRAND TOTAL $ 124,088.00
</TABLE>
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<PAGE> 14
MINIMUM AND MAXIMUM LABOR BY FUNCTIONAL AREA AND PRODUCTIVITY LEVEL (NUMBER
OF BIKES/MONTH)
<TABLE>
<CAPTION>
100 Bikes/Month 200 Bikes/Month 300 Bikes/Month
------------------------------------------------------
<S> <C> <C> <C> <C>
Paint Min Semi-Skilled Labor 4 8 13
MAX SEMI-SKILLED LABOR 15 30 50
Polishing Min Semi-Skilled Labor 3 5 8
MAX SEMI-SKILLED LABOR 10 20 30
Fiberglass Min Semi-Skilled Labor 3 5 8
MAX SEMI-SKILLED LABOR 10 20 30
Final Assembly Min Semi-Skilled Labor 13 26 39
MAX SEMI-SKILLED LABOR 52 104 156
Inventory Min Semi-Skilled Labor 3 6 9
MAX SEMI-SKILLED LABOR 12 24 36
------------------------------------------------------
Quality Control Min Semi-Skilled Labor 3 6 9
MAX SEMI-SKILLED LABOR 12 24 36
Grand Total Min Semi-Skilled Labor 15 30 46
MAX SEMI-SKILLED LABOR 111 222 338
</TABLE>
ATTACHMENT B
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<PAGE> 1
EXHIBIT 10.20
STOCK PURCHASE AGREEMENT
BY AND AMONG
VIPRO CORPORATION,
NORTHWOOD VENTURES, LLC,
NORTHWOOD CAPITAL PARTNERS, LLC
AND
U.S. TECHNOLOGIES INC.
MARCH 13, 2000
45
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. AUTHORIZATION AND CLOSING. 1
-------------------------
1A. Authorization of the Stock 1
--------------------------
1B. Purchase and Sale of the Stock 1
------------------------------
SECTION 2. CONDITIONS OF THE PURCHASERS' AND THE COMPANY'S CLOSING 2
------------------------------------------------------
OBLIGATIONS
-----------
2A. Initial Closing--Conditions to Northwood's Obligation 2
-----------------------------------------------------
2B. Second Closing--Conditions to USXX's Obligations 4
------------------------------------------------
2C. Initial Closing--Conditions to the Company's Obligations 6
-----------------------------------------------------
2D. Second Closing--Conditions to the Company's Obligations 7
-----------------------------------------------------
SECTION 3. COVENANTS OF THE COMPANY. 8
------------------------
3A. Financial Statements and Other Information 8
------------------------------------------
3B. Inspection of Property 9
----------------------
3C. Restrictions 10
------------
3D. Affirmative Covenants 13
---------------------
3E. Current Public Information 14
--------------------------
3F. Public Disclosures 14
------------------
3G. Hart-Scott-Rodino Compliance 14
----------------------------
SECTION 4. COVENANTS OF THE PURCHASERS. 15
---------------------------
4A. Public Disclosure 15
-----------------
SECTION 5. TRANSFER OF RESTRICTED SECURITIES. 15
---------------------------------
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. 15
---------------------------------------------
6A. Organization and Corporate Power 15
--------------------------------
6B. Capital Stock and Related Matters 16
---------------------------------
6C. Registration Rights 17
-------------------
6D. Authorization; No Breach 17
------------------------
6E. Subsidiaries; Investments 18
-------------------------
6F. Tax Matters 18
-----------
6G. Litigation, Etc. 19
----------------
6H. Brokerage 20
---------
6I. Governmental Consent, Etc. 20
-------------------------
6J. Financial Statements 20
--------------------
6K. Title to Property and Assets; Contracts and Leases 20
--------------------------------------------------
6L. Related-Party Transactions and Certain Actions 21
----------------------------------------------
6M. Employees; Employee Compensation 21
--------------------------------
6N. Patents and Trademarks 22
----------------------
6O. Proprietary Information and Inventions Agreements 22
-------------------------------------------------
6P. ERISA 22
-----
</TABLE>
46
<PAGE> 3
<TABLE>
<S> <C>
6Q. Compliance with Laws and Insurance 23
----------------------------------
6R. Minute Books 23
------------
6S. Business Plan 23
-------------
6U. Real Property Holding Company 24
-----------------------------
SECTION 7. DEFINITIONS. 25
-----------
SECTION 8. MISCELLANEOUS 28
-------------
8A. Expenses 28
--------
8B. Remedies 28
--------
8C. Purchaser's Investment Representations 29
--------------------------------------
8D. Consent to Amendments 30
---------------------
8E. Survival of Representations and Warranties 30
------------------------------------------
8F. Indemnification 31
---------------
8G. Successors and Assigns 32
----------------------
8H. Generally Accepted Accounting Principles 32
----------------------------------------
8I. Severability 33
------------
8J. Counterparts 33
------------
8K. Descriptive Headings; Interpretation 33
------------------------------------
8L. Governing Law 33
-------------
8M. Notices 33
-------
8N. Rights 35
------
8O. Amendments 35
----------
Schedule 1 -- Purchase Schedule
Schedule 2 -- Schedule of Exceptions
Exhibit A -- Certificate of Designation
Exhibit A-1 -- Certificate of Incorporation
Exhibit B -- Bylaws
Exhibit C -- Registration Rights Agreement
Exhibit D-1 -- Stockholders' Agreement
Exhibit E-1 -- Legal Opinion
Exhibit F-1 -- Business Plan
Exhibit F-2 -- Financial Information
</TABLE>
47
<PAGE> 4
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "AGREEMENT") is made as of March
13, 2000, by and among VIPRO CORPORATION, a Delaware corporation (the
"COMPANY"), Northwood Ventures LLC, a New York limited liability company
("NORTHWOOD VENTURES"), Northwood Capital Partners, LLC, a New York limited
liability company ("NORTHWOOD CAPITAL") and U.S. Technologies Inc., a Delaware
corporation ("USXX"). Northwood Ventures and Northwood Capital are collectively
referred to herein as "NORTHWOOD." Northwood and USXX are sometimes
collectively referred to herein as the "PURCHASERS" and individually as a
"PURCHASER". Except as otherwise indicated herein, capitalized terms used
herein are defined in Section 7 hereof.
In consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties to this Agreement, intending to be legally
bound, hereby agree as follows:
SECTION 1. AUTHORIZATION AND CLOSING.
1A. AUTHORIZATION OF THE STOCK. The Company shall authorize the
issuance and sale to the Purchasers of up to 1,043,552 shares of its Series B
Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"),
having the rights and preferences set forth on the form of Certificate of
Designation attached hereto as Exhibit A (the "Certificate of Designation").
1B. PURCHASE AND SALE OF THE STOCK
(i) Subject to the terms and conditions of this Agreement,
the Company agrees to sell to Northwood, and Northwood agrees to purchase from
the Company a total of 521,776 shares of Preferred Stock at a price of $1.91653
per share, and the Company agrees to sell to USXX and/or any of its controlled
Affiliates, and USXX and/or any of its controlled Affiliates agrees to purchase
from the Company a total of 521,776 shares of Preferred Stock at a price of
$1.91653 per share. Such shares of Preferred Stock shall be purchased in two
separate closings subject to the conditions set forth in this Agreement.
(ii) At the initial closing of the purchase and sale of the
Preferred Stock pursuant hereto (the "Initial Closing"), the Company shall sell
to Northwood Ventures and, subject to the terms and conditions set forth
herein, Northwood Ventures shall purchase from the Company, 469,598 shares of
Preferred Stock at a price of $1.91653 per share; provided, however, that the
total purchase price payable by Northwood Ventures at the Initial Closing for
the Preferred Stock shall be reduced by the unpaid principal amount of the
Northwood Note, and
-i-
<PAGE> 5
any accrued interest thereon, as of the Initial Closing Date. The Company shall
also sell to Northwood Capital at the Initial Closing and, subject to the terms
and conditions set forth herein, Northwood Capital shall purchase from the
Company 52,178 shares of Preferred Stock at a price of $1.91653 per share. The
Initial Closing shall take place at the offices of Fleischman and Walsh,
L.L.P., 1400 Sixteenth Street, N.W., Washington, D.C. 20036 at 10:00 a.m. no
later than the third business day after the date that all of the conditions set
forth in Section 2A have been satisfied or waived, or such other date as may be
agreed upon by the parties in writing (the "INITIAL CLOSING DATE"). At the
Initial Closing, in connection with the purchase and sale of the Preferred
Stock pursuant hereto, the Company shall deliver to each of Northwood Ventures
and Northwood Capital stock certificates evidencing the Preferred Stock
purchased at the Initial Closing by such entity, registered in such entity's
name, upon payment of the purchase price thereof by check or wire transfer of
immediately available funds to such account as is designated by the Company.
(iii) At the second closing of the purchase and sale of the
Preferred Stock pursuant hereto (the "Second Closing"), the Company shall sell
to USXX and/or any of its controlled Affiliates and, subject to the terms and
conditions set forth herein and on the Purchase Schedule, USXX and/or any of
its controlled Affiliates shall have the right to purchase from the Company a
total of 521,776 shares of Preferred Stock at a price of $1.91653 per share (as
adjusted from time to time as a result of stock dividends, stock splits,
recapitalizations, and similar events); provided, however, that the total
purchase price payable by USXX at the Second Closing shall be reduced by
$50,000. USXX shall have no right or obligation to purchase such shares of
Preferred Stock after April 12, 2000. Such purchase of the Preferred Stock
shall be made by USXX and/or any of its controlled Affiliates at such time (the
"SECOND CLOSING DATE") and subject to the conditions set forth on the Purchase
Schedule attached hereto as Schedule 1. The delivery of the Preferred Stock
purchased by USXX and/or any of its controlled Affiliates hereunder and the
payment therefor shall otherwise be made in the same manner as set forth in
Section 1B(ii).
SECTION 2. CONDITIONS OF THE PURCHASERS' AND THE COMPANY'S CLOSING OBLIGATIONS.
2A. INITIAL CLOSING--CONDITIONS TO NORTHWOOD'S OBLIGATIONS. The
obligation of Northwood to purchase and pay for the Preferred Stock at the
Initial Closing is subject to Northwood's satisfaction as of the Initial
Closing Date of the following conditions:
(I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties contained in Section 6 and elsewhere in this
Agreement and all information contained in any exhibit, schedule or attachment
hereto shall be true and correct at and as of the Initial Closing Date in all
material respects as though then made, except to the extent of changes caused
by the transactions expressly contemplated herein, and except for those
representations and warranties that are made by their terms as of a date
specified herein which shall be true and correct in all material respects as of
such specified date, and the Company shall have performed
-2-
<PAGE> 6
in all material respects all of the covenants required to be performed by it
hereunder prior to the Initial Closing Date.
(II) CERTIFICATE OF INCORPORATION; BYLAWS. The Company's
Certificate of Incorporation, together with all amendments thereto, and any
other certificates of designation or other similar documents or instruments
filed with the Secretary of State of Delaware shall be in the form and
substance set forth in Exhibit A-1 hereto, shall be in full force and effect
under the laws of the state of Delaware as of the Initial Closing Date and
shall not have been amended or modified, except as provided in the Certificate
of Designation which shall be filed with the Delaware Secretary of State on or
before the Initial Closing Date. The Company's bylaws (the "BYLAWS") shall be
in the form and substance set forth in Exhibit B hereto, shall be in full force
and effect under the laws of the State of Delaware as of the Initial Closing
Date, and shall not have been amended or modified.
(III) REGISTRATION AGREEMENT. The Company and Northwood shall
have entered into a registration rights agreement in form and substance set
forth in Exhibit C attached hereto (the "REGISTRATION AGREEMENT").
(IV) STOCKHOLDERS' AGREEMENT. The Company and each of its
stockholders immediately prior to the Initial Closing Date shall have
terminated each and every stockholders agreement or (similar arrangement) in
effect immediately prior to the Initial Closing Date. The Company, Northwood
and each of the Company's other stockholders shall have entered into a
stockholders agreement in form and substance set forth in Exhibit D-1 attached
hereto (the "STOCKHOLDERS' AGREEMENT").
(V) CONSENTS AND APPROVALS. The Company shall have received
or obtained all third-party and governmental and regulatory consents and
approvals necessary for the consummation of the transactions contemplated
hereby.
(VI) COMPLIANCE WITH APPLICABLE LAWS. The purchase of
Preferred Stock by Northwood hereunder shall not be prohibited by any
applicable law or governmental regulation, shall not subject Northwood to any
penalty, liability or, in the reasonable judgment of Northwood, other onerous
conditions under any governmental approval or consent obtained in connection
with the transactions contemplated hereby, and shall be permitted by laws and
regulations of the jurisdictions to which Northwood is subject.
(VII) DUE DILIGENCE. Northwood shall have completed its due
diligence review of the Company and found nothing, in its reasonable sole
discretion, that is objectionable to Northwood.
(VIII) LEGAL OPINION. Northwood shall have been furnished
with a legal opinion in the form of Exhibit E-1 attached hereto (the "LEGAL
OPINION").
-3-
<PAGE> 7
(IX) CLOSING DOCUMENTS. The Company shall have delivered to
Northwood all of the following documents:
(a) an Officer's Certificate, dated the Initial
Closing Date, stating that the conditions specified in Sections
2A(i) through 2A(vi), inclusive, have been fully satisfied;
(b) the Legal Opinion specified in Section 2A(viii)
hereof;
(c) certified copies of the resolutions duly adopted
by the Company's board of directors (its "BOARD") authorizing the
execution, delivery, and performance of this Agreement, the
Registration Agreement, the Stockholders' Agreement and each of
the other agreements contemplated hereby in connection with the
Initial Closing, the filing of the Certificate of Designation,
the issuance and sale of the Preferred Stock and the consummation
of all other transactions contemplated by this Agreement in
connection with the Initial Closing;
(d) certified copies of (1) the Certificate of
Incorporation (including the Certificate of Designation); and (2)
the Company's Bylaws, each as in effect on the Initial Closing
Date; and
(e) such other documents relating to the
transactions contemplated hereby as Northwood or its counsel may
reasonably request.
Any condition specified in this Section 2A may be waived only if such waiver is
set forth in a writing executed by Northwood.
2B. SECOND CLOSING--CONDITIONS TO USXX'S OBLIGATIONs. The
obligation of USXX to purchase and pay for the Preferred Stock at the Second
Closing is subject to USXX's satisfaction as of the Second Closing of the
following conditions:
(I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties contained in Section 6 and elsewhere in this
Agreement and all information contained in any exhibit, schedule or attachment
hereto shall be true and correct at and as of the Second Closing Date in all
material respects as though then made, except to the extent of changes caused
by the transactions expressly contemplated herein, and except for those
representations and warranties that are made by their terms as of a date
specified herein which shall be true and correct in all material respects as of
such specified date, and the Company shall have performed in all material
respects all of the covenants required to be performed by it hereunder prior to
the Second Closing Date. To the extent required to satisfy the condition set
forth in this Section 2B(i), the Company shall have provided USXX with an
updated Schedule of Exceptions that is accurate and complete as of the Second
Closing Date; provided that if such updated Schedule of Exceptions reflects any
material adverse change in the business (including business prospects),
financial condition or results of operations of the Company, USXX shall have
the right to
-4-
<PAGE> 8
consider such change a material breach of the Company's representations and
warranties hereunder with respect to the Second Closing, with its sole remedy
being that it shall have no obligation to purchase any Preferred Stock at the
Second Closing.
(II) CERTIFICATE OF INCORPORATION; BYLAWS. The Company's
Certificate of Incorporation, together with all amendments thereto, and any
other certificates of designation or other similar documents or instruments
filed with the Secretary of State of Delaware shall be in the form and
substance set forth in Exhibits A and A-1 hereto, shall be in full force and
effect under the laws of the state of Delaware as of the Second Closing Date
and shall not have been amended or modified. The Company's bylaws (the
"BYLAWS") shall be in the form and substance set forth in Exhibit B hereto,
shall be in full force and effect under the laws of the State of Delaware as of
the Second Closing Date, and shall not have been amended or modified.
(III) REGISTRATION AGREEMENT. The Company and USXX and/or any
of its Affiliates purchasing Preferred Stock hereunder shall have entered into
the Registration Agreement, which shall not have been amended or modified, and
shall be in full force and effect as of the Second Closing Date.
(IV) STOCKHOLDERS' AGREEMENT. The Company, each of the
Company's other stockholders and USXX and/or any of its Affiliates purchasing
Preferred Stock hereunder shall have entered into the Stockholders' Agreement,
which shall not have been amended or modified, and shall be in full force and
effect as of the Second Closing Date.
(V) CONSENTS AND APPROVALS. The Company shall have received
or obtained all third-party and governmental and regulatory consents and
approvals necessary for the consummation of the transactions contemplated
hereby.
(VI) COMPLIANCE WITH APPLICABLE LAWS. The purchase of
Preferred Stock by USXX and/or any of its Affiliates at the Second Closing
hereunder shall not be prohibited by any applicable law or governmental
regulation, shall not subject USXX and any of its Affiliates purchasing
Preferred Stock hereunder to any penalty, liability or, in the reasonable
judgment of USXX, other onerous conditions under any governmental approval or
consent obtained in connection with the transactions contemplated hereby, and
shall be permitted by laws and regulations of the jurisdictions to which USXX
and any of its Affiliates purchasing Preferred Stock hereunder is subject.
(VII) DUE DILIGENCE. USXX shall have completed any additional
due diligence review of the Company and found nothing, in its reasonable sole
discretion, that is objectionable to USXX.
(VIII) LEGAL OPINION. USXX shall have been furnished with a
legal opinion in the form of Exhibit E-1 attached hereto.
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(IX) CLOSING DOCUMENTS. The Company shall have delivered to
USXX all of the following documents:
(a) an Officer's Certificate, dated the Second
Closing Date, stating that the conditions specified in Sections
2B(i) through 2B(vi), inclusive, have been fully satisfied;
(b) the Legal Opinion specified in Section 2B(viii)
hereof;
(c) certified copies of the resolutions duly adopted
by the Company's Board authorizing the execution, delivery, and
performance of the Registration Agreement, the Stockholders'
Agreement and each of the other agreements contemplated hereby in
connection with the Second Closing, the issuance and sale of the
Preferred Stock and the consummation of all other transactions
contemplated by this Agreement in connection with the Second
Closing;
(d) certified copies of (1) the Certificate of
Incorporation (including the Certificate of Designation); and (2)
the Company's Bylaws, each as in effect on the Second Closing
Date; and
(e) such other documents relating to the
transactions contemplated hereby as USXX or its counsel may
reasonably request.
Any condition specified in this Section 2B may be waived only if such waiver is
set forth in a writing executed by USXX.
2C. INITIAL CLOSING--CONDITIONS TO THE COMPANY'S OBLIGATIONS. The
obligation of the Company to issue Preferred Stock to Northwood at the Initial
Closing is subject to the Company's satisfaction as of the Initial Closing of
the following conditions:
(I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties of Northwood contained in Section 8C hereof in
respect of the Initial Closing shall be true and correct at and as of the
Initial Closing Date as though then made, except to the extent of changes
caused by the transactions expressly contemplated herein, and Northwood shall
have performed all of the covenants in respect of the Initial Closing required
to be performed by Northwood at or prior to the Initial Closing Date.
(II) PAYMENT OF PURCHASE PRICE. Northwood shall have paid by
the Initial Closing Date the purchase price for the Preferred Stock to be
purchased by it at the Initial Closing.
(III) STOCKHOLDERS' AGREEMENT. Northwood shall have executed
and delivered to the Company the Stockholders' Agreement.
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(IV) REGISTRATION AGREEMENT. Northwood shall have executed
and delivered to the Company the Registration Agreement.
2D. SECOND CLOSING--CONDITIONS TO THE COMPANY'S OBLIGATIONS. The
obligation of the Company to issue Preferred Stock to USXX and/or any of its
Affiliates at the Second Closing is subject to the Company's satisfaction as of
the Second Closing of the following conditions:
(I) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties of USXX contained in Section 8C hereof in
respect of the Second Closing shall be true and correct at and as of the Second
Closing Date as though then made, except to the extent of changes caused by the
transactions expressly contemplated herein, and USXX shall have performed all
of the covenants in respect of the Second Closing required to be performed by
USXX hereunder at or prior to the Second Closing Date.
(II) PAYMENT OF PURCHASE PRICE. USXX and/or any of its
Affiliates purchasing Preferred Stock hereunder shall have paid by the Second
Closing the purchase price for the Preferred Stock to be purchased by it at the
Second Closing, as provided on the Purchase Schedule.
(III) STOCKHOLDERS' AGREEMENT. USXX shall have executed and
delivered to the Company the Stockholders' Agreement.
(IV) REGISTRATION AGREEMENT. USXX shall have executed and
delivered to the Company the Registration Agreement.
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SECTION 3. COVENANTS OF THE COMPANY.
Until such time as the Company has completed a Qualified Public
Offering:
3A. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall
deliver to each holder of at least twenty percent (20%) of the Purchaser
Preferred and each holder of at least twenty percent (20%) of the Purchaser
Common:
(i) as soon as available but in any event within forty-five
(45) days after the end of each quarterly accounting period in each fiscal
year, unaudited consolidating and consolidated statements of income and cash
flows of the Company and its Subsidiaries for such quarterly period and for the
period from the beginning of the fiscal year to the end of such quarter, and
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such quarterly period, all prepared in accordance
with generally accepted accounting principles, consistently applied, subject to
the absence of footnote disclosures and to normal year-end adjustments;
(ii) accompanying the financial statements referred to in
Section 3A(i), an Officer's Certificate stating that neither the Company nor
any of its Subsidiaries is in default under any of its material agreements or,
if any such default exists, specifying the nature and period of existence
thereof and what actions the Company and its Subsidiaries have taken and
propose to take with respect thereto;
(iii) within ninety (90) days after the end of each fiscal
year, audited consolidating and consolidated statements of income and cash
flows of the Company and its Subsidiaries for such fiscal year, and audited
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year, setting forth in each case
comparisons to the annual budget and to the preceding fiscal year, all prepared
in accordance with generally accepted accounting principles, consistently
applied, and accompanied by: (a) with respect to the consolidated portions of
such statements (except with respect to budget data), an opinion containing no
exceptions or qualifications (except for qualifications regarding specified
contingent liabilities) of an independent accounting firm of recognized
standing selected by the Company and reasonably acceptable to the Purchaser;
and (b) a copy of such firm's annual management letter to the Board;
(iv) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant aspects
of the Company's operations or financial affairs given to the Company by its
independent accountants (and not otherwise contained in other materials
provided hereunder);
(v) at least thirty (30) days before the beginning of each
fiscal year, an annual budget prepared on a monthly basis for the Company and
its Subsidiaries for such fiscal year (displaying anticipated statements of
income and cash flows), and promptly upon preparation thereof any other
significant budgets prepared by the Company and any revisions of such annual
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or other budgets, and within thirty (30) days after any monthly period in which
there is a material adverse deviation from the annual budget, an Officer's
Certificate explaining the deviation and what actions the Company has taken and
proposes to take with respect thereto; provided that the budget for the fiscal
year ending December 31, 2000 shall not be due until March 1, 2000; and
(vi) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries, regularly prepared
by the management of the Company or otherwise available without significant
cost or effort, as any Person entitled to receive information under this
Section 3A may reasonably request.
Each of the financial statements referred to in Sections 3A(i)
and (iii) shall be consistent with the books and records of the Company (which
in turn shall be accurate and complete in all material respects) and in
accordance with generally accepted accounting principles applied on a
consistent basis and shall present fairly the financial condition and results
of operation of the Company and its Subsidiaries as of the dates and for the
periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments (none of
which would, alone or in the aggregate, be materially adverse to the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole).
In addition to the information to be delivered to certain holders
of the Purchaser Stock specified in this Section 3A, the Company shall deliver
to the Board and the Purchasers promptly (but in any event within ten (10)
business days) after the discovery or receipt of notice of any default under
any material agreement to which the Company or any of its Subsidiaries is a
party or any other event or circumstance affecting the Company or any of its
Subsidiaries which is reasonably likely to have a material adverse effect on
the financial condition, operating results, assets, operations, or business
prospects of the Company or any of its Subsidiaries (including the filing of
any material litigation against the Company or any of its Subsidiaries or the
existence of any material dispute with any Person which involves a reasonable
likelihood of such litigation being commenced), an Officer's Certificate
specifying the nature and period of existence thereof and what actions the
Company and its Subsidiaries have taken and propose to take with respect
thereto.
3B. INSPECTION OF PROPERTY. The Company shall permit each holder
of at least 20% of the Purchaser Preferred, or the representatives of any such
Person, upon reasonable notice and during normal business hours and such other
times as any such holder may reasonably request, to: (i) visit and inspect any
of the properties of the Company and its Subsidiaries; (ii) examine the
corporate and financial records of the Company and its Subsidiaries and make
copies thereof or extracts therefrom; and (iii) discuss the affairs, finances,
and accounts of any such corporations with the directors, officers, key
employees, and independent accountants of the Company and its Subsidiaries;
provided that the Company shall have the right to have its chief financial
officer present at any meetings with the Company's independent accountants.
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3C. RESTRICTIONS.
(i) So long as a Qualified Public Offering has not been
consummated and the Purchasers and/or their Affiliates collectively own of
record or beneficially at least 10% of the outstanding Common Stock (giving
effect to the Purchaser Preferred on an as converted basis) without the prior
written consent of the Northwood Representative and the USXX Representative (as
such terms are defined in the Stockholders' Agreement), the Company shall not
and shall not commit to:
(a) directly or indirectly declare or pay any
dividends, other than from earnings, or make any distributions
upon any of its equity securities, other than payments of
dividends on, or redemption payments in respect of, or in
connection with the conversion of, the Preferred Stock pursuant
to the Certificate of Designation;
(b) permit any Subsidiary to accomplish that which
the Company can not accomplish without prior written consent of
one of the Investor's Representative pursuant to this 3C(i);
(c) except as set forth on Schedule 3C hereto or as
expressly contemplated by this Agreement or the Employment
Agreement entered into between the Company and Bernard Brenner,
the CEO of the Company (the "Brenner Employment Agreement"),
authorize, issue, sell, or enter into any agreement providing for
the issuance (contingent or otherwise), or permit any of its
Subsidiaries to authorize, issue, sell, or enter into any
agreement providing for the issuance (contingent or otherwise) of
any equity securities or debt securities with equity features or
securities exercisable or convertible into equity securities or
debt securities with equity features to the Founders;
(d) effect or permit any of its Subsidiaries to
effect any consolidation or merger of the Company with or into
any other corporation (other than a wholly-owned Subsidiary) or
other entity or person (other than for the purpose of
reincorporating the Company in another jurisdiction), any share
exchange with another entity or any other corporate
reorganization, in which the Stockholders' of the Company
immediately prior to such consolidation, merger, share exchange,
or reorganization own less than 50% of the resulting
corporation's voting power immediately after such consolidation,
merger, share exchange, or reorganization, or any transaction or
series of related transactions in which in excess of 50% of the
Company's voting power is transferred;
(e) sell, lease, or otherwise dispose of, or permit
any of its Subsidiaries to sell, lease, or otherwise dispose of,
more than twenty percent (20%) of the consolidated assets of the
Company and its Subsidiaries (computed on the basis of book
value, determined in accordance with generally accepted
accounting principles consistently applied, or fair market value,
determined by the Board in its reasonable good faith judgment) in
any transaction or series of related transactions (other than
sales of inventory in the ordinary course of business);
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<PAGE> 14
(f) liquidate, dissolve, or effect, or permit any of
its Material Subsidiaries to liquidate, dissolve, or effect, a
recapitalization or reorganization in any form of transaction
(including, without limitation, any reorganization into
partnership form);
(g) materially change the businesses or activities
in which the Company and its Subsidiaries were engaged on the
date of this Agreement;
(h) make, or permit any of its Subsidiaries to make,
any loans or advances to, guarantees for the benefit of, or
Investments in, any Person (other than a wholly-owned
Subsidiary), except for: (a) reasonable advances to employees in
the ordinary course of business; (b) Investments having a stated
maturity no greater than one year from the date the Company makes
such Investment in (1) obligations of the United States
government or any agency thereof or obligations guaranteed by the
United States government, (2) certificates of deposit of
commercial banks having combined capital and surplus of at least
$50 million or (3) commercial paper with a rating of at least
"Prime-1" by Moody's Investors Service, Inc.; and (c) those that
have been made in the ordinary course of business;
(i) except as expressly contemplated by this
Agreement, make any amendment to the Certificate of Incorporation
(including the Certificate of Designation) or the Company's
Bylaws, or file any resolution of the Board or certificate of
designation with the Secretary of State of Delaware;
(j) make any material capital expenditures above the
amounts set forth therefor in the annual budget (including,
without limitation, payments with respect to capitalized leases,
as determined in accordance with generally accepted accounting
principles consistently applied);
(k) terminate, suspend, promote or demote either of
Bernard Brenner or James Basara;
(l) enter into, or cause any Subsidiary to enter
into, any agreement which would restrict the Company's or any of
its Subsidiaries' right or ability to perform the provisions of
this Agreement or to conduct its business as currently conducted;
or
(m) issue any stock options or increase the salary,
bonus or other employee benefits of the Founders; it being
acknowledged and agreed that Bernard Brenner will be entitled to
a maximum base salary, bonuses and other employee benefits as
provided in the Brenner Employment Agreement.
(ii) So long as a Qualified Public Offering has not been
consummated and the Purchasers and/or their Affiliates collectively own of
record or beneficially at least 10% of the
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<PAGE> 15
outstanding Common Stock (giving effect to the Purchaser Preferred on an as
converted basis) without the approval of the majority of the Board; the Company
shall not and shall not commit to:
(a) directly or indirectly declare or pay any
dividends on earnings;
(b) except as expressly contemplated by this
Agreement, authorize, issue, sell, or enter into any agreement
providing for the issuance (contingent or otherwise), or permit
any of its Subsidiaries to authorize, issue, sell, or enter into
any agreement providing for the issuance (contingent or
otherwise) of any equity securities or debt securities with
equity features or securities exercisable or convertible into
equity securities or debt securities with equity features;
(c) enter into, amend, modify, or supplement or
permit any of its Subsidiaries to enter into, amend, modify, or
supplement any agreement, transaction, commitment, or arrangement
with any of its or any of its Subsidiaries' officers, directors,
advisory board members, employees, or Affiliates or any
individual related by blood, marriage, or adoption to any such
Person (a "RELATIVE") or any entity in which any such Person or
individual owns a beneficial interest (a "RELATED ENTITY"),
except for normal and customary employment arrangements and
benefit programs on reasonable terms that have been previously
approved by the holders of a majority of the outstanding
Purchaser Stock and except as otherwise expressly contemplated by
this Agreement;
(d) create, incur, assume, or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume, or
suffer to exist, Indebtedness or other non-ordinary course
liabilities exceeding the greater of $100,000 or amounts approved
therefor by the Board and the holders of a majority of the
outstanding Purchaser Stock in the annual budget;
(e) hire, terminate, suspend, promote or demote any
member of the Company's senior management team or the senior
management team of any of its Material Subsidiaries;
(f) approve any business plan or annual budget of
the Company or any of its Subsidiaries for any fiscal year;
(g) change its fiscal year, which shall end on
December 31; or
(h) except pursuant to this Agreement, directly or
indirectly redeem, purchase, or otherwise acquire, or permit any
of its Subsidiaries to redeem, purchase, or otherwise acquire,
any of the Company's or any Subsidiary's equity securities
(including, without limitation, warrants, options, and other
rights to acquire equity securities) excluding redemptions of or
conversion of the Preferred Stock in accordance with the terms of
the Certificate of Incorporation.
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<PAGE> 16
3D. AFFIRMATIVE COVENANTS. Unless the Company obtains the prior
written consent of the holders of a majority of the then-outstanding Purchaser
Preferred and Purchaser Common, the Company shall, and shall cause each
Subsidiary to:
(i) comply with all applicable laws, rules, and regulations
of all governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations, or business prospects of the Company and
its Subsidiaries taken as a whole, and pay and discharge when payable all
Taxes, assessments, and governmental charges (except to the extent the same are
being contested in good faith and adequate reserves therefor have been
established);
(ii) enter into and maintain appropriate (as determined by
the Board) non-disclosure, noncompete, and non-solicitation agreements with its
employees;
(iii) cause any agreement entered into by the Company or any
Subsidiary after the date hereof which provides for the sale of capital stock
of the Company (or the capital stock of any Subsidiary of the Company) to, or
employment of, a senior management or junior management employee to be in form
and substance substantially similar to the draft of such agreement previously
approved by the Purchasers prior to execution;
(iv) within 90 days of the date of the Initial Closing use
its best efforts to obtain from financially sound and reputable insurers (A)
term life insurance on the life of Bernard Brenner in the amount of $1,000,000,
(B) fire and casualty insurance policies, with extended coverage, sufficient in
amount (subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed and (C) products liability and
errors and omissions insurance in amounts customary for companies similarly
situated; and the Company shall maintain such insurance in accordance with
commercially reasonable standards; each such policy shall name the Company as
loss payee; and such insurance shall not be cancelable by the Company without
the approval of the Purchasers;
(v) refrain from adopting any stock option plan for
employees, consultants and/or directors other than the Company's existing stock
option plan providing for the issuance of up to 1,037,612 shares of Common
Stock (such existing plan being herein referred to as an "EMPLOYEE STOCK OPTION
PLAN");
(vi) refrain from of issuing any equity or debt securities of
the Company or any subscriptions, warrants, options, convertible securities, or
other rights (contingent or other) to purchase or otherwise acquire equity
securities of the Company other than (A) Employee Stock Options; (B) up to
1,000,000 shares of Common Stock to be issued by the Company in connection with
its private placement to be completed after the date of this Agreement; and (C)
the Company's Common Stock to be issued to Sideout Technologies, Inc.
("Sideout") as partial payment for Sideout's web development services actually
performed for the Company provided that (1) the total number of shares of
Common Stock to be issued to Sideout shall not exceed an
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<PAGE> 17
aggregate value of $100,000 and (2) the price per share of the Common Stock to
be issued to Sideout shall be established by the Board on the basis of the fair
market value of the Common Stock on each date of issuance.
3E. CURRENT PUBLIC INFORMATION. At all times after the Company
has filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted
Securities may reasonably request, all to the extent required to enable: (i)
such holders to sell Restricted Securities pursuant to Rule 144 adopted by the
Securities and Exchange Commission under the Securities Act (as such rule may
be amended from time to time) or any similar rule or regulation hereafter
adopted by the Securities and Exchange Commission; or (ii) the Company to be
eligible to register its securities pursuant to a registration statement on
Form S-2 or S-3 or any similar registration form hereafter adopted by the
Securities and Exchange Commission. Upon request, the Company shall deliver to
any holder of Restricted Securities a written statement as to whether it has
complied with such requirements.
3F. PUBLIC DISCLOSURES. The Company shall not, nor shall it
permit any of its Subsidiaries or other Affiliates to, disclose any Purchaser's
(or its Affiliates') name or identity as an investor in the Company in any
press release or other public announcement or in any document or material filed
with any governmental entity, without the prior written consent of such
Purchaser, unless such disclosure is required by applicable law or governmental
regulations or by order of a court of competent jurisdiction, in which case,
before making such disclosure the Company shall give written notice to such
Purchaser describing in reasonable detail the proposed content of such
disclosure and shall permit such Purchaser to review and comment upon the form
and substance of such disclosure.
3G. HART-SCOTT-RODINO COMPLIANCE. In connection with any
transaction in which the Company, or any Subsidiary, is involved which is
required to be reported under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended from time to time (the "HSR ACT"), the Company, or any such
Subsidiary, shall prepare and file all documents with the Federal Trade
Commission and the United States Department of Justice which may be required to
comply with the HSR Act, and shall promptly furnish all materials thereafter
requested by any of the regulatory agencies having jurisdiction over such
filings, in connection with the transactions contemplated thereby. The Company,
or any such Subsidiary, shall take all reasonable actions and shall file and
use reasonable best efforts to have declared effective or approved all
documents and notifications with any governmental or regulatory bodies, as may
be necessary or may reasonably be requested under federal antitrust laws for
the consummation of the subject transaction.
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SECTION 4. COVENANTS OF THE PURCHASERS.
4A. PUBLIC DISCLOSURE. The Purchasers shall consult with the
Company before issuing any press release or otherwise making any public
statement or making any other non-confidential disclosure (whether or not in
response to any inquiry) regarding the existence or terms of this Agreement and
no Purchaser shall issue any such press release or make any such statement or
disclosure without the prior approval of the Company (which approval shall not
be unreasonably withheld), including such press releases, statements or
disclosures as may be required by law. In addition, no Purchaser shall issue
any public statement or make any other non-confidential disclosure regarding
the existence or terms of any agreement the Company has with any third party
without the written approval of the Company (which approval shall not be
unreasonably withheld).
SECTION 5. TRANSFER OF RESTRICTED SECURITIES.
Each Purchaser acknowledges that the Restricted Securities are
transferable only pursuant to: (a) public offerings registered under the
Securities Act and applicable state law; (b) Rule 144 or Rule 144A of the
Securities and Exchange Commission (or any similar rule or rules then in force)
if such rule or rules are available; and (c) any other legally available means
of transfer. In connection with the transfer of any Restricted Securities
(other than a transfer described in clauses (a) or (b) above), the holder
thereof shall deliver written notice to the Company describing in reasonable
detail the transfer or proposed transfer. In connection with the transfer of
any Restricted Securities (other than a transfer described in clause (a)
above), the holder thereof shall deliver to the Company an opinion of counsel
reasonably satisfactory to the Company that registration thereof under the
Securities Act and applicable state law is not required. In addition, upon the
request of a Purchaser, the Company shall promptly supply to such Purchaser or
its prospective transferees all information regarding the Company required to
be delivered in connection with a transfer pursuant to Rule 144A of the
Securities and Exchange Commission.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As a material inducement to the Purchasers to enter into this
Agreement and purchase the Preferred Stock, the Company hereby represents and
warrants to (1) Northwood that as of the date of this Agreement and (2) USXX
that as of the date of this Agreement, except as set forth on the Schedule of
Exceptions attached hereto as Schedule 2 and furnished to the Purchasers or, as
applicable, USXX (with respect to the Second Closing), specifically identifying
the relevant subparagraph(s) hereof:
6A. ORGANIZATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and is qualified to do business in every
jurisdiction in which the failure to so qualify might reasonably be expected to
have a material adverse effect on the financial condition, operating results,
assets, operations, or business prospects of the Company and its Subsidiaries
taken as a whole. The
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Company has all requisite corporate power and authority and all material
licenses, permits, and authorizations necessary to own and operate its
properties, to carry on its businesses as now conducted and presently proposed
to be conducted, and to carry out the transactions contemplated by this
Agreement. The copies of the Company's Certificate of Incorporation and Bylaws,
and the copies of the charters and bylaws (or other similar organizational
documents) of each Subsidiary of the Company, which have been furnished to each
Purchaser, reflect all amendments made thereto at any time before the date on
which said documents were furnished to each Purchaser and are correct and
complete.
6B. CAPITAL STOCK AND RELATED MATTERS.
(i) The authorized capital stock of the Company consists of
16,000,000 shares of capital stock. 4,000,000 shares are designated as
preferred stock, par value $.01 per share, of which 1,000,000 are designated
Series A Convertible Preferred Stock, par value $.01 per share ("Series A
Preferred Stock"). 12,000,000 shares are designated as Common Stock par value
$.01 per share. Immediately prior to the Initial Closing, the Company had
4,000,000 shares of Common Stock issued and outstanding, and 857,413 shares of
Series A Preferred Stock issued and outstanding. Except for (i) such issued and
outstanding shares and (ii) the conversion privileges of the Series A Preferred
Stock and the Preferred Stock, the Company does not have outstanding any stock
or securities convertible or exchangeable for any shares of its capital stock
or containing any profit participation features, nor does it have outstanding
any rights, arrangements or options to subscribe for, receive or to purchase
its capital stock or any stock or securities convertible into or exchangeable
for its capital stock or any stock appreciation rights or phantom stock plans
other than pursuant to, and as contemplated by, this Agreement. No stock plan,
stock purchase, stock option or other agreement or understanding between the
Company and any holder of any equity securities of the Company or rights to
purchase equity securities of the Company provides for acceleration or other
changes in the vesting provisions or other terms of such securities, as the
result of any merger, sale of stock or assets, change in control or other
similar transaction by the Company. The Company is not now and is not to be
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock or any warrants, options, or
other rights to acquire its capital stock, except pursuant to this Agreement
and the Stock Purchase Agreement, dated October 7, 1999, by and among the
Company and the holders of the Series A Preferred Stock. All of the outstanding
shares of the Company's capital stock are validly issued, fully paid, and
nonassessable. Provided that the purchase price set forth herein for the
Purchaser Stock is paid to the Company as provided herein, all shares of
Purchaser Stock will be validly issued, fully paid and nonassessable when
issued by the Company in accordance with the terms hereof.
(ii) There are no statutory or contractual stockholders
preemptive rights or rights of refusal with respect to the issuance of any of
the Purchaser Stock hereunder, except as expressly provided herein, and as
expressly provided in the Stockholders' Agreement and the Registration
Agreement. All shares of the Company's capital stock and other securities
issued by the Company have been issued in transactions exempt from registration
under the Securities Act and applicable state securities or "blue sky" laws,
and the offer, sale and issuance of said
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capital stock and other securities has not violated any applicable federal or
state securities laws. Based in part on truth and accuracy the investment
representations of the Purchasers in Section 8C hereof, the offer, sale, or
issuance of the Purchaser Stock hereunder will not require registration under
the Securities Act or any applicable state securities laws. Except for the
Stockholders' Agreement and the Registration Agreement, there are no agreements
between the Company's stockholders with respect to the voting or transfer of
the Company's capital stock or with respect to any other aspect of the
management of the Company's affairs.
6C. REGISTRATION RIGHTS. Except as provided in the Registration
Agreement, the Company is not presently under any obligation and has not
granted any rights to register under the Securities Act any of its presently
outstanding securities or any of its securities that may be subsequently
issued.
6D. AUTHORIZATION; NO BREACH. The execution, delivery, and
performance of this Agreement, the Registration Agreement, the Stockholders'
Agreement and all other agreements contemplated hereby in connection with the
Initial Closing to which the Company will enter into on the Initial Closing
Date and the filing of the Certificate of Designation have been duly authorized
by the Company. The execution, delivery, and performance of all of the
agreements contemplated hereby in connection with the Second Closing to which
the Company will enter into on the Second Closing Date will have been duly
authorized by the Company as of the Second Closing Date. Each of this
Agreement, the Registration Agreement, the Stockholders' Agreement, the
Certificate of Designation, and each other agreement contemplated hereby to
which the Company will enter into in connection with the Initial Closing
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms. All other agreements contemplated hereby to which
the Company will enter into in connection with the Second Closing will each
constitute a valid and binding obligation of the Company, enforceable in
accordance with its terms. The execution and delivery by the Company of this
Agreement, the Registration Agreement, the Stockholders' Agreement and all
other agreements contemplated hereby in connection with the Initial Closing
which the Company will enter into on the Initial Closing Date, the offering,
sale, and issuance of the Purchaser Preferred hereunder, the filing of the
Certificate of Designation contemplated herein and the fulfillment of and
compliance with the
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respective terms hereof and thereof by the Company do not and will not: (i)
conflict with or result in a breach of the terms and conditions of; (ii)
constitute a material default under; (iii) result in the creation of any Lien,
security interest, charge, or encumbrance upon the Company's capital stock or
assets pursuant to; (iv) give any third party the right to modify, terminate,
or accelerate any obligation under; (v) result in a material violation of; or
(vi) require any authorization, consent, approval, exemption, or other action
by or notice to any court or administrative or governmental body pursuant to,
the Certificate of Incorporation or Bylaws of the Company, or any law, statute,
rule, or regulation to which the Company is subject, or any agreement,
instrument, order, judgment, or decree to which the Company or any of its
Affiliates, or employees is a party or by which it or any of the foregoing
Persons is bound.
The Company is not in violation or default in any respect of (A) any
provision of its Certificate of Incorporation or Bylaws, (B) any instrument,
judgment, order, writ, decree or contract to which it is a party or by which it
is bound, the violation or default of which has or could have a material
adverse effect on the Company, or (C) any provision of any federal or state
statute, rule or regulation applicable to the Company, the violation or default
of which has or could have a material adverse effect on the Company.
6E. SUBSIDIARIES; INVESTMENTS. The Company does not own or hold
any shares of stock or any other security or interest in, and does not directly
or indirectly control, any other Person or any rights to acquire any such
security or interest, and the Company has never had any Subsidiary. The Company
is not a participant in any joint venture, partnership or similar arrangement.
6F. TAX MATTERS.
(i) The Company has filed all Tax Returns that it was
required to file and all such Tax Returns were correct and complete in all
material respects. The Company has paid or will pay all Taxes due on or before
the Initial Closing, regardless of whether shown on any such Tax Returns,
except such as are being contested in good faith by appropriate proceedings (to
the extent any such proceedings are required) and with respect to which the
Company is maintaining reserves adequate for their payment, and which are
described on the Schedule of Exceptions. The accrued but unpaid Taxes of the
Company for tax periods through the date of the unaudited financial statements
of the Company for the year ended June 30, 1999 do not exceed the accruals and
reserves for Taxes (other than deferred Taxes) set forth on the said financial
statements. All Taxes attributable to the period January 1, 1999 through the
Initial Closing are attributable to the conduct by the Company of its
operations in the ordinary course of business. The Company has no actual or
potential liability for any Tax obligation of any taxpayer (including without
limitation any affiliated group of corporations or other entities that included
the Company during a prior period) other than the Company. All Taxes that the
Company is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
governmental entity, except such as are being contested in good faith by
appropriate proceedings (to the extent any such proceedings are required), with
respect to which the Company is maintaining reserves adequate for their payment
and which are described in the
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Schedule of Exceptions. The Federal Tax Returns of the Company have never been
audited by the Internal Revenue Service. No deficiency assessment with respect
to, or proposed adjustment of, the Company's Taxes is pending or, to the best
of the Company's knowledge, threatened. There is no tax lien, whether imposed
by any Federal, state, county or local taxing authority, outstanding against
the assets, properties or business of the Company. Neither the Company nor any
of its stockholders has ever filed an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), that the Company be
taxed as an S corporation.
(ii) The Company has previously provided to the Purchasers
correct and complete copies of all federal income Tax Returns, examination
reports and statements of deficiencies assessed against or agreed to by the
Company. No examination or audit of any Tax Returns of the Company by any
governmental entity is currently in progress or, to the knowledge of the
Company, threatened or contemplated. The Company has not waived any statute of
limitations with respect to Taxes or agreed to an extension of time with
respect to a tax assessment or deficiency.
(iii) The Company is not a "consenting corporation" within
the meaning of Section 341(f) of the Code and none of the assets of the Company
is subject to an election under Section 341(f) of the Code. The Company has not
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section
897(c)(l)(A)(ii) of the Code. The Company is not a party to any Tax allocation
or sharing agreements.
(iv) The Company is not and has never been a member of an
"affiliated group" of corporations (within the meaning of Section 1504 of the
Code).
(v) No deductions by the Company for severance payments are
subject to limitation based on the "golden parachute provisions" of Section
280G of the Code.
6G. LITIGATION, ETC. Except as set forth on the Schedule of
Exceptions, there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the best of the Company's knowledge, threatened against
or affecting the Company (or to the best of the Company's knowledge after due
inquiry, pending or threatened against or affecting any of the officers,
directors or employees of the Company with respect to their business or
proposed business activities) at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, any actions, suits, proceedings or
investigations with respect to the transactions contemplated by this Agreement)
which could have a material adverse effect on the financial condition,
operating results, assets, operations or business prospects of the Company
taken as a whole; the Company is not subject to any arbitration proceedings
under collective bargaining agreements or otherwise or, any governmental
investigations or inquiries; and, there is no basis for any of the foregoing.
The Company is not subject to any judgment, order or decree of any court or
other governmental agency. The Company has not received any opinion or
memorandum or legal advice from legal
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<PAGE> 23
counsel to the effect that it is exposed, from a legal standpoint, to any
liability or claim which may be material to its business.
6H. BROKERAGE. There are no claims for brokerage commissions,
finders fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company. The Company shall pay, and hold the Purchasers harmless
against, any liability, loss or expense (including, without limitation,
attorneys fees and out-of-pocket expenses) arising in connection with any such
claim.
6I. GOVERNMENTAL CONSENT, ETC. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, the offer, sale or issuance of the Preferred Stock by the Company or
the issuance of Common Stock upon conversion of the Preferred Stock, except:
(i) the filing of the Certificate of Designation with the Secretary of State of
the State of Delaware; and (ii) such filings as have been made prior to the
Closing, except any notices of sale required to be filed with the Securities
and Exchange Commission under Regulation D of the Securities Act, or such
post-closing filings as may be required under applicable state securities laws,
which will be timely filed within the periods therefor.
6J. FINANCIAL STATEMENTS. The Company has delivered to the
Purchasers a business plan (the "BUSINESS PLAN"), which Business Plan is
appended as Exhibit F-1 hereto, unaudited financial statements for the years
ended June 30, 1998 and June 30, 1999, the six months ended December 31, 1999
and the year ended December 31, 1999, together with the financial projections
as of January 19, 2000 (collectively, the "FINANCIAL INFORMATION"), a copy of
each of which is appended as Exhibit F-2 hereto. Except as disclosed in the
Financial Information, the Company is not a guarantor or indemnitor of any
Indebtedness of any other person, firm or corporation. All such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied and fairly present the financial position of
the Company for the periods covered. The Company maintains a standard system of
accounting established and administered in accordance with generally accepted
accounting principles. Since its formation, there has not been any event or
condition of any type that has materially and adversely affected the business,
prospects, properties or financial condition of the Company.
6K. TITLE TO PROPERTY AND ASSETS; CONTRACTS AND LEASES. Except
(i) as reflected in the Financial Information; (ii) for Liens and current taxes
not yet delinquent; (iii) for Liens imposed by law and incurred by the ordinary
course of business for obligations not past due to carriers, warehousemen,
laborers, materialmen and the like; (iv) for Liens in respect of pledges or
deposits under workers' compensation laws or similar legislation; or (v) for
minor defects in title, none of which, individually or in the aggregate,
materially interferes with the use of such property, the Company has good and
marketable title to its property and assets, if any, free and clear of all
mortgages, Liens, claims and encumbrances. With respect to the property and
assets it leases, if any, the Company is in compliance with such leases and
holds a valid leasehold
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<PAGE> 24
interest free of any Liens, claims, or encumbrances, subject to clauses (i)
through (v) above. There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company, in excess of $10,000
(ii) the license of any patent copyright, trade secret or other proprietary
right to or from the Company, (iii) provisions restricting or affecting the
development, manufacture or distributions of the Company's products or services
or (iv) indemnification by the Company with respect to infringements of
proprietary rights. The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Certificate of Incorporation or Bylaws that adversely affects its business as
now conducted or as proposed to be conducted in the Business Plan, its
properties or its financial condition.
6L. RELATED-PARTY TRANSACTIONS AND CERTAIN ACTIONS. No employee,
officer, consultant, stockholder or director of the Company or member of his or
her immediate family is indebted to the Company, nor is the Company indebted
(or committed to make loans or guarantee credit) to any of them, other than (i)
for payment of salary for services rendered; (ii) reimbursement for reasonable
expenses incurred on behalf of the Company; and (iii) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any option plan). None of such persons has
any direct or indirect ownership interest in any firm or corporation with which
the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, stockholders, officers, or directors of the Company may own
stock in publicly traded companies that may compete with the Company. No
officer, director, consultant or stockholder or any member of their immediate
families is, directly or indirectly, interested in any material contract with
the Company (other than such contracts as relate to any such person's related
ownership of capital stock or other securities of the Company). The Company has
not (A) declared or paid any dividends or authorized or made any distributions
upon or with respect to any class or series of its capital stock, (B) incurred
any indebtedness for money borrowed or any other liabilities individually or in
excess of $10,000, (C) made any loans or advances to any person, other than
ordinary advances for travel expenses, or (D) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory
in the ordinary course of business.
6M. EMPLOYEES; EMPLOYEE COMPENSATION. To the best of the
Company's knowledge, there is no strike, labor dispute or union organization
activities pending or threatened between it and its employees. None of the
Company's employees belongs to any union or collective bargaining unit. The
Company has materially complied with all applicable state and federal equal
opportunity and other laws related to employment. No employee or consultant of
the Company is or will be in material violation of any judgment, decree, or
order or any term of any employment contract, patent disclosure agreement, or
other contract or agreement relating to the relationship of any such employee
or consultant with the Company, or any other party because of the nature of the
business conducted or presently proposed to be conducted by the Company or to
the use by the employee or consultant of his or her efforts with respect to the
Company. The Company is not aware that any officer or key employee, or that any
group of key
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<PAGE> 25
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. Subject to general principles related to wrongful termination of
employees, the employment of each officer and employee of the Company is
terminable at the will of the Company. The consulting relationship of each
consultant to the Company is terminable at the will of the Company.
6N. PATENTS AND TRADEMARKS. The Company owns or possesses
sufficient legal rights to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and proprietary rights and
processes necessary for its business as now conducted, except for those
disclosed on the Schedule of Exceptions (including without limitation its
corporate names) and as proposed to be conducted without any conflict with, or
infringement of the rights of, others. The Schedule of Exceptions contains a
complete list of all patents and pending patent applications of the Company.
Except for agreements with its own employees or consultants, substantially in
the form referenced in Section 6P below, and standard end-user license
agreements, there are no outstanding options, licenses, or agreements of any
kind relating to the foregoing, nor is the Company bound by or a party to any
options, licenses, or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and proprietary rights and processes of any other person or entity.
The Company has not violated or, by conducting its business as proposed, would
not violate any of the patents, trademarks, service marks, trade names,
copyrights, trade secrets or any other proprietary rights or processes of any
person or entity in such a manner as will or may have an adverse effect on the
business, operations or prospects of the Company. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants, or commitments of any nature) or any other agreement, or subject to
any judgment, decree or order of any court or administrative agency, that would
interfere with the use of such employee's best efforts to promote the interests
of the Company or that would conflict with the Company's business as proposed
to be conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will conflict with or result in
a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant, or instrument under which any of such employees
is now obligated. The Company does not believe it is or will be necessary to
use any inventions of any of its employees (or persons it currently intends to
hire) made prior to their employment by the Company.
6O. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each
current and former employee and officer of the Company has executed a
confidentiality/nonsolicitation/noncompete agreement substantially in the form
or forms which has been delivered to the Purchaser. A copy of such form or
forms is (are) appended as Exhibit G hereto. No current or former employee or
officer has excluded works or inventions made prior to his or her employment
with the Company from his or her assignment of inventions pursuant to such
employee's confidentiality agreement.
6P. ERISA. The Company does not maintain or have any obligation
to contribute to or any other liability with respect to or under (including but
not limited to current or potential withdrawal, liability), nor has it ever
maintained or had any obligation to contribute to or any
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other liability with respect to or under: (i) any plan or arrangement whether
or not terminated, which provides medical, health, life insurance or other
welfare types benefits for current or future retired or terminated employees
(except for limited continued medical benefit coverage required to be provided
under Section 4980B of the IRC or as required under applicable state law); (ii)
any "multiemployer plan" (as defined in Section 3(37) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")); (iii) any
employee plan which is a tax-qualified "defined benefit plan" (as defined in
Section 3(35) of ERISA), whether or not terminated; (iv) any employee plan
which is tax-qualified "defined contribution plan" (as defined in Section 3(34)
of ERISA), whether or not terminated; or (v) any other plan or arrangement
providing benefits to current or former employees, including any bonus plan,
plan for deferred compensation, employee health or other welfare benefit plan
or other arrangement, whether or not terminated. For purposes of this Section
6Q, the term "Company" includes all organizations under common control with the
Company pursuant to Section 414(b) or (c) of the IRC.
6Q. COMPLIANCE WITH LAWS AND INSURANCE. The Company has not
violated any law or any governmental regulation or requirement which violation
would reasonably be expected to have a material adverse effect upon the
financial condition, operating results, assets, operations or business
prospects of the Company, and the Company has not received notice of any such
violation. The Company is not subject to any clean up liability, and the
Company has no reason to believe it may become subject to any clean up
liability, under any federal, state or local environmental law, rule or
regulation.
6R. MINUTE BOOKS. The copy of the minute books of the Company
provided to the Purchasers contains minutes of all meetings of directors and
stockholders and all actions by written consent without a meeting by the
directors and stockholders since the date of incorporation and accurately
reflects all actions by the directors (and any committee of directors) and
stockholders with respect to all transactions referred to in such minutes in
all material respects.
6S. BUSINESS PLAN. The Business Plan delivered to the Purchasers
was prepared in good faith by the Company and does not, to the best of the
Company's knowledge after reasonable investigation, contain any untrue
statement of a material fact nor does it omit to state a material fact
necessary to make the statements therein not misleading, except that with
respect to assumptions, projections and expressions of opinion or predictions
contained in the Business Plan, the Company represents only that such
assumptions, projections, expressions of opinion and projections were made in
good faith and that the Company believes there is a reasonable basis therefor.
6T. DISCLOSURE. Neither this Agreement nor any of the schedules,
other agreements to be entered into by the Company on the date hereof, or
certificates or other items prepared or supplied to the Purchasers by or on
behalf of the Company with respect to the transactions contemplated hereby
contain any untrue statement of a material fact regarding the Company or omit a
material fact regarding the Company necessary to make each statement contained
herein or therein not misleading. There is no fact which the Company has not
disclosed to the
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Purchasers in writing and of which any of its officers, directors or executive
employees is aware and which has had or might reasonably be anticipated to have
a material adverse effect upon the existing or expected financial condition,
operating results, assets, customer or supplier relations, employee relations
or business prospects of the Company.
6U. REAL PROPERTY HOLDING COMPANY. The Company is not a real
property holding company within the meaning of Section 897 of the IRC.
SECTION 7. DEFINITIONS.
For the purposes of this Agreement, the following terms have the
meanings set forth below:
"AFFILIATE" of any particular person or entity means any
other person or entity controlling, controlled by, or under common control with
such particular person or entity.
"AFFILIATED GROUP" means an affiliated group as defined in
Section 1504 of the IRC (or any analogous combined, consolidated, or unitary
group defined under state, local, or foreign income Tax law).
"BRENNER EMPLOYMENT AGREEMENT" has the meaning set forth in
Section 3C(i)(c) hereof.
"BUSINESS PLAN" has the meaning set forth in Section 6J
hereof.
"COMMON STOCK" means the Company's common stock, par value
$.01 per share.
"EMPLOYEE STOCK OPTIONS" means options issued to eligible
employees, consultants or directors under an Employee Stock Option Plan.
"EMPLOYEE STOCK OPTION PLAN" has the meaning set forth in
Section 3D(vi) hereof.
"FOUNDER" or "FOUNDERS" means one or all of Bernard Brenner,
Robert Sofsky and Gregory Gershuni.
"INDEBTEDNESS" means all indebtedness for borrowed money
(including purchase money obligations), all indebtedness under revolving credit
arrangements, all capitalized lease obligations, and all guarantees of any of
the foregoing, exceeding $100,000 in the aggregate on a consolidated basis
during any twelve (12) month period.
"INVESTMENT" as applied to any Person means: (i) any direct
or indirect purchase or other acquisition by such Person of any notes,
obligations, instruments, stock, securities, or
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ownership interest (including partnership interests and joint venture interests
of any other Person, and; (ii) any capital contribution by such Person to any
other Person.
"IRC" means the Internal Revenue Code of 1986, as amended,
and any reference to any particular IRC section shall be interpreted to include
any revision of or successor to that section regardless of how numbered or
classified.
"LIEN" means any mortgage, pledge, security interest,
encumbrance, lien, or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof), any sale of receivables with recourse against the Company, any of its
Subsidiaries or any of its Affiliates, any filing or agreement to file a
financing statement as debtor under the Uniform Commercial Code or any similar
statute other than to reflect ownership by a third party of property leased to
the Company or any of its Subsidiaries under a lease which is not in the nature
of a conditional sale or title retention agreement, or any subordination
arrangement in favor of another Person (other than any subordination arising in
the ordinary course of business).
"MATERIAL SUBSIDIARY" means any Subsidiary included in the
group of the Company's Subsidiaries, which, together with the Company, accounts
for ninety percent (90%) of the lesser of: (X) the Company's and all of its
Subsidiaries' revenues on a consolidated basis during any twelve (12) month
period; or (Y) the Company's and all of its Subsidiaries' assets on a
consolidated basis during any twelve (12) month period.
"NORTHWOOD NOTE" means the Convertible Demand Note, dated
February 24, 2000, executed by the Company as Maker in favor of Northwood
Ventures with a principal amount of $100,000.
"OFFICER'S CERTIFICATE" means a certificate signed by the
Company's Chairman, President or its Chief Financial Officer (but without
personal liability), stating that: (i) the officer signing such certificate has
made or has caused to be made such investigations as are necessary in order to
permit him to verify the accuracy of the information set forth in such
certificate; and (ii) such certificate does not misstate any material fact and
does not omit to state any fact necessary to make the certificate not
misleading.
"PERSON" means an individual, a partnership, a limited
partnership, a limited liability company, a corporation, an association, a
joint stock company, a trust, a joint venture, an unincorporated organization,
and a governmental entity or any department, agency, or political subdivision
thereof.
"PREFERRED STOCK" means the Company's Series B Convertible
Preferred Stock, par value $.01 per share.
"PURCHASER COMMON" means: (i) the Common Stock issued to any
Purchaser or any of its Affiliates upon the conversion of the Preferred Stock;
and (ii) any capital stock issued
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or issuable with respect to the Common Stock referred to in clause (i) above by
way of stock dividends or stock splits or in connection with a combination of
shares, recapitalization, merger, consolidation, or other reorganization. As to
any particular shares of Purchaser Common, such shares shall cease to be
Purchaser Common when they have been: (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them; or (b) distributed to the public through a broker, dealer, or
market maker pursuant to Rule 144 under the Securities Act (or any similar rule
then in force).
"PURCHASER PREFERRED" means (i) the Preferred Stock issued to
any Purchaser or any of its Affiliates hereunder; and (ii) any capital stock
issued or issuable with respect to the Preferred Stock referred to in clause
(i) above by way of stock dividends or stock splits or in connection with a
combination of shares, recapitalization, merger, consolidation, or other
reorganization. As to any particular shares of Purchaser Preferred, such shares
shall cease to be Purchaser Preferred when they have been: (a) converted into
Common Stock; (b) redeemed by the Company; (c) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them; or (d) distributed to the public through a broker, dealer, or
market maker pursuant to Rule 144 under the Securities Act (or any similar rule
then in force).
"PURCHASER STOCK" means, collectively, the Purchaser
Preferred and the Purchaser Common.
"QUALIFIED PUBLIC OFFERING" means the first firm commitment
underwritten public offering of shares of Common Stock pursuant to an effective
registration statement under the Securities Act in which the gross proceeds
received by the Company are at least $15 million. For purposes of this
Agreement, a Qualified Public Offering shall be deemed to have occurred upon
the effectiveness of the registration statement filed with respect to such
offering, subject to any consequences under this Agreement of such Qualified
Public Offering having been deemed to have occurred being reversed and
nullified if the closing of the sale of such shares pursuant to such offering
does not occur within ten business days after such effectiveness.
"RESTRICTED SECURITIES" means: (i) the Purchaser Stock issued
or issuable hereunder; and (ii) any securities issued with respect to the
securities referred to in clause (i) above by way of a stock dividend or stock
split or in connection with the conversion of stock, or in connection with
combination of shares, recapitalization, merger, consolidation, or other
reorganization. As to any particular Restricted Securities, such securities
shall cease to be Restricted Securities when they have: (a) been effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them; (b) become eligible for sale pursuant to
Rule 144(k) (or any similar provision then in force) under the Securities Act;
or (c) been otherwise transferred and new certificates for them not bearing the
Securities Act legend set forth in Section 8C have been delivered by the
Company in accordance with Section 8C. Whenever any particular securities cease
to be Restricted Securities, the holder thereof shall be entitled to receive
from the Company, without expense, new securities of like tenor not bearing a
Securities Act legend of the character set forth in Section 8C.
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"SECURITIES ACT" means the Securities Act of 1933, as
amended, or any similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any
governmental body or agency succeeding to the functions thereof.
"SERIES A PREFERRED STOCK" means the Company's Series A
Convertible Preferred Stock, par value $.01 per share.
"STOCK" means the Company's Preferred Stock and Common Stock.
"SUBSIDIARY" means, with respect to any Person, any
corporation, limited liability company, partnership, association, or other
business entity of which: (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers, or trustees
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof; or (ii) if a limited liability company, partnership, association, or
other business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association, or
other business entity if such Person or Persons shall be allocated a majority
of limited liability company, partnership, association, or other business
entity gains or losses or shall be or control any managing director or general
partner of such limited liability company, partnership, association, or other
business entity. References to a "SUBSIDIARY" of the Company shall be given
effect only at such times as the Company has one or more Subsidiaries.
"TAX" OR "TAXES" means any: (i) federal, state, local, or
foreign income, gross receipts, franchise, estimated, alternative minimum,
add-on minimum, sales, use, transfer, registration, value added, excise,
natural resources, severance, stamp, occupation, premium, windfall profit,
environmental, customs, duties, real property, personal property, capital
stock, social security, unemployment, disability, payroll, license, employee or
other withholding, or other tax, of any kind whatsoever, including any
interest, penalties, or additions to tax or additional amounts in respect of
the foregoing; (ii) liability of the Company for the payment of any amounts of
the type described in clause (i) arising as a result of being (or ceasing to
be) a member of any Affiliated Group (or being included (or required to be
included) in any Tax Return relating thereto); and (iii) liability of the
Company for the payment of any amounts of the type described in clause (i) as a
result of any express or implied obligation to indemnify or
-27-
<PAGE> 31
otherwise assume or succeed to the liability of any other person (including,
but not limited to, as a successor or transferee).
"TAX RETURNS" means returns, declarations, reports, claims
for refund, information returns, or other documents (including any related or
supporting schedules, statements, or information) filed or required to be filed
in connection with the determination, assessment, or collection of Taxes of any
party or the administration of any laws, regulations, or administrative
requirements relating to any Taxes.
SECTION 8. MISCELLANEOUS.
8A. EXPENSES.
(i) As a further inducement for the Purchasers to consummate
the transactions contemplated hereby, the Company agrees to pay, and hold each
Purchaser harmless against liability for the payment of: (i) its reasonable
fees and expenses (including its reasonable fees and expenses of its counsel
and other advisors) arising in connection with the interpretation and
enforcement of its rights, provided that such Purchaser is the prevailing party
with respect to any interpretation or enforcement dispute, under this
Agreement, the Registration Agreement, the Stockholders' Agreement and the
other agreements contemplated hereby and thereby, the Certificate of
Incorporation and the Company's Bylaws; and (ii) stamp documentary and other
similar taxes which may be payable in respect of the execution and delivery of
this Agreement, or the issuance, delivery or acquisition of any shares of stock
purchased hereunder; provided that the Company's obligation shall not extend to
transfer taxes on any subsequent transfer. In addition, the Company shall pay
all reasonable expenses of the Purchasers' representatives in connection with
their attendance at meetings of the Board and/or committees thereof.
(ii) As a further inducement for the Company to consummate
the transactions contemplated hereby, if (A) the Initial Closing or the Second
Closing does not occur due to the fault of a Purchaser and (B) there exists no
breach of any representation, warranty or covenant of the Company under this
Agreement, then such Purchaser agrees to reimburse the Company for attorneys'
fees that the Company has incurred in connection with the transactions
contemplated by this Agreement; provided, however, that the total amount
payable to the Company by the Purchasers hereunder as reimbursement for
attorneys' fees shall not exceed $20,000.
8B. REMEDIES. Each holder of Purchaser Stock issued hereunder
shall have all rights and remedies set forth in this Agreement and the
Certificate of Designation and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the
rights which such holders have under any law. Any Person having any rights
under any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement, and to exercise all
other rights granted by law.
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<PAGE> 32
8C. PURCHASER'S INVESTMENT REPRESENTATIONS. Each Purchaser hereby
represents and warrants to the Company that such Purchaser is acquiring the
Restricted Securities purchased hereunder or acquired pursuant hereto for its
own account with the present intention of holding such securities for purposes
of investment, and that it has no intention of selling such securities in a
public distribution in violation of the federal securities laws or any
applicable state securities laws; provided that nothing contained herein shall
prevent any Purchaser and subsequent holders of Restricted Securities from
transferring such securities in compliance with the provisions of the
Stockholders' Agreement and the Registration Agreement. Each Purchaser hereby
represents and warrants to the Company that the execution, delivery, and
performance of this Agreement, the Registration Agreement, the Stockholders'
Agreement and all other agreements contemplated hereby in connection with the
Initial Closing and the Second Closing to which such Purchaser or any of its
Affiliates will enter into on the Initial Closing Date and, if applicable, the
Second Closing Date have been duly authorized by such Purchaser or such
Purchaser's Affiliate. This Agreement, the Registration Agreement, the
Stockholders' Agreement and all other agreements contemplated hereby in
connection with the Initial Closing that each Purchaser will enter into on the
Initial Closing Date each constitutes a valid and binding obligation of such
Person, enforceable in accordance with its terms. With respect to the Second
Closing, USXX represents and warrants that, when entered into as of the Second
Closing Date, the Registration Agreement and Stockholders' Agreement will each
constitute a valid and binding obligation of USXX and/or any Affiliate of USXX
purchasing Preferred Stock hereunder, each enforceable in accordance with its
terms. All other agreements contemplated hereby in connection with the Second
Closing that USXX and/or any Affiliate of USXX purchasing Preferred Stock
hereunder will enter into on the Second Closing Date will each constitute a
valid and binding obligation of USXX and/or any Affiliate of USXX purchasing
Preferred Stock hereunder, each enforceable in accordance with its terms. The
execution and delivery by each Purchaser of this Agreement, the Registration
Agreement, Stockholders' Agreement and all other agreements contemplated hereby
in connection with the Initial Closing which each Purchaser is entering into on
the Initial Closing Date, the purchase of the Preferred Stock hereunder at the
Initial Closing, and the fulfillment of and compliance with the respective
terms hereof and thereof by such Purchaser do not and will not: (i) conflict
with or result in a breach of the terms, conditions, or provisions of; (ii)
constitute a default under; (iii) result in a violation of; or (iv) require any
authorization, consent, approval, exemption, or other action by or notice to
any court or administrative or governmental body pursuant to, the certificate
of incorporation, certificate of formation, partnership agreement, bylaws or
any similar constitutive document of such Purchaser, or any law, statute, rule,
or regulation to which such Purchaser is subject, or any agreement, instrument,
order, judgment, or decree to which such Purchaser or any of its Affiliates, or
employees is a party or by which it or any of the foregoing Persons is bound.
The execution and delivery by USXX and/or any Affiliate of USXX purchasing
Preferred Stock hereunder of the Registration Agreement, the Stockholders'
Agreement and all other agreements contemplated hereby in connection with the
Second Closing which USXX and/or any Affiliate of USXX purchasing Preferred
Stock hereunder will enter into on the Second Closing Date, the purchase of the
Preferred Stock hereunder by USXX and/or any Affiliate of USXX at the Second
Closing, and the fulfillment of and compliance with the respective terms hereof
and thereof by USXX and/or any of its Affiliates do not and will not: (i)
conflict with or result in a breach of the terms, conditions, or
-29-
<PAGE> 33
provisions of; (ii) constitute a default under; (iii) result in a violation of;
or (iv) require any authorization, consent, approval, exemption, or other
action by or notice to any court or administrative or governmental body
pursuant to, the certificate of incorporation, certificate of formation,
partnership agreement, bylaws or any similar constitutive document of USXX
and/or any Affiliate of USXX purchasing Preferred Stock hereunder, or any law,
statute, rule, or regulation to which USXX and/or any Affiliate of USXX
purchasing Preferred Stock hereunder is subject, or any agreement, instrument,
order, judgment, or decree to which USXX or any of its Affiliates, or employees
is a party or by which it or any of the foregoing Persons is bound.
Each certificate for Restricted Securities shall be imprinted
with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY
ISSUED ON MARCH 13, 2000, AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THE PURCHASE AGREEMENT DATED AS OF MARCH
13, 2000, BETWEEN THE ISSUER (THE "COMPANY") AND CERTAIN
INVESTORS AND THE CONDITIONS SPECIFIED IN THE AGREEMENTS
REFERENCED IN THE PURCHASE AGREEMENT, AND THE COMPANY RESERVES
THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH
CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A
COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY THE COMPANY TO THE
HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE."
If the holder of the Restricted Securities delivers to the
Company an opinion of counsel reasonably acceptable to the Company that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, the Company shall promptly upon such contemplated
transfer deliver new certificates for such Restricted Securities which do not
bear the Securities Act legend set forth in this Section 8C.
8D. CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required
to be performed by it, only if the Company has obtained the written consent of
a majority of the holders of all shares of the then-outstanding Purchaser
Stock. No other course of dealing between the Company and the holder of any
Stock or any delay in exercising any rights hereunder or under the Certificate
of Designation shall operate as a waiver of any rights of any such holders.
8E. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the Second Closing Date and for a period
of eighteen (18) months thereafter regardless of any
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<PAGE> 34
investigation made by any Purchaser or on its behalf. In the event that the
Second Closing does not occur, all representations and warranties contained
herein or made in writing by any party in connection herewith shall survive for
a period of eighteen (18) months from the Initial Closing Date.
8F. INDEMNIFICATION.
(i) Subject to Section 8F(iii) and (iv), (i) the Company
shall indemnify the Purchasers against and agrees to hold the Purchasers
harmless from any and all claims, damage, loss, liability and expense
(including, without limitation, reasonable expenses of investigation and
reasonable attorneys' fees and expenses in connection with any action, suit or
proceeding) (collectively, "DAMAGES") actually incurred or suffered by any
Purchaser or such Purchaser's Affiliate on or after the Initial Closing Date
(or, as applicable, after the Second Closing Date) arising out of any material
misrepresentation, inaccuracy or breach of any representation, warranty,
covenant or promise by the Company contained in this Agreement, the
Registration Agreement or the Stockholders' Agreement (or in any certificate
document, list or schedule delivered to any Purchaser or any Purchaser's
Affiliate by the Company hereunder or thereunder).
(ii) Subject to Section 8F(iii) and (iv), (i) each of USXX
and Northwood shall severally, and not jointly, indemnify the Company against
and agrees to hold the Company harmless from any and all Damages actually
incurred or suffered by the Company on or after the Initial Closing Date (or,
as applicable, after the Second Closing Date) arising out of any material
misrepresentation, inaccuracy or breach of any representation, warranty,
covenant or promise by, as applicable, USXX or Northwood or any Affiliate of
USXX or Northwood contained in this Agreement, the Registration Agreement or
the Stockholders' Agreement (or in any certificate document, list or schedule
delivered to Company by, as applicable, USXX or Northwood or any Affiliate of
USXX or Northwood hereunder or thereunder).
(iii) If any party hereto who is entitled to indemnification
hereunder shall seek indemnification pursuant to this Section 8F
("INDEMNITEE"), such Indemnitee shall give prompt notice to the party hereto
against which indemnification is sought ("INDEMNITOR") of the assertion of any
claim, or the commencement of any action, suit or proceeding by a third party,
in each case in respect of which indemnity may be sought hereunder, but no
failure to give such notice shall relieve the Indemnitor of any liability
hereunder. The Indemnitor may, at its expense, participate in or assume the
defense of any such action, suit or proceeding involving a third party with
counsel reasonably acceptable to such Indemnitee, and after notice from the
Indemnitor of its election to assume the defense thereof, the Indemnitor shall
not be liable to such Indemnitee for any legal fees or other expenses
subsequently incurred by the Indemnitee in connection with the defense thereof.
Each Indemnitee will have the right to employ its counsel in any such action,
but the fees and expenses of such counsel will be at the expense of such
Indemnitee unless (1) the employment of counsel by such Indemnitee has been
authorized in writing by the Indemnitor, (2) such Indemnitee has reasonably
concluded that there may be legal defenses available to it that are different
from or in addition to those available to the Indemnitor
-31-
<PAGE> 35
(in which case the Indemnitor will not have the right to direct the defense of
such action on behalf of such Indemnitee) or (3) the Indemnitor has not in fact
employed counsel to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, in each of which
cases the reasonable fees and expenses of only one counsel will be at the
expense of the Indemnitor, and the Indemnitor shall reimburse or pay such fees
and expenses as they are incurred. Whether or not the Indemnitor chooses to
defend or prosecute any claim involving a third party, all the parties hereto
shall cooperate in the defense or prosecution thereof and shall furnish such
records, information and testimony, and attend such conferences, discovery
proceedings, hearings, trials and appeals, as may be reasonably requested in
connection therewith.
(iv) The Indemnitor shall not be liable under this Section 8F
for any settlement effected without its consent of any claim, litigation or
proceeding by a third party in respect of which indemnity may be sought
hereunder (which consent shall not be unreasonably withheld), unless the
Indemnitor refuses to acknowledge liability for indemnification under this
Section 8F and/or declines to defend any Indemnitee in such claim, litigation
or proceeding. Any contrary provision in this Section 8F or elsewhere
notwithstanding, (A) the maximum liability of the Company under this Section 8F
to each Purchaser and such Purchaser's Affiliates shall not exceed the amount
invested in the Company by such Purchaser and its Affiliates hereunder and (B)
the maximum liability of each Purchaser and such Purchaser's Affiliates under
this Section 8F to the Company shall not exceed the amount invested in the
Company by such Purchaser and its Affiliates hereunder.
8G. SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto whether so
expressed or not; provided that this Agreement may not be assigned by the
Company without the prior written consent of the Purchasers and their
Affiliates holding a majority of all of the Purchaser Stock. In addition, and
whether or not any express assignment has been made, the provisions of this
Agreement which are for the Purchasers' benefit as the Purchasers or the
holders of the Purchaser Stock are also for the benefit of, and enforceable by,
any subsequent holder of at least twenty percent (20%) of the Purchaser Stock.
The rights and obligations of each Purchaser under this Agreement and the
agreements contemplated hereby may be assigned by such Purchaser at any time,
in whole or in part, to any Affiliate of such Purchaser.
8H. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Where any
accounting determination or calculation is required to be made under this
Agreement or the exhibits hereto, such determination or calculation (unless
otherwise provided) shall be made in accordance with generally accepted
accounting principles, consistently applied, except that, if because of a
change in generally accepted accounting principles the Company would have to
alter a previously utilized accounting method or policy in order to remain in
compliance with generally accepted accounting principles, then such
determination or calculation shall continue to be made in accordance with the
Company's previous accounting methods and policies. All numbers set
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<PAGE> 36
forth herein which refer to share prices or numbers or amount will be
appropriately adjusted to reflect stock splits, stock dividends, combinations
of shares, and other recapitalizations affecting the subject class of stock.
8I. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but, if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, then such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
8J. COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures
of more than one party, but all such counterparts taken together shall
constitute one and the same Agreement.
8K. DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive
headings of this Agreement are inserted for convenience only and do not
constitute a substantive part of this Agreement. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine, or neuter forms, and the singular form of nouns, pronouns,
and verbs shall include the plural and vice versa. The use of the word
"INCLUDING" in this Agreement shall be by way of example rather than by
limitation. Reference to any agreement, document, or instrument means such
agreement, document, or instrument as amended or otherwise modified from time
to time in accordance with the terms thereof, and if applicable hereof. Without
limiting the generality of the immediately preceding sentence, no amendment or
other modification to any agreement, document, or instrument that requires the
consent of any Person pursuant to the terms of this Agreement or any other
agreement will be given effect hereunder unless such Person has consented in
writing to such amendment or modification. The use of the words "or," "either,"
and "any" shall not be exclusive.
8L. GOVERNING LAW. The corporate law of Delaware shall govern all
issues concerning the relative rights of the Company and its stockholders. All
questions concerning the construction, validity, and interpretation of this
Agreement and the exhibits and schedules hereto shall be governed by and
construed in accordance with the internal laws of the State of Delaware,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of Delaware or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
Delaware.
8M. NOTICES. All notices, demands, or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, upon machine-generated acknowledgment of receipt after
transmittal by facsimile, sent to the recipient by reputable express courier
service (charges prepaid) or mailed to the recipient by certified or registered
mail, return receipt requested, and postage prepaid. Such notices, demands, and
other communications shall be sent to the Purchaser and to the Company at the
address indicated below:
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<PAGE> 37
IF TO THE COMPANY:
VIPRO Corporation
3998 Fair Ridge Drive, Suite 125
Fairfax, Virginia 22033
Attention: Bernard Brenner
Facsimile: (703) 591-2313
Telephone: (703) 591-2200, Ext. 700
WITH A COPY (WHICH SHALL NOT CONSTITUTE NOTICE) TO:
Fulbright and Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Attention: Carl Kaplan
Facsimile: (212) 752-5958
Telephone: (212) 318-3224
IF TO USXX:
U.S. Technologies Inc.
2001 Pennsylvania Avenue, N.W.
Suite 675
Washington, D.C. 20006
Attention: C. Gregory Earls
Facsimile: (202) 466-3100
Telephone: (202) 466-4557
WITH A COPY (WHICH SHALL NOT CONSTITUTE NOTICE) TO:
Fleischman and Walsh, L.L.P.
1400 Sixteenth Street, N.W.
Sixth Floor
Washington, DC 20036
Attention: Stephen A. Bouchard
Facsimile: (202) 667-8543
Telephone: (202) 939-7911
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<PAGE> 38
IF TO NORTHWOOD:
Northwood Ventures LLC
485 Underhill Boulevard, Suite 205
Syosset, New York 11791
Attention: Peter G. Schiff
Facsimile: (516) 364-0879
Telephone: (516) 364-5544
WITH A COPY (WHICH SHALL NOT CONSTITUTE NOTICE) TO:
Andrew J. Beck
Torys
237 Park Avenue
New York, New York 10017
Facsimile: (212) 682-0200
Telephone: (212) 880-6010
8N. RIGHTS. This Agreement shall not confer any rights or
remedies upon any Person, other than the parties hereto and their respective
heirs, successors, and permitted assigns.
8O. AMENDMENTS. Any reference contained herein to any agreement,
instrument, or other document shall include any amendments or modifications
made to such agreement, instrument, or other document made from time to time in
accordance with the terms thereof, and if applicable, hereof.
[SIGNATURES BEGIN ON THE NEXT PAGE]
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this
Purchase Agreement on the date first written above.
VIPRO CORPORATION
By:/s/ Bernard D. Brenner
----------------------
Bernard D. Brenner
President and Chief Executive Officer
U.S. TECHNOLOGIES INC.
By:/s/ C. Gregory Earls
--------------------
C. Gregory Earls
President and Co-Chief Executive Officer
NORTHWOOD VENTURES LLC
By:/s/ Peter G. Schiff
-------------------
Peter G. Schiff
Manager
NORTHWOOD CAPITAL PARTNERS LLC
By:/s/ Peter G. Schiff
-------------------
Peter G. Schiff
Manager
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<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Service-to-Industry, Inc.
Technology-to-Industry, Inc.
Labor-to-Industry, Inc.
U.S. Technologies Acquisition Sub, Inc.
Each subsidiary of the Registrant has been organized and is a corporation
existing under the laws of the State of Delaware.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
U.S. Technologies Inc.
Marietta, Georgia
We hereby consent to the incorporation by reference of our reports
dated March 17, 2000, except for Note 18, which is as of April 5, 2000,
relating to the consolidated financial statements appearing in the Company's
Form 10-K for the year ended December 31, 1999, into the Company's previously
filed registration statement on Form S-8, Registration No. 333-31518, relating
to the Company's 1999 Stock Option Plan, including the prospectus therein.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Atlanta, Georgia
April 6, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999, UNAUDITED FINANCIAL STATEMENTS OF US TECHNOLOGIES, INC., AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS IN FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999. (IN THOUSANDS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 401
<ALLOWANCES> 206
<INVENTORY> 261
<CURRENT-ASSETS> 505
<PP&E> 1,901
<DEPRECIATION> 1,330
<TOTAL-ASSETS> 1,092
<CURRENT-LIABILITIES> 1,284
<BONDS> 0
0
5,290
<COMMON> 584
<OTHER-SE> (6,095)
<TOTAL-LIABILITY-AND-EQUITY> 1,092
<SALES> 3,765
<TOTAL-REVENUES> 3,765
<CGS> 4,459
<TOTAL-COSTS> 6,491
<OTHER-EXPENSES> (469)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (2,781)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,781)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,781)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
